FINANCIAL ACCOUNTING

FORMATION 2 EXAMINATION - APRIL 2016

NOTES:
You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5.
Should you provide answers to all of Questions 2 to 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first three answers to hand for Questions 2 to 5 will be marked.

Note: Students have optional use of the Extended Trial

Balance, which if used, must be included in the answer booklet.

Provided are pro-forma:

Statements of Profit or Loss and Other Comprehensive Income By Expense, Statements of Profit or Loss
and Other Comprehensive Income By Function, and Statements of Financial Position.

TIME ALLOWED:
3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:
During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of your solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

 The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - APrIl 2016

Time allowed: 3.5 hours plus 10 minutes to read the paper. Answer Question 1 and three
of the remaining four questions.

Note: Students have optional use of the Extended Trial

Balance, which if used, must be included in the answer booklet.

1.
(a) Identify and explain the fundamental differences between a company and a partnership. (10 marks)

rubroc limited is a company involved in the distribution of quarry material for the construction and agricultural
industries. The following trial balance was extracted from their books as at 31 december 2015:
(b)

Debit Credit

Accumulated depreciation - building - 1 January 2015 34,750

€ €

Accumulated depreciation - office equipment - 1 January 2015 26,840

Accumulated depreciation - Trucks - 1 January 2015 350,000
Admininstrative expenses 103,510
Allowance for Trade receivables 10,574
bank 267,410
building at Cost at 1 January 2015 241,020
Current Tax Payable 16,500
distribution Costs 754,210
Income Tax 13,640
Inventory at 1 January 2015 nil
Issued share Capital - 100,000 at €1.50 each 150,000
land 240,000
office equipment at Cost at 1 January 2015 42,400
Purchases / Purchase returns 1,236,570 10,869
retained earnings at 1 January 2015 593,119
revenue returns / revenue 14,570 2,478,560
revaluation surplus 64,851
share Premium 30,000
Trade Payables 324,867
Trade receivables 487,600
Trucks at Cost at 1 January 2015 690,000

4,090,930 4,090,930

The following information, based on your investigations, has also come to your attention:

(i) expenses are to be allocated evenly between distribution Costs and Administrative expenses unless otherwise
stated. Interest on loans is to be included in finance Costs.

(ii) There is no closing inventory.

(iii) depreciation is to be charged as follows:

land not depreciated

buildings see Part v below
office equipment 20% reducing balance
Trucks 25% straight line on Cost

depreciation is calculated monthly from date of purchase to the date of sale.

Page1
(iv) A truck was involved in an accident on 1 may 2015 and had to be scrapped. €15,000 was received for the
scrappage of this truck. This amount was lodged to the bank account. The truck had originally cost €75,000
on 1 september 2013. rubroc limited replaced the truck by purchasing a new truck costing €80,000 on 1
July 2015.

(v) The new truck in part (iv) above was partially paid for by rubroc limited by cheque and by taking out a long
term loan of €60,000 carrying interest at 6% per annum which was not paid for by year-end.

(vi) The building was revalued on 1 January 2015 by a professional valuer who valued the building at €200,000.
The valuer places a useful economic life of twenty years from 1 January 2015 and that the residual value of
the building in twenty year’s time would be €50,000.

(vii) A customer of rubroc limited is suing the company, claiming that incorrect material was delivered. rubroc
limited’s solicitor has advised that it is more likely than not the company will be found liable. This would result
in rubroc limited being required to pay court and legal fees of €15,000. The judge in the case will decide
on damages. There is an 80% chance that the damages would be €100,000 whereas there is a 20% chance
the damages would be €60,000. rubroc limited intends to sue the quarry which it purchased the material
from for €80,000. The quarry disputes this claim by rubroc limited.

(viii) The income tax amount for the 2015 year included in the above trial balance is incorrect and should be
€18,900. This amount was paid in march 2016.

(ix) A VAT refund of €6,000 relating to purchases has not been accounted for. This amount was received in
february 2016.

(x) rubroc limited wrote off bad debts of €7,200. The Allowance for doubtful debts should be set at 4%.

(xi) rubroc limited had amounts owing at the year-end for Administrative expenses and distribution Costs of
€2,860 and €14,520 respectively.

REQUIREMENT:

Prepare, in a form suitable for publication, a statement of Profit or loss and other Comprehensive Income and a
statement of financial Position for rubroc limited for the financial year-ended 31 december 2015.

Note: All workings should be shown. (30 marks)

[Total: 40 Marks]

Page 2
2. The bank account of Collatc limited for the month of december 2015 was as follows:

(a) Prepare the bank reconciliation statement for Collatc limited at the 31 december 2015. (18 marks)
REQUIREMENT:
(18 Marks)
explain why the bank statement is usually taken as being more accurate than the details that appear in the
company’s own records.
(b)

(2 marks)
(2
M

[Total: 20 Marks]

Page 3
3.
(A) durine limited is a company involved in building wind farms in Ireland. The financial controller has asked you,
a newly qualified CPA for some help in correctly accounting for property, plant and equipment (PPe) within the
company for the financial year ending 31 december 2015.

The following costs have occurred on a wind farm site:

€
Preparation of site 80,000
Annual maintenance once operational 30,000
VAT on materials (recoverable) 120,000
staff training on correctly operating the wind farm once operational 25,000
Import duty on materials purchased 28,000
Initial surveying of site 40,000
Project manager’s salary to build and manage the wind farm 140,000
Wages of employees to build the wind farm 300,000
Annual wages of employees once the wind farm is operating 100,000
Testing costs 60,000
materials purchased for wind farm net of VAT 250,000
discount received on materials purchased 33,000

(a) Calculate the amount that should be capitalised as property, plant and equipment for the above wind farm.
REQUIREMENT:

(5 marks)

In accordance with IAs 16 – Property, Plant & Equipment explain the accounting treatment allowed for the
measurement of PPe:
(b)

(i) At recognition;

(ii) After recognition. (3 marks)

(c) In the context of IAs 16 – Property, Plant & Equipment:

(i) discuss what is meant by the term ‘fair Value’;

(ii) how can the fair value of a building be determined? (3 marks)

durine limited’s head office building is the only building it owns. using professional valuers, it revalued this
building on 1 January 2015, at €2,100,000. durine limited has adopted a revaluation policy for buildings from
(B)

this valuation date and has decided that the original useful life of buildings has not changed as a result of the
revaluation. The building was acquired on 1 January 2005. The cost of the building on acquisition was
€2,500,000 and the accumulated depreciation to the 31 december 2014 amounted to €500,000. The
depreciation up to 1 January 2015 was depreciated evenly since acquisition. The professional valuer believes
that the residual value on the building would be €600,000 at the end of its useful life.

In accordance with IAs 16 – Property, Plant & Equipment:

REQUIREMENT:

(i) how should the depreciable amount of an asset be allocated? (1 mark)

(ii) how often should the residual value and the useful life of an asset be reviewed? (1 mark)

(iii) Calculate the depreciation amount of the building for the year ending 31 december 2015 based on the
information provided in the above scenario.
(7 marks)

[Total: 20 Marks]

Page 4
 Terry and Thomas are in partnership sharing profits and losses 2:1. They had originally invested €50,000 and
€40,000, respectively. Their current account balances on 1 January 2015 were €14,000 credit for Terry and
4.

€9,900 debit for Thomas.

The partnership agreement specifies the following:

1) The payment of interest on drawings and receipt of interest on capital at the rate of 5% per annum and
3% per annum, respectively.
2) The partners take drawings in the same proportion as they share profits or losses. Terry takes drawings
of €2,400 a month with Thomas taking the amount of drawings as allowed by the partnership rules.
3) Thomas is entitled to take a salary of €2,000 a month.
4) The interest on drawings is calculated as if the drawings for the six month period had been taken in full
on the first day of the period.

on 1 July 2015, Terry decides to retire. both partners agree to have the partnership valued and bring in the
resultant goodwill into the partnership. Terry agrees to leave €30,000 of his capital as a loan to the business
earning interest at the rate of 4% per annum and to withdraw the balance of what is owing to him. An
independant expert values the goodwill on 1 July at €90,000.

on 1 July, Thomas decides to enter a new partnership with Toby where they share profits or losses 3:1. They
decided to keep the same interest rates from the previous partnership agreement in relation to drawings and
capital. Thomas’s salary was changed to €2,200 a month. from this period to the year-end, Thomas took
drawings of €10,000 and Toby took drawings of €5,000. Toby introduced capital of €25,000 on his admission
to the partnership. The goodwill was cancelled in the same proportion as they share profits or losses.

The profits for the year amounted to €108,000 and these profits occurred evenly throughout the year.

REQUIREMENT:

for the year ended 31 december 2015:

(a) Prepare the Profit & loss Appropriation Accounts. (12 marks)

(b) Post to and balance the Current Account of all the individual partners. (8 marks)

[Total: 20 Marks]

Page 5
 redona limited operates a hotel in dublin and the following is its results for the last three years with its year
end being 31 december.
5.

revenue increase / (decrease) (5%) 4% 12%

2013 2014 2015

non-Current Assets increase / (decrease) 40% 10% 2%

Gross Profit 60% 61% 66%
net Profit 23% 25% 21%
return on Capital employed 12% 15% 10%
Current ratio 1.4:1 1.6:1 1.8:1
Acid ratio 0.6:1 1.0:1 0.9:1
debt to equity ratio 50% 44% 43%
dividend Cover 4 times 8 times 10 times

REQUIREMENT:

(a) using all of the above information, comment on the performance of redona limited from 2013 to 2015.

(12 marks)

Identify and explain the main advantages of ratio analysis as a means of assessing the financial performance
of a business.
(b)

(5 marks)

(c) Comment on the use of the Gross Profit ratio to the service industry. (3 marks)

[Total: 20 Marks]

END OF PAPER

Page 6
 SUGGESTED SOLUTIONS
The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - APrIl 2016

(a) discuss the differences that exist between a company and a partnership.
SOLUTION 1

Name – A partnership cannot use the word “limited” in its name.

No separate legal personality – a partnership has no separate legal personality, separate from its
partners/members of the partnership. however, a company does have a separate personality from its
shareholders. A company owns its property, not the shareholders. Partners own the partnership property.

Unlimited Personal Liability– a partnership has unlimited liability for all the debts of the firm (except under
the limited Partnership Act 1907) whereas shareholders in a company have liability limited.

Succession – when one partner dies, the partnership is dissolved unless the partnership agreement provides
otherwise. however, a company has “perpetual succession”. shareholders may die but the company
continues until it is wound up.

Management – a partnership is managed by the partners together – they are the shareholders, managers and
workers. A company is managed by the directors not the shareholders.

Shares – partners have a share in a partnership as agreed between them. A partner’s share cannot be
transferred without the consent of the other partners. In reality there is not a substantial difference in the
definition of a share between a company and a partnership.

Size – a partnership can have between 2 and 20 partners, except solicitors and accountants. A private
company can have more and a public company can have 7 or more shareholders.

Regulation – a company has memorandum & Articles of Association and a partnership usually has a
Partnership Agreement to regulate its affairs.

Legislation – The Partnership Act, 1890 is the primary piece of law (legislation) which governs partnerships
(and the limited Partnership Act, 1907). Companies are governed by the Companies Acts 1963 – to date,
and various eu regulations.

Taxation – it is often said that partnerships are tax-transparent. Tax is paid by the partners on the profits each
partner makes at the usual income tax levels for an individual. A company, being a separate legal personality,
pays corporation tax (currently at 12.5%) but in addition to this, the shareholders will pay tax on any dividends
received from the company.

Accounts – Partnerships are not required to file accounts in the Company records office. Companies must
file accounts at the Company records office. Therefore while a lot of a company’s financial details are a
matter of public record, Partnerships financial details are kept private.

Withdrawal of Capital – Technically speaking, partners may withdraw their capital contributions without any
restrictions (unless regulated by the partnership agreement). A shareholder cannot, generally, withdraw his/her
capital under the capital maintenance rules of the Companies Acts.

In Court – A company cannot represent itself in court, it must do so through a solicitor. Any of the partners
in a partnership can represent themselves in court.
(10 marks)

Page 7
(b) Rubroc Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2015
! ! ! !
Revenue TB 2,478,560 0.25
- Revenue Returns TB - 14,570 0.25
Cost of Sales W2 - 1,219,701
Gross Profit 1,244,289 0.25
Finance Costs W1.v 1,800 0.25
Distribution Costs W2 938,832
Administrative Expenses W2 276,472 1,217,104 0.25
Profit/(Loss) before Tax 27,185 0.25
Income Tax Expense TB + W1.viii 13,640 5,260 18,900 0.25
PROFIT/(LOSS) FOR THE YEAR 8,285 0.25
Other Comprehensive Income
Revaluation Loss W3 - 6,270 0.25
Other Comprehensive Income for the year, net of tax - 6,270
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2,015 0.25

Rubroc Limited Statement of Financial Position as at 31st December 2015

! ! ! !
Property, Plant & Equipment W3 651,198 0.25
Total Non-Current Assets 651,198 0.25
Current Assets
Inventories W1.ii -
Trade Receivables W1.x 461,184 0.50
Other Receivables W1.ix 6,000 0.25
Cash & Cash Equivalents TB + W1.iv + W1.v 267,410 15,000 - 20,000 262,410 0.25
Total Current Assets 729,594 0.25
TOTAL ASSETS 1,380,792 0.25
Equity & Liabilities
Equity
Share Capital 150,000 0.25
Share Premium 30,000 0.25
Retained Earnings TB + SOPL 593,119 8,285 601,404 0.25
Revaluation Surplus W3 64,851 - 6,270 58,581 0.25
Total Equity 839,985 0.25
Non-Current Liabilities
Long-term Loan W1.v 60,000 0.25
Total Non-Current Liabilities 60,000
Current Liabilities
Trade Payables TB 324,867 0.25
Current Tax Payable TB + W1.viii 16,500 5,260 21,760 0.25
Provisions W1.vii 115,000 0.25
Accruals W1.v + W1.xi 1,800 2,860 14,520 19,180 0.25
Total Current Liabilities 480,807 0.25
TOTAL EQUITY & LIABILITIES 1,380,792 0.25

SUBTOTAL MARKS 7.50

Page 8
 Working - Journal Entries
! !
1.ii No Closing Inventory at year-end
1.iv Dr. Bank + Current Assets SOFP 15,000
Cr. Disposal Account - Trucks 15,000
Dr. Disposal Account - Trucks 75,000
Cr. Property, Plant & Equipment (PPE) - Non-Current Assets SOFP 75,000 2.00
Dr. Accumulated Depreciation - PPE + Non-Current Assets SOFP 31,250
Cr. Disposal Account - Trucks 31,250
Dr. Loss on Disposal + Expenses SOPL & OCI 28,750
Cr. Disposal Account - Trucks 28,750

1.v Dr. Property, Plant & Equipment (PPE) + Non-Current Assets SOFP 80,000
Cr. Long-term Loan + Non-Current Liabilities SOFP 60,000 1.00
Cr. Bank - Current Assets SOFP 20,000
Dr. Finance Costs + Expenses SOPL & OCI 1,800 1.00
Cr. Accruals + Current Liabilities SOFP 1,800
Loan 60,000
Loan Interest 6% 3,600
Time Apportion 6 Months 1,800

1.vi Dr. Revaluation Loss (W3) - Equity SOFP 6,270 1.00

Cr. Property, Plant & Equipment (PPE) - Non-Current Assets SOFP 6,270

Dr. Depreciation - Administrative Expenses + Expenses SOPL & OCI 3,750

Dr. Depreciation - Distribution Costs + Expenses SOPL & OCI 3,750 1.00
Cr. Accumulated Depreciation - PPE - Non-Current Assets SOFP 7,500

Calculation of Depreciation on Buildings

Revalued Amount - Residual Value 200,000 - 50,000

Remaining Useful Life 20

Depreciation for the year 7,500

1.vii IAS 37 Provisions, Contingent Liabilities & Contingent Assets

Given more likely than not that Rubroc will be found guilty, a present obligation is assumed to exist - IAS 37, para 15-16
Given that a single obligation is being measured, a provision is made for the outflow of the most likely outcome, IAS 37
para 40.
Consequently, a provision is recognised for !15,000 and !100,000 i.e. !115,000

Dr. Administrative Expenses + Expenses SOPL & OCI 57,500

Dr. Distribution Costs + Expenses SOPL & OCI 57,500 2.00
Cr. Provisions + Current Liabilities SOFP 115,000
Rubroc suing its supplier may give rise to a contingent asset.
A contingent asset is a possible asset arising from past events whose existence will only be confirmed by the
occurence of one or more uncertain future events not wholly within the control of the entity.
However, a contingent asset is not recognised in the financial statements and therefore, the !80,000 cannot be recognised 1.00
in Rubroc's financial statements for the year-ended 31 December 2015.
1.viii Dr. Income Tax + Expenses SOPL & OCI 5,260
Cr. Current Tax Payable + Current Liabilities SOFP 5,260 1.00

1.ix Dr. Other Receivables + Current Assets SOFP 6,000

Cr. Purchases - Expenses SOPL & OCI 6,000 1.00
1.x Dr. Bad Debt Write Off + Expenses SOPL & OCI 7,200
Cr. Trade Receivables - Current Assets SOFP 7,200 1.00

Dr. Allowance for Doubtful Debts + Expenses SOPL & OCI 8,642
Cr. Allowance for Doubtful Debts - Current Assets SOFP 8,642 1.00
Trade Receivables Balance per TB 487,600
- Bad Debt Written Off W1.viii - 7,200
480,400
- Allowance for Trade Receivables - 4% - 19,216
Revised Trade Receivable 461,184
Current Allowance for Trade Receivables TB 10,574
New Allowance for Trade Receivables See Above 19,216
Increase in Allowance for Trade Receivables 8,642
1.xi Dr. Administrative Expenses + Expenses SOPL & OCI 2,860
Dr. Distribution Costs + Expenses SOPL & OCI 14,520 1.00
Cr. Accruals + Current Liabilities SOFP 17,380

SUBTOTAL MARKS 14.00

Page 9
 Cost of Distribution Administration
Working 2 - Expenses Sales ! Costs ! Expenses !
Opening Inventory Per TB - - - Cost of
Purchases Per TB 1,236,570 - - Sales
- Purchases Returns Per TB - 10,869
Closing Inventory W1.ii - - - 0.50
Vat Refund W1.ix - 6,000
Expenses Per TB - 754,210 103,510 Distribution
Loss on Disposal W1.iv - 14,375 14,375 28,750 Costs
Provision W1.vii - 57,500 57,500 115,000 2.00
Bad Debt Write Off W1.x - 3,600 3,600 7,200
Allowance for Doubtful Debts W1.x - 4,321 4,321 8,642
Accruals W1.xi - 14,520 2,860 17,380
Depreciation - Buildings W3 - 3,750 3,750 7,500 Admin.
Depreciation - Plant & Equipment W3 - 1,556 1,556 3,112 Expenses
Depreciation - Office Equipment W3 - 85,000 85,000 170,000 2.00
Total 1,219,701 938,832 276,472

Working 3 - Property, Plant & Equipment Office

Land Buildings Equipment Trucks Total
! ! ! ! !
Cost Per TB 240,000 241,020 42,400 690,000 1,213,420
Accumulated Depreciation b/d Per TB - - 34,750 - 26,840 - 350,000 - 411,590
Carrying Value b/d at 1st January 2013 240,000 206,270 15,560 340,000 801,830 0.50
Revaluation Loss - - 6,270 - - - 6,270 0.50
240,000 200,000 15,560 340,000 795,560
Disposal - Cost W1.iv - - - - 75,000 - 75,000 0.50
Disposal - Accumulated Depreciation Note 1 - - - 31,250 31,250 0.50
240,000 200,000 15,560 296,250 751,810
Addition W1.iv - - - 80,000 80,000 0.50
240,000 200,000 15,560 376,250 831,810
Depreciation - Buildings W1.vi - - 7,500 - - - 7,500 0.50
Depreciation - Office Equipment - 20% Reducing Balance - - - 3,112 - - 3,112 0.50
Depreciation - Trucks - 25% Straight Line - - - - 170,000 - 170,000 0.50
Carrying Value c/d at 31st December 2015 240,000 192,500 12,448 206,250 651,198
Note 1 - Disposal of Truck ! !
Cost 75,000
Accumulated Depreciation - 25% straight line per annum
Depreciation 2013 - 4 Months 6,250
Depreciation 2014 18,750
Depreciation 2015 - 4 Months 6,250
31,250 - 31,250
Carrying Value of Equipment disposed 43,750
Disposal Account
Cost 75,000 Accumulated Depreciation 31,250
Disposal Proceeds 15,000
Loss on Disposal 28,750
75,000 75,000

SUBTOTAL MARKS 8.50

TOTAL MARKS 22.50

Page 10
 Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Accumulated Depreciation - Building - 1 January 2015 34,750 7,500 15,000 42,250
Accumulated Depreciation - Office Equipment - 1 January 2015 26,840 3,112 6,224 29,952
Accumulated Depreciation - Trucks - 1 January 2015 350,000 201,250 340,000 488,750
Admininstrative Expenses 103,510 172,962 276,472
Allowance for Trade Receivables 10,574 8,642 19,216
Bank 267,410 15,000 20,000 262,410
Building at Cost at 1 January 2015 241,020 6,270 234,750
Current Tax Payable 16,500 5,260 21,760
Distribution Costs 754,210 184,622 938,832
Income Tax 13,640 5,260 18,900
Inventory at 1 January 2015 -
Issued Share Capital - 100,000 at !1.50 each 150,000 150,000
Land 240,000 240,000
Office Equipment at Cost at 1 January 2015 42,400 42,400
Purchases / Purchase Returns 1,236,570 10,869 6,000 1,230,570 10,869

Page 11
Retained Earnings at 1 January 2015 593,119 8,285 601,404
Revenue Returns / Revenue 14,570 2,478,560 14,570 2,478,560
Revaluation Surplus 64,851 6,270 58,581
Share Premium 30,000 30,000
Trade Payables 324,867 324,867
Trade Receivables 487,600 7,200 480,400
Trucks at Cost at 1 January 2015 690,000 80,000 75,000 695,000
Loss on Sale of Truck 75,000 75,000
Long Term Loan 60,000 60,000
Finance Costs 1,800 1,800
Accruals 19,180 19,180
Provisions 115,000 115,000
Other Receivables 6,000 6,000
Bad Debt Write Off 7,200 7,200

4,090,930 4,090,930 765,976 765,976 2,489,429 2,489,429 1,960,960 1,960,960

 SOLUTION 2

2(a)
(a) Step 1: Reconcile the opening balance in the bank account with the opening balance on the bank statements
!
Balance per Bank Account - 01/12/2015 28,754
Add Items not yet Debited -
28,754 1.00

Balance per Bank Account - 01/12/2015 28,471

Add Unpresented Lodgements 670 1.00

Less Unpresented Cheques

Cheque 8751 - 245 1.00
Cheque 8753 - 142 1.00
28,754 1.00

Adjusted Bank Account

December ! December !
31 Balance 37,042 31 Lodgement (05/12/15) - Difference 90 1.50
31 Lodgement (19/12/15) - Difference 9 31 Cheque 8756 - Difference 18 1.50
31 Lodgement 2,451 31 Gas 486 1.50
31 Rates 1,600 0.75
31 Closing Balance 37,308 0.75
39,502 39,502

Bank Reconciliation Statement

Closing Balance per Bank Statement - 31/12/2015 43,265 0.75
Less Unpresented Cheques
Cheque 8755 548 0.75
Cheque 8757 1,654 0.75
Cheque 8759 1,499 0.75
Cheque 8760 2,147 - 5,848 1.50
Add Lodgement not yet Cleared
Lodgement - 31/12/2015 890 890 0.75
Bank Errors
1245785621 - 23/12/2015 - 999 - 999 0.75
Balance as per Adjusted Bank Account 37,308 1.00

SUBTOTAL MARKS 18.00

Q 2 (b) Human Error - There is more chance of errors happening in the bank account details in a company due to human
e

(b)
Q 2 (b) Human Error - There is more chance of errors happening in the bank account details in a company due to human
error in inputting details. T 2.00

TOTAL MARKS 20.00

Page 12
SOLUTION 3

(A)
REPORT
To: Financial Controller – Durine Limited
From: Future Financial Accountant
Re: IAS 16 – Property, Plant & Equipment (PPE)
Date: April 2016

(a) The amount that can be capitalised for this wind farm is as follows:

€ €
Preparation of site 80,000 Yes 80,000
Annual maintenance once operational 30,000 no
Vat on materials (recoverable) 120,000 no
staff training on correctly operating the wind farm once operational 25,000 no
Import duty on materials purchased 28,000 Yes 28,000
Initial surveying of site 40,000 Yes 40,000
Project manager salary to build and manage the wind farm 140,000 Yes 140,000
Wages of employees to build the wind farm 300,000 Yes 300,000
Annual wages of employees once the wind farm is operating 100,000 no
Testing costs 60,000 Yes 60,000
materials purchased for wind farm net of vat 250,000 Yes 250,000
discount received on materials purchased 33,000 Yes -33,000
Amount to be Capitalised 865,000

(5 marks)

(i) Per paragraph 15 of IAs 16, at initial recognition, all items of PPe are recognised at cost.
(b)

(ii) Per paragraph 29 of IAs 16, two methods of valuing PPe after initial recognition are allowed i.e.

a) Cost model i.e. PPe is carried at cost less accumulated depreciation and impairment losses
b) revaluation model i.e. PPe is carried at a revalued amount

The revalued amount is equal to the fair value at date of revaluation less subsequent accumulated depreciation
and impairment losses.
(3 marks)

(i) Per paragraph 6 of IAs 16, fair value is the amount for which an asset could be exchanged between
(c)

knowledgeable, willing parties in an arm's length transaction.

(ii) from market based evidence by appraisal by professionally qualified valuers. (3 marks)

Page 13
(i) Per paragraph 6 of IAs 16, it should be allocated over its useful life (1 mark)
(B)

(ii) Per paragraph 51 of IAs 16, the residual value and the useful life of an asset shall be eviewed at least at each
financial year end and if expectations differ from previous estimates, the change(s) shall be accounted for as
a change in an accounting estimate in accordance with IAs 8 Accounting Policies, Changes in Accounting
estimates and errors.
(1 mark) 

(iii) The depreciation amount is as follows:

Working - Property, Plant & Equipment Buildings Total

€ €
Cost 2,500,000 2,500,000
- Accumulated depreciation -500,000 -500,000
Carrying Value b/d at 1st January 2015 2,000,000 2,000,000
revaluation Gain 100,000 100,000
2,100,000 2,100,000
depreciation - buildings - note 1 -37,500 -37,500
Carrying Value c/d at 31st december 2015 2,062,500 2,062,500

note 1
buildings - original Cost 2,500,000
buildings - original Accumulated depreciation 500,000
Accumulated depreciation / Cost = 20%

building has been depreciated by 20% over 10 years (01.01.05 - 31.12.14) so annual rate ofdepreciation has
been 2% i.e. 20% / 10 years as asset has been depreciated evenly since acquistion. Therefore the original
useful life is 50 years i.e. 100% / 2% and the remaining useful life is 40 years. Therefore, the remaining
useful life is 10 years

To Calculate the new depreciation amount, we use the following depreciation formula

revalued Cost of Asset – residual Value i.e. 2,100,000 - 600,000

expected useful life of Asset 40 Years

depreciation = 37,500 (7 marks)

If you have any further queries, please do not hesitate to contact me.

Yours sincerely,

financial Accountant
[Total: 20 Marks]

Page 14
SOLUTION 4

Old P'ship New P'ship

! !
Net Profit 108,000 split evenly per month 54,000 54,000 1.00
Less Loan Interest - - 600 1.00
Add Interest on Drawings Note 1
Terry 360 - 1.00
Thomas 180 250 1.00
Toby - 125 1.00

Less Salary - Thomas - 2,000*6 Mths : 2,200*6 Mths (12,000) - 13,200 1.00
Less Interest on Capital Note 2
Terry (750) - 0.50
Thomas (600) - 600 1.00
Toby - - 375 0.50
Residual Profits 41,190 39,600 1.00
Residual Profits Split
Terry 2:1 27,460 - 1.00
Thomas 1:2 in 1st Partnership and 3:1 in 2nd Partnership 13,730 29,700 1.00
Toby 1:3 - 9,900 1.00
41,190 39,600
Note 1 - Interest on Drawings Interest on
Amount No. of Mths Interest Drawings
Terry ! !
01.01.15 - 30.06.15 14,400 6 5% 360
01.07.15 - 31.12.15 - 6 5% - 360
14,400
Thomas
01.01.15 - 30.06.15 7,200 6 5% 180
01.07.15 - 31.12.15 10,000 6 5% 250 430
17,200
Toby
01.01.15 - 30.06.15 - 6 5% -
01.07.15 - 31.12.15 5,000 6 5% 125 125
5,000
Total Interest on Drawings 915
Note 2 - Interest on Capital
Terry Thomas Toby
! ! ! !
50,000 x 3% x 6 / 12 750
- x 3% x 6 / 12 -
40,000 x 3% x 6 / 12 600
40,000 x 3% x 6 / 12 600
- x 3% x 6 / 12 -
25,000 x 3% x 6 / 12 375
750 1,200 375 2,325

SUBTOTAL MARKS 12.00

Page 15
(b)
Partners Current Account
Terry Thomas Toby Terry Thomas Toby
! ! ! ! ! !
Balance B/D - 9,900 - Balance B/D 14,000 - - 1.00
Interest on Capital 750 1,200 375 0.50
Salary - 25,200 - 0.50
Residual Profits 27,460 43,430 9,900 0.50
Interest on Loan 600 - - 0.50
Goodwill 60,000 30,000 - 1.00
Goodwill - 67,500 22,500 1.00
Interest on Drawings 360 430 125 0.50
Drawings 14,400 17,200 5,000 0.50
Bank 88,050 1.00
Balance C/D - 4,800 Balance C/D - 17,700 1.00

102,810 99,830 27,625 102,810 99,830 27,975

Balance B/D - - 17,700 Balance B/D - 4,800 -

SUBTOTAL MARKS 8.00

TOTAL MARKS 20.00

Page 16
Solution 5

(a) Commentary on Performance of Redona Limited from 2013 to 2015

The decrease and increase in redona limited revenue appears to be in line with how the hotel sector has
Revenue increase / (decrease)

performed in the recession and coming out of the recession in 2014. The hotel sector in dublin has shown a
noticeable improvement in revenue in 2015 so redona limited has displayed a decent performance with its
revenue over the period.

redona limited appears to have carried out a sizeable capital improvement programme in 2013 with some
Non-Current Assets increase / (decrease)

residue of this spend rolling over to 2014. The 2015 spend is small and is consistent with the hotel not needing
much capital spend given the refurbishment in 2013 and 2014.

A good performance by redona limited in capitalising on improving market conditions in 2015 by increasing
Gross Profit Percentage

its rates and thereby increasing its gross margin. Again the results are in line with the hotel sector in dublin.

redona limited performed poorly in this ratio. As dublin gradually came out of recession in 2014, redona
Net Profit Percentage

limited net profit percentage increased and showed the hotel was performing well. however, there has been
a sizeable decrease in the net profit percentage from 2014 to 2015 which is very disappointing especially in
light of the increase in the gross profit percentage. This is an area that the hotel management and
shareholders needs to examine closely to identify and correct the reasons for the decrease in net profit
percentage from 2014 to 2015.

Again a disappointing return and the decrease in profit is the significant reason for the decrease in the ratio.
Return on Capital Employed

underneath the line, the capital employed would have increased year on year which would also help to
decrease the ratio but the change in profit from 2014 to 2015 has been the main driver for the decrease in the
ratio from 2014 to 2015.

The company has struggled with this ratio particularly in 2013 and 2014 but it is improving and 2015 is getting
Current Ratio

closer to the norm of 2:1. overall, the result from 2013 to 2015 has been decent and continued focus on this
ratio can ensure that it gets to a satisfactory level in the years ahead.

Again this ratio has improved from 2013 to 2015 but it is disappointing to see that it decreased from the 2014
Acid Ratio

level. Therefore, management need to find the reasons for the decrease and work to ensure that it gets back
to the norm of 1:1 at a minimum. The 2013 ratio shows that the hotel was carrying a sizeable quantity of
inventory which then decreased in 2014 and increased again in 2015. This is surprisingly high for a hotel and
needs serious investigation as normally inventory would not be at this level in a hotel.

It is pleasing to note the improvement in this ratio from 2013 to 2015 as the company has paid down its debt
Debt to Equity Ratio

and improved its reserves. The decrease has slowed down in 2015 which is probably due to decreased
profits leading to decreased cash flow to pay back debt as well as the company trying to improve its current
ratio by holding on to more of its cash.

This ratio is going in the right direction as increased profits due to higher revenue are helping to increase the
Dividend Cover

cover. It also appears as if a decision was made to reduce the amount of the dividend and leave more of the
profit in the hotel to be used for future investment. management need to ensure that the shareholders are
happy with the decrease in the level of the dividend given the increased profits despite lower profit margins,
the hotel is enjoying.

overall, the hotel is performing well with management’s main focus to ensure that inventory levels are reduced
to hotel norms and to remedy the decrease in net profits for 2015 while ensuring that the hotel improves its
ratios overall due to a more buoyant hotel market existing in dublin.
(12 marks)

Page 17
 financial ratios provide a standardised method with which to compare companies and industries. ratios can
(b) Comparison

put all companies on a relatively equal playing field in the eyes of analysts; companies are judged on their
performance rather than their size, sales volume or market share.

ratios can reveal trends in particular industries, creating benchmarks against which the performance of all
Industry Analysis

industry players can be measured thus providing valuable information to users, shareholders, trade payables,
banks.

ratios help investors and analysts to evaluate the strengths and weaknesses of individual companies or
Stock Valuation

industries and allow them to highlight companies to invest in or to avoid investing in.

ratios can provide guidance to entrepreneurs when creating business plans or preparing presentations for
Planning and Performance

lenders and investors. ratios can also serve as an impetus for strategic change within an organisation,
providing management with relevant guidance and feedback as ratio valuations shift in response to
organisational changes. ratios help to ensure managers perform by revealing financial weaknesses and
opportunities.

It highlights important information in simple formats. A user can judge a company by just looking at a small
Simplicity

amount of numbers instead of reading the whole financial statements.

(5 marks)

It depends on the service industry. for example, an accountancy practice will usually not have any cost of
sales and therefore, the gross profit ratio is meaningless as all its costs are under expenses. however, a hotel
(c)

while providing a service will have a cost of sales for its food and beverage operations and therefore, the
gross profit ratio is relevant.
(3 marks)

[Total: 20 Marks]

Page 18
 MARKING SCHEME

SOLUTION 1

(a) differences – 2 x 5 marks each 10

Workings 22.5
statement of Profit or loss and other Comprehensive Income + 7.5
(b)

statement of financial Position

Total Marks 40

SOLUTION 2

(a) bank reconciliation 18

(b) explanation 2

Total Marks 20

SOLUTION 3

(a) Calculation of amount to be capitalised 5

Accounting treatment at recognition 1.5

Accounting treatment after recognition 1.5
(b)

fair Value 1.5

how should fair Value be determined 1.5
(c)

depreciable amount of an asset be allocated 1

how often residual value and useful life be reviewed 1
(d)

depreciation amount 7

Total Marks 20

SOLUTION 4

(a) Profit & loss Appropriation Account 11

(b) Preparation of Partners Current Accounts 7

(c) Journal entries for Introduction and removing of Goodwill 2

Total Marks 20

SOLUTION 5

(a) Commentary on performance of redona limited 12

(b) Advantages of ratio Analysis 5

(c) Gross Profit applicable to a service industry 3

Total Marks 20

Page 19