Part 1 Past Papers

FINANCIAL REPORTING & TAX ACCOUNTING FUNDAMENTALS

Please note that the format of the Financial Reporting & Tax Accounting Fundamentals exam paper changed in 2018 to reflect the updated syllabus. The format of the paper is as follows:

Duration: 2hrs (Previously 3hrs)

FORMAT:

Question 1 is a compulsory preparation of accounts question worth 40 marks. Question 2–4 are all worth 30 marks and students are required to complete 2 of these 3 questions.

Summer 2015

QUESTION 1

Patrick Harris is the managing director of the construction firm, Harris & Son Ltd. The past few years were a difficult time for the business and it suffered losses but this year Patrick is hopeful that the business will make a profit. The following Trial Balance for the year to 31 December 2014 was prepared prior to a meeting with you.

Debit Credit
Issued share capital (authorised 100,000 €1 shares) 50,000
Retained profits 31/12/13 35,000
Revenue 730,000
Purchases 420,000
Inventory at 31/12/13 25,000
Salaries (Note 8) 125,000
Administration costs 12,000
VAT 5,500
PAYE/PRSI/Levies 3,000
Running costs of vans 20,000
Rent of office paid (Note 5) 6,000
Warehouse (Note 1) 150,000
Warehouse depreciation 30,000
Vans (Note 2) 90,000
Vans depreciation 18,000
Preliminary tax paid 2014 (Note 3) 10,000
Corporation tax asset 31/12/13 (Note 4) 25,000
Trade receivables 18,500
Trade payables 25,000
Bank ________ 5,000
901,500 901,500

Notes

1. Depreciation method of the warehouse is 2% on cost per annum.

2. Depreciation on vans is straight line on cost over five years with a residual value of €0.

3. Corporation tax charge for the 2014 year is €11,000.

4. The corporation tax asset was a result of the losses incurred.

5. The business has not paid the rent on the office for the last two months of the year. The rent was paid for the period 1 January 2014 to 31 October 2014.

6. Value of inventory at 31 December 2014 was €45,000.

7. Due to water damage at the warehouse on 31 January 2014, inventory which cost €7,000 was seriously damaged. This can be sold without any remedial work for €500. The full cost of this inventory is included in closing inventory figure per Note 6 above.

8. Patrick Harris did not draw his salary for the year 2014 of €50,000. This salary is not included in the Trial Balance figure above. He did take his salary for 2014 in February 2015. There was no employer PRSI due on Patrick’s salary.

REQUIREMENT

Prepare the Statement of Comprehensive Income for the year to 31 December 2014 and a Statement of Financial Position as at 31 December 2014 for Harris & Son Ltd.

Total 20 Marks

QUESTION 2

FatFred Ltd makes up its accounts each year to 31 December. During 2014, FatFred Ltd paid the balance of its 2013 corporation tax liability of €36,450 and a preliminary corporation tax payment for 2014 of €123,000. The opening balance on 1 January 2014, on the corporation tax nominal account, was €38,000 credit. The corporation tax assessment for 2014 was €136,500. During 2014, a tax audit was conducted and it was discovered that the tax charge for 2012 was over assessed by €10,500 and under assessed for 2013 by €6,300. These amounts have not been paid or refunded and are still outstanding.

FatFred Ltd has 450,000 €0.50 ordinary shares in issue. On 30 June 2014, FatFred Ltd declared a dividend of 3 cent per share and paid this on 31 July 2014. All of FatFred Ltd’s shareholders are individual Irish residents. Dividend withholding tax is payable at the rate of 20%.

REQUIREMENTS

(i) Prepare the corporation tax T-account for 2014.

(5 marks)

(ii) Calculate the corporation tax charge for 2014 and the corporation tax liability as at 31 December 2014.

(2 mark)

(iii) Reconcile the difference between FatFred Ltd’s corporation tax charge for 2014 and its corporation tax liability as at 31 December 2014.

(3 marks)

(iv) Explain the purpose of an effective current tax rate reconciliation.

(5 marks)

(v) Calculate the gross and net dividend and dividend withholding tax payable.

(3 marks)

(vi) Explain under what circumstances Irish resident companies do not suffer withholding tax.

(2 marks)

Total 20 Marks

QUESTION 3

Tom Trader is having problems preparing his VAT return for January/February 2015. Tom accounts for VAT on an “invoice basis”. The opening balance on the VAT account as at 1 January 2015 was a €1,250 liability. Tom is waiting for a VAT refund from the September/October 2014 period of €2,300. Due to a cash flow problem he was unable to pay the November/December 2014 VAT liability of €3,550. The following are the transactions for the period January/February 2015:

Invoice sales excluding VAT @ 23% 85,000
Cash sales including VAT @ 23% 25,215
Invoice sales excluding VAT @ 13.5% 56,000
Cash sales including VAT @ 13.5% 21,565
Invoice purchases excluding VAT @ 23% 48,000
Cash purchases including VAT @ 23% 12,054
Credit note including VAT @ 23% issued for sales return 738
Credit note excluding VAT @ 23% received for purchases returned 1,800

REQUIREMENTS

(i) Prepare the VAT control T-account for the January/February 2015 period.

(10 marks)

(ii) Reconcile the closing balance of the VAT account.

(6 marks)

(iii) Explain the term “Non-Registered persons” in respect of VAT and explain how they should account for VAT in their accounts.

(4 marks)

Total 20 Marks

QUESTION 4

BXY Ltd is preparing their Financial Statements for 2014 and the following issues have arisen:

1. Tangible non-current assets were acquired during the year and need to be recorded in the accounts.

2. Some of the assets in number 1 above were acquired under finance lease and need to be recorded in the accounts.

3. An investment was impaired.

4. The valuation of inventory manufactured by the business.

5. An investment property, on which BXY Ltd receives rent, was purchased at market value.

REQUIREMENT

Explain how four of the five issues above should be dealt with in the Financial Statements which are prepared under International Accounting Standards (“IAS”).

Total 20 Marks

QUESTION 5

Below are the Statement of Financial Position and Statement of Comprehensive Income for CoCo Ltd.

CoCo Ltd

Statement of Financial Position as at 31 December

2014 2013
€000’s €000’s
Non-Current Assets
Land (Note 1) 2,500 2,000
Property, plant & equipment (Note 2) 1,400 1,200
3,900 3,200
Current Assets
Inventories 750 800
Trade receivables 520 410
Cash & cash equivalents 45 85
1,315 1,295
Total Assets 5,215 4,495
Equity & liabilities
Equity
Ordinary €1 shares (Note 3) 1,100 1,000
Share premium (Note 3) 100
Revaluation reserve 500
Retained profits (Note 4) 2,385 2,370
Total equity 4,085 3,370
Non-current liabilities
Long term borrowings 600 700
Current liabilities
Trade payables 530 425
Total equity & liabilities 5,215 4,495

CoCo Ltd

Statement of Comprehensive Income for year ended 31 December

2014

2013

€000’s

€000’s

Revenue

7,200

6,400

Cost of sales

(5,450)

(5,300)

Gross Profit

1,750

1,100

Administration expenses

(990)

(595)

Depreciation

(450)

(300)

Operating profit

310

205

Finance costs

(60)

(80)

Profit before Tax

250

125

Corporation Tax

(80)

(35)

Profit for year

170

90

Notes

1. Land was revalued upwards by €500,000 during the year to 31 December 2014.

2. The movement in property, plant & equipment for 2014 was as follows:

€000’s €000’s
Cost 2,000 Acc depreciation as at 1 Jan 2014 800
Additions 850 Depreciation on disposals (350)
Disposals during year (550) Depreciation charge for year 450
Cost at 31 Dec 2014 2,300 Depreciation as at 31 Dec 2014 900
Net Book Value at 1 Jan 2014 €1,200,000
Net Book Value at 31 Dec 2014 €1,400,000

3. 100,000 €1 ordinary shares were issued at a premium of €1 on 1 May 2014.

4. A dividend of €155,000 was paid on 1 April 2014.

5. Loss on the sale of property, plant & equipment was €50,000.

6. Assume interest and tax is paid as incurred.

REQUIREMENT

Prepare a Statement of Cash Flow for the year to 31 December 2014 as per IAS 7 using the indirect method.

Total 20 Marks

QUESTION 6

(a) Businesses may need to raise finance so that they can grow their business, either through debt or equity. Explain two differences between debt and equity.

(4 marks)

(b) Explain the financial implications of a company’s dividend policy.

(4 marks)

JK Ltd

(c) Budgeted Statement of Comprehensive Income for year ended 31 December 2016

Gross profit 580,000
Expenses (500,000)
Net Profit before tax 80,000
Corporation tax (10,000)
Net profit after tax 70,000
Retained earnings carried forward 70,000

JK Ltd

Budgeted Statement of Financial Position as at 31 December 2016

Non-current assets 450,000
Current assets 50,000
500,000
Equity & liabilities
Issued ordinary share capital (€1 shares) 400,000
Retained earnings 70,000
Dividend (16,000)
454,000
Non-current liabilities
Current liabilities 46,000
500,000

JK Ltd needs to raise €200,000 to improve its liquidity.

REQUIREMENTS

Using the Financial Statements above show the revised Budgeted Statement of Comprehensive Income and the share capital, reserves and non-current liability section of the Budgeted Statement of Financial Position if the €200,000 was raised on 1 January 2016 by issuing:

(i) 4% debentures redeemable in 2025.

(6 marks)

(ii) 200,000 €1 ordinary shares with a proposed dividend of 4 cent per share. Dividends are paid during the financial year.

(6 marks)

You should assume the corporation tax rate of 12.5% will apply in 2016.

Total 20 Marks

SOLUTION 1

Harris & Son Ltd

Statement of Comprehensive Income for the year to 31 December 2014

Revenue 730,000
Opening inventory 25,000
Purchases 420,000
Closing inventory (W1) (38,500) (406,500)
Gross Profit 323,500
Administration costs 12,000
Motor expenses 20,000
Salaries (W6) 175,000
Rent (W5) 7,200
Motor vehicles depreciation (W3) 18,000
Warehouse depreciation (W2) 3,000 (235,200)
88,300
Corporation Tax expense (W4) (11,000)
Profit for the year 77,300

Harris & Son Ltd

Statement of Financial Position as at 31 December 2014

Non-current assets
Warehouse (W2) 150,000 (33,000) 117,000
Motor vehicles (W3) 90,000 (36,000) 54,000
171,000
Current assets
Inventory (W1) 38,500
Trade receivables 18,500
Corporation tax (W4) 24,000 81,100
Total assets 252,000
Equity & Liabilities
Share Capital 50,000
Retained earnings (W7) 112,300
162,300
Non-current liabilities
Current liabilities
Trade payables 25,000
VAT 5,500
PAYE etc 3,000
Accruals (W5, W6) 51,200
Bank 5,000 89,700
252,000

Workings

W1 Closing inventory
Per Note 6 45,000
Reduction (6,500)
38,500

Reduction in value of inventory = €7,000 − €500 = €6,500

This damaged inventory reduces the value of closing inventory by €6,500 to €38,500 for inclusion on the Statement of Financial Position as inventory is required to be accounted for at the lower of cost and net realisable value

W2 Warehouse depreciation
2% per annum on cost
€150,000 × 2% = €3,000
Cumulative depreciation €30,000 + €3,000 = €33,000
W3 Motor vehicles depreciation
5 years straight line €90,000/5 = €18,000
Cumulative depreciation €18,000 + €18,000 = €36,000
W4 Corporation tax
Asset as at 31/12/13 25,000
2014 charge (11,000)
Preliminary tax paid 10,000
Asset as at 31/12/14 24,000
Corporation tax expense 2014 €11,000
Corporation tax asset €24,000
W5 Rent
€6,000 for 10 months
(€6,000 × 12)/10 = €7,200 for year
€1,200 accrual
W6 Salaries
€125,000 + €50,000 = €175,000 salary expense
€50,000 accrual
W7 Retained earnings
Balance from trial balance 35,000
Retained profit for year 77,300
€112,300

SOLUTION 2

(i)

FatFred Ltd

Corporation Tax account.

2014 2014
Bank 2013 bal 36,450 01/01   bal c/f 2013 38,000
Bank 2014 PT 123,000 2014 assessment 136,500
2012 overprovision 10,500 2013 underprovision 6,300
Bal b/f 2014 10,850
180,800 180,800
01/01/15 bal b/f 2014 10,850

(ii) Fatfred Ltd’s Corporation Tax charge for 2014 is €132,300.

2014 Assessment €136,500
2013 underprovision €6,300
2012 overprovision (€10,500)
€132,300

FatFred Ltd’s Corporation Tax liability as at 31 December 2014 is €10,850

(iii)

Balance of Corporation Tax liability as at 1 January 2015 (10,850)
Corporation Tax assessment for 2014 (136,500)
Corporation Tax paid in 2014 159,450
Opening balance as at 1 January 2013 (38,000)
2012 Overprovision 10,500
2013 Underprovision (6,300)
Closing liability as at 31 December 2014 (10,850)

(iv)

The Irish corporation tax rate is 12.5%. In the Statement of Comprehensive Income of a company many users expect the tax expense line to be 12.5% of the profit before tax and this is referred to as the effective current tax rate. The tax expense is rarely 12.5% of the profit before tax.

The effective tax rate reconciliation shows the differences between

12.5% of the accounting profit and

The actual tax expense shown in the Statement of Comprehensive Income.

Users of the Financial Statements can see the reasons for the difference:

Where there are expenses which were deductible for accounting purposes but which are not deductible for tax purposes.

Income which is not taxable.

Income which is taxable at a higher rate.

Essentially, the reconciliation is a summary of the significant add-backs/deductions made in the tax computation.

(v)

450,000 shares at 3 cent per share

Gross dividend = 450,000 × 0.03 = €13,500

100% of the shares are held by Irish resident individuals so therefore DWT payable on all gross dividend

DWT = €13,500 × 20% = €2,700

Net dividend = €10,800.

(vi)

Circumstances where Irish resident companies do not suffer withholding tax.

Irish resident companies do not suffer Irish withholding tax on dividends received from other Irish companies.

Irish resident companies do not suffer Irish withholding tax on interest and royalties received from other Irish companies

SOLUTION 3

(i)

VAT Control a/c

Dr   Cr  
Jan/Feb 2015 Jan/Feb 2015
Inv purchase @ 23% 11,040 opening balance b/f 2014 1,250
Cash purchases @ 23% 2,254 Invoice sales @ 23% 19,550
Sales Returns 138 Cash sales @ 23% 4,715
  Invoice Sales @ 13.5% 7,560
  Cash sales @ 13.5% 2,565
Balance c/f 22,622 Purchase returns 414
26,054 36,054
  1/03/15 Bal b/f 22,622

Workings

Invoice sales @ 23% = €85,000 × 23% = €19,550

Cash sales @ 23% = (€25,215/1.23) × 23% = €4,715

Invoice sales @ 13.5% = €56,000 × 13.5% = €7,560

Cash sales @ 13.5% = (€21,565/1.135) × 13.5% = €2,565

Invoice purchase @ 23% = €48,000 × 23% = €11,040

Cash purchase @ 23% = (€12,054/1.23) × 23% = €2,254

Sales credit note = (€738/1.23) × 23% = €138

Purchase credit note = €1,800 × 23% = €414

(ii)

The balance to be reconciled is the closing balance of the VAT control account of €22,622

Balance per VAT control account €22,622
VAT payable for November/December 2014 €3,550
VAT refund not yet received (€2,300)
Net VAT payable January/February 2015 €21,372
Total €22,622

Workings

Net VAT payable Jan/Feb 2015

  €Net €VAT €Gross

23% invoice sales

85,000

19,550

104,550

23% cash sales

20,500

4,715

25,215

13.5% invoice sales

56,000

7,560

63,560

13.5% cash sales

19,000

2,565

21,565

Purchase return

1,800

414

2,214

23% invoice purchase

48,000

11,040

59,040

23% cash purchase

9,800

2,254

12,054

Sales return

600

138

738

(iii)

Traders whose sales are below a certain minimum level need not register for VAT. Non-registered persons do not charge VAT on their sales, but will be charged VAT on their purchase. As they are not registered they cannot reclaim VAT on their purchases. The VAT paid increases the cost of their purchases and is an allowable expense in the Statement of Comprehensive Income. The non-registered trader does not have to keep VAT accounts or make VAT returns.

SOLUTION 4

BXY Ltd should deal with the issues under IAS as follows.

1. Non-current assets are accounted for under the provisions of IAS16. Non-current assets are initially capitalised at cost on the Statement of Financial Position. The non-currents assets can be revalued, but it is not obligatory, to market value. If this route is taken then the increase in valuation goes through a revaluation reserve account in the Statement of Financial Position. The non-current assets are depreciated over its estimated useful life. The depreciation is an expense in the Statement of Comprehensive Income.

2. Finance Lease are accounted for under the provisions of IAS17. BXY Ltd recognises the lease obtained to purchase the non-current asset as a Financial Liability in the Statement of Financial Position. The interest payable under the finance lease is treated as a finance cost in the Statement of Comprehensive Income. Capital repayments reduce the financial liability. The non-current asset purchased with the finance lease is accounted for under the provisions of IAS16.

3. Impairments of non-current assets are accounted for under the provisions of IAS36. Impairment is defined as the amount by which the carrying value of an asset exceeds its recoverable amount. The impairment loss on the non-current asset is expensed to the Statement of Comprehensive Income except where the non-current asset was previously revalued and in this case it is charged to the revaluation reserve (Statement of Financial Position).

4. Inventory is accounted for under the provisions of IAS2. Inventory is valued at the lower of cost and net realisable value. Costs includes all direct expenditure to get the inventory ready for sale and the method used to calculate the cost is FIFO (first in first out). Net realisable value is defined as the higher of value in use and selling price. Inventory is an assets on the Statement of Financial Position and when sold is charged in the Statement of Comprehensive Income.

5. Investment Properties are accounted for under the provisions of IAS40. The property is initially recognised in the Statement of Financial Position at cost. The property can be accounted for under the cost model (IAS16) or fair value model. Under the fair value model the property is measured at its fair value annually. Any change in the fair value of the property is recorded in the Statement of Comprehensive Income. Investments properties valued at fair value are not depreciated. The rent received on the property is recorded as other income in the Statement of Comprehensive Income.

SOLUTION 5

(a)

CoCo Ltd

Statement of Cash Flow for the year to 31 December 2014 €000’s
Cash flows from operating activities (note 1) 715
Cash flow from investing activities (note 2) (700)
Cash flows from financing activities (note 3) (55)
Net increase in cash and cash equivalents (40)
Cash and cash equivalents at 1 Jan 2014 85
Cash and cash equivalents at 31 December 2014 45

Note 1

Cash flow from operating activities

Profit before tax and finance costs for year to 31 December 2014 310
Add depreciation 450
Add loss on disposal 50
Add decrease in Inventories (800 – 750) 50
Less increase in trade receivables (520 – 410) (110)
Add increase in trade payables (530 – 425) 105
855
Tax paid (80)
Finance Costs (60)
Cash flow from operating activities 715

Note 2

Cash flow from investing activities

Purchase of PPE (850)
Sale of PPE (W1) 150
(700)

Note 3

Cash flow from financing activities

Dividend paid (155)
Repayment of long term loan (600 – 700) (100)
Share issue 100,000 × €2 200
Cash flow from financing activities (55)

W1

Proceeds on sale = Net Book Value + Profit (loss)

Net Book Value on item sold = 550 – 350 = 200

Proceeds = 200 – 50 (loss) = 150

SOLUTION 6

(a)

1. Debt is money lent to a business by Banks or investors through debentures and loans. The return the investors and bank receives is interest on the principal amount loaned. These debentures and loans will have a redemption rate. Usually they are secured over the assets of the business.

Equity is also money given to a business but this time the investors become part owners of the business and the investors reward for this is a dividend from the business profits which is not guaranteed. The owners have no security over their investment.

(b)

A company’s dividend policy is simply its decisions on how much of its profits should be retained and how much should be paid out to shareholders as a dividend.

This is a very important question as dividends can be a major cash outlay for companies. The company will have to weigh up the shareholders’ desire for a dividend with its ability to pay a dividend and its wish to retain funds for future investments.

Directors of companies are not free to decide on whatever dividends they wish to pay out. There are certain restrictions placed on them by internal and external forces.

Many financial analysts are of the opinion that markets view dividend policy as a way for management to signal to the market. If the dividend policy remains unchanged then the market tends to interpret this as management having nothing to signal. Where the dividend policy is changed (without the market being significantly forewarned about why) the resulting fluctuations in the share price indicate the market’s views

(c)

1. Effect on statements when €200,000 raised by issuing 4% debentures

JK Ltd

Budgeted Statement of Comprehensive Income for year ended 31 December 2016

Funds raised by Debentures
Gross Profit 580,000
Expenses (500,000)
Net Profit before Interest & Tax 80,000
Finance Costs (8,000) (W1)
Net Profit before tax 72,000
Corporation Tax (9,000) (W2)
Net Profit after Tax 63,000
Retained earnings c/forward 63,000

JK Ltd

Extract from Budgeted Statement of Financial Position as at 31 December 2016

Funds raised by Debentures

Equity & Non Current Liabilities
Issues Ordinary Share Capital 400,000
Retained earnings 63,000
Dividend (16,000)
447,000
Non-Current liabilities
4% Debentures 200,000

W1 Expenses are increased by the debenture interest payable.

W2 Interest is tax deductible so 12.5% of €8,000 = Corporation tax saving = €1,000.

2. Effect on statements when €200,000 raised by issuing ordinary shares

JK Ltd

Budgeted Statement of Comprehensive Income for year ended 31 December 2016

Funds raised by Shares
Gross Profit 580,000
Expenses (500,000)
Net Profit before Tax 80,000
Corporation Tax (10,000)
Net Profit after Tax 70,000
Retained earnings c/forward 70,000

JK Ltd

Extract from Budgeted Statement of Financial Position as at 31 December 2016

Funds raised by Shares
Equity & Non Current Liabilities
Issues Ordinary Share Capital 600,000
Retained earnings 70,000
Dividend Paid (24,000) (W3)
646,000
Non-Current liabilities
4% Debentures -

W3 Additional dividend is payable during the financial year and is 4c on 200,000 shares which is €8,000, added to original dividend = €24,000.

Examiner’s Report

The paper had a mixture of computational and theory questions. On the computational questions it is important to include the workings to gain maximum marks.

The paper was answered exceptionally well by prepared students.

Marks are awarded for the correct layout of the Financial Statements, so please take care that the Statement has the correct title, date and business name for which the Statement was prepared.

Also please number questions and write legibly.

Question 1 - Computational trial balance

Most students were well prepared for this question. A common error was ignoring the accrual on the rent and salary. Some students had difficulty with calculating the adjustment required for the damaged inventory. The business is a limited company but many students took the directors salary as drawings. The treatment of the corporation tax asset proved a problem for some students.

Question 2 - Corporation tax and dividend

Many students calculated the gross dividend on the monetary value of the shares and not on the number of shares in issue. Some students did not understand the purpose or indeed what the effective current tax rate reconciliation was. Part (i) of question on the corporation tax T-account was well answered but in general the question was very poorly answered.

Question 3 - VAT

Purchase returns is a credit and sales returns is a debit on the VAT account but many students reversed these entries. Some students were confused as to a non-registered VAT business. Part (ii) the reconciling of the closing VAT account caused confusion. Many students included the VAT refund/overdue from previous periods into this periods VAT account not realising that it was included in the opening balance. Overall, the question was answered question.

Question 4 - Theory question on International Accounting Standards

This was a poorly answered question and was unpopular. Many students gave the auditors treatment of the scenarios given and not the required accounting treatment. More knowledge of IAS’s required.

Question 5 - Cash Flow preparation

Some students have problems with the layout of the Statement of Cash Flow. Many students ignored the note stating that interest and tax is paid as incurred. The most common error was ignoring the loss incurred on the sale of the property, plant and equipment in the calculating of the cash flow from operating activities and the calculating of the sales proceeds.

Question 6 - Debt and equity

In general well answered but some students had a problem with part (b) on the financial implications of a company’s dividend policy.

 

Q1

Q2

Q3

Q4

Q5

Q6

Highest

20

19

20

18

20

20

Lowest

1

1

3

3

2

3

Average

16

10

14

10

13

14

Autumn 2015

QUESTION 1

Painters Ltd drew up the following Trial Balance for the year to 31 December 2014:

Debit Credit
Issued share capital (authorised 1,500,000 €1 shares) 750,000
Retained profits 31/12/13 220,000
Dividend paid 120,000
Revenue (Note 5) 1,800,000
Cost of sales 810,000
Inventory at 31/12/14 110,000
Administration expenses (Note 6) 105,000
VAT 30,000
Payroll taxes 5,000
Salaries 170,000
Transport costs 85,000
Land 850,000
Office building (Note 1) 800,000
Office building depreciation 64,000
Motor vehicles (Note 2) 85,000
Motor vehicles depreciation 25,000
Corporation tax paid (Note 4) 75,000
Corporation tax liability 31/12/13 84,000
Trade receivables 320,000
Trade payables 120,000
8% debentures (Note 3) 500,000
Bank 68,000 ________
3,598,000 3,598,000

Notes

1. Depreciation on office building is 2% on cost per annum.

2. Depreciation on motor vehicles is 25% reducing balance.

3. Interest on the 8% debentures was unpaid as at 31 December 2014.

4. Corporation tax charge for the year was €85,000.

5. Included in revenue are the proceeds of a share issue (September 2014) of 250,000, €1 ordinary shares at a premium of 10 cent.

6. Administration expenses included the purchase of a computer system for €50,000. Computers are depreciated on a straight line basis over four years.

REQUIREMENTS

Prepare a Statement of Comprehensive Income for the year to 31 December 2014 and a Statement of Financial Position as at 31 December 2014 for Painters Ltd.

Total 20 Marks

QUESTION 2

(a) BeeBee Ltd had an accounting profit of €350,000 for the year ended 31 December 2014. This accounting profit included depreciation of €45,000 and client entertainment of €20,000 but excluded capital allowances of €32,000.

In July 2014, the company had a Revenue audit covering the period 2011 – 2012 which resulted in an additional tax charge of €9,250. This was not paid until March 2015.

The company paid preliminary tax of €35,500 in respect of the year ended 31 December 2014 and the balance of the 2013 liability of €26,000 during 2014. The balance of the 2013 liability was the only amount outstanding as at 31 December 2013.

REQUIREMENTS

(i) Calculate the expected tax charge for BeeBee Ltd for 2014.

(2 marks)

(ii) Calculate the total tax charge for inclusion in BeeBee Ltd’s accounts for 2014.

(3 marks)

(iii) Prepare the corporation tax T-account for BeeBee Ltd for 2014.

(4 marks)

(iv) Reconcile the difference between BeeBee Ltd’s corporation tax charge for 2014 and its corporation tax liability as at 31 December 2014.

(3 marks)

(b) (i)  Explain the purpose of a financial audit.

(4 marks)

(ii) Explain what is meant by “the Audit Expectation Gap”.

(4 marks)

Total 20 Marks

QUESTION 3

Patio Sales Ltd makes up its accounts to 31 December each year. Patio Sales Ltd has received notice of a VAT and payroll audit and is preparing for same in advance of it commencing.

VAT

For the year ended 31 December 2014, the following summaries of receipts and payments are prepared. All figures are inclusive of VAT at 23% unless stated.

Receipts Payments
Sales 945,870
Purchases 688,800
VAT exempt purchases 35,100
Sales returns 15,375
Purchase returns 22,140
Office equipment 108,240
Expenses 67,650
VAT exempt expenses 5,000
Repairs (inclusive of 13.5%) 28,375

VAT due to the Revenue Commissioners at 31 December 2013 was €19,988.

VAT paid to the Revenue Commissioners during 2014 was €82,076.

REQUIREMENTS

(i) Prepare the VAT T-account for the year to 31 December 2014.

(8 marks)

(ii) Detail how Patio Sales Ltd should account for the VAT exempt purchases in its accounts.

(4 marks)

Payroll

The following information relates to Patio Sales Ltd regarding its payroll for the year to 31 December 2014. All payments were by bank transfer:

Gross wages & salaries (excluding employer PRSI) 563,640
PAYE 81,200
PRSI/USC (employee) 55,100
PRSI (employer) 39,450
PAYE paid to the Revenue Commissioners during 2014 76,500
PRSI/USC paid to the Revenue Commissioners during 2014 85,095
PAYE due to the Revenue Commissioners at 31 December 2013 6,210
PRSI/USC due to the Revenue Commissioners at 31 December 2013 3,000

REQUIREMENTS

(iii) Prepare the wages and salaries control T-account for 2014.

(2 marks)

(iv) Prepare the payroll taxes T-account.

(6 marks)

Total 20 Marks

QUESTION 4

(a) Briefly explain the following terms:

(i) Substance over form

(ii) Materiality

(iii) Operating lease

(iv) Equity

(v) GAAP

(10 marks)

(b) Even though a Trial Balance may balance, its accounts may not be correct.

REQUIREMENT

Name and detail five general types of errors which a Trial Balance does not reveal.

(10 marks)

Total 20 Marks

QUESTION 5

Pear Ltd is considering investing in Orange Ltd and has calculated important ratios for both businesses. Pear Ltd and Orange Ltd are both in the technology industry.

Pear Ltd Orange Ltd
Current ratio 2.5 times 0.5 times
Profit margin 20% 15%
Earnings per share (EPS) 3 cent 9 cent
Return on assets 25% 12%
Return on equity 14% 6%
Debtors’ turnover 45 days 60 days
Interest cover 5 times 20 times

REQUIREMENTS

(i) Define any four of the ratios above.

(4 marks)

(ii) Based on the ratios above, what information can you deduce about the operation of Orange Ltd?

(12 marks)

(iii) If Pear Ltd purchased 100% of the shares in Orange Ltd, how would Pear Ltd account for this investment in its accounts?

(4 marks)

Total 20 Marks

QUESTION 6

TicToc Ltd has prepared the following draft Statement of Financial Position as at 31 December 2014.

TicToc Ltd

Draft Statement of Financial Position as at 31 December 2014

Non-current assets

Equipment

195,000

Investment property

580,000

Investments

100,000

875,000

Current assets

Inventory

87,000

Trade receivables

64,000

Bank

44,000

195,000

1,070,000

Equity & liabilities

Share capital

500,000

Retained earnings

265,000

765,000

Non-current liabilities

9% Debenture

250,000

Current liabilities

Corporation tax

16,000

Trade payables

39,000

55,000

1,070,000

Notes

Following a review by TicToc Ltd’s accountant, the following matters were discovered:

1. An investment property, currently shown at a cost of €580,000, should have been revalued under the provisions of IAS 40. The market value of the building at 31 December 2014 was €700,000.

2. An investment in shares of a new startup was impaired by €7,000.

3. €120,000 of the new equipment purchased throughout the year was financed through a finance lease. The repayment on this for the period was €14,000 (this included interest of €6,500). The equipment acquired under the finance lease was ignored in preparing the draft financial statements. The repayment was debited to administration expenses. The company depreciates equipment on a 25% reducing balance basis. It is company policy to provide for a full year’s depreciation in the year of purchase for all assets.

4. The corporation tax charge for the year was €65,000. The figure in the Draft Statement of Financial Position comprised of:

Corporation tax brought forward 1 January 2014 66,000
Corporation tax paid during 2014 (50,000)
Balance at 31 December 2014 16,000

5. The inventory contained damaged stock costing €15,000. This stock can be sold without any remedial work for €7,250.

6. A debtor was declared bankrupt on 15 December 2014, owing TicToc Ltd €8,500, but communication of this fact was not received by TicToc Ltd until 15 January 2015.

REQUIREMENT

Prepare the Statement of Financial Position as at 31 December 2014 after adjusting for the above matters.

Total 20 Marks

SOLUTION 1

Painters Ltd

Statement of Comprehensive Income for year to 31 December 2011

Revenue (W1) 1,525,000
Cost of sales (810,000)
Gross Profit 715,000
Less expenses
Admin (W2) 55,000
Salaries 170,000
Transport costs 85,000
Depreciation
Office building (W4) 16,000
Motor vehicles (W5) 15,000
Computer system (W2) 12,500 (353,500)
361,500
Finance Costs (W3) (40,000)
Net Profit 321,500
Corporation Tax (W7) (85,000)
Retained profit for year 236,500

Painters Ltd

Statement of Financial Position as at 31 December 2014

Non-current assets
Land 850,000
Office building (W4) 800,000 (80,000) 720,000
Computer (W2) 50,000 (12,500) 37,500
Motor vehicles (W5) 85,000 (40,000) 45,000
1,652,500
Current assets
Inventories 110,000
Trade receivables 320,000
Bank 68,000 498,000
Total assets 2,150,500
Equity & liabilities
Equity
Share Capital (W6) 1,000,000
Share premium (W6) 25,000
Retained profits (W8) 336,500
1,361,500
Non-current liabilities
8% Debentures 500,000
Current liabilities
Trade payables 120,000
Corporation Tax (W7) 94,000
Accruals (W3) 40,000
VAT 30,000
Payroll Taxes 5,000 289,000
2,150,500

Workings

W1 Revenue
Share issue = 250,000 × €1.1 = €275,000
Revenue = €1,800,000 − €275,000 = €1,525,000
W2 Administration
Cr Administration €50,000
Dr Computer System €50,000
Administration = €105,000 − €50,000 = €55,000
Computer depreciation
€50,000/4 = €12,500
W3 Debenture Interest
Interest = €500,000 × 8% = €40,000
Accrual = €40,000 debenture interest
W4 Depreciation on office building
For year €800,000 × 2% = €16,000
To 31/12/14 = €64,000 + €16,000 = €80,000
W5 Depreciation on Motor vehicles
Net Book Value at 01/01/14 €85,000 − €25,000 = €60,000
For year €60,000 × 25% = €15,000
To 31/12/14 €25,000 + €15,000 = €40,000
W6 Share Issue
Ordinary Share Issue 250,000 × €1 = €250,000
Share premium 250,000 × 10c = €25,000
W7 Corporation Tax liability
Opening Corporation tax liability 84,000
Corporation Tax charge for 2014 85,000
Corporation Tax paid (75,000)
Corporation Tax liability 94,000
W8 Retained profits
Retained profits b/f 220,000
Profit for year 236,500
Dividend paid (120,000)
336,500

SOLUTION 2

(a) (i)

BeeBee Ltd’s expected tax charge for 2014 is:

Profit before tax

350,000

Expected tax charge × 12.50%

43,750

(ii)

BeeBee Ltd’s current tax for 2014 is:

Corporation Tax Computation

Profit before tax

350,000

Addbacks:

Client entertainment

20,000

Depreciation

45,000

65,000

Deductions:

Capital allowances

(32,000)

383,000

Current tax charge × 12.50%

47,875

Add: additional audit liability

9,250

Total current tax expense for 2014

57,125

(iii)

Corporation tax liability account

Preliminary tax paid

35,500

Bal b/f 2013

26,000

2013 balance paid

26,000

Current tax charge

47,875

Bal c/f 2014

21,625

Audit liability

9,250

83,125

83,125

 

Balance b/f 2014

21,625

(iv)

Balance of Corporation Tax liability as at 1 January 2015 (21,625)
Corporation Tax charge for 2014 (47,875)
Corporation Tax paid in 2014 61,500
Opening balance as at 1 January 2013 (26,000)
Audit liability (9,250)
Closing liability as at 31 December 2014 (21,625)

(v)

The purpose of a financial audit is to form a professional, independent opinion as to whether the accounts give a fair presentation of the financial position of the company at the period end and the performance of the company during the period. Financial audits are important because they provide the users of the Financial Statements with a level of assurance that the accounts are materially correct and can be trusted. Many companies will opt to have their accounts audited even if they fall within the exemption for small companies because it provides assurance to investors, lenders etc.

Financial audits may also be performed by internal auditors (employees of the company) to ensure that the internal controls the company has put in place over their accounting systems are effective and to substantiate the amounts included in the accounting records and financial accounts.

(vi)

The role of the auditor is to form an opinion as to whether the Financial Statements prepared by the directors give a fair presentation of the company’s affairs. Inherent in this statement is that:

i. the Financial Statements are the responsibility of the directors;

ii. the audit report is an opinion; and

iii. this opinion refers to a fair presentation.

Consequently, the audit report does not (and could not) provide absolute assurance that every entry in the Financial Statements is 100% accurate – the concept of materiality is also alluded to above. Neither does it guarantee that the company is free from fraud.

Some stakeholders are of the view that an unqualified (favourable) audit report provides the guaranteed assurances described above. The variation between what these stakeholders erroneously believe and the actuality of what the auditor provides is known as “the expectation gap”.

SOLUTION 3

(i)

Patio Sales Ltd

VAT a/c

2014 2014
Purchase 128,800 1 Jan Bal b/d2013 19,988
Sales Return 2,875 Sales 176,870
Office Equipment 20,240 Purchase Returns 4,140
Expenses 12,650
Repairs 3,375
Bank 82,076 31 Dec Bal c/d 2014 49,018
250,016 250,016
1 Jan Bal b/d 2014 49,018

A credit balance at the start of the year (owe Revenue commissioner €19,988) is turned into a debit balance at the end of the year (VAT refund of €49,018 is due from the revenue commissioner).

(ii)

VAT exempt purchases means that the VAT paid on purchases may never be recovered by VAT registered businesses.

The VAT paid on the purchase is regarded as an extra expense of the business and is included as expense in the Statement of Comprehensive Income. This VAT cannot be recovered and hence does not appear as an asset on the Statement of Financial Position.

(iii)

Patio Sales Ltd

Wages & Salaries Control account

2014 2014
Gross Wage 563,640 Statement of Comprehensive 603,090
Employer PRSI 39,450 Income
603,090

(iv)

Payroll taxes account

2014 2014
Bank PAYE 76,500 1 Jan Bal b/d 2013 PAYE 6,210
Bank PRSI/USC 85,095 Bal b/d 2013 PRI/USC 3,000
Bal c/d 2014 23,365 PAYE 81,200
PRSI/USC 55,100
Employer PRSI 39,450
184,960 184,960
Bal b/d 2014 23,365

SOLUTION 4

(a)

(i) Substance over form means that the economic reality of some transactions is not always consistent with their legal form in accounting the main example is a finance lease. Legally the asset is owned by the lessor but the lessee records the asset of their Statement of Comprehensive Income because it is the lessee who has all risks and rewards associated with ownership.

(ii) Materiality. While every effort is made to ensure Financial Statements accurately record all transactions, errors will arise from time to time. Omissions or misstatements of items are material if they could, individually or collectively, influence decisions based on the Financial Statements. Either the size or the nature of the item, or a combination of both, could be the determining factor.

(iii) Operating Lease. A lease is classified as an operating lease if it does not substantially transfer all the risks and rewards associated with ownership, repairs to the asset will be paid for by the lessor and not the lessee.

(iv) Equity. A business is made up of assets, liabilities and equity. Equity is basically the owners’ interest in the business. It includes the owners’ contribution (capital introduced for a sole trader or share capital for a company) as well as their residual interest in the business. The owners’ residual interest includes anything left in the business after all of its liabilities have been discharged (i.e., profit).

(v) GAAP (Generally Accepted Accounting Principles) is the term used to refer to the standard set of guidelines used by accountants in any given jurisdiction. It signifies all the rules and regulations from whatever source, which govern accounting such as local/national legislation, national and international accounting standards, statutory requirements in countries and stock exchange requirements. The most common GAAP worldwide is the International Financial Reporting Standards (IFRSs).

(b)

Type of Trial Balance errors. Any 5 of the following.

Errors of omission: Where a transaction is completely omitted from the books (i.e. the debits and credits will have been understated by the same amount).

Errors of commission: Where the correct amount is entered but in the wrong account, e.g. when a sale of €11 to C. Green is entered in the account of P. Green. In this case, the debits and credits side will continue to be equal but the individual debtor balances will be incorrect.

Errors of principle: Where an item is entered in the wrong class or type of account, e.g. If motor car expenses are debited to the motor car account (an asset account) instead of being debited to motor car expenses (an expenses account). Thus recording less expense in the Statement of Comprehensive Income (and inflating profits) and overstating the value of the asset.

Compensating errors: These will not be revealed by extracting a Trial Balance because errors cancel each other out, e.g. If the sales account was credited €10 too much and the purchases account was debited €10 too much.

Errors of original entry: Where the original figure entered is incorrect, yet the double entry repeats the incorrect figure, e.g. If sales of €98 were entered in both the sales account and the personal account as €89.

Complete reversal of entries: Where the correct accounts are used, but each item is shown on the wrong side of the account, e.g. sales account debited and personal account credited instead of vice versa.

SOLUTION 5

(i)

1) Current ratio measures a business’s ability to meet short-term obligations when they fall due by using current assets. Current ratio is calculated by diving current assets by current liabilities. The higher the ratio the stronger the liquidity position of the business.

2) Profit margin indicates how profitable a business’s sales are. It is calculated by dividing net profit after tax by its revenue. The higher the ratio the greater profit made by the business on its sales.

3) EPS is the amount of profits that could be available for distribution to its ordinary share holders. It is calculated by dividing the profit after tax divided by the number of shares. The higher the value the more potential value for the share price.

4) Return on assets shows how much profit is earned by the assets of the business. It is calculated by dividing net profit after tax by total assets (non-current and current). Generally the higher the ratio the more efficiently the assets of the company are being employed.

5) Return on equity relates profitability to equity in the business. It is calculated by dividing net profit after tax divided by equity. The higher the ratio the more profit is earned by the owners (shareholders) of the business.

6) Debtors turnover indicates how well a business manages its receivables. It indicates the number of days a debtor takes to pay its invoices. The higher the figure the more potential for bad debts to arise in the business.

7) Interest cover shows whether there are enough profits being earned to meet the interest payments (finance costs) when due. It is calculated by dividing profit before finance costs and tax by finance costs. The higher the figure the more profits are available to meet interest payments.

(ii)

The points made below are only an indicated of the type of answer expected to get full marks. There are a number of ways to interpret the given ratios.

The current ratio for Orange Ltd is less than Pear Ltd which would indicate that Orange Ltd has fewer liquid assets or a high current liability.

Orange Ltd overhead costs appear to be higher than Pear Ltd or the gross profit margin (due to lower selling price) is less by comparing profit margins.

From the return on asset ratio Orange Ltd’s asset base is quite low so we can assume that the assets are old and nearly fully depreciated.

The EPS of Orange Ltd is three times that of the Pear Ltd which would indicate that there may be a low number of shares in issue.

Interest cover for Orange Ltd is very high indicating that the business has very low interest payments hence indicating that the debt of the business is low.

Orange Ltd has higher debtor days than Pear Ltd indicating that company is carrying a high level of debtors.

In summary Orange Ltd is not very profitable, has very little debt, old assets and a low number of shares in issue.

(iii)

In the Financial Statements of Pear Ltd the investment in Orange Ltd would be recorded at the investment price in the Statement of Financial Position under non-current assets. Any dividend received from Orange Ltd would be recorded as Other Income on the Statement of Comprehensive Income.

Pear Ltd would have to prepare Consolidated Financial Statements where Pear Ltd would be the parent company and Orange Ltd the subsidiary. The goodwill on the investment would be recorded on the Consolidated Statement of Financial Position. All the assets and liabilities of both companies would be on the Consolidated Statement of Financial Position and on the Statement of Comprehensive Income all external sales and expenses, outside the group, would be included. All intercompany transactions would need to be eliminated.

SOLUTION 6

TicToc Ltd

Statement of Financial Position as at 31/12/14

Non-current assets
Equipment (W1) 285,000
Investment Property (W2) 700,000
Investments (W3) 93,000
1,078,000
Current assets
Inventory (W4) 79,250
Trade Receivables (W5) 55,500
Bank 44,000 178,750
1,256,750
Equity & Liabilities
Share Capital 500,000
Retained earnings (W7) 274,250
774,250
Non-current liabilities
9% Debenture 250,000
Finance Lease (W1) 112,500
Current liabilities
Corporation tax (W6) 81,000
Trade payables 39,000 120,000
1,256,750

Workings

W1 Equipment

IAS 17 Asset purchased by a finance lease is capitalised, depreciated and loan recorded as a liability

Dr Equipment €120,000
Cr Finance lease (loan) €120,000
Initially recording of finance lease
Dr finance lease €7,500
Dr finance costs €6,500
Cr Bank €14,000
This is what should have been posted when €14,000 repayment made
Dr Admin exp €14,000
Cr Bank €14,000
This is what was posted
Dr finance lease €7,500
Dr retained earnings (finance costs) €6,500
Cr retained earnings (admin expenses) €14,000
To correct above mis-posting

Depreciation on €120,000 equipment at 25% reducing balance

€120,000 × 25% = €30,000

Dr Retained earnings €30,000
Cr Depreciation on equipment €30,000

Upon recording depreciation on financed asset

W2 Investment property

IAS 40 Revaluation goes directly through the Statement of Comprehensive Income

Dr Investment Property €120,000
Cr Retained earnings €120,000

Upon valuation of investment property

No depreciation under IAS 40

W3 Impairment

IAS 36 non-current assets impairment is debited to Statement of Comprehensive Income

Dr retained earnings €7,000
Cr investment €7,000
Upon impairment of investments

W4 Inventory

IAS 2 inventory is recorded at lower of cost and net realisable value

Cost of damaged inventory €15,000
NRV €7,250
Reduction in inventory by €7,750
Dr Retained earnings €7,750
Cr Inventory €7,750
Upon adjustment on value of closing inventory

W5 Bad debt

Since the debtor was bankrupt before year end this fact needs to be recorded in the Financial Statements for the year ended 31 December 2014.

Dr Retained earnings €8,500
Cr Trade receivables €8,500
Upon bankruptcy of debtor

W6 Corporation tax

€66,000 opening corporation tax
(€50,000) paid during year
€65,000 2014 charge
€81,000 corporation liability as at 31/12/14
Dr Retained earnings €65,000
Cr Corporation tax liability €65,000
Upon recording 2014 charge

W7 Retained earnings

€265,000 as per draft retained earnings
€120,000 Investment property valuation (W2)
(€7,000) impairment (W3)
(€30,000) depreciation (W1)
(€6,500) finance costs (W1)
€14,000 admin exp (W1)
(€7,750) inventory (W4)
(€8,500) bad debt (W5)
(€65,000) corporation tax (W6)
€274,250

Examiner’s Report

The paper had a mixture of computational and theory questions. On the computational questions it is important to include the workings to gain maximum marks.

The paper was answered exceptionally well by prepared students.

Marks are awarded for the correct layout of the Financial Statements, so take care that the Statement has the correct title, date and business name for which the Statement was prepared.

Also number questions, write legibly and start each answer on a new page.

Question 1

This was a computational trial balance question. Most students were well prepared for this question. A common error was a lack of realisation that the share issue should have resulted in a Share Premium account. The majority of students answered this question exceptionally well. Some students still need to be more familiar with the layout of the Statement of Comprehensive Income.

Question 2

This was a corporation tax and financial audit question. Very few students were able to calculate the expected tax charge which is the accounting profit multiplied by the current rate of corporation tax. Part (a) (ii)-(iv) were very well answered with the majority of students getting full marks on this section. Part (b) was poorly answered with some students not knowing what the term “the Audit Expectation Gap” meant.

Question 3

This was a VAT and payroll taxes question. The VAT T-account was very well answered. A few students did not know how VAT exempt purchases are treated in a business. Some students reversed the debits and credits on the payroll T-accounts.

Question 4

This was a theory question on accounting terms. Part (a) was very well answered with the accounting terms being very well explained. Part (b) on the trial balance error was incorrectly answered by some students who explained how errors cause the trial balance to be not balanced.

Question 5

This was a ratio analysis question. This was the least popular question but those that answered the question did quite well. Some of the answers on the analysis of the company based on ratios were excellent. Very few students understood the implications to the acquiring company on the purchased of another company.

Question 6

This question was based on adjustments to a draft statement of financial position. Some students did not realise that the depreciation of the assets and interest calculation were already included in the draft statement if they were not included the question would have stated this fact. Very few students did not realise that the increase in value of the investment property went through the statement of Comprehensive Income and not a revaluation reserve as per IAS 40.

 

Q1

Q2

Q3

Q4

Q5

Q6

Highest

20

20

20

20

18

20

Lowest

11.5

4.5

7.5

2

8

1

Average

18

10

15

13

14

12

Summer 2016

QUESTION 1

The following Trial Balance has been extracted from the records of Shoreside Ltd, a construction company, as at 31 March 2016:

Note Debit Credit

Ordinary shares (€1 each) (Authorised 1,000,000 shares)

(1)

600,000

Share premium

384,000

Loan note (debenture) interest paid

21,000

Retained earnings

203,000

Trade receivables and trade payables

65,000

53,000

Cash at bank

76,000

Land & buildings - Cost

(2)

3,100,000

Land & buildings Accumulated depreciation 1/4/15

(2)

400,000

Plant & equipment - Cost

(2)

120,000

Plant & equipment Accumulated depreciation 1/4/15

(2)

48,000

Inventory 1/4/15

35,000

Administration expenses

(3)

175,000

Distribution expenses

(3)

183,000

Purchases

1,230,000

Revenue

(1)

2,500,000

5% loan notes (debentures) (redeemable 2030)

(4)

840,000

Dividend paid

35,000

Corporation tax

_________

  12,000

5,040,000

5,040,000

The following items are to be adjusted for in preparing the financial statements for the year ended 31 March 2016 for the company:

(1) The company issued 100,000 €1 ordinary shares at €4 each on 1 January 2016. In error, the Sales Account (Revenue Account) was credited with the entire proceeds. Except for this, all other elements of the transaction were correctly posted.

(2) Depreciation is to be provided as follows:

Buildings - per year on cost

2%

Plant & equipment - per year on reducing balance

30%

Value of the land element included in land & buildings is €1,100,000.

(3) Accruals and prepayments were as follows:

Accruals

Prepayments

Distribution expenses

€7,700

€8,500

Administration expenses

€12,000

€14,500

(4) The debentures were issued on 1 July 2015.

(5) Closing inventory at 31 March 2016 valued at the lower of cost and net realisable value is €42,000.

(6) The corporation tax liability for the year ended 31 March 2016 is estimated to be €48,000.

REQUIREMENT

Prepare the Statement of Comprehensive Income for the year to 31 March 2016 and the Statement of Financial Position as at 31 March 2016 for Shoreside Ltd.

Total 20 Marks

QUESTION 2

Archie and Bernie have been in partnership for many years, sharing profits and losses in the ratio 2:3 respectively.

They decide to sell the partnership to a limited company called AB Ltd on 31 January 2016.

At that date the assets and liabilities of the partnership were as follows:

Property

270,000

Trade payables

22,000

Vans

25,000

Capital accounts

Goodwill

20,000

Archie

164,000

Equipment

28,000

Bernie

256,000

420,000

Receivables

15,000

Inventory

19,000

Bank current account

65,000

_______

442,000

442,000

AB Ltd is to take over all the assets and liabilities of the partnership with the exception of the bank current account. The costs incurred in selling the partnership, which amount to €10,000, are to be paid by the partnership.

The trade payables are to be taken over at face value and the assets at the following valuations:

Equipment

22,000

Property

300,000

Inventory

17,000

Vans

12,000

Goodwill

NIL

Receivables

14,000

365,000

The purchase consideration is €380,000, made up of €80,000 in cash and 300,000 ordinary shares of €1 each. 200,000 shares are to be allocated to Archie, and 100,000 shares to Bernie.

REQUIREMENT

Close the books of the partnership and prepare the opening Statement of Financial Position of AB Ltd, assuming all the above transactions have taken place.

Total 20 Marks

QUESTION 3

Statement of Financial Position of Shield Ltd as at 31 March

2016

2015

Tangible Non-current assets

Land and buildings

170,000

120,000

Plant and equipment

245,000

190,000

415,000

310,000

Current assets

Inventory

105,000

90,000

Trade receivables

89,000

60,000

Bank and cash

64,000

20,000

258,000

170,000

673,000

480,000

Equity and liabilities Share capital and reserves

Ordinary share capital

355,500

290,000

Reserves

120,500

110,050

Shareholders’ funds

476,000

400,050

Non-current liabilities

5% Debentures (issued on 1 Oct 2015)

100,000

-

Current liabilities

Trade payables

85,000

72,000

Taxation

12,000

7,950

673,000

480,000

Additional notes

2016

2015

Turnover

820,000

600,000

Dividends paid

40,000

20,000

Reserves at start of year

110,050

75,000

Profit before interest and tax

64,950

63,000

Net Profit

50,450

55,050

REQUIREMENTS

(i) Outline four purposes of carrying out ratio analysis on Financial Statements of companies.

(4 marks)

(ii) Using the extracts from the Financial Statements of Shield Ltd, calculate the following ratios in respect of 2015 and 2016.

(a) Profit margin ratio;

(b) Current ratio;

(c) Return on capital employed; and

(d) Debtor days.

(12 marks)

(iii) Comment on two of the ratios you calculated in part (ii).

(4 marks)

Total 20 Marks

QUESTION 4

(a) Explain the term “depreciation” as it applies to property, plant and equipment and outline how it is accounted for in the Financial Statements of a company.

(7 marks)

(b) IAS 16 allows, but does not require, companies to re-value property, plant and equipment to fair value. Production Ltd currently values its property, plant and equipment at cost less depreciation. It now wishes to examine changing its accounting policy from cost less depreciation to fair value.

REQUIREMENT

List and explain three relevant factors which Production Ltd should consider before changing to a fair value accounting policy.

(6 marks)

(c) IAS 36 covers the impairment of a variety of non-current assets, including property, plant and equipment, goodwill, intangible assets and investments. On 1 January 2015, Jones Ltd carried out an impairment review of its non-current assets in accordance with IAS 36 and identified a tooling machine the carrying value of which exceeded its recoverable amount. The details are as follows:

Jones Ltd had used depreciated cost for valuing the tooling machine. The machine cost €350,000 in July 2012. The expected useful life was five years with a residual value of €50,000. The accumulated depreciation on the machine at 31 December 2014 was €180,000. On 1 January 2015, the machine had a recoverable amount of €75,000 and a residual amount at 31 December 2016 of nil. The year end is 31 December.

REQUIREMENT

Prepare the journal entries to record the impairment of the asset and the depreciation charge for 2015.

(7 marks)

Total 20 Marks

QUESTION 5

(a) Explain the accounting term “books of first entry”.

(2 marks)

(b) On 3 March 2016, Johnson Ltd had the following transactions:

Credit purchase from Hook Ltd (invoice no 123) for €10,000 (excludes VAT at 23%).

Purchase from Joe Smith (invoice no 145) for €2,000 (VAT exempt) paid by cheque at time of purchase.

Credit purchase from Crook Ltd (invoice no 172) for €3,000 (excludes VAT at 13.5%).

Purchase from John McDee (invoice no 163) for €1,230 (includes VAT at 23%) paid by cheque at time of purchase.

REQUIREMENTS

(i) Prepare the Purchase Day Book for 3 March 2016 to record the above purchases.

(8 marks)

(ii) Show the journal entries to post the entries to the nominal ledgers.

(4 marks)

(c) Jaffa Ltd, a trading company, prepares Financial Statements to 31 May each year.

The following information relates to the corporation tax (CT) elements of the business for the year to 31 May 2016:

The opening balance on the CT nominal account showed €64,000, the estimated amount due to the Revenue for the year to 31 May 2015;

On 23 November 2015, the company paid the balance of its CT liability of €65,000 for the year to 31 May 2015 and paid preliminary CT of €325,000 for the year to 31 May 2016;

On 23 April 2016, the company paid the balance of preliminary CT of €305,000 for year to 31 May 2016;

The CT assessment for the year to 31 May 2016 was €700,000; and

Arising from discussions with the Revenue, the assessment for the year to 31 May 2015 was revised downwards by €10,000.

REQUIREMENT

Prepare the corporation tax T-account for Jaffa Ltd for the year to 31 May 2016.

(6 marks)

Total 20 Marks

QUESTION 6

(a) There are a number of different valuation techniques for valuing a business.

REQUIREMENT

List and explain two of the most common valuation techniques for valuing a business and set out three main limitations of each technique.

(10 marks)

(b) Public liability companies are prohibited from making distributions in certain circumstances.

REQUIREMENT

Describe the restrictions on the distributions of profits and assets by public limited companies.

(4 marks)

(c) A company’s dividend policy is simply its decisions on how much of its profits should be retained and how much should be paid out to shareholders as a dividend.

REQUIREMENT

List and explain four financial implications of a company’s dividend policy.

(6 marks)

Total 20 Marks

SOLUTION 1

Notes.

W1

Revenue

2,500,000

Less Ordinary Share Account

100,000

Less Share Premium Account

  300,000

  400,000

Adjusted Revenue

2,100,000

W2

Cost of sales

Opening Inventory

35,000

Purchases

1,230,000

Less Closing Inventory

  (42,000)

1,223,000

W3

Accruals and Prepayments

Distribution expenses per trial balance

183,000

Add Accrued 31 March 2016

7,700

Less Prepaid 31 March 2016

  (8,500)

182,200

Administration expenses per trial balance

175,000

Add Accrued 31 March 2016

12,000

Less Prepaid 31 March 2016

  (14,500)

172,500

W4

Depreciation

Buildings

Land and Buildings per trial balance

3,100,000

Less Land (not depreciated)

(1,100,000)

Depreciable amount

2,000,000

Depreciation (2%)

40,000

40,000

Accumulated depreciation 1 April 2015

  400,000

Accumulated depreciation 31 March 2016

440,000

Plant and Equipment

Cost per trial balance

120,000

Less Accumulated depreciation 1 April 2015

  (48,000)

Residual value

  72,000

Depreciation (@30%)

21,600

21,600

Accumulated depreciation 1 April 2015

  48,000

Accumulated depreciation 31 March 2016

  69,600

Total Depreciation for the year

61,600

W5

Debenture Interest

Nominal value of Debentures

 840,000

Interest for 9 months (@5%) (SOCI)

31,500

Less interest paid

 (21,000)

Interest Accrued at 31 March 2016

10,500

W6

Corporation Tax

Balance owed per trial balance

12,000

Charge for the year

 48,000

Balance owed at 31 March 2016

 60,000

W7

Retained profits 1 April 2016 per trial balance

203,000

Profit for the Year

381,200

Less Dividend Paid

(35,000)

Retained profits 31 March 2016 (SOFP)

549,200

Shoreside Ltd Statement of Comprehensive Income for year ended 31 March 2016

Sales revenue (W1)

2,100,000

Cost of Sales (W2)

(1,223,000)

Gross profit

877,000

Less Costs

Distribution expenses (W3)

182,200

Administration expenses (W3)

172,500

Depreciation (W4)

61,600

( 416,300)

Operating Profit

460,700

Less Finance Cost

Debenture Interest (W5)

 (31,500)

Profit before Tax

429,200

Income tax expense

 (48,000)

Profit for the period

381,200

Shoreside Ltd Statement of Financial Position (Balance Sheet) as at 31 March 2016

Non current assets

Land and buildings (3,100,000 − 440,000) (W4)

2,660,000

Plant and equipment (120,000 − 69,600) (W4)

 50,400

2,710,400

Current assets

Inventory

42,000

Trade Receivables

65,000

Other Receivables

Prepaid Distribution Expenses

8,500

Prepaid Admin Expenses

14,500

Cash at bank

76,000

206,000

2,916,400

Capital and reserves

Share capital (600,000 + 100,000)

700,000

Share premium (384,000 + 300,000)

684,000

Retained earnings (W7)

549,200

1,933,200

Non current liabilities

5% loan notes 2030

840,000

Current liabilities

Trade Payables

53,000

Taxation (W6)

60,000

Accruals - Debenture Interest

10,500

Distribution expenses

7,700

Administration expenses

12,000

143,200

2,916,400

SOLUTION 2

Realisation account

 

 

Assets at NBV

377,000

Trade payables

22,000

Costs of sale 10,000

 

AB Ltd

 

Purchase consideration

380,000

Profit on Realisation

 15,000

_______

402,000

402,000

Archie Capital Account

6,000

Profit on Realisation

15,000

Bernie Capital Account

 9,000

______

15,000

15,000

Bank Account

 

 

Opening Balance

65,000

Costs of sale

10,000

AB Ltd

80,000

Capital account Bernie (W3)

165,000

Capital account Archie (W2)

 30,000

______

175,000

175,000

Statement of Financial Position AB Ltd as at 31 March 2016

Non Current Assets

Property Plant and Equipment (300 + 22 + 12)

 

334,000

Goodwill (W1)

 

 37,000

 

 

371,000

Current Assets

 

 

Inventory

17,000

 

Receivables

14,000

 31,000

 

 

402,000

Share Capital

 

 

Ordinary Shares

 

300,000

Current Liabilities

 

 

Trade payables

22,000

 

Bank overdraft

80,000

102,000

 

 

402,000

Calculation of Goodwill (W1)

 

 

Asset valuations

 

 

Property

300,000

 

Equipment

22,000

 

Vans

12,000

 

Inventory

17,000

 

Receivables

14,000

365,000

Less Trade payables

 

 22,000

 

 

343,000

Purchase consideration

 

380,000

Goodwill

 

 37,000

Capital Accounts

 

€000

€000

 

€000

€000

A

B

A

B

AB Ltd Ord Sh

200.0

100.0

Balance

164.0

256.0

 

Profit on Real

6.0

9.0

Bank (W3)

_____

165.0

Bank from A (W2)

30.0

_____

200.0

265.0

200.0

265.0

Shares in new company

 

300,000

Share allotment

 

 

Archie

200,000

 

Bernie

100,000

300,000

SOLUTION 3

(i) Ratio analysis means comparing two particular numbers from a business’s Financial Statements. Ratios compare annual trends within the same business and also provide useful comparisons between businesses. Measuring amounts relative to other amounts allows for a comparison between businesses of different sizes.

Ratios are used by managers and owners to assess how their business is performing. They are also used by potential acquirers when valuing target businesses, by banks when assessing the suitability of a business for additional debt and by Revenue when trying to identify taxpayers for audit.

Ratios generally hold no meaning unless they are compared to a business’s past performance or another business’s performance. For example, an EPS of €2.50 means nothing by itself, and means very different things if the industry average is €22.50 or €1.50. Care should be taken when comparing the ratios of firms in different industries, which face different risks, capital requirements and competition.

For businesses that have operations in more than one industry, ratio analysis is less meaningful unless it can be done on a divisional basis.

Also, it is important to keep in mind that ratio analysis does not tell the entire story. There may be good business reasons to support management’s decision to reduce or increase liquidity or tangible non-current assets in a different manner than the rest of the industry. Having a single ratio out of line with an industry, therefore, does not necessarily mean there is a problem.

(ii)

2016

2015

Net Profit (after interest)/Sales

50,450

820,000

6.15%

55,050

600,000

9.18%

Current ratio/working capital ratio

258,000

97,000

2.66:1

170,000

79,950

2.13:1

ROCE:

64,950

11.28%

63,000

15.75%

576,000

400,050

Debt collection period

89,000 × 365

40 days

60,000 × 365

37 days

820,000

600,000

(iii) The profit margin ratio indicates how profitable a business’s sales are.

Given net income and revenue from a business’s Statement of Comprehensive Income:

Generally, the higher the ratio, the more profit is earned for each euro of sales.

The fall in the ratio is significant. Sales have increased by 36% but further information would be required to discover if the drop in profit is due to a drop in the gross margin or if there is an increase in the expenses of the business. The interest on debentures is a factor in the reduced profit also.

The current ratio measures a business’s ability to meet short-term obligations (those falling due within one year) by using current assets.

Given the current assets and current liabilities from a company’s Statement of Financial Position:

Generally, the higher the ratio, the stronger the liquidity position of the business and the more easily it can meet its obligations

The increase in the ratio is a positive aspect of the liquidity position of the business but perhaps some of the resources of the company could be diverted to the longer term objectives of the business.

Return on capital employed (‘RoCE’)

The return on capital employed ratio compares the company’s earnings before interest and tax to its capital employed. It is often used to compare the business’s performance to its cost of capital.

Given net income, interest and tax from a business’s Statement of Comprehensive Income and total equity and non-current liabilities from its Statement of Financial Position:

Generally, the higher the ratio, the more efficiently the business is using capital.

The fall in the return is attributable to the fall in the profit margin and also the interest on debentures. Further analysis is necessary to allay shareholders fears that the drop is not permanent.

Debtor Days

Debtors’ turnover indicates how well a business manages its receivables. It tells us the number of days, on average, that a receivable balance is outstanding before it is turned into cash.

Given the sales from a company’s Statement of Comprehensive Income and the opening and closing accounts receivable from its Statement of Financial Position:

Strictly speaking this should be calculated on credit sales only. However it is generally very difficult to find this figure from financial reports. If this ratio is being carried out by management they would use credit sales but investors use total revenue as an approximation.

Generally, the higher the ratio, the more potential for bad debts to arise (leading to losses for the business).

The increase in the number of days suggests that credit control needs to be tightened. The increase in sales by 36% may have arisen through increased credit limits which may result in increased bad debts. The change may also be due to a lack of control exercised by the accounts department which may need additional staffing.

SOLUTION 4

(a)

Depreciation.

At its simplest level, depreciation is the systematic allocation of the cost (or re-valued amount) of the value of PP&E over its useful life. It reflects the contribution of the non-current asset to profits.

Useful life is the period over which the asset is expected to be available for use.

Depreciation is not charged on the full cost (or re-valued amount) of an asset. Instead, an asset’s depreciable amount is its cost less its residual value. Residual value is the amount that an entity expects to receive for the asset when it expects to dispose of it. Residual value does not include expected future inflation.

Accounting for depreciation.

Non-current tangible assets are shown in the Statement of Financial Position under three headings:

cost (or re-valued amount);

accumulated depreciation (the sum of the annual depreciation expensed to date); and

net book value (cost less accumulated depreciation) or carrying value.

The depreciation charge for each period is recognised as an expense in the Statement of Comprehensive Income.

Where depreciation has been charged on a ‘straight line’ basis, the same amount has been charged each year. Two of the more common depreciation methods used are:

Straight line, in which the depreciable value is divided by its useful life.

Reducing balance, which records a percentage reduction in value over the useful life.

A key consequence of the concept of depreciation is that assets which are increasing in value still need be depreciated. This has particular implications for the depreciation of appreciating assets that have been re-valued. Indeed, after an upward revaluation, the depreciable amount of an asset normally increases so the depreciation charge is larger after revaluation than it was before! This is a difficult concept but it is important to focus on the fact that the accountant’s definition of depreciation is not framed in terms of a loss in the value of the asset, but in terms of the consumption of economic benefits through use.

(b) If the valuation route is chosen it should be applied consistently to all assets of the same class (assets that have a similar nature or function within the business).

This means that entities cannot cherry pick the assets they carry at re-valued amounts.

If an accounting policy of revaluation is chosen, then revaluations should be kept up to date, so that the carrying amount of an asset (that is, the amount at which it is stated in the Statement of Financial Position) at the reporting date does not differ materially from its fair value. Thus, anyone who re-valued their property in recent years must continue to re-value their property during a recession that is lowering prices.

The general rule on an increase in valuation is that any surplus arising on a revaluation is recognised directly in a revaluation reserve (part of equity on the Statement of Financial Position). That is, it does not go to the Statement of Comprehensive Income and does not increase the company’s profit for the period. By recording these unrealised increases (unrealised because the asset has not been sold and a ‘true’ profit has not been recorded) in an assets value in the reserves rather than in the Statement of Comprehensive Income we insure that the company’s profit is not falsely inflated for the period.

The general rule on a decrease on valuation is that any deficit arising on the revaluation is recognised in a Statement of Comprehensive Income. Thus, revaluing assets downwards has a direct and immediate effect in the profit reported for that period.

An exception to this general rule on devaluations of an asset is where a revaluation downwards reverses a previous revaluation upwards on the same asset. If this happens, the revaluation deficit is taken directly to the revaluation reserve (to offset the previous increase that is recorded there). Where the deficit is greater than the original increase in valuation (surplus), only an amount equivalent to the surplus can be taken directly off the revaluation reserve.

The excess deficit goes through the Statement of Comprehensive Income.

An exception to this general rule on an asset that is revalued upwards, is where a revaluation upwards reverses a previous revaluation downwards on the same asset. If this happens, the revaluation increase is taken to the Statement of Comprehensive Income (to offset the previous decrease that was recorded here) and, any excess to the revaluation reserve.

(c)

The net book value of the machine at 31 December 2014 is:

Cost

€350,000

Accumulated depreciation

€180,000

Net Book Value

€170,000

Less Recoverable amount

€75,000

Impairment charge

€95,000

(Dr SOCI, Cr PPE)

Recoverable amount 1.1.2015

€75,000

Residual value 31.12.2016

NIL

Depreciation each year (2 years)

€37,500

(Dr Depreciation expense, Cr Accumulate Depreciation)

Journal entries

1 January 2015

Dr

Impairment charge

€95,000

Cr

PPE

€95,000

Being the impairment of the asset at 1 January 2015

31 December 2015

Dr

Depreciation expense

€37,500

Cr

Accumulated depreciation

€37,500

Being the depreciation of the asset for 2015.

SOLUTION 5

(a) Books of first entry, also known as books of prime entry or day books, are where the business’s transactions are first recorded.

(b)

(i) Purchases Day Book - 3 March 2016

Details

Inv No

Total

Creditors

Cash at Bank

VAT 23%

VAT 13.5%

Net

Hook Ltd

123

12,300

12,300

2,300

10,000

J Smith

145

2,000

2,000

2,000

Crook Ltd

172

3,405

3,405

405

3,000

J McDee

163

1,230

_____

1,230

230

____

1,000

18,935

15,705

3,230

2,530

405

16,000

(ii) Journal entries

3rd March 2016

DR Purchases Account

16,000

 

DR VAT

2,530

 

DR VAT

405

 

CR Hook Ltd

 

12,300

CR Crook Ltd

 

3,405

CR Cash at Bank

 

3,230

With transfer of balances from Purchases Dav Book

(c)

Corporation tax account

 

 

 

 

23-Nov-15

Paid bal of prior year

65,000

01-Jun-15

Balance

64,000

Paid PT current year

325,000

23-Apr-16

Paid PT current year

305,000

31-May-16

Assessment for current year

700,000

31-May-16

Revision prior year

10,000

31-May-16

Balance c/f

 59,000

      

764,000

764,000

 

01-Jun-16

Balance b/d

59,000

SOLUTION 6

(a)

There are a number of techniques for valuing businesses. Three of the most common valuation processes are:

(1) Earnings per share (EPS), and the price earnings (P/E) ratio (this only works for valuing companies).

(2) Net asset value method.

(3) Cash flow method.

Each of these approaches will produce a different result for the same entity. It is important to note that the valuation process for each business is unique and in practice a combination of techniques may be used.

(1) Earnings per share method

Definition of earnings per share (EPS)

EPS is the net income attributable to ordinary shareholders. In practice, EPS can be very difficult to calculate. How do you take account of rights issues or bonus shares, or of convertible debentures that may or may not be converted into ordinary shares at some future date? To take account of these and many more potential complications there is an accounting standard that governs the calculation of EPS. IAS 33 requires that the EPS, calculated in accordance with the Standard, is presented on the face of the Statement of Comprehensive Income. GAAP under FRS 102 does not require that EPS is disclosed. However, is a company elects to disclose EPS, it must do so in accordance with all the requirements of IAS 33. EPS is therefore a defined metric, meaning there are strict rules which govern how it is calculated.

For the purposes of this course, however, you will use a simplified non-GAAP method of calculating EPS. It is calculated by the formula:

Calculating EPS

First of all, we must determine what the earnings of a company are. “Earnings” means the profit or net income available to the ordinary shareholders i.e. profit after tax. EPS is simply this number divided by the number of ordinary shares in issue.

The P/E ratio will reflect investors’ confidence in the company and the industry in which it operates. A high P/E ratio usually means that the investors are very confident in the companies earning and growth ability in the future.

The P/E ratio is easily calculable and in fact freely available for public companies.

Many sources, such as Bloomberg or DataStream publish the P/E for industries as well as for individual quoted companies. Owners of private companies can take the P/E for the relevant industry, suitably adjusted, to work out value of their company. Adjustments required to an industry P/E relate to issues such as the liquidity of shares or the need to combine two or more industries where a private company operates in two or more industries.

Limitations of the method

The P/E ratio method is simple to calculate, but it has a number of limitations:

Earnings manipulation: Companies often use a variety of accounting techniques to arrive at their reported net income. Since net income is a critical component of this valuation technique, manipulated earnings can lead to an inaccurate valuation.

Industry differences: Different industries have different growth rates, risk levels and histories and therefore different P/E ratios. Shares that may appear cheap in one industry may look expensive compared to another. However, each company is unique and therefore even companies in the same sector would differ in size, trading partners and other factors. Thus when valuing private companies the selection of a suitable ratio is a matter of significant judgment.

Volatility and risk: P/E ratios also ignore such critical items as risk and volatility. Two firms may sport identical P/E ratios, but if one firm’s revenue and earnings base is extremely reliable while the other’s earnings are highly uncertain, then the more reliable firm could make a better investment over the long haul.

Other factors: It is important to remember that P/E ratios take no account of a company’s projected future growth rate. Two stocks could be identical in every respect (including on a P/E basis), but if one company is growing at twice the rate of the other firm, then the high-growth company will likely make a better investment over the long haul.

Note: As a result of the above, it is important to remember that the P/E ratio should not be used in isolation when making investment decisions.

(2) Net asset value method

The net asset value (NAV) method uses the Statement of Financial Position of a business to approximate its market value. There are two approaches one can take:

Equity-holders’ funds method

This simply takes the equity (that is, assets less liabilities) as the value of the business.

Liquidation value method

This is based on market (realisable) values of the assets and liabilities of the business and not their book values.

Limitations of the method

The basic net asset valuation method, while simple, is generally not an accurate reflection of the value of a company. This is because the book value of assets is rarely reflective of their current market value. It takes no account of future plans or of how the business is performing compared to other similar businesses.

The liquidation method, though more accurate, has a number of limitations:

It can be an onerous undertaking, as the entire company has to be broken down into its components.

It can be very costly as a number of specialists may need to be involved.

Certain assets may be hard to value (e.g. because they are unique to the company).

While more accurate and informative than the simple NAV, the liquidation method still retains the two key flaws: it takes no account of:

future plans; or

how the business is performing compared to similar businesses

(3) Cash flow method

Under this method, the business’s value is determined by its ability to generate free cash flow. Free cash flow is the cash available to equity-holders after all investment and operating expenses have been met. The cash flows are calculated at their present value.

The cash flow method of valuing companies eliminates the subjectivity of profits. Cash receipts and payments are absolute measures, as they represent actual money, and cannot be influenced by the choice of accounting policies that can modify accounting profits.

Valuing a company by the cash flow method is a three-step process:

(i) Calculate free cash flows over a suitable period.

(ii) Discount the cash flows using a suitable rate.

(iii) Add the discounted values over the period.

Limitations of the method

The cash flow method would appear to take away some of the uncertainty with regards manipulation of accounting profits. However, there are significant inherent limitations with this method as below:

estimation of free cash flows is highly judgmental;

there can be difficulty in deciding on a suitable discount rate;

there can be difficulty in deciding on the horizon/time period to extend projected cash flows; and

future assumptions become increasingly uncertain and volatile.

(b)

Section 1082 of the Companies Act 2014 contains a restriction on the distribution of assets by public limited companies, which may only make a distribution if:

at the time of the distribution the amount of its net assets is not less than the aggregate of its called-up share capital and its undistributable reserves (as discussed in section 19.2); and

to the extent that the distribution does not reduce the amount of those assets to less than that aggregate.

For the purposes of Section 1082, undistributable reserves are defined as:

the share premium account;

the capital redemption reserve fund;

the amount by which the company’s accumulated, unrealised profits (so far as not previously utilised by any capitalisation) exceed its accumulated unrealised losses (so far as not previously written off in a reduction or reorganisation of capital duly made); and

any other reserve which the company is prohibited from distributing by any enactment (other than one contained in Part 17 of the Companies Act 2014 or by its constitution.

Most quoted companies pay dividends twice a year. An interim dividend is usually paid relating to the first six months of trading, followed by a final dividend at the end of the financial year.

(c)

A company’s dividend policy is simply its decisions on how much of its profits should be retained and how much should be paid out to shareholders as a dividend.

This is a very important question as dividends can be a major cash outlay for companies. The company will have to weigh up the shareholders’ desire for a dividend with its ability to pay a dividend and its wish to retain funds for future investments.

Some classes of shareholders (those with high marginal rates of income tax) may prefer to have capital appreciation in their shares rather than receive an annual dividend. Therefore, their preference will be that the directors do not declare a dividend but rather retain the funds within the company and invest it in profitable activities.

Shareholders who have bought the shares as a long-term investment may similarly prefer that the company use its funds for an investment rather than using up its cash reserves to pay dividends to the shareholders.

Shareholders who borrowed to invest in a company may be relying on the dividend payments to help them meet their borrowing obligations.

Corporate shareholders may wish to receive a dividend so that they can use the cash to make further investments.

In reality, directors of companies are not free to decide on whatever dividends they wish to pay out. There are certain restrictions placed on them by internal and external forces, such as:

Providers of debt capital: Certain restrictions may be included in loan agreements which prevent excessive dividend payout.

Legal restrictions: Companies can only distribute out of certain reserves (discussed previously).

Shortage of cash: A company may not have sufficient cash on hand to pay out the dividend.

Investment opportunities: If profitable investment opportunities exist, it may be preferable to invest rather than distributing the cash.

Many financial analysts are of the opinion that markets view dividend policy as a way for management to signal to the market. If the dividend policy remains unchanged then the market tends to interpret this as management having nothing to signal. Where the dividend policy is changed (without the market being significantly forewarned about why) the resulting fluctuations in the share price indicate the market’s views.

Examiner’s Report

Overall

The paper had a mixture of computational and theory questions. On the computational questions the majority of students included workings, which is very important to gain maximum marks. Students should take particular care that all statements have the correct title, date and business name for each of the statements so as to obtain the marks that are awarded for the correct layout. Students are reminded to number questions and to write legibly. The paper was answered exceptionally well by students who were well prepared.

Question 1 – Preparation of Income Statement and Statement of Financial Position

Most students were well prepared for this question. A number of students did not complete the adjustment to revenue for the incorrect initial posting of the issue of shares at a premium. Some students did not correctly account for the accrued and prepaid administration and distribution expenses, either by incorrect addition or subtraction and omission from current assets/liabilities. Debenture interest, which was for a part of the year, was incorrectly accounted for by some students.

Question 2 – Sale of a partnership to a limited company

Students were asked to close the books of a partnership and prepare the opening statement of financial position for the new company. This was the least popular question with students. Many students were not familiar with the preparation of the disposal account or the partners’ capital accounts. A number of students calculated the goodwill arising on the purchase of the partnership.

Question 3 – Ratio analysis

The majority of students attempted this question and performed very well. They understood the purposes of preparing ratios and accurately calculated and provided relevant comments on the four ratios listed.

Question 4 - Theory question on International Accounting Standards

This question tested the students’ knowledge of depreciation, fair value and impairment. Some students were excellently prepared and attained full or nearly full marks. However the calculation of impairment charge and depreciation expense in part (c) was answered poorly by some.

Question 5 – Books of prime entry, day books and T-accounts

Nearly all students attempted this question. The majority of the students answered the question very well, but some were unsure how to complete the purchases day book correctly and then transfer the totals to the relevant accounts. This is a basic element of accounting. Students were more familiar with T-accounts and obtained good marks in preparing the corporation tax T-account.

Question 6 – Valuation technique for valuing a business, distribution of profits by public liability companies and dividend policy.

Students had a good knowledge of valuing a business and dividend policy. However, responses on distributions of profits by public liability companies were weak.

Q1

Q2

Q3

Q4

Q5

Q6

Highest

20

16

20

20

19

19

Lowest

3

2

2

2

7

1

Average

16

5

15

10

12

11

Autumn 2016

QUESTION 1

The following trial balance has been extracted from the records of McAdo Ltd at 31 July 2016.

 

Notes

Debit

Credit

 

 

Inventory 1/8/15

(1)

87,000

 

Land & buildings - cost

(2)

4,500,000

 

Land & buildings accumulated depreciation 1/8/15

(2)

 

680,000

Plant & equipment - cost

(2)

650,000

 

Plant & equipment accumulated depreciation 1/8/15

(2)

 

260,000

Bank overdraft

 

 

66,000

Revenue

 

 

3,360,000

Purchases

 

2,016,000

 

Administration expenses

(3)

456,000

 

Distribution expenses

(3)

385,000

 

4% loan notes (debentures) (redeemable 2030) (Issued 2014)

 

 

500,000

Trade payables and receivables

(4)

82,000

67,000

Dividend paid

 

35,000

 

Ordinary shares (€1 each) (Authorised 2,000,000 shares)

 

 

1,300,000

Share premium

 

 

1,400,000

Loan note (debenture) interest

 

12,500

 

Retained earnings

 

 

602,500

Corporation tax

 

12,000

________

 

 

8,235,500

8,235,500

The following items are to be adjusted for in preparing the financial statements for the year ended 31 July 2016:

(1) Inventory at 31 July 2016 (valued at the lower of cost and net realisable value) €78,000.

(2) Depreciation is to be provided as follows:

Buildings – per year on cost

2%

Plant & equipment – per year on reducing balance

40%

The value of the land element included in land and buildings is €1,500,000.

(3) Accruals and prepayments are as follows:

 

Accruals

Prepayments

Administration expenses

€17,500

€16,800

Distribution expenses

€12,200

€9,900

(4) A debtor who owed the company €2,000 at 31 July 2016 went into liquidation on 1 August 2016. The company decided that the full amount of the debt must be written off.

(5) The corporation tax liability for the year is estimated to be €36,000.

REQUIREMENT

Prepare the Statement of Comprehensive Income for the year to 31 July 2016 and the Statement of Financial Position as at 31 July 2016 for McAdo Ltd.

Total 20 Marks

QUESTION 2

On 1 July 2015, Ms Harper had the following balances in the books of her business:

 

Debit

Credit

 

Property, plant and equipment

292,000

 

Inventory (stock in trade)

8,800

 

Balance in bank

24,000

 

Trade payables (trade creditors)

 

3,400

Balance on owner’s capital/equity account

 

321,400

 

324,800

324,800

Ms Harper does not keep proper books of account, but bank statements covering the year from 1 July 2015 to 30 June 2016 were obtained from the bank and are summarised as follows:

Money paid into the bank:

Extra capital introduced

€10,000

Shop takings

€70,000

Payments made by cheque:

To trade payables (trade creditors) for stock

€30,000

Van purchased (not included in trade payables above)

€15,000

Light and heat (not included in trade payables above)

€4,500

Wages

€15,600

Sundry expenses (not included in trade payables above)

€5,600

It has been discovered that, in the year ending 30 June 2016, Ms Harper had paid all the takings into the bank except for €6,400 which was used as follows:

Miscellaneous expenses

€2,400

Drawings

€4,000

Ms Harper has reported the following details to you which pertain to the financial statements for the year to 30 June 2016:

There had been no sales on credit during the year.

The balance due to trade payables is NIL.

Stock in trade at 30 June 2016 was valued at

€7,400

Depreciation on property, plant and equipment for the year

€16,400

REQUIREMENTS

Based on the above information, prepare the following for the business of Ms Harper:

(i) Bank account for the year to 30 June 2016;

(5 marks)

(ii) Statement of Comprehensive Income for the year to 30 June 2016; and

(8 marks)

(iii) Statement of Financial Position as at 30 June 2016.

(7 marks)

Total 20 Marks

QUESTION 3

Statement of Financial Position of Jaygard Ltd as at 31 July 2016

 

2016

2015

 

Tangible non-current assets

 

 

Property, plant and equipment

940,000

780,000

Accumulated depreciation

(320,000)

(240,000)

 

620,000

540,000

Current assets

 

 

Inventory

396,000

324,000

Trade receivables

412,000

438,000

Cash and bank

  3,000

   12,000

 

1,431,000

1,314,000

Equity and liabilities

 

 

Share capital and reserves

 

 

Ordinary shares (€1 each)

750,000

600,000

Share premium account

120,000

100,000

Retained earnings

 90,000

 74,000

 

960,000

774,000

Non-current liabilities

 

 

6% Debentures (Issued 2012 Redeemable 2025)

150,000

200,000

Current liabilities

 

 

Trade payables

265,000

298,000

Taxation

45,000

42,000

Bank overdraft

  11,000

       0

 

1,431,000

1,314,000

You are given the following additional information:

(i) Extract from Statement of Comprehensive Income for the year ended 31 July 2016

Operating profit

103,000

Interest

(12,000)

91,000

Taxation

(45,000)

Profit after tax

46,000

Dividend paid

30,000

(ii) There were no disposals of non-current assets during the year.

(iii) Debentures were redeemed at par on 31 July 2016.

REQUIREMENT

Prepare the Statement of Cash Flows, under the indirect method, for the year to 31 July 2016 for Jaygard Ltd.

Total 20 Marks

QUESTION 4

(a) IAS 2 Inventories gives accounting guidance on the accounting treatment for inventory.

REQUIREMENTS

(i) State how inventories are measured.

(2 marks)

(ii) Explain the term “cost” as it applies to inventories and outline two methods for calculating the cost as permitted under IAS 2.

(8 marks)

(iii) Explain the term “net realisable value”.

(4 marks)

(b) John, operates a retail business, and his financial year ended on 31 January 2016. The cost of inventory on hand, ascertained on the basis of a count on 5 February 2016, was €348,400. The details of transactions occurring during period 1 February to 5 February 2016 which may affect the valuation of the end of year inventory were as follows:

Purchases in the amount of €20,000 net of VAT were received into stores on 2 February 2016.

Sale of goods in the amount of €24,000 (selling price) net of VAT were despatched from stores on 3 February 2016. The mark up on sales is 25%.

Goods in the amount of €2,000 net of VAT were returned to suppliers on 4 February 2016.

Goods which cost John’s business €2,400 were returned by customers on 4 February 2016.

REQUIREMENT

Identify the cost of inventory as at 31 January 2016 to be included in the financial statements of John, taking account of the transactions listed above.

(6 marks)

Total 20 Marks

QUESTION 5

(a) Trading Ltd operates a computer business and the details shown hereunder are relevant to the completion of the VAT account for the month of January 2016.

The balance on the VAT control account at 31 December 2015 was made up as follows:

Refund due from the Collector General for Nov/Dec 2015

(€4,400)

VAT due to Collector General for Nov/Dec 2015

€6,000

Balance due

€1,600

During the month of January 2016, Trading Ltd had the following sales and purchases:

Purchase on credit (exclusive of VAT at 13.5%) from registered suppliers
on 5 January

€1,000

Purchases on credit (exclusive of VAT at 23%) from registered suppliers
on 20 January

€20,000

Sales on credit at 23% VAT (exclusive of VAT) in January 2016

€3,000

Sales on credit at 23% VAT (inclusive of VAT) in January 2016

€49,200

The refund due from the Collector General in respect of Nov/Dec 2015 was not received by 31 January 2016.

The amount due to the Collector General for Nov/Dec 2015 was paid on 18 January 2016.

REQUIREMENTS

(i) Show the journal entries to record the above transactions.

(4 marks)

(ii) Prepare the VAT account for the month of January 2016.

(8 marks)

(b) Explain how an Annual VAT Return of Trading Details is used as an analytical tool.

(3 marks)

(c) Trading Ltd employs 10 employees. Details of the salary payments for January 2016 are as follows:

Gross salaries

€20,000

PAYE deducted from employees

€6,000

PRSI and USC deducted from employees

€800

PRSI paid by employer

€2,100

The salaries due to staff were paid on 31 January 2016 and the amounts due to the Collector General were paid on 14 February 2016.

REQUIREMENT

Show the journal entries to record the above transactions.

(5 marks)

Total 20 Marks

QUESTION 6

(a) A fundamental characteristic of a business is that it is formed to earn a profit, to increase the wealth of its owners and grow the business. Two basic types of structures for a business are sole traders and partnerships. Whereas there are similarities in accounting for each structure there are also a number of differences.

REQUIREMENT

Discuss the differences between accounting for a sole trader and accounting for a partnership.

(8 marks)

(b) Where Irish resident companies make payments such as dividends and royalty payments, they may be required to withhold tax on such payments.

REQUIREMENT

Set out the circumstances when an Irish resident company is required/is not required to withhold tax on the payment of dividends and state when dividend withholding tax (DWT) is paid over to Revenue.

(6 marks)

(c) Irishbro Ltd is an Irish company with issued share capital of 200,000 €1 shares.

40% of its shareholders are Irish individuals (20% DWT will apply to any dividend) and 60% are Irish companies (no DWT will apply as all have properly applied for, and been granted, an exemption from DWT).

Irishbro Ltd declared a dividend of €3 per share on 10 February 2016 and paid out the dividend on 10 March 2016.

REQUIREMENT

Show the journal entries in the books of Irishbro Ltd to record the transactions associated with the declaration and payment of the dividend.

(6 marks)

Total 20 Marks

SOLUTION 1

 

 

W1

Cost of sales

 

 

 

Opening Inventory

87,000

 

 

Purchases

2,016,000

 

 

 

2,103,000

 

 

Less Closing Inventory

 −78,000

2,025,000

W2

Depreciation

 

 

 

Buildings

 

 

 

Land and Buildings per TB

4,500,000

 

 

Less Land (not depreciated)

−1,500,000

 

 

Depreciable amount

3,000,000

 

 

Depreciation (2%)

60,000

60,000

 

Accumulated depreciation SOY

680,000

 

 

Acc Dep EOY

740,000

 

 

Plant and Equipment

 

 

 

Cost per TB

650,000

 

 

Less Depreciation pri years

−260,000

 

 

Residual value

390,000

 

 

Depreciation (@40%)

156,000

  156,000

 

Depreciation pri years

260,000

 

 

Acc Dep EOY

416,000

 

 

Total Depreciation

216,000

W3

Accruals and Prepayments

 

 

 

Distribution Costs per TB

385,000

 

 

Add Accruals

12,200

 

 

Less Prepayments

−9,900

  387,300

 

Administration Costs per TB

456,000

 

 

Add Accruals

17,500

 

 

Less Prepayments

−16,800

  456,700

W4

Trade Receivables per TB

82,000

 

 

Write off Bad Debts-

2,000

 

 

Adjusted Balance per Trial Balance

80,000

 

W5

Debenture Interest

 

 

 

Nominal value of Debs

500,000

 

 

Interest (@4%) (SOCI)

20,000

 

 

Interest paid

−12,500

 

 

Interest Accrued at EOY

7,500

 

W6

Corporation Tax

 

 

 

Balance due per TB

12,000

 

 

Charge for the year

36,000

 

 

Balance owed at EOY

24,000

 

W7

Retained profits per TB

602,500

 

 

Profit for the Year

217,000

 

 

Less Dividend Paid

−35,000

784,500

Statement of Comprehensive Income McAdo Ltd for year ended 31 July 2016

Sales revenue

3,360,000

Cost of Sales (W1)

−2,025,000

Less Costs

216,000

1,335,000

Depreciation (W2)

Distribution costs (W3)

387,300

Administration costs (W3)

456,700

Bad Debts (W4)

2,000

1,062,000

Operating Profit

273,000

Less Finance Cost Debenture Interest (W5)

20,000

Profit before Tax

253,000

Income tax expense

36,000

Profit for the period

  217,000

McAdo Ltd Statement of Financial Position (Balance Sheet) as at 31 July 2016

 

Non-current assets

 

 

Land and Buildings (€4,500,000 − €740,000) (W4)

 

3,760,000

Plant and equipment (€650,000 - €416,000) (W4)

 

  234,000

 

 

3,994,000

Current assets

 

 

Inventory

78,000

 

Trade Receivables (W4) (€80,000 - €4,000)

80,000

 

Other Receivables

 

 

Prepaid Distribution Expenses

9,900

 

Prepaid Admin Expenses

16,800

  184,700

 

 

4,178,700

Capital and reserves

 

 

Share capital

 

1,300,000

Share premium

 

1,400,000

Retained earnings (W7)

 

  784,500

 

 

3,484,500

Non-current liabilities

 

 

4% loan notes 2030

 

500,000

Current liabilities

 

 

Trade Payables

67,000

 

Taxation

24,000

 

Accruals - Debenture Interest

7,500

 

Distribution expenses

12,200

 

Administration expenses

17,500

 

Balance at Bank

66,000

 194,200

 

 

4,178,700

SOLUTION 2

Bank Account Business Ms Harper for year to 30 June 2016

 

 

Opening Balance

24,000

Stock purchased

30,000

Extra capital introduced

10,000

Delivery van

15,000

Shop takings

70,000

Van running expenses

3,600

Debtors’ receipts

500

Light and Heat

4,500

 

 

Wages

15,600

 

 

Sundry expenses

2,000

 

_______

Closing Balance 30.6.16

 33,800

 

104,500

 

104,500

Opening Balance 1.7.16

33,800

 

 

Statement of Comprehensive Income Ms Harper for the year ended 30 June2016

 

Sales (W1)

 

76,600

Less cost of sales:

 

 

Opening Inventory 1 Mar 15

8,800

 

Purchases (W2)

29,400

 

 

38,200

 

Less Inventory 29 Feb 16

7,400

30,800

Gross profit

 

45,800

Wages

15,600

 

Van running expenses

3,600

 

Bad debts

100

 

Sundry expenses (W3)

4,400

 

Electricity

4,500

 

Depreciation: Buildings

5,000

 

  

Plant and equipment

5,600

 

  

Motor Vehicles

5,800

44,600

Net Profit

 

1,200

Notes

W1.

Sales

70,000

 

 

Sundry expenses

2,400

 

 

Drawings

4,200

76,600

W2.

Purchases

 

 

 

Paid to creditors

30,000

 

 

Deduct Owing to creditors at start

−3,400

 

 

Add Owing to creditors at end

2,800

29,400

W3

Sundry Expenses

 

 

 

Bank

2,000

 

 

Cash

2,400

4,400

Statement of Financial Position Ms Harper 29 February 2016

Non-current Assets

Land and Buildings

250,000

5,000

245,000

Plant and equipment

28,000

5,600

22,400

Motor Vehicles

 29,000

 5,800

 23,200

 

307,000

16,400

290,600

Current Assets

 

 

 

Stock

 

7,400

 

Bank Balance

 

33,800

 41,200

 

 

 

331,800

Capital and Liabilities

 

 

 

Opening Capital

 

 

322,000

Add Extra Capital introduced

 

 

10,000

Add profit/Less loss

 

 

1,200

Less Drawings

 

 

 −4200

 

 

 

329,000

Current Liabilities

 

 

 

Trade Creditors

 

 

2,800

 

 

 

331,800

SOLUTION 3

Statement of Cash Flow for year ended 31 July 2016

 

 

Cash flow from operating activities

(1)

 

20,000

Cash outflow from investing activities

(2)

 

−160,000

Cash inflow from financing activities

(3)

 

120,000

Net cash outflow

 

 

−20,000

Opening balance in Cash and bank

 

 

12,000

Closing balance in Cash and bank

 

 

−8,000

Cash and bank

 

3,000

 

Bank overdraft

 

−11,000

−8,000

(1) Cash flow from operating activities

 

 

 

Operating profit

 

 

103,000

Add back depreciation

 

80,000

 

Deduct inventory increase

 

−72,000

 

Add receivables decrease

 

26,000

 

Deduct payables increase

 

−33,000

104,000

Deduct taxation paid

 

 

−42,000

Deduct dividend paid

 

 

−30,000

Deduct interest paid

 

 

−12,000

 

 

 

20,000

(2) Cash flow from investing activities

 

 

 

Non-current assets at start of year

 

 

780,000

Non-current assets at end of year

 

 

940,000

Cash outflow from investing activities

 

 

-160,000

(3) Cash inflow from financing activities

 

 

 

Ordinary share of €1 at start of year

 

600,000

 

Ordinary share of €1 at end of year

 

750,000

150,000

Share premium account at start of year

 

100,000

 

Share premium account at end of year

 

120,000

20,000

6% Debentures at start of year

 

200,000

 

6% Debentures at end of year

 

150,000

−50,000

 

 

 

120,000

SOLUTION 4

(a)

(i) Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials).

Generally, inventories are measured as the lower of:

Cost; and

Net realisable value.

Cost

Cost includes all direct expenditure to get inventory ready for sale. This includes:

Purchase costs;

Production or conversion costs; and

Other costs incurred in bringing inventory to its present location and condition, including attributable overheads such as depreciation.

(ii) Calculating cost

Calculating the cost of inventory is straightforward in a trading organisation, and is usually the price paid to the supplier plus delivery charges. The calculation is more difficult for a manufacturing organisation.

The factory cost of goods is made up of direct costs and factory overheads. This calculation is outside the scope of this course.

Profit is calculated by matching costs with related revenues arising during an accounting period. The problem, in the case of inventory, is to decide which inventory costs match which sales revenues. This can be difficult because of the large number of items acquired at different times during the year, and probably at different prices. It is possible to identify the actual items sold when a firm deals in a relatively small number of high-value items (such as cars), so the revenue can be easily matched against the cost of sale. Where there are a large number of transactions, however, this becomes more difficult.

Method

There are a number of different methods for the calculation of cost, including the weighted average and first-in, first-out (FIFO) methods. The entity must decide which method is the most appropriate, and apply it consistently year-on-year.

Weighted average: Under this method the stock value is arrived at by working out an average unit price based on the quantities purchased at different prices.

FIFO: Under this method it is assumed that the first goods purchased are the first items of inventory sold.

(iii) NRV

Net realisable value is defined as the higher of:

value in use: the present value of future economic benefits to be generated by the item; or

actual or estimated selling price (including trade discounts but not settlement discounts) less:

–– All further costs to completion; and

–– All costs to be incurred in marketing, selling and distributing.

The comparison of cost and net realisable value needs to be made with each item of inventory separately. Where this is not practical, for example where there are many similar products such as in a green grocers, groups or categories of inventory items which are similar can be considered together. Inventory has to be itemised in this fashion because simply comparing the total NRV with the total cost can be inaccurate. For example, one item of inventory could be damaged and thus have a lower NRV than cost. Another item which remains undamaged could have a lower cost than NRV. Looking at these items on a gross basis (comparing the combined NRV to the combined cost) could result in a lower or nil write-down, which would be incorrect.

(b)

Results of inventory count

 

 

€348,400

Less purchases after the year end

 

(€20,000)

 

Add Sales after year end

€24,000

 

 

Less Profit (1/ (114) (24,000/5)

(€4,800)

€19,200

 

Less Packing materials

 

(€1,200)

 

Less Goods already sold

 

(€12,500)

 

Add Goods in Bonded warehouse

 

€14,800

  €300

Inventory to be accounted

 

 

€348,700

SOLUTION 5

(a)

Journal entries

5 January 2016

 

 

Dr Purchases Account

1,000

 

Dr VAT Account

135

 

Cr Neville Ltd

 

1,135

Being the purchase of goods at 13.5% VAT from Neville Ltd on credit.

7 January 2016

Dr Jones Ltd

3,690

 

Cr Sales Account

 

3,000

Cr VAT Account

 

690

Being sales of goods at 23% VAT to Jones Ltd on credit.

VAT Account for the period Jan/Feb 2106

 

 

Balance due from Coll Gen

4,400

Balance due to Coll Gen

6,000

13.5% Purchase from Neville Ltd

135

23% Credit Sales to Jones

690

23% VAT Purchases other traders

4,600

23% Sales

11,500

Payment to Coll Gen

6,000

 

 

Balance due to Coll Gen

 7,455

Balance due from Coll Gen

 4,400

22,590

22,590

Balance due from Coll Gen

4,400

Balance due to Coll Gen

7,455

(b)

The Annual Return of Trading Details includes more detailed information on sales and purchases for the 12 months up to the trader’s annual accounting date

This contains details of:

Sales, net of VAT

Purchase of inventory for resale, net of VAT

Purchase of other deductible expenses, net of VAT

Value of purchases from other EU countries, net of VAT

Each of the amounts above must be given for each VAT rate that arises in the year. For example, sales for the year will be broken down between net sales at the standard rate (23%), reduced rates (13.5% or 9%), zero rate and exempt. The total sales figure should be then reconciled with the annual accounts.

As part of Revenue Audit procedure this Annual Return of Trading Details is reconciled with the turnover and purchases in the Statement of Comprehensive Income. Thus ensuring that the correct amount of VAT has been returned to the Collector General on the company’s trading activities.

Auditors of the company can also use the Annual Return of Trading Details to verify the level of Sales and Purchases in the Statement of Comprehensive Income and the VAT liability/asset in the Statement of Financial Position.

(c)

31 January 2016

Dr Salaries Control Account

€20,000

Cr Salaries Payable (Net Pay)

€13,200

Cr Collector General PRSI and USC

€6,000

Cr Collector General PRSI and USC

€800

With monthly payroll figures

31 January 2016

Dr Salaries Control Account

€2,100

Cr Collector General PRSI and USC

€2,100

With Employers’ PRSI on payroll

31 January 2016

Dr Salaries Payable (Net Pay)

€13,200

Cr Bank

€13,200

With payment of salaries

14 February 2016

Dr Collector General PRSI and USC (€6,000 + €800 + €2,100))

€8,900

Cr Bank

€8,900

With payment of payroll taxes to Collector General

SOLUTION 6

(a) A separate section of the Statement of Comprehensive Income (note partnerships and sole traders are not bound by IFRS so they may use the term “profit and loss account” rather than Statement of Comprehensive Income), called the appropriation account, shows the division of net profit between the partners in the agreed ratios. The ratio between two partners may be 1:1, with all profits shared equally, or it could be 2:1 if one partner contributed more to the partnership. This ratio is set out in the partnership agreement.

While with a sole trader the entire net profit is transferred to his capital account at the end of the year, a partnership, by definition, involves the division of profit between the partners in a prescribed ratio, and the appropriation account accommodates this.

The division of profit can be of three sorts:

Interest on capital: Often partners do not contribute equal amounts of capital to a partnership. To compensate a partner who has contributed more money or expertise to the business, interest on capital, at a commercial rate agreed between the partners, is given by way of a guaranteed slice of that year’s net profits.

Salaries: Some partners devote more time than others to the administration of partnership affairs; or are junior partners, recently admitted to the partnership, who need a minimum level of guaranteed profits on which to live (often the size of this guaranteed minimum is determined by their previous remuneration as an employee).

The term ‘salary’, as given to a partner, must be distinguished from the term ‘wages and salaries’ as paid to employees. Partners of a firm are owners of a firm (however small the share for a junior partner), and salary in this context means guaranteed minimum share of profits.

Drawings: The term ‘drawings’ should also not be confused with salary. Drawings relate to actual cash withdrawn from the business, whereas salary, plus the other shares of profit, make up the total sum available for withdrawal from the business. Where a partner draws

down cash from the partnership in excess of his salary, the partnership agreement may provide for interest to be charged on this amount.

The capital employed in the business is divided into partners’ capital and current accounts, the balances of which are shown separately on the Statement of Financial Position. While a sole trader records any capital he introduces in a capital account (his account with the business). Partners divide their interest in the business between capital and current accounts.

Capital accounts represent net assets that the partners intend to keep in the business, while current accounts represent net assets that can be withdrawn.

To summarise the kinds of transactions recorded in these two types of accounts:

Capital accounts (long term)

Capital sums introduced by partners

Goodwill adjustments

Profits or losses on revaluation of non-current assets

Current accounts (short term)

Drawings

Partner salaries

Interest on capital

Shares of the balance of profit

Interest on drawings

In addition to capital and current accounts, a partnership may borrow money from the individual partners or from third-party banks. The partnership accounts will therefore also include:

Loans from banks and individuals

Loans from owners of the business

Partnership books could contain either of these two sorts of loans, the latter occurring when a partner lends money to the business in excess of his agreed capital. As with capital, a separate loan account is maintained for each partner. Partner’s loans are treated in the accounts in exactly the same way as loans from banks, being long-term liabilities on the Statement of Financial Position.

It is important to remember therefore that interest on a loan is a Statement of Comprehensive Income expense, while interest on capital and drawings is an appropriation of profit and hence is shown in the appropriation statement.

(b) Dividends paid

An Irish resident company is required to dividend withhold tax (DWT) on the payment of dividends to

Irish individual resident;

non-resident shareholders; and

non resident companies.

Dividend payments to Irish resident companies are paid without deduction of DWT.

Date of Payment

The DWT withheld is to be paid over to Revenue by 14th of the month following the payment of the dividend.

(c) The total dividend payable is €600,000 [€3 × 200,000 shares].

The gross dividend payable to the Irish companies is €360,000 [200,000 × €3 × 60%].

No DWT will apply so the net dividend is also €360,000.

The gross dividend payable to the Irish individuals is €240,000 [€200,000 × €3 × 40%].

DWT at 20% applies, being €48,000 [€240,000 × 20%].

The net dividend payable to individuals is therefore €192,000 [€240,000 − €48,000].

The journals to book these entries are:

10 February 2016:

DR Dividend declared

€600,000

CR Dividend payable

€552,000 [€360,000 + €192,000]

CR DWT payable

€48,000

With the dividend declared

10 March 2016:

DR Dividend payable

€552,000

CR Bank

€552,000

With the amount of dividend paid to shareholders

13 April 2016

DRDWT payable

€48,000

CR Bank

€48,000

With the net amount of DWT paid to Revenue Commissioners.

Examiners Report

Question 1 – SOCI and SOFP for a limited company

In general question 1 was answered very well.

Some of the points reflected in the solutions indicated the following in some instances:

The calculation of the cost of sales was not shown as a separate working.

Accruals were deducted from and not added to expenses.

The figure for expenses with prepayment and accrual was shown but the net figure was not set out.

Bad debts were omitted or were deducted from Trade Payables.

The accrued element of debenture interest was not calculated.

Incorrect figure for corporation tax was used in the SOCI and SOFP

In the SOCI, the bad debts were omitted, incorrect totals were used and assets were included in the statement.

In the SOFP, receivables and prepayment were reversed, incorrect figure for taxation was included, debenture interest owing was omitted, inventory was omitted and there was poor layout in a few cases.

Question 2 – Incomplete records

Some of the points reflected in the solutions indicated the following in some instances:

Bank Account - entries reversed, cash takings not lodged were deducted from, not added to, takings which were lodged.

SOCI - Incorrect sales and purchases figures used, van included as an expense; sales, purchases, expenses and property – full workings not shown.

SOFP - heading incomplete, new vehicle not included in PP&E.

Question 3 – Statement of Cash Flows.

Some of the points reflected in the solutions indicated the following in some instances:

Knowledge of the layout of the statement could be improved.

Candidates were unsure which items went into Operating, Investing and Financing activities.

Adjustment to operating profit was made for interest.

The amount shown as paid for taxation was not used in the statement.

Question 4 IAS2 Inventories

Some of the points reflected in the solutions indicated the following in some instances:

A number of candidates were not familiar with the definitions.

Only three candidates correctly calculated the revised cost of inventory.

A number of candidates did not understand when stock is added back and when it is deducted from the value of the physical stock count carried out after the reporting period.

Question 5 VAT and PAYE

Some of the points reflected in the solutions indicated the following in some instances:

Some candidates were not familiar with the correct layout of journals.

The VAT account was in general well prepared but some candidates omitted some of the entries.

Most candidates were familiar with the VAT return being used as an analytical tool and answered this part of the question well.

Some candidates prepared T accounts and did not show the journals for Wages/PAYE/PRSI.

Question 6 – Sole trader v partnerships, DWT, and journal entries for DWT

The results for this question were the lowest of all the questions.

Some of the points reflected in the solutions indicated the following in some instances:

Trader v partnerships - candidates understood some of the differences but could have included more detailed answers.

DWT – candidates did not fully understand the requirements to deduct DWT and were not clear on the journal entries attached to the declaration and payment of the tax.

Overall comment

Overall some candidates did not appear to be prepared for this exam. Question 1 was in line with prior years. However, no candidate attained full marks in the question.

General notes

Bad layout of figures resulted in incorrect totalling in some instances. Candidates should be advised that figures should be neatly laid out.

Headings for financial statements, such as the SOCI and/or SOFP, were not complete in a number of cases.

Q1

Q2

Q3

Q4

Q5

Q6

Highest

20

18

19

17

16

14

Lowest

1

3

1

3

3

2

Average

13

12

11

9

10

8

Summer 2017

QUESTION 1

The following Trial Balance has been extracted from the records of BAY Wood Ltd at 28 February 2017.

Note

Debit

Credit

Land and buildings:

Cost

(1)

5,200,000

Accumulated depreciation at 1 March 2016

(1)

820,000

Plant and equipment:

Cost

(1)

800,000

Accumulated depreciation at 1 March 2016

(1)

320,000

Ordinary shares of €1 each (Authorised 2,000,000 shares)

1,500,000

Share premium

260,000

Retained earnings

1,017,400

Revenue

5,600,000

Purchases

2,750,000

Trade receivables

140,000

Trade payables

126,000

Inventory at 1 March 2016

210,000

Cash at bank

185,000

Dividend paid

150,000

Administration expenses

(2)

450,000

Distribution expenses

(2)

382,000

4% loan notes (debentures) (redeemable 2030)

(3)

840,000

Loan note (debenture) interest paid

(3)

20,200

Corporation tax paid

(4)

196,200

10,483,400

10,483,400

The following items are to be adjusted for in preparing financial statements for publication for the year ended 28 February 2017.

(1) Depreciation is to be provided as follows:

Buildings – 2% per year on cost.

Plant and equipment – 40% per year on reducing balance.

Note: The value of the land element included in land and buildings is €1,200,000.

(2) Accruals and prepayments were as follows:

Accruals

Prepayments

Administration expenses

€46,000

€38,200

Distribution expenses

€11,600

€17,600

(3) The debentures were issued on 1 June 2016.

(4) The corporation tax liability for the year ended 28 February 2017 is estimated to be €218,000.

(5) The value of the closing inventory at the lower of cost and net realisable value at 28 February 2017 is €235,000.

REQUIREMENTS

Prepare the following financial statements for BAY Wood Ltd in accordance with the requirements of international standards, (using the function of expenditure method for the statement of comprehensive income):

(i) A Statement of Comprehensive Income for the year to 28 February 2017.

(11 marks)

(ii) A Statement of Financial Position as at 28 February 2017.

(9 marks)

Total 20 Marks

QUESTION 2

The following are Statements of Financial Position and Statements of Comprehensive Income for Heaslip Ltd for the years as shown.

Heaslip Ltd Statement of Financial Position as at 30 April

2017

2016

Non-current assets

Property plant and equipment

6,400,000

5,200,000

Trade investments

800,000

480,000

7,200,000

5,680,000

Current assets

Inventories

300,000

276,000

Trade receivables

220,000

252,000

Bank

28,000

16,000

548,000

544,000

Total assets

7,748,000

6,224,000

Equity and liabilities

Equity

Ordinary shares

4,000,000

3,200,000

Retained earnings

2,628,000

2,200,000

6,628,000

5,400,000

Non-current liabilities

8% Debentures (redeemable 2037)

900,000

600,000

Current liabilities

Trade payables

140,000

172,000

Corporation tax

80,000

52,000

Total equity and liabilities

7,748,000

6,224,000

Heaslip Ltd Statement of Comprehensive Income for the year to 30 April

2017

2016

Revenue

3,520,000

3,132,000

Cost of sales

(1,800,000)

(1,720,000)

Gross profit

1,720,000

1,412,000

Less expenses

Administration

(320,000)

(300,000)

Depreciation

(308,000)

(280,000)

Salaries and wages

(400,000)

(396,000)

Net operating profit

692,000

436,000

Less debenture interest

(72,000)

(48,000)

Profit before tax

620,000

388,000

Tax

(92,000)

(76,000)

Net profit

528,000

312,000

Dividend paid

100,000

80,000

Note 1

On 1 May 2016, the company issued €300,000 8% debentures which are redeemable in 2037.

REQUIREMENT

Prepare the Statement of Cash Flows for Heaslip Ltd for the year ended 30 April 2017.

Total 20 Marks

QUESTION 3

(a) Explain the accounting term “accounting equation”.

(2 marks)

(b) Explain the accounting term “debit”.

(2 marks)

(c) List the two possible effects of debits.

(2 marks)

(d) Define the accounting term “trial balance” and explain the role of the trial balance in the preparation of financial statements.

(4 marks)

(e) There are a number of general types of error which a trial balance does not reveal. List and explain two such errors.

(4 marks)

(f) The following is the list of debtors for the business of Mr Ahern who supplies electrical goods.

Debtor

Amount of the Debt

John Ltd

1,000

Jim Ltd

2,500

Joan Ltd

4,000

Others

23,000

Total

30,500

Mr Ahern is aware that John Ltd who has not paid anything for the previous 12 months is gone into liquidation and he expects that he will not receive any of the amount due.

He is also aware that Jim Ltd is in financial difficulty and he has received reliable reports that he will only receive 50% of the amount due.

REQUIREMENTS

(i) Show the journal entries to record the write off of the amount due by John Ltd and the provision for the write down in the amount due by Jim Ltd.

(4 marks)

(ii) Show the extracts from the Statement of Comprehensive Income and the Statement of Financial Position of Mr Ahern to reflect the write off of and the write down in the amounts due.

(2 marks)

Total 20 Marks

QUESTION 4

(a) Explain the purpose of a financial audit.

(3 marks)

(b) Describe how auditors of a limited company are appointed and how their level of remuneration is approved.

(2 marks)

(c) Outline the contents of an audit report.

(3 marks)

(d) Explain what is meant by the “audit expectation gap”.

(4 marks)

(e) International Accounting Standard (IAS) 1 Presentation of Financial Statements (under IFRS) sets out guidance on the preparation of Financial Statements. The standard lists four statements which must be contained in a complete set of Financial Statements and sets out a number of guiding principles with regard to Financial Statements prepared under IFRS.

REQUIREMENTS

(i) List the four statements to be included in a complete set of Financial Statements.

(4 marks)

(ii) Outline two guiding principles with regard to Financial Statements prepared under IFRS.

(4 marks)

Total 20 Marks

QUESTION 5

(a) Valuing a business or a company is the process of estimating its potential market value. The value of a business is needed in a number of circumstances.

REQUIREMENT

List four circumstances in which a company may need to be valued.

(4 marks)

(b) The net asset value (NAV) method of valuing a business uses the Statement of Financial Position to approximate the market value of a business. There are two approaches one can take to the valuation:

Equity-holders’ funds method; and

Liquidation value method.

The following is the Statement of Financial Position of Foxtrot Ltd as at 31 March 2017.

Non-current assets

Freehold land and buildings (NBV)

6,000,000

Plant and machinery (NBV)

3,500,000

9,500,000

Current assets

Inventory

3,700,000

Receivables

600,000

Bank

3,000,000

7,500,000

Total assets

17,000,000

Equity and liabilities

Equity

Ordinary shares (€1) (Authorised €5million)

3,200,000

Retained profits

4,300,000

7,500,000

Non-current liabilities

Long- term loans

4,400,000

Current liabilities

Trade creditors

2,900,000

Short loan

800,000

Other liabilities

1,400,000

5,100,000

Total equity and liabilities

17,000,000

Foxtrot Ltd wishes to obtain a valuation of the company and has engaged a firm of professional valuers who establish the current resale value of the company’s assets as follows:

Freehold land and buildings

9,300,000

Plant and machinery

2,800,000

Inventory

2,900,000

All other asset and liability values are in line with their book values.

REQUIREMENTS

(i) Using the information provided above, prepare valuations for Foxtrot Ltd using:

(I) Equity-holders’ funds method; and

(6 marks)

(II) Liquidation value method.

(6 marks)

(ii) Outline two limitations of each method of valuation.

(4 marks)

Total 20 Marks

QUESTION 6

(a) A fundamental characteristic of a business is that it is formed to earn a profit, to increase the wealth of its owners and grow the business. There are three basic types of structures for a business, namely sole trader, partnership and limited company.

REQUIREMENT

List five advantages and five disadvantages of carrying on a business operating as a sole trader compared to a limited company.

(10 marks)

(b) List two of the three types of withholding tax accounts.

(2 marks)

(c) Bravo Ltd, an Irish resident company has an issued share capital of €2,000,000 (€1 shares). 50% of the shares are held by shareholders who are Irish tax resident individuals (20% dividend withholding tax (DWT) will apply to the dividend) and the remaining 50% are held by Irish tax resident companies (no DWT will apply as all have properly applied for, and been granted, an exemption from DWT).

Bravo Ltd declared a dividend of 50c per share on 21 March 2017 and paid the dividend on 31 March 2017.

REQUIREMENT

Show the journal entries to record the transactions associated with the declaration and payment of the dividend and the DWT by Bravo Ltd.

(8 marks)

Total 20 Marks

SOLUTION 1

(i) Statement of Comprehensive Income BAY Wood Ltd for year ended 28 February 2017

Note

Sales revenue

5,600,000

Cost of sales

(W1)

(2,725,000)

Gross profit

2,875,000

Less expenses

Distribution expenses

(W2)

376,000

Administration expenses

(W2)

457,800

Depreciation

(W3)

272,000

(1,105,800)

Operating profit

1,769,200

Less finance cost - debenture interest

(W4)

(25,200)

Profit before tax

1,744,000

Income tax expense

(218,000)

Profit for the period

1,526,000

(ii) BAY Wood Ltd Statement of Financial Position (Balance Sheet) as at 28 February 2017

Assets

Note

Non-current assets

Land and buildings

(W3)

4,300,000

Plant and equipment

(W3)

288,000

4,588,000

Current assets

Inventory

235,000

Trade receivables

140,000

Other receivables

Prepaid distribution expenses

17,600

Prepaid admin expenses

38,200

Cash at bank

185,000

615,800

5,203,800

Capital and reserves

Share capital

1,500,000

Share premium

260,000

Retained earnings

2,393,400

4,153,400

Non-current liabilities

4% loan notes 2030

840,000

Current liabilities

Trade payables

126,000

Taxation

21,800

Other payables

Accrued debenture interest

5,000

Accrued distribution expenses

11,600

Accrued administration expenses

46,000

210,400

5,203,800

Statement of Changes in Equity (SOCE) for BAY Wood Ltd for the year ended 28 February 2017

Ordinary

Share

Retained

Total

Shares

Premium

Earnings

Equity

1 March 2016

1,300,000

60,000

1,017,400

2,377,400

Share Issue

200,000

200,000

400,000

Dividend paid

(150,000)

(150,000)

Profit for the year

_______

________

1,526,000

1,526,000

28 February 2017

1,500,000

260,000

2,393,400

4,153,400

Workings

Notes

W1

Cost of sales

Opening Inventory

210,000

Purchases

2,750,000

2,960,000

Less Closing Inventory

 

(235,000)

2,725,000

W2

Expenses

Distribution Costs per TB

382,000

Add Accruals

11,600

Less Prepayments

(17,600)

376,000

Administration Costs per TB

450,000

Add Accruals

46,000

Less Prepayments

(38,200)

457,800

W3

Depreciation

Buildings

Land and Buildings per TB

5,200,000

5,200,000

Less Land (not depreciated)

(1,200,000)

Depreciable amount

4,000,000

Depreciation (2%)

80,000

Accumulated depreciation 1 March ‘16

820,000

Acc Dep 28 February 2017

900,000

900,000

Net Book Value (SOFP)

4,300,000

Plant and Equipment

Cost per TB

800,000

800,000

Less Depreciation prior years

(320,000)

Residual value

480,000

Depreciation (@40%)

192,000

Depreciation prior years

320,000

Acc Dep 28 March 2017

512,000

512,000

Net Book Value (SOFP)

288,000

Depreciation Charge for the year

Buildings

80,000

Property Plant and Machinery

192,000

272,000

W4

Debenture Interest

Nominal value of Debs

840,000

Interest for 9 month (@4%) (SOCI)

25,200

Interest paid

(20,200)

Interest Accrued at 28 February 2016

5,000

W5

Corporation Tax

Charge for the year

218,000

Balance paid per trial balance

(196,200)

Balance owed at 28 February 2016

21,800

SOLUTION 2

Heaslip Ltd Statement of Cash Flows for the year ended 30 April 2017

Note

€000’s

Cash flow from operating activities

1

912

Cash flow from investing activities

2

(1,828)

Cash flow from financing activities

3

928

Net increase in cash and cash equivalent during the year

12

Cash and cash equivalent at 01 May 2016

16

Cash and cash equivalent at 30 April 2017

28

Note 1

€000’s

Operating activities

Net profit for the period

528

Add tax charge

92

Add depreciation

308

Add debenture interest

72

Increase in inventories

(24)

Decrease in receivables

32

Decrease in payables

(32)

976

Tax paid (52 1 92 2 80)

(64)

Net cash flows for operating activities

912

Note 2

€000’s

Investing activities

Purchase of PPE (i)

(1,508)

Purchase of trade investments (800 – 480)

(320)

Net cash flow from investing activities

(1,828)

Note 3

€000’s

Financing activities

Issue of 8% debentures (900 – 600)

300

Issue of ordinary (4,000 – 3,200)

800

Dividend paid

(100)

Finance cost - debenture interest paid

(72)

928

Purchase of PPE

Net book value at 30 April 2017

6,400

Add back depreciation charged

308

6,708

Less Net book value at 1 May 2016

(5,200)

Purchased PPE

1,508

SOLUTION 3

(a) The accounting equation represents the residual ownership in an entity after deducting all liabilities from assets. This is, in essence, the accounting equation. In basic terms the equation states that what the business owns (assets) equals what it owes (equity and liabilities).

This is represented as:

EQUITY + LIABILITIES = ASSETS, or EQUITY + ASSETS = LIABILITIES

(b) Accounts are traditionally prepared as “T” accounts. That is, they have two sides: the debit side (left hand side), and the credit side (right hand side). “T” accounts are so called because they resemble a capital “T” in layout, as follows:

Account name

Debit (or Dr)

Credit (or Cr)

(c) The two possible effects of debits are:

A debit entry increases an asset, loss or an expense.

A debit entry can also be used to reduce a liability, profit or income/revenue.

(d) The Trial Balance is a list of all the balances of all the accounts in the nominal ledger at a given time. The debit and credit balances are listed in two separate columns. The two columns should have the same total, that is, the Trial Balance is “balanced”.

The Trial Balance provides an arithmetical check on the accuracy of the double entry. The rule of double entry demands that each debit must have an equal and corresponding credit. It is key to remember that the Financial Statements (Statement of Comprehensive Income and the Statement of Financial Position) are simply the Trial Balance in a different format. If we follow the basic principles of double-entry bookkeeping to prepare the nominal ledgers, then the preparation of the Trial Balance is simple. It involves only a listing of all the accounts and their balances. It is important to remember too, however, that a balanced Trial Balance is only an arithmetical check. It does not follow that all postings have been to the correct account.

(e) It may, at first sight, appear that the balancing of a Trial Balance proves that the books are correct. This is, however, a misconception. It means that certain types of errors have not been made, for instance errors in addition. It also means that different figures have not been posted for credit and debit entries, unless there are compensating errors which cancel them out. In other words, the arithmetic is correct. But there are general types of errors which a Trial Balance does not reveal.

These are:

Errors of omission: Where a transaction is completely omitted from the books (i.e. the debits and credits will have been understated by the same amount).

Errors of commission: Where the correct amount is entered but in the wrong account, e.g. when a sale of €11 to C. Green is entered in the account of P. Green. In this case, the debits and credits side will continue to be equal but the individual debtor balances will be incorrect.

Errors of principle: Where an item is entered in the wrong class or type of account, e.g. If motor car expenses are debited to the motor car account (an asset account) instead of being debited to motor car expenses (an expenses account). Thus recording less expense in the Statement of Comprehensive Income (and inflating profits) and overstating the value of the asset.

Compensating errors: These will not be revealed by extracting a Trial Balance because errors cancel each other out, e.g. If the sales account was credited €10 too much and the purchases account was debited €10 too much.

Errors of original entry: Where the original figure entered is incorrect, yet the double entry repeats the incorrect figure, e.g. If sales of €98 were entered in both the sales account and the personal account as €89.

Complete reversal of entries: Where the correct accounts are used, but each item is shown on the wrong side of the account, e.g. sales account debited and personal account credited instead of vice versa.

(f) (i) Journal Entries

Write off of bad debt John Ltd

Dr Bad Debts Expense Account

1,000

Cr Debtor John Ltd

1,000

Note. Write off of bad debt John Ltd which is in liquidation and no dividend expected.

Provision for Doubtful Debt Jim Ltd

Dr Bad Debts Expense Account

1,250

Cr Provision for Doubtful Debt Account

1,250

Note. Bad debt provision for 50% of balance due from Jim Ltd.

(ii) Extract from Statement of Comprehensive Income

Expenses

Write off Bad Debt

1,000

Provision for Doubtful Debt

1,250

Extract from Statement of Financial Position

Current Assets

Trade Receivables (30,500 – 1,000)

29,500

Less Provision for Doubtful Debt

(1,250)

28,250

SOLUTION 4

(a) The purpose of a financial audit is to form a professional, independent opinion as to whether the accounts give a fair presentation of the financial position of the company at the period end and the performance of the company during the period. Financial audits are important because they provide the users of the Financial Statements with a level of assurance that the accounts are materially correct and can be trusted. Many companies will opt to have their accounts audited even if they fall within the exemption for small companies because it provides assurance to investors, lenders etc.

Financial audits may also be performed by internal auditors (employees of the company) to ensure that the internal controls the company has put in place over their accounting systems are effective and to substantiate the amounts included in the accounting records and financial accounts.

(b) The auditor of a limited company is appointed/re-appointed by the members at each AGM. The remuneration of the auditor is generally set by the company at the annual general meeting. This remuneration is disclosed in the notes to the Financial Statements. Where an auditor receives remuneration for non-audit services to an entity (e.g., tax advice), this is disclosed separately in the Financial Statements.

(c) An external Audit report includes:

An overview of the directors’ responsibilities.

The Auditor’s responsibilities.

Basis of Auditor’s opinion.

Auditor’s opinion.

Name and address of auditors and date of report.

(d) As stated above, the role of the auditor is to form an opinion as to whether the Financial Statements prepared by the directors give a fair presentation of the company’s affairs. Inherent in this statement is that:

i. the Financial Statements are the responsibility of the directors;

ii. the audit report is an opinion; and

iii. this opinion refers to a fair presentation.

Consequently, the audit report does not (and could not) provide absolute assurance that every entry in the Financial Statements is 100% accurate – the concept of materiality is also alluded to above. Neither does it guarantee that the company is free from fraud.

Some stakeholders are of the view that an unqualified (favourable) audit report provides the guaranteed assurances described above. The variation between what these stakeholders erroneously believe and the actuality of what the auditor provides is known as “the expectation gap”.

(e) (i) IAS 1 (under IFRS) provides guidance on the preparation of Financial Statements.

A complete set of Financial Statements must include the following:

A Statement of Financial Position.

A Statement of Comprehensive Income.

A Statement of Cash Flows.

A Statement of Changes in Equity.

It is important to remember that all of the above constitute a set of Financial Statements, and not just the Statement of Comprehensive Income and Statement of Financial Position.

(ii) The guiding principles with regard to Financial Statements prepared under IFRS are:

Financial Statements must fairly present the financial position (Statement of Financial Position), financial performance (Statement of Comprehensive Income) and cash flows (Statement of Cash Flows) of an entity, as well as movements in its equity (Statement of Changes in Equity).

Fair presentation requires faithful representation of the effects of transactions, events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses. An example of this is applying the principal of substance over form.

Application of IFRS (standards and interpretations), including disclosures, are presumed to result in Financial Statements that achieve a fair presentation.

To comply with IFRS, a company must make an explicit and unreserved statement of compliance with IFRS in the notes to the Financial Statements. Such a statement can only be made on compliance with every requirement of IFRS. That is, a company cannot choose not to apply certain requirements.

An example of this is that Irish company law provides an exemption from preparing a Statement of Cash Flows for small companies. IFRS does not provide for this exemption. If a small company chooses not to prepare a Statement of Cash Flows (by availing of the company law exemption) they are not in compliance with IFRS and cannot state that their Financial Statements have been prepared in accordance with IFRS.

SOLUTION 5

(a) Merger and acquisition transactions (M&A)

M&A transactions involve the buying, selling and combining of different businesses or companies. The business or company will be valued by the purchaser, to help them decide how much they want to offer, and by the seller, to help them decide how much they will accept.

Similarly, when a company has been involved in a joint venture which is being wound up, a valuation may be required to ensure both parties receive their share of the profits.

Obtaining finance

Companies and businesses have different ways of raising finance and each of these requires valuations for different reasons.

Where a company decides to sell shares in itself it needs to value those shares to work out how much to charge the new investors.

When a business is seeking finance it must value itself to convince the bank or other financiers that the level of debt required is not excessive.

Taxable events

Where a business is being transferred between family members, such as the business passing to a daughter on the retirement of her father, the market value must be determined in order to assess the tax liability arising. Revenue will need to see that a proper valuation has been carried out to determine the correct tax liability.

Litigation

The business may be involved in litigation, which requires that it is valued. If a married couple owned 50% of a company each and were seeking a divorce, the company would have to be valued so that the court could decide on the value of assets to go to each spouse.

(b) (i) (I) Equity holders’ funds method

This method takes the equity (i.e. assets less liabilities) as the value of the company.

Assets

170,000

Less liabilities

Non-current liabilities

44,000

Current liabilities

51,000

95,000

Value

75,000

Or it can be calculated by taking the total from the Shareholders funds.

(II) Liquidation value method

This method derives a valuation for the company based on market (realisable) values of the company’s assets and liabilities and not their book values.

Realisable value of assets at market values

Freehold land and buildings

93,000

Plant and equipment

28,000

Inventory

29,000

Other assets at book values

Receivables

6,000

Bank

32,000

18,800

Less liabilities

Non-current liabilities

44,000

Current liabilities

51,000

(95,000)

Value of business

93,000

(ii) The basic net asset valuation method, while simple, is generally not an accurate reflection of the value of a company. This is because the book value of assets is rarely reflective of their current market value. It takes no account of future plans or of how the business is performing compared to other similar businesses.

The liquidation method, though more accurate, has a number of limitations:

It can be an onerous undertaking, as the entire company has to be broken down into its components.

It can be very costly as a number of specialists may need to be involved.

Certain assets may be hard to value (e.g. because they are unique to the company).

While more accurate and informative than the simple NAV, the liquidation method still retains the two key flaws: it takes no account of:

future plans; or

how the business is performing compared to similar businesses.

SOLUTION 6

(a) Operation as a Sole Trader

Advantages

The sole trader is not required to file accounts which would be available for inspection by the public.

There are fewer legal formalities for a sole trader compared to other structures.

The closure of the business is a simple process and requires less formality.

Disadvantages

A business organised as a sole trader is likely to have a harder time raising capital since an interest in the business cannot be sold to a third party.

This owner has unlimited liability.

The lifespan of the business is more uncertain as it is dependent on a single individual.

Pays income tax on business profits.

Capital structure and basic accounts

There are two key points to remember with regards sole traders:

the business is not a separate legal entity; and

there is no requirement to file accounts.

In pure accounting terms, capital in the Statement of Financial Position of a sole trader may simply be considered as an account of the owner.

Sole traders are not required to prepare audited accounts. Because of the nature and size of sole traders it would be rare for such a business to prepare detailed notes on the accounts. Accounts prepared by sole traders are generally intended to assess the profitability of the business and to facilitate the filing of tax returns.

The equity line in the Statement of Financial Position is simply the capital of the owner and retained earnings.

Accounting for sole traders is very straightforward. We follow the basic rules of double entry for all transactions to prepare a Trial Balance and extract a basic set of Financial Statements.

Operating as a company

The key points to note about a company are:

It is a separate legal entity from its owners and its managers.

The capital of a company is divided into shares.

Businesses are generally organised as companies when:

It is necessary to raise capital from 3rd parties; and/or

Limited liability is desired; and/or

Separate legal identity is required.

Organising a business as a company brings with it both advantages and disadvantages, some of which are outlined below.

Advantages:

Limited liability: (refer to Law Fundamentals manual)

The transfer of ownership: In partnerships, once a partner dies or decides to leave, the partnership, as originally formed, ceases to exist. The position is the same with a sole trader. Unless the articles of the company provides otherwise, the shares in a company are transferable and the person who acquires those shares acquires all the rights and obligations of the previous owner. There may, however, be restrictions on the transfer of shares, depending on the type of company formed.

Perpetual succession: When a business partner or sole trader dies, his or her business dies with them, but shares in a company continue to exist after the death of their owner. The company is, in a sense, “immortal”.

Raising finance: As the company is a separate legal entity it can borrow money on the strength of its assets and its business performance, just like any other individual. This money can be obtained by giving a potential investor a stake in the company in the form of shares. This allows investors to share in the future growth of the business, something which is impossible with sole traders or partnerships.

Management of the company: The affairs of a company are managed by a board of directors and not by the general body of members. This allows for more efficient day-to-day operations.

Lower tax rate: Corporation tax is currently at 12.5% on Case I compared to max 41% as a sole trader, albeit that close company rules limit the ability of shareholders in smaller companies to avoid personal taxation on their share of company profits.

Disadvantages:

Cost of incorporation: The cost of incorporation may deter some smaller associations from availing of the protections of incorporation.

Statutory and legal requirements: There are a number of statutory and legal requirements which must be adhered to upon incorporation, such as filing of publicly available audited accounts (refer to your Law Fundamentals manual and Chapter 2 of this manual). These are not required for sole traders or partnerships.

Capital Structure

In simple terms, the basic capital structure of a company is in the form of shares. The accounting for equity we have been practicing thus far has mainly been for a company.

There is an important distinction between public and private companies, which affects how they can raise capital.

Capital raising - public vs private

It is important to remember the difference between public and private companies from the view of capital raising.

A private company (“limited” or “Ltd” or “DAC”) has a maximum of 149 shareholders, and restricts the sale of shares by shareholders. It cannot raise capital from the general public. Generally, private companies issue shares to the family of the founders, friends of the family and occasionally a financial institution.

A public company (“public limited company” or “plc” or “SE”) has no maximum number of shareholders, and can raise capital from the general public. Most public companies will be quoted on a stock exchange, or be planning to become quoted once a reliable level of profit growth is achieved. However, it is quite possible for a public company to exist for years without seeking a stock exchange listing.

(b) There are three types of withholding tax accounts

Where the tax withheld is paid separately over to the Revenue Commissioners within 14 days of the month end e.g. PAYE, Relevant Contract Tax, Dividend Withholding Tax and Professional Services Withholding Tax.

Where the tax withheld goes through the tax account e.g. royalties and interest receipts/payments and is included in the corporation tax return.

Where tax is withheld on foreign income.

(c) The total dividend payable is €1,000,000 [€0.50 * 2,000,000 shares].

The gross dividend payable to the Irish companies is €500,000 [2,000,000 * €0.50 * 50%].

No DWT will apply so the net dividend is also €500,000.

The gross dividend payable to the Irish individuals is €500,000 [€2,000,000 * €0.50 * 50%].

DWT at 20% applies, being €100,000 [€500,000 * 20%].

The net dividend payable to individuals is therefore €400,000 [€500,000 - €100,000].

The journals to book these entries are:

21 March 2017:

DR Dividend declared

€1,000,000

CR Dividend payable

€900,000 [€500,000 + €400,000]

CR DWT payable

€100,000

Declaration of dividend of 50c per share

31 March 2017:

DR Dividend payable

€900,000

CR Bank

€900,000

With the amount of dividend paid to shareholders

13 April 2017

DR DWT payable

€100,000

CR Bank

€100,000

With the net amount of DWT paid to Revenue Commissioners.

Examiner’s Report

Overall the students seemed to be well prepared for this exam.

General observations

Poor layout of figures resulted in incorrect totalling in some instances.

Headings for financial statements, such as the SOCI and/or SOFP, were not complete in some cases.

There is room for improvement in students’ knowledge of journals entries.

Question 1

– SOCI and SOFP for a limited company

In general question 1 was answered very well. Some of the points reflected in the solutions indicated the following in some instances:

The calculation of the cost of sales was not shown as a separate working.

Accruals were deducted from and not added to expenses.

In the case of depreciation, the workings were not shown in all cases and the incorrect method of calculating depreciation was used in a few cases.

The accrued element of debenture interest was not calculated.

Incorrect figure for corporation tax was used in the SOCI and SOFP

In the SOFP, receivables and prepayment were reversed, incorrect figure for taxation was included, debenture interest owing was omitted, inventory was omitted.

Question 2

– Statement of Cash Flows.

Some of the points reflected in the solutions indicated the following in some instances:

Knowledge of the layout of the statement could be improved.

Students were unsure which items went into operating, investing and financing activities.

Expenditure on PP&E was incorrectly calculated in some cases.

Adjustment to operating profit was made for interest.

The amount shown as paid for taxation was not shown in several cases.

Question 3

– Accounting definitions and treatment of bad and doubtful debts

Overall students displayed a good know of the accounting definitions and terms. Some of the points reflected in the solutions indicated the following in some instances:

Knowledge of journal entries was poor.

Many students were unclear on how to set down the extracts from the financial statements.

Question 4

– Auditing and International Accounting Standards

Some of the points reflected in the solutions indicated the following in some instances:

Knowledge of the purpose of an audit was weak as was knowledge of the contents of the audit report.

Understanding of the guiding principles set out in IAS 1 on the preparation of financial statements was poor.

Question 5

– Circumstances when a company may need to be valued and methods of valuation

58% of candidates attempted this question. 12% attained 75% or better and 77% attained 50% or more. The average mark was 65% which was very good

Some of the points reflected in the solutions indicated the following in some instances:

Students were familiar with the circumstances where a company may require to be revalued.

Students had a good knowledge of the methods of revaluation.

Question 6

– Sole trader v company structure, tax withholding accounts, and journal entries for payment of dividends

This question proved to be very popular with students. Some of the points reflected in the solutions indicated the following in some instances:

Students were very familiar with the comparison of sole trader v company structure.

Journal entries continue to hold difficulty for many students.

Q1

Q2

Q3

Q4

Q5

Q6

Highest

20

19

20

18

20

20

Lowest

3

1

1

1

2

2

Average

16

10

12

9

13

14

Autumn 2017

QUESTION 1

The following trial balance has been extracted from the records of Treeline Ltd at 30 June 2017.

Note

Debit

Credit

Revenue

2,600,000

Purchases

1,450,000

Administration expenses

(1)

375,000

Distribution costs

(1)

364,200

Loan note (debenture) interest paid

(2)

8,500

Dividend paid

80,000

Land and buildings:

Cost

(3)

2,400,000

Accumulated depreciation at 1 July 2016

(3)

260,000

Plant and equipment:

Cost

(3)

600,000

Accumulated depreciation at 1 July 2016

(3)

240,000

Trade receivables

72,000

Trade payables

65,400

Inventory at 1 July 2016 (opening)

115,000

Cash at bank

65,000

Ordinary shares of €1 each (Authorised 1,000,000 shares)

800,000

Share premium

320,000

Retained earnings

895,600

3% loan notes (debentures) (redeemable 2040)

(2)

400,000

Corporation tax paid

(4)

51,300

________

5,581,000

5,581,000

The following items are to be adjusted for in preparing financial statements for publication for the year ended 30 June 2017.

(1) At 30 June 2017 the following expenses were accrued/prepaid:

Administration expenses accrued

€22,000

Administration expenses prepaid

€35,200

Distribution costs accrued

€14,600

Distribution costs prepaid

€20,600

(2) The debentures were issued on 1 September 2016.

(3) Depreciation is to be provided as follows:

Buildings

€48,000

Plant and equipment – 30% per year on reducing balance.

(4) The corporation tax liability for the year ended 30 June 2017 is estimated to be €57,000.

(5) The value (at the lower of cost and net realisable value) of the closing inventory at 30 June 2017 is €307,000.

REQUIREMENTS

Prepare the following financial statements for Treeline Ltd in accordance with the requirements of international standards, (using the function of expenditure method for the Statement of Comprehensive Income):

(i) A Statement of Comprehensive Income for the year to 30 June 2017.

(11 marks)

(ii) A Statement of Financial Position as at 30 June 2017.

(9 marks)

Total 20 Marks

QUESTION 2

Behan and Crehan operate a retail outlet through a partnership. They share profits in the ratio 5:3.

The following additional details have been extracted from the partnership agreement:

Behan is to be paid a salary of €20,000.

Interest on the partners’ capital account balances at 31 December 2016 is to be paid to each partner at 3%.

The following are the balances in the books of the partnership at 31 December 2016:

Debit

Credit

Buildings at net book value

600,000

Office equipment at net book value

110,000

Motor vehicles at net book value

60,000

Inventory at 31 December 2016 (closing)

120,000

Bank current account

15,000

Receivables and prepayments

6,000

Payables and accruals

111,000

Profit for year ended 31 December 2016

350,000

Capital accounts 1 January 2016

Behan

250,000

Crehan

150,000

Current accounts at 1 January 2016

Behan

30,000

Crehan

10,000

_______

906,000

906,000

The following adjustments have been agreed between the partners:

Inventory - the valuation of inventory at 31 December 2016 is to be reduced from €120,000 to €80,000.

REQUIREMENTS

Prepare the following for the partnership:

(i) Calculate the profit for the year ended 31 December 2016 after adjusting for the reduction in valuation of the inventory at 31 December 2016.

(3 marks)

(ii) The appropriation account for the partnership for the year to 31 December 2016.

(6 marks)

(iii) The partners’ current accounts for the year to 31 December 2016.

(5 marks)

(iv) The Statement of Financial Position for the partnership as at 31 December 2016.

(6 marks)

Total 20 Marks

QUESTION 3

(a) Explain the purpose of books of first entry.

(2 marks)

(b) List two books of first entry and briefly describe their role in the accounting procedures and practice of a business.

(6 marks)

(c) Debit and credit are the most fundamental concepts in accounting and bookkeeping.

REQUIREMENTS

(i) Explain the term “credit”.

(2 marks)

(ii) List two possible effects of credits.

(2 marks)

(d) List and explain two characteristics which financial statements should possess to be useful.

(4 marks)

(e) List and briefly explain the two underlying assumptions that are integral to preparing or using financial statements.

(4 marks)

Total 20 Marks

QUESTION 4

(a) International Accounting Standard (IAS) 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and equipment.

REQUIREMENTS

(i) Explain the meaning of the term property, plant and equipment as set out in IAS 16.

(2 marks)

(ii) Explain the initial measurement of property, plant and equipment in the books of a business.

(4 marks)

(b) IAS 16 allows, but does not require, companies to revalue property, plant and equipment.

REQUIREMENT

Outline the main points contained in IAS 16 of relevance to a company where it decides to revalue property, plant and equipment.

(6 marks)

(c) Jones & Family Ltd runs a successful company in the retail industry. It prepares its financial statements to 31 December each year. On 1 January 2012, it purchased a machine for €1,000,000. It depreciates the machine over its useful life which is 10 years on a straight-line basis with no residual value. The depreciation charged for the years 2012, 2013, 2014, 2015 and 2016 was €500,000.

On 1 January 2017, the company revalued the machine at €600,000, when the remaining useful life is 5 years.

REQUIREMENT

Show the extracts in the Statement of Comprehensive Income for the year to 31 December 2017 and the Statement of Financial Position as at 31 December 2017 to reflect the revaluation of the machine including the charge for depreciation for 2017.

(8 marks)

Total 20 Marks

QUESTION 5

(a) Businesses will often be faced with the choice between debt and equity finance.

REQUIREMENT

List five main sources of finance available to businesses and outline the considerations and common implications of these sources.

(10 marks)

(b) EBITDA is a non-GAAP metric that is measured exactly as stated.

REQUIREMENTS

(i) Explain what is meant by EBITDA.

(4 marks)

(ii) Calculate EBITDA for Golf Ltd from the Statement of Comprehensive Income shown below.

Golf Ltd Statement of Comprehensive Income for the year ended 31 March 2017

Turnover

35,200,000

Cost of sales

(15,000,000)

Gross profit

20,200,000

Administration expenses

5,200,000

Depreciation charges

2,300,000

Wages and salaries

3,800,000

(11,300,000)

Net operating profit

8,900,000

Interest charges

(3,600,000)

Net profit

5,300,000

Taxation expense

(600,000)

Profit for the period

4,700,000

(6 marks)

Total 20 Marks

QUESTION 6

(a) Charlie Ltd operates a retail operation and the following are the details relevant to the completion of the VAT account for the months of January/February 2017.

An extract from the trial balance of Charlie Ltd as at 31 December 2016 shows:

Debit

Credit

Refund due from the Collector General for September/October 2016**

2,000

Liability due to Collector General for November/December 2016

4,000

** The refund of VAT due is disputed by the Collector General.

During the period January/February 2017, the company had the following transactions which affect the VAT account.

Purchases for resale including VAT at 23%

455,100

Services excluding VAT at 13.5%

22,000

Purchases returns excluding VAT at 23%

2,000

Sales including VAT at 23%

639,600

Sales returns excluding VAT at 23%

3,500

Entertainment of clients which is not recoverable including 23% VAT

2,460

Notes

**The refund due from the Collector General remains unresolved at the end of February 2017.

The company paid the balance due to the Collector General for November/December 2016 on 12 January 2017.

REQUIREMENT

Prepare the VAT account for Charlie Ltd for the two-month period January/February 2017.

(10 marks)

(b) The following was the annual cost of the employees of Delta Ltd for the year to 31 March 2017.

Gross salaries

204,650

Income tax (PAYE)

(51,000)

PRSI and USC

(7,500)

Net salaries

146,150

Gross salaries

204,650

Employers PRSI

22,000

Total salary cost

226,650

The following information is also relevant.

The balance on the Collector General Account at 1 April 2016 was a credit balance in the amount of €7,700.

The company paid the Collector General €71,800 in the year to 31 March 2017.

REQUIREMENTS

Prepare:

(i) The Wages Control Account and

(4 marks)

(ii) The Collector General Account

(6 marks)

for Delta Ltd for the year to 31 March 2017 to reflect the above transactions.

Total 20 Marks

SOLUTION 1

(i)

Note

Sales revenue

2,600,000

Cost of Sales

(W1)

(1,258,000)

Gross profit

1,342,000

Less Costs

Distribution costs

(W2)

358,200

Administration costs

(W2)

361,800

Depreciation

(W3)

156,000

(876,000)

Operating Profit

466,000

Less Debenture Interest

(W4)

(10,000)

Profit before Tax

456,000

Income tax expense

(57,000)

Profit for the period

399,000

(ii)

Assets

Note

Non current assets

Land and Buildings

(W3)

2,092,000

Plant and equipment

(W3)

252,000

2,344,000

Current assets

Inventory

307,000

Trade Receivables

72,000

Other Receivables

Prepaid Distribution Expenses

20,600

Prepaid Admin Expenses

35,200

Cash at bank

65,000

499,800

2,843,800

Equity and Liabilities

Equity

Share capital (SOCE)

800,000

Share premium (SOCE)

320,000

Retained earnings (SOCE)

(W6)

1,214,600

2,334,600

Non current liabilities

3% loan notes (2040)

400,000

Current liabilities

Trade Payables

65,400

Taxation

5,700

Accruals

Debenture Interest

1,500

Distribution expenses

14,600

Administration expenses

22,000

109,200

2,843,800

Notes

W1

Cost of sales

Opening Inventory

115,000

Purchases

1,450,000

1,565,000

Less Closing Inventory -

(307,000)

1,258,000

W2

Expenses

Distribution Expenses per Trial Balance

364,200

Add Accruals

14,600

Less Prepayments

(20,600)

358,200

Administration Expenses per Trial Balance

375,000

Add Accruals

22,000

Less Prepayments

(35,200)

361,800

W3

Depreciation

Buildings

Land and Buildings per Trial Balance

2,400,000

2,400,000

Depreciation

48,000

Accumulated depreciation SOY

260,000

Accumulated dep 30 Jun 2016

308,000

(308,000)

Net Book Value (SOFP)

2,092,000

Plant and Equipment

Cost per Trial Balance

600,000

600,000

Less Depreciation prior years

(240,000)

Residual value

360,000

Depreciation (@30%)

108,000

Depreciation prior years

240,000

Accumulated dep 30 Jun 2016

348,000

(348,000)

Net Book Value (SOFP)

252,000

Depreciation Charge for the year

Buildings

48,000

Property Plant and Machinery

108,000

156,000

W4

Debenture Interest

Nominal value of Debs

400,000

Interest for 10 months (@ 3%) (SOCI)

10,000

Interest paid

(8,500)

Interest Accrued at EOY

1,500

W5

Corporation Tax

Charge for the year

57,000

Balance paid per Trial Balance

(51,300)

Balance owed at 30 Jun 2016

5,700

W6

Retained earnings

Balance at 1 Jul 2016

1 July 2016

895,600

Profit for the year

399,000

Dividend paid

(80,000)

Balance at 30 June 2017

1,214,600

SOLUTION 2

(i)

Trading profit

350,000

Less reduction in inventory

(40,000)

Adjusted trading profit

310,000

(ii)

Adjusted trading profit

310,000

Salary Behan

20,000

Interest on Capital

Behan

7500

Crehan

4500

(32,000)

Profit to be shared

278,000

Behan (5/8)

173,750

Crehan (3/8)

104,250

278,000

(iii)

Behan

Crehan

Behan

Crehan

Balance b/f

10,000

Balance b/f

30,000

Salary

20,000

Interest on Capital

7,500

4,500

Balance c/f

231,250

98,750

Appropriation

173,750

104,250

231,250

108,750

231,250

108,750

(iv)

Assets

Non Current assets

Buildings

600,000

Office equipment

110,000

Motor vehicles

60,000

770,000

Current assets

Inventory

80,000

Receivables and prepayments

6,000

86,000

856,000

Capital and liabilities

Partners accounts

Behan

Crehan

Capital accounts

250,000

150,000

400,000

Current accounts

231,250

98,750

330,000

730,000

Current liabilities

Payables and accruals

111,000

Bank current account

15,000

126,000

856,000

SOLUTION 3

(a) The books of first entry are used to record the daily transactions of the business. They serve as the primary information collation and recording process.

(b) The books of first entry, also known as books of prime entry or day books, are where the business’s transactions are first recorded.

When a business makes a sale, it issues an invoice or a receipt. All of the invoices or receipts are the source documents for a sale. These source documents are all recorded in a sales day book, which is one of the key books of first entry. The information recorded in the sales day book includes:

The date of sale

The nature of the goods or services sold

To whom the sale was made (customer reference numbers)

The sale value (excluding VAT)

The VAT included in the sale amount

The invoice number, if relevant.

When a business receives cash it will issue a receipt. These receipts are the source documents for cash receipts. These source documents are all recorded in the cash receipts day book – the book of first entry for cash receipts. The information recorded in the cash receipts day book includes:

The date of the cash receipt

The reason for the cash receipt

From whom the money was received

The amount received

When a business pays out cash it will receive a receipt. These receipts are the source documents for cash payments. These source documents are all recorded in the cash payments day book – the book of first entry for cash payments. The information recorded in the cash payments day book includes:

The date the cash was paid out

The reason for the cash payment

To whom the money was paid

The amount paid

When a business writes a cheque, the cheque stub is the source document. These are recorded in the cheque payments book. The information recorded in the cheque payment book includes:

The date of the cheque

The cheque number

The reason for the payment

To whom the money was paid

The amount paid

It is an important control that all cheques, even those cancelled, are included in the cheque payments book so that cheque numbers run consecutively and all cheques are accounted for.

When a business receives a sale return from one of its customers it will either issue a credit note or cash refund. The cash refund is recorded through a receipt kept with the cash. These source documents (the credit note or receipt) are the source documents and they are recorded in a sales return day book.

When a business makes a purchase it will receive an invoice or a receipt. These again represent the source documents for a purchase. The purchases day book is the book of first entry and it records similar information to the sales day book.

When a business returns goods to one of its suppliers it will receive a cash refund for which is issues a receipt, or a credit note. This credit note or receipt will be the source document and will be recorded in the purchases returns day book.

Most businesses now use computerised accounting systems which raise invoices and record this information electronically. The only item that many businesses record manually is their petty cash, which is generally a combination of the cash receipts and cash payments day book.

Whether electronic or manual, bookkeeping involves recording the details of all of these source documents into the books of first entry. The books of first entry are the key sources of information in relation to a business’s transactions. Accordingly, these books provide significant opportunities to analyse sales, purchases, cash movements etc.

(c) (i) Accounts are traditionally prepared as “T” accounts. That is, they have two sides:

the debit side (left hand side), and

the credit side (right hand side).

“T” accounts are so called because they resemble a capital “T” in layout, as follows:

Account name

Debit (or Dr)

Credit (or Cr)

(ii) There are two possible effects of credits:

A credit entry increases a liability, profit or income/revenue.

A credit entry can be used to decrease an asset, loss or an expense.

(d) Financial statements need to possess a number of characteristics to be useful:

Understandability – Financial Statements should avoid undue complexity.

Relevance – Readers should get the information they need when they need it.

Reliability – The statements should be based on reliable information.

Comparability – The format and content should be consistent year-on-year.

Materiality – While every effort is made to ensure Financial Statements accurately record all transactions, errors will arise from time to time. Omissions or misstatements of items are material if they could, individually or collectively, influence decisions based on the Financial Statements. Either the size or the nature of the item, or a combination of both, could be the determining factor.

Substance over form – The economic reality of some transactions is not always consistent with their legal form.

(e) There are two assumptions that are integral to preparing or using Financial Statements. These underpin everything in the accounts and determine how useful the information is.

The accruals basis

The assumption is that accounts have been prepared on an accruals basis, which means that the effect of transactions and other events are recognised in the period to which they relate, not as cash is received or paid.

Businesses will often pay expenses in advance. A common example of this practice is found with rent payments, which may be made 6 months in advance. This payment gives the business the use of the premises to generate profits for 6 months.

Similarly, there are many expenses which businesses pay in arrears – a common example being electricity. Most electricity bills cover a two-month period, and are actually received in the third month.

Going concern

The Financial Statements are prepared on the basis that an entity will continue in operation for the foreseeable future. This is the going concern concept.

If a business has difficulty in meeting its debts or there are other doubts over its ability to continue in the foreseeable future, then the accounts may have to be prepared other than on a going concern basis. This is because assets are unlikely to realise their full potential value if they are being sold under pressure (‘fire-sale’). This must be clearly stated, as users of Financial Statements will start with the premise that the going concern principal has been applied.

SOLUTION 4

(a) (i) Property, plant & equipment (PP&E), traditionally known as ‘fixed assets’, are accounted for under the provisions of IAS 16. Under IFRS, fixed assets are described as non-current assets.

Plant is a term that is not defined anywhere but, for accounting purposes, generally refers to factories or the manufacturing units of an organisation.

PP&E includes non-current tangible assets held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes. PP&E (like a hammer) is expected to be used for more than one period, unlike current assets (like a nail).

(ii) PP&E is initially recognised in the accounts at cost.

The journal entry for the purchase of non-current tangible assets is Debit the asset and credit the bank/supplier.

Cost includes all expenditure directly attributable to bringing the asset to the location and condition necessary for its intended use, where intended use means being capable of operating in the manner intended by management.

Directly attributable costs include labour costs as well as certain borrowing costs such as interest in certain instances.

The costs incurred need not be external costs (that is, where the business paid a third party) or incremental costs (that is, they need not be costs that the business would otherwise not have incurred) in order to be directly attributable.

(b) The fair value of property, plant and equipment is normally its market value. Market value is the highest possible price that could be obtained for the item of PP&E in an arm’s length deal, without regard to its existing use.

If the valuation route is chosen it should be applied consistently to all assets of the same class (assets that have a similar nature or function within the business).

This means that entities cannot cherry pick the assets they carry at re-valued amounts.

If an accounting policy of revaluation is chosen, then revaluations should be kept up to date, so that the carrying amount of an asset (that is, the amount at which it is stated in the Statement of Financial Position) at the reporting date does not differ materially from its fair value. Thus, anyone who re-valued their property in recent years must continue to re-value their property during a recession that is lowering prices.

The general rule on an increase in valuation is that any surplus arising on a revaluation is recognised directly in a revaluation reserve (part of equity on the Statement of Financial Position). That is, it does not go to the Statement of Comprehensive Income and does not increase the company’s profit for the period. By recording these unrealised increases (unrealised because the asset has not been sold and a ‘true’ profit has not been recorded) in an assets value in the reserves rather than in the Statement of Comprehensive Income we insure that the company’s profit is not falsely inflated for the period.

The general rule on a decrease on valuation is that any deficit arising on the revaluation is recognised in a Statement of Comprehensive Income. Thus, revaluing assets downwards has a direct and immediate effect in the profit reported for that period.

An exception to this general rule on devaluations of an asset is where a revaluation downwards reverses a previous revaluation upwards on the same asset. If this happens, the revaluation deficit is taken directly to the revaluation reserve (to offset the previous increase that is recorded there). Where the deficit is greater than the original increase in valuation (surplus), only an amount equivalent to the surplus can be taken directly off the revaluation reserve. The excess deficit goes through the Statement of Comprehensive Income.

An exception to this general rule on an asset that is revalued upwards, is where a revaluation upwards reverses a previous revaluation downwards on the same asset. If this happens, the revaluation increase is taken to the Statement of Comprehensive Income (to offset the previous decrease that was recorded here) and, any excess to the revaluation reserve.

(c) Entries in Financial Statements 2017

Machine

Cost

1,000,000

Accumulated depreciation five years

(500,000)

Revaluation value

600,000

Net book value (Non current assets SOFP 2017)

(500,000)

Revaluation reserve (Equity and reserves SOFP 2017)

100,000

Depreciation charge 2007

Revaluation value

600,000

Depreciation (5 years) 2017 (Expenditure SOCI 2017)

120,000

SOLUTION 5

(a) The main sources of finance and capital available to a business (some of these are company specific, such as shares) are:

1. Owners

Equity, invested as shares in the company or as capital in the business

Loans from the owner

2. Banks

Secured or unsecured loans from high-street banks

Bank overdrafts

Leases or hire purchase financing

3. Capital markets

Shares, for a plc

Quoted bonds, a type of loan traded on the capital markets

4. Other

Lines of credit from suppliers

Government grants

Venture capital

Factoring of debts (you should look up what debt factoring means if you are not familiar with the term)

In general, most businesses use a combination of the different sources of finance listed above.

Some of the other considerations and common implications of different financing choices:

If the owner invests money into the company as a loan he will be able to withdraw it at a later date, while if he invests it as equity he will not be able to withdraw any unless he sells part of his business.

If the funds are invested as debt there will be interest and a tax deduction may be available for this from the company’s perspective. (Note: there will be income tax implications for the investor(s)). No tax deduction is ever available for dividends paid.

If the business seeks additional funding from banks, the banks may look at the debt to equity ratio and would prefer that the owner had taken an equity stake rather than making the investment as debt. The equity cannot be repaid and so it represents a real commitment by the investor and banks usually like to see a real commitment before lending to businesses.

Similarly, the bank may look at the EBITDA cover and want to reduce the interest paid on any loans from shareholders.

Interest expenses reduce a company’s net profit and EPS, while dividends do not.

Funding from the capital markets may be cheaper than borrowing from a high-street bank, but it may also bring the administrative burden of extra stock exchange regulation that the business may not want.

Secured borrowings may restrict the uses that an asset may be put to, so while they are usually cheaper than unsecured borrowings they may be less attractive to businesses.

(b) (i) EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is a non-GAAP metric that is measured exactly as stated. Non-GAAP simply means that, unlike EPS, there is no standard governing how it is calculated. Consequently, there can be significant variations from company to company.

To arrive at a company’s EBITDA, all the company’s interest, tax, depreciation and amortisation entries in the Statement of Comprehensive Income are added back to the net income.

It is claimed that EBITDA measures “cash earnings”. The effects of accrual accounting, differing tax jurisdictions, and differing capital structures are cancelled out.

While EBITDA is a common metric in company comparison, it is not normally shown on the face of the Statement of Comprehensive Income.

(ii) The EBITDA for Golf Ltd for year to 31 March 2017

Net profit for the period

4,700,000

Add back:

Interest

3,600,000

Taxation

600,000

Depreciation/Amortisation

2,300,000

6,500,000

EBIDTA

11,200,000

SOLUTION 6

(a)

1 Jan 17 Refund due

2,000

1 Jan 17 due Nov/Dec

4,000

VAT @ 23% on Purchases for Resale

85,100

VAT @ 23% on Sales

119,600

VAT @23% on Services

2,970

VAT @ 23% on Purchases Returns

460

VAT @23% on Sales Returns

805

Paid to Collector General

4,000

28 Feb 17 due to Collector General

31,185

28 Feb 17 Refund due

2,000

126,060

126,060

1 Mar 17 Refund due

2,000

1 Mar 17 due to Collector General

31,185

(b) (i)

Wages Control Account

Gross Salary

204,650

SOCI for ye 31 Mar 16

226,650

Employers PRSI

22,000

______

226,650

226,650

(ii)

Collector General Account

Paid to Collector General

71,800

1 April 16 Balance

7,700

Income Tax

51,000

PRSI and USC

7,500

31 Mar 17 Balance due

16,400

Employers PRSI

22,000

88,200

88,200

1 Apr 17 Balance due

16,400

Examiner’s Report

Overall comment

Overall the students seemed to be well prepared for this exam.

General observations.

Headings for financial statements, such as the Statement of Comprehensive Income (SOCI) and/or Statement of Financial Position (SOFP), were not complete in a number of cases.

There is room for improvement in students’ knowledge of journals entries.

Question 1 – SOCI and SOFP for a limited company.

Most students attempted the question. In general it was answered very well.

Some of the points reflected in the solutions indicated the following in some instances:

In a small number of cases the calculation of the cost of sales was not shown as a separate working and opening and closing inventory was reversed.

Accruals and prepayments reversed.

In the case of depreciation, the workings were not shown in all cases and the incorrect method of calculating depreciation was used in a some cases.

The accrued element of debenture interest was miscalculated.

Incorrect figure for corporation tax was used in the SOCI and SOFP.

In the SOFP, the title of the statement was incorrect, calculation of retained earnings was not shown, opening instead of closing inventory was shown instead, closing inventory was omitted, incorrect corporation tax figure was used, prepayments and debenture interest accrued was not shown.

Question 2 – Statement of Cash Flows.

This question was attempted by the majority of students.

Some of the points reflected in the solutions indicated the following in some instances:

Part (i) Amended profit: This part was well answered.

Part (ii) Appropriation Account: A number of students were unsure as to how to complete this account.

Part (iii) Current Account: As with part (ii) this part was not answered very well.

Part (iv) SOPF: The majority of students had no difficulty with this part. The credit balance in bank was shown as an asset by a number of students.

Question 3 – Accounting definitions and treatment of bad and doubtful debts.

This question was attempted by most students.

Overall the students displayed a good know of the accounting definitions and terms.

Some of the points reflected in the solutions indicated the following in some instances:

Books of prime entry

Students had a good understanding of books of prime entry and were able to list and explain two of the books. Most listed the Sales and Purchases day books. Some could have provided a better description of entry in nominal accounts.

The term “credit”

The majority understood the term but some explained it as a loan or outstanding instead of the double entry effect. Most understood the effects of crediting an account.

Financial statements

Students had a good understanding of the characteristics which make financial statements useful.

Underlying assumptions

Many students not clear on the underlying assumption. These are integral to preparing or using financial statements.

Question 4 Property Plant and Equipment IAS 16.

Students had a reasonably good knowledge of the theory relating to revaluations.

Some of the points reflected in the solutions indicated the following in some instances:

PP&E

Most students understood that PP&E are known as fixed/non-current assets but did not state what was included in PP&E.

Initial Measurement

Some students did not state that initial measurement is at cost and did not outline what was included in cost. Some described the methods of depreciation which was not required.

Revaluation

Most students understood the theory regarding revaluation.

Extracts from SOCI and SOFP

Many students calculated the correct figures for the revaluation reserve and depreciation but did not reflect them correctly in the extracts from SOCI and SOFP.

Question 5 Sources of finance and EBITDA.

Students had a greater knowledge of the sources of finance but were not as familiar with explaining or calculating EBITDA.

Some of the points reflected in the solutions indicated the following in some instances:

Sources of finance

Most students listed 5 or more sources but in some cases did not outline the considerations and common implications of the sources.

EBITDA explanation

Some students only listed what the abbreviation stood for but did not explain the term.

Calculation of EDITDA

Some students omitted the calculation.

Question 6 – VAT and PAYE.

This question proved to be very popular with all students attempting the question.

Some of the points reflected in the solutions indicated the following in some instances:

VAT account

Students had a good understanding of this area but in some cases the entries were on the incorrect side of the account.

Wages Control account

Some students were not clear on the operation of the Wages Control Account.

Collector General

Most students answered this part very well.

Overall students scored well on this question.

Q1

Q2

Q3

Q4

Q5

Q6

Highest

20

20

20

20

20

19

Lowest

3

4

3

3

3

3

Average

15

11

14

11

13

13