Advanced Financial Accounting Financial Accounting...balance on the bank statement. 4 Marks b)...

Financial Accounting1st Year Examination

May 2019

Solutions, Examiners Comments & Marking Scheme

Advanced Financial Accounting2nd Year Examination

May 2018

Solutions, Examiners Comments & Marking Scheme

Financial Accounting May 2019 1st Year Paper

of 22

NOTES TO USERS ABOUT THESE SOLUTIONS

The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations.

Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors.

There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits.

This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved.

This publication is copyright 2019 and may not be reproduced without permission of Accounting Technicians Ireland.

© Accounting Technicians Ireland, 2019


of 22 Financial Accounting (FA) S2019

Accounting Technicians Ireland

1st Year Examination: May 2019

Paper: FINANCIAL ACCOUNTING

Tuesday 14 May 20199.30 a.m. to 12.30 p.m.

INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

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

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

Answer ALL THREE questions in Section A and TWO of the three questions in Section B.Candidates should allocate their time carefully.

All workings should be shown.

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

Answers should be illustrated with examples, where appropriate.

Candidates may ignore any VAT implications to transactions throughout this paper unless the question specifically instructs them to do otherwise.

Question 1 begins on Page 2 overleaf.

**Please note: If more than the required number of questions are answered, then only those questions in the order presented will be marked. Please place a line through any answers you do NOT wish to be marked**



SECTION A

Answer ALL THREE QUESTIONS (Compulsory) in this Section

Question 1

The following trial balance was extracted from the books of Z. Maloney, a sole trader, on 31 December 2018:

€/£ €/£Sales 250,000Returns 4,000 3,000Purchases 150,000Drawings 10,000Advertising 2,000Rent 10,000Electricity 4,100Rates 3,000Wages and salaries 22,000Insurance 4,000Building 100,000Accumulated depreciation of buildings at 01 January 2018 10,000Motor Vehicles 40,000Accumulated depreciation of motor vehicles 01 January 2018 14,400Plant & Machinery 60,000Capital at 31 December 2017 10,200Loan interest paid 5,00010% long-term bank loan 100,000Bank 15,000Accumulated depreciation on plant & machinery 01 January 2018 20,000Bad debts 9,100Trade receivables/payables 21,000 33,000Allowance for receivables at 31 December 2017 1,200Suspense a/c 1,000Discounts 2,200 2,600Inventory at 01 January 2018 14,000

460,400 460,400

The following information is also provided:(a) Closing inventory at 31 December 2018 was counted at €/£16,500. However, this excluded the

following items:

Item Cost Sales value Selling costs€/£ €/£ €/£

A 500 600 90B 680 700 50

(b) On 31 December 2018 Zoe purchased land for €/£50,000, on credit. This transaction was not recorded in the above trial balance.

(c) When the trial balance was prepared the sum of the debits did not equal the sum of the credits and this has caused the balance in the suspense account. On further investigation the following errors were identified:(i) Rent paid of €/£1,500 was posted to the debit of the advertising account.(ii) Discounts received of €/£500 was posted correctly in the trade payables account but

debited to the discount allowed account.



(d) In December 2018 the plant & machinery was sold for €/£36,000. By year end this had not been recorded in the above financial statements and the disposal value had not been received. A full year’s depreciation is charged for plant and machinery in the year of purchase and none in the year of sale.

(e) The long-term loan was received on 01 April 2018

(f) At 31 December 2018 electricity due was €/£300 and rent prepaid was €1,000.

(g) Depreciation is charged as follows:

Buildings - straight line over 40 yearsMotor vehicles - 20% reducing balance Plant & machinery - straight line over 12 years

(h) A review of trade receivables at year end identified €/£2,000 that should be written off as bad debtsThe allowance for receivables should be adjusted to 5% of the remaining receivable balance.

You are required to:(i) Prepare the income statement for Z. Maloney for the year ended 31 December 2018.

18 Marks(ii) Prepare the statement of financial position for Z. Maloney as at 31 December 2018.

12 Marks

Total: 30 Marks

Question 2

Matt Carty is a sole trader, based in Co. Wexford. He had provided you with the following information that relates to the year ended 31 December 2018:

(1) Closing inventory at 31 December was €/£27,000.(2) In December 2018, he sold a piece of machinery that had originally cost €/£100,000 in 2014 for

€/£15,000. The machinery is depreciated at 20% on cost with a full year’s depreciation in the year of purchase and none in the year of sale.

(3) On 01 September 2018, he paid insurance of €/£6,000 for the year-ending 30 August 2019.(4) In December 2018, Matt sold goods on credit for €/£121,000 inclusive of VAT at 21%. Matt is

registered for VAT.(5) In December 2018, Matt purchased goods for €/£90,000 cash exclusive of VAT at 21%.

You are required to:Prepare the journal to record the above transactions in the financial statements of Matt Carty for the year ending 31 December 2018.

Total: 10 Marks



QUESTION 3 (Compulsory)

Answer ANY FOUR of the SIX Parts below

Part A

T. Durcan is a sole trader. You are provided with the following information in relation to her loan account:

€/£Opening loan balance at 01 January 2018 80,000Loan drawn down 01 June 2018 20,000Loan repayment 01 October 2018 18,000

The interest rate on all of the loans was constant throughout the year at 10%. During the year to 31 December 2018 loan interest of €/£7,000 was paid. There was no opening prepayment or accrual in relation to the loan interest at 1 January 2018.

You are required to:

(i) Calculate the interest charge to the income statement for the year ended 31 December 2018.4 Marks

(ii) Prepare the interest expense T account for the year ended 31 December 2018.1 Marks

Part BS. Kelly has the following balances in her financial statements for the years ended:

31/12/17 31/12/18 €/£ €/£

Non-current assets 500,000 600,000Non-current liabilities 250,000 300,000Current liabilities 50,000 70,000

During 2018, capital introduced was €/£70,000, cash drawings was €/£20,000 and stock drawings €/£12,000.

You are required to:Calculate the profit or loss for the year ended 31 December 2018. 5 Marks

Part C(a) Explain what is meant by the term “True and Fair view”.

2 Marks(b) Explain the following accounting conventions: (i) Historic cost (ii) Business entity.

3 Marks

Part D(a) Simon Kearns has just completed his first year of trading. The value of his closing inventory,

at year-end 31 December 2018, was €/£2,800. He valued the closing inventory using the First In First Out (FIFO) method. If he had valued the closing inventory using the Weighted Average method, the value of the closing inventory would have been €/£2,450.




Outline the impact on Simon’s net profit if he had valued the closing inventory using Weight Average instead of FIFO.

2 Marks

(b) During March 2019 the following transactions occurred:

03 March Purchased 500 units at €/£20 each15 March Purchased 300 units @ €22 each22 March Sold 700 units 28 March Purchased 200 units at €/£21 each

You are required to: Calculate the value of the closing inventory at 31 March if the inventory is valued using the First

In First Out (FIFO) method.3 Marks

Part EAt 01 January 2018, there was an opening insurance prepayment, of €/£600, in Claire Harney’s trial balance. During 2018, the following transactions occurred:

01 February Paid insurance of €/£1,400 for period 01 February 2018 – 31 May 201801 May Paid insurance of €/£1,440 for period 01 June 2018 – 30 September 201801 October Paid insurance of €/£1,600 for period 01 October 2018 – 31 January 2019


(a) Prepare the insurance expense account for the year ending 31 December 2018.4 Marks

(b) Explain why a prepayment is presented as a current asset in the statement of financial position.1 Mark

Part F

(a) Explain the differences between public and private companies. 3 Marks(b) Outline two reasons why shareholders might buy shares in a public limited company.

2 Marks



SECTION B

Answer ANY TWO of the three questions

QUESTION 4You have been provided with the Bank Statement and the Bank Account, from the General Ledger, for Jessica Smith for the month of June 2018.

Bank account (from general ledger)€/£ €/£

01/06 Lodgement 73 850 01/06 Balance b/d 43002/06 Lodgement 74 1,500 02/06 Cheque 84 50011/06 Lodgement 75 280 08/06 Cheque 85 51029/06 Lodgement 76 825 15/06 Cheque 86 220

20/06 Cheque 87 20024/06 Cheque 88 41025/06 Cheque 89 26030/06 Cheques 90 330Balance c/d 595

3,455 3,455

Jessica SmithBank Statement as at 30 June 2018

Date Details DR €/£ CR €/£ Balance €/£01/06 Balance 180 Dr03/06 Cheque 84 500 680 Dr05/06 Lodgement 72 1,400 720 Cr06/06 Cheque 78 950 230 Dr07/06 Lodgement 73 850 620 Cr11/06 Cheque 85 150 470 Cr13/06 Lodgement 74 1,500 1,970 Cr16/06 Standing order 420 1,550 Cr17/06 Cheque 86 222 1,328 Cr18/06 Credit transfer 250 1,578 Cr22/06 Cheque 87 200 1,378 Cr23/06 Cheque 59 700 678 Cr24/06 Direct debit 75 603 Cr25/06 Lodgement 75 180 783 Cr29/06 Cheque 88 410 373 Cr30/06 Bank charges 162 211 Cr

You are to assume that the figures in the bank statement figures are correct


a) Reconcile the opening balance from the bank account, in the general ledger, to the opening balance on the bank statement.

4 Marksb) Prepare the adjusted bank account, in the general ledger, for Jessica Smith for the month of June

2018.8 Marks

c) Prepare the Bank Reconciliation Statement as at 30 June 2018.4 Marks

d) Explain the nature and purpose of bank reconciliation statements.4 Marks

Total: 20 Marks



Question 5(a) Explain how the VAT system operates.

5 Marks(b) Outline why ethics are important to accountants in general and specifically to an Accounting

Technician.5 Marks

(c) Rosaleen Tully purchased a machine for €/£100,000 on 01 July 2015. On 01 April 2018 Rosaleen sold the machine for €/£65,000. On the same date she purchased a replacement machine for €/£90,000. Depreciation of all machines are charged at 10% on cost based on the proportionate number of months the asset is in use.

You are required to:Prepare the following “T” accounts, in the general ledger, for the year ending 31 December 2018.(i) Machine account(ii) Machine depreciation expense account(iii) Machine accumulated depreciation account(iv) Machine disposal account.

10 Marks

Total: 20 Marks

Question 6(a) Explain the accruals concept.

4 Marks(b) Describe the conflict between the accruals concept and the prudence concept.

4 Marks(c) Discuss the limitations of a trial balance.

4 Marks(d) Outline the situations where incomplete record techniques will be required to produce a set of

financial statements.4 Marks

(e) S. Smyth, a sole trader, owned a business that had the following asset and liability balances in the accounts on 01 January 2018:

£/€Land 200,000Motor vehicles 80,000Accumulated depreciation of motor vehicles 28,000Rent prepaid 5,000Electricity due 1,000Trade payables 33,000Trade receivables 45,000Cash 2,000Bank overdraft 16,000 Inventory 15,000Term loan 70,000

You are required to:Calculate S. Smyth’s capital as at 1 January 2018.

4 MarksTotal: 20 Marks



1st Year Examination: Month 2019

Financial Accounting

Suggested Solutions and

Examiner’s Comments

Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits.

Statistical Analysis – By QuestionQuestion No. 1 2 3 4 5 6Average Mark (%) 67% 43% 55% 66% 45% 57%

Nos. Attempting 821 821 821 790 723 129

Statistical Analysis - OverallPass Rate 68.60Avg Mark 57.90No of Weak Candidates (< 45%) 339No of Marginal Candidates (45% - 49%) 30No of Pass Candidates (50% - 64%) 292No of Merit Candidates (65% - 79%) 272No of Distinct Candidates (80% & Higher) 242No of Absent Candidates 246No of Approved Absent Candidates 43Total No. applied for exam 1464Total No. sitting exam 1175

General Comments:

Overall there was an improvement in the performance of students compared to the previous year’s May exam. However, there is still a problem when candidates are required to prepare solutions for double entry scenarios. Double entry, whether asked through journals or general ledger “T” accounts is a key component of this module.



Examiner Comments on Question One

Solution to Question 1

Income statement of Z. Maloney for year ended 31 December 2018 0.25 MarksMarks

€/£ €/£Sales 250,000 0.25Less sales returns (4,000) 0.25

246,000Less cost of salesOpening inventory 14,000 0.25Purchases 150,000 0.25Purchase returns (3,000) 0.25Closing inventory (w1) (17,650) (143,350) 0.25Gross Profit 102,650 0.25Discount received [ 2,600 + 500] (wk 2) 3,100 1Reduction in allowance for receivables 250 0.5

106,000

Less ExpensesRent [10,000 + 1,500-1,000] 10,500 1.25Advertising [2,000 – 1,500] 500 1Discount allowed [ 2,200 – 500] (wk 2) 1,700 1Loss on disposal (wk 3) 4,000 0.5Interest (wk 4) 7,500 0.25Electricity [4,100 + 300] 4,400 0.75Depreciation : Building (wk 5) 2,500 0.25Depreciation : motor (wk 5) 5,120 0.25Bad debts [9,100 + 2,000] 11,100 0.75Rates 3,000 0.25Wages 22,000 0.25Insurance 4,000 (76,320) 0.25Net Profit 29,680 0.25

Overall this question was answered well by a large number of candidates. Some common mistakes included:- Candidates often did not identify profit or loss implications of disposal- Discounts received and discounts allowed were often classified incorrectly and no adjustment (500) noted- Rent, advertising, electricity often had adjustments incorrect (DR instead of CR and vice versa)- Candidates rarely identified correct interest figure. Most common figure presented in Income Statement was interest paid and not the charge for the year.Candidates often included P&M in non current assets- Candidates often included bank overdraft as current asset- Few Candidates identified other receivables of £/€36k- Interest due often omitted from current liabilities



Statement of financial Position of Z. Maloney as at 31 December 2018 [0.25 marks]

Marks£/€ £/€ £/€

Non- current assets Cost Accumulated dep NBVLand 50,000 0 50,000 0.25Building 100,000 12,500 87,500 1.0Motor 40,000 19,520 20,480 1.0

157,980

Current assetsClosing inventory 17,650 0.5Other receivable (W3) 36,000 1Rent prepaid 1,000 0.5Trade receivables [21,000 – 2,000 – 950] 18,050 1.5

72,700Total assets 230,680

Equity and liabilitiesCapital 10,200 0.5Profit for year 29,680 0.5Drawings (10,000) 1

29,880

Non-current liabilitiesBank 100,000 0.5

Current liabilitiesOther payables 50,000 0.5Interest due (wk 4) 2,500 1Electricity due 300 0.5Trade payables 33,000 0.5Bank overdraft 15,000 1.0

100,800Total equity and liabilities 230,680



Working 1 – closing inventoryMarks

Per question 16,500 0.5A 500 0.5B 650 0.5

17,650

Working 2 – Suspense a/cDr Cr Marks

Discount allowed 500Discount received 500Suspense 1,000Correction of error

Working 3 – profit or loss on sale of machineryMarks

Cost 60,000Accumulated depreciation (20,000) 0.5Carrying value at date of sale 40,000 0.5Sale proceeds 36,000Loss on disposal 4,000 0.5

Working 4 loanMarks

Interest charge for year 100,000 x 10% x 9/12 7,500 1Interest paid 5,000Interest due 2,500

Working 5 – DepreciationBuildingsCharge for year 100,000/40 years = 2,500 [1 mark]Accumulated depreciation 10,000 + 2,500 = 12,500Motor vehiclesCharge for year (40,000 – 14,400) x 20% =5,120 [1 mark]Accumulated depreciation 14,400 + 5,120= 19,520

Working 6 – Allowance for receivablesMarks

Opening balance 1,200Movement – IS 250 0.5Closing balance [21,000 – 2,000] X 5%

950 1



Examiner Comments on Question Two


Dr Cr MarksClosing inventory a/c IS 27,000 0.5Closing inventory asset a/c- SOFP 27,000 0.5Closing inventory at year end

Bank a/c 15,000 0.5Accumulated depreciation a/c 80,000 1.0Machinery a/c 100,000 1.0Loss on disposal a/c- IS 5,000 1.0Sale of machinery

Bank a/c 6,000 0.5Insurance prepaid a/c 4,000 1.0Insurance expense a/c 2,000 0.5Insurance prepaid

Trade receivables a/c 121,000 0.5Sales a/c 100,000 0.5VAT a/c 21,000 0.5Sale of goods on credit

Purchases a/c 90,000 0.5VAT a/c 18,900 0.5Cash a/c 108,900 0.5Purchase of goods

0.5 marks for narratives

Overall this question was poorly answered by a large number of candidates. A significant number of candidates were not able to prepare journals and presented “T” accounts or extracts instead.

Some common mistakes included:- Candidates often mixed up DR’s and CR’s- Narrative often left out of journals- Numerous students did workings but did not present any journals



Examiner Comments on Question Three


Part A(i)

Marks[80,000 x 10% x 5/12] 3,333 1.0[100,000 x 10% x 4/12] 3,333 1.0[82,000 x 10% x 3/12] 2,050 1.0Charge to income statement 8,716 1.0

(ii) Interest expense account

Marks Marks0.25 Bank 7,000 Income statement 8,716 0.50.25 Interest accrual 1,716

8,716 8,716

Part BClosing capital [ 600,000 -300,000 – 70,000] 230,000Opening capital [500,000 - 250,000 – 50,000] 200,000

MarksOpening capital 200,000 1.0Capital introduced 70,000 1.0Drawings (32,000) 1.0Profit for year ? (note 1) (8,000) 1.0Closing capital 230,000 1.0

Note 1Therefore profit for year equals €/£92,000

This question was well attempted by the majority of students: Comments on each section are as follows:Part AA significant number of candidates did not time apportion the amount of the loan balance over the year. Also, entries made in the loan interest “T” account were on the wrong side

Part BA lot of candidates failed to take into account the opening capital

Part CIn general, this was well answered

Part DThe impact of the change on profit was stated incorrectly by a significant number of candidates. The calculation of the closing inventory value was well answered by the vast majority of candidates.

Part EIn general, this was well answered

Part FIn general, this was well answered



Part C(a)“True and fair” is a legal concept and ultimately its meaning may be decided by the courts. However, there is no legal definition of “true and fair”.The meaning of “true and fair” may change over time. What was true and fair twenty years ago might not be true and fair today. This is because generally accepted accounting practice (GAAP) changes in response to changes in the business environment

[2 marks](b)Historical costThe historical cost accounting system is a system of accounting in which all values are based on the historical costs incurred. The figure shown in the financial statements for an item is the value of the item when the transaction occurred, not a current market value. For example, a property is shown in the financial statements at its original cost, not at a value that the property could be currently sold for. Although this may not show a true value of the business, it is at least objective, in that the original cost of the property is fact. Any current market valuations would be based on opinions of the various valuers and thus would be subjective. In practice, although most assets and liabilities are held at historic cost, some businesses might “revalue” certain non-current assets, especially land and buildings, to a current value.

[1.5 marks]Business EntityFinancial Accounting information relates only to the activities of the business entity and not to the personal activities of its owners. The business accounts are prepared as though the business is an entity that is separate from its owner. Sole traders and partnerships are not legally separate from its owners. For example, a sole trader is liable for the debts of the business and his or her own personal assets must be sold to meet them if the business does not have sufficient resources. Even so, for accounting purposes, the business is regarded as being a separate entity and accounts are drawn up for the business separately from the trader’s own personal financial dealings

[1.5 marks]Part D

(a) Weighted average would have reduced closing inventory by €/£350 and this would have reduced profit by €/£350.

[2 marks]

(b)

Marks100 units at €/£22 2,200 1.5200 units at €/£21 4,200 1.5

6,400

Part E(a)

Insurance expense accountMarks Marks Marks

0.5 Bal b/d 6000.5 Bank 1,4000.5 Bank 1,440 Income statement 4,640 1.5

Bank 1,600 C/balance 400 1.05,040 5,040

(b)



A prepaid asset is an expenditure of money in advance of when the money is due. For example, you might pay up front for a year’s rent or insurance, even though the payments are due monthly. Under accrual accounting, you convert part of your prepaid assets to actual expenses monthly. As the expense has not yet occurred it is technically classified as an asset.

[1 mark]

(F)Limited companies are governed very tightly, namely through the Companies Acts. Limited companies can either be private limited companies or public limited companies. The difference between the two is that shares in a Public Limited Company (Plc) can be traded on the Stock Exchange and be bought by members of the general public. Shares in a Private Limited Company are not available to the general public.A private limited company may wish to become a Plc because shares in a private limited company cannot be offered for sale to the general public, thereby restricting the availability of finance, especially if the business wants to expand. Therefore, it is attractive to change status. It is also easier to raise money through other sources of finance, e.g. from banks. It is important to note that a “Plc” does not necessarily mean that the company is quoted on the Stock Exchange. In order to have a listing on the Stock Exchange, the company must undergo a flotation or Initial Public Offering (IPO).

[3 marks](b)Shares sometimes pay dividends to the shareholders, which is a share of the profits at the end of the year. Companies on the Stock Exchange usually pay dividends twice each year.

Over time the value of the share might increase and can be sold for a profit – this is known as a “capital gain”. Of course, the price of the shares can go down as well as up, so investing in shares can be risky.

If they have enough shares they can influence the management of the company. A good example is a “venture capitalist” that will often buy up to an average of between 10% to 50% of the shares of a company and insist on choosing some of the directors.

[2 reasons x 1 mark each]



Examiner Comments on Question Four

Solution to Question 4 (a)

MarksBalance per Bank statement (180) 1.0Add: lodgement 72 1,400 1.0Less: cheque 78 (950) 1.0Less: cheque 59 (700) 1.0Balance per bank T account (430)

(b)Marks Marks

0.5 Balance 595 Lodgement 75 [280 -180] 100 1.01.0 Cheque 85 [510 – 150] 360 Cheque 86 [222 -220] 2 1.01.0 Credit transfer 250 Standing order 420 1.0

Direct debit 75 1.0Bank charges 162 1.0Balance c/d 446 0.5

1,205 1,205

(c)Marks

Closing balance per bank statement 211 1.0Add: lodgement 76 not cleared 825 1.0Less: cheques not presented 89 (260)

1.0

90 (330) 1.0Balance as per adjusted bank T account 446

(d)The bank reconciliation is a method of identifying errors and omissions and correcting them, in advance of the preparation of the final accounts. The balance from the bank account of a business states how much cash the business believes it has in the bank. This should exactly equal the balance in the bank account, as per the bank statement issued by the bank. In practice however, these two figures are usually not the same. For this reason, a bank reconciliation statement is prepared

[4 marks]

This question was really well answered by the majority of candidates. A significant number scored full marks. Some errors included:

-not preparing opening reconciliation- not preparing an adjusted bank “T” account, which starts with the closing balance as per the “T” account in the question.

-using “T” accounts to prepare the bank reconciliation



Examiner Comments on Question Five


(a)VAT is a form of indirect taxation; it is a tax on the supply of goods and services. A business that is registered for VAT is essentially a collection agent for the government. A taxable trader must account for VAT to the Collector-General for every two month period, i.e. January/February, March/April, etc. He will be required to keep a record of all transactions which involved VAT, which is called a VAT return. VAT returns must be submitted to the Collector-General by the 19th day of the month, following the end of each bi-monthly VAT period, e.g. the VAT return for January/February 2012 must be submitted to the Collector-General by 19th March 2012. In certain cases, it is possible to make a return once a year. [ 5.0 marks](b)Ethics in accounting is of utmost importance to accounting professionals and those who rely on their services. Accounting professionals know that people who use their services, especially decision makers using financial statements, expect them to be highly competent, reliable and objective. Those who work in the field of accounting must not only be well qualified but must also possess a high degree of professional integrity.People need to have confidence in the quality of the complex services provided by accountants and accounting technicians. Because of these high expectations, accountants have adopted a code of ethics, also known as Codes of Professional Conduct. These ethical codes call for their members to maintain a level of self-discipline that exceeds the requirements of laws and regulations.

[ 5.0 marks]

(c)Machine a/c

Marks Marks0.5 O/bal 100,000 Disposal a/c 100,000 0.50.5 Bank 90,000

Balance c/d 90,000 0.5190,000 190,000

Machine depreciation expense a/cMarks Marks

0.75 Acc dep (wk2) 2,5000.75 Acc dep (wk 3) 6,750 IS 9,250 0.5

9,250 9,250

Overall the theory parts on VAT and ethics were well answered. However, the preparation og the relevant “T” accounts proved challenging for the majority of candidates that attempted this question. Common mistakes included:-putting debits and credits on wrong side-putting figures in “T” accounts with no description beside them.-Not understanding the difference between the depreciation expense account and the accumulated depreciation account.



Machine accumulated depreciation a/cMarks Marks

1.5 Disposal a/c (wk 2)

27,500 O/Bal (wk 1) 25,000 1.0

Dep exp 2,500 0.50.5 Balance c/d 6,750 Dep exp 6,750 0.5

34,250 34,250

Machine disposal a/cMarks Marks

0.5 Machine a/c 100,000 Acc dep a/c 27,500 0.5Bank 65,000 0.5IS 7,500 0.5

100,000 100,000

Wk 12015 100,000*10%*6/12 5,0002016 100,000*10% 10,0002017 100,000*10% 10,000

25,000

Wk2 100,000*10%*3/12 = 2,500

Wk 3 90,000*10% *9/12 = 6,750



Examiner Comments on Question Six


(a)Income is recognised in the financial statements as it is earned, not when the cash is received. Expenditure is recognised as it is incurred, not when it is paid for. When income is incurred over time (e.g. rental/finance income) or expenditures are time-based (e.g. rent payments), the income and expenditure recognised in the Income Statement should relate to the time period, not to the receipts and payments of cash.

[ 4.0 marks] (b)There are instances where the accruals concept and the prudence concept conflict. For example, the prudence concept says that a sale should only be recognised when the cash is received or its receipt is reasonably certain. Accruals, on the other hand, states that a sale is recognised as earned when the transaction takes place, which is before the cash is received.The argument is resolved by the words, “reasonably certain”. These allow the operation of the accruals concept within the boundaries of prudence because a sale on credit is legally enforceable and therefore the cash receipt is reasonably certain. Preparers should aim for a “neutral” or “objective” view of events, which is neither too optimistic nor too pessimistic.

[ 4.0 marks](c)The Trial Balance does not identify errors such as mis-postings to the incorrect account, as the debits and credits may still be correct but just not in the correct ledger account or nor does it identify a double entry for the wrong monetary value to the correct account. The Trial Balance is just a listing of ledger accounts; it does not identify where errors have been made and what the substances of the errors are.

[ 4.0 marks](d)There may be no accounting records kept at all for the year in question. In this case, the accountant will use the “Net Assets Approach” (the Accounting Equation) to work out the profit or loss for the year.

There are some accounting records kept but not in sufficient quantity, (i.e. some accounting information is missing). In this case, the accountant will use the bank statement and other information to prepare the financial statements. (This is the method that Financial Accounting students should be most familiar with for exam questions).

Proper records have been kept but have been lost due to a fire or flood. In this case, the accountant has to prepare financial statements from whatever information is left.

[ 4.0 marks]

(e)Marks

Land 200,000 0.25Motor vehicles 80,000 0.25Accumulated depreciation (28,000) 0.25Rent prepaid 5,000 0.75Electricity due (1,000) 0.25Trade payables (33,000) 0.25Trade receivables 45,000 0.25

This was really well answered by the majority of candidates. Some problems included the following:- Explaining what an accrual is instead of the accrual concept- Not explaining the conflict between the accruals concept and the prudence concept.



Cash 2,000 0.25Bank overdraft (16,000) 0.75Inventory 15,000 0.25Term loan (70,000) 0.25Opening capital 199,000 0.25

Advanced Financial Accounting Financial Accounting...balance on the bank statement. 4 Marks b)...

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Transcript of Advanced Financial Accounting Financial Accounting...balance on the bank statement. 4 Marks b)...