The Chartered Tax Adviser Examination

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1 The Chartered Tax Adviser Examination May 205 AWARENESS MODULE G ACCOUNTING Suggested Solutions

2 Q) Q2) ) Simon uses the accounts to see how his investment is performing. 2) Vera uses the accounts to see whether she is going to be remunerated and whether her job is secure. 3) Soapy Ltd uses the accounts to see whether the company can pay the amounts owed to it on time. 4) HM Revenue & Customs uses the accounts to see how much tax should be paid by the company. 5) ABCD Bank plc uses the accounts to see whether it is safe to lend the company money. Dr Bank 5,000 Cr Capital 5,000 Dr Purchases 600 Cr Trade creditors 600 Dr Bank 900 Cr Sales 900 Dr Advertising expense 50 Cr Bank 50 Dr Drawings 00 Cr Bank 00 Q3) Any five of the following, mark per characteristic Reliability. The information given must be free from material error and bias and represents faithfully that which it purports to represent. Substance over form. Transactions should be accounted for and presented in accordance with their substance and not merely their legal form. Prudence. This is using of a degree of caution where there is uncertainty, so that assets and income are not overstated, and liabilities and expenses are not understated. Completeness. The information must be complete, as an omission can lead to information being misleading. Comparability. Users should be able to compare the financial statements of one entity over time to assess trends, and compare different entities. Timeliness. Information must be provided to users whilst it can still be used to aid their decision making. Balance between benefit and cost. The benefits derived from information should exceed the cost of providing it.

3 Q4) ) Dr Debtors,000 Cr Sales,000 Dr Discounts allowed (expense) (5%,000) 50 Dr Bank 950 ) Cr Debtors,000 ) 2) Dr Trade creditors,000 ) Cr Bank 950 ) Cr Discounts received (income) 50 Q5) Insurance account January 204 Prepayment,500 April 204 Bank 8,000 Profit and loss account 7,500 (, /2 8,000) 3 December 204 Prepayment 2,000 9,500 9,500 Q6) ) The useful life of an asset is the period over which the present owner will derive economic benefit. 2) An asset s useful life may be: predetermined, for example, a lease of a certain length, or may be based on: depletion, because of extraction of resources from the asset; physical deterioration, erosion through use or the passage of time; or time, for assets such as copyrights which have a flow of benefits over a defined time. Any two of the above four factors 2 3) Dr Depreciation expense 4,000 Cr Provision for depreciation 4,000 Working: Annual depreciation charge = (0,000 2,000)/2 = 4,000 2

4 Q7) Dr Fixed asset 60,000 Cr Loan creditor account 54,000 Cr Bank 6,000 Dr Loan creditor account (2 2,650) 3,800 Cr Bank 3,800 Dr Finance expense (2 400) (W) 4,800 Cr Loan creditor account 4,800 Working Total payments: Deposit 6,000 Instalments (24 2,650) 63,600 Less cash price (60,000) 9,600 Interest per instalment (divide by 24) 400 Q8) FRS 02 requires that when the outcome of a transaction can be estimated reliably, (where revenue, costs and stage of completion can be reliably measured), the accounts should recognise revenue by reference to the stage of completion of the transaction. Therefore, using hours spent to determine stage of completion, revenue of 8,000 5/20 = 6,000 should be recognised in respect of project A. In respect of project B, the outcome of the project cannot be estimated reliably (it is not yet probable that Superly Ltd will receive any fee). Therefore, since there are no recoverable costs to date, no revenue would be recognised. Q9) ) Bad debt expense account Debt written off 500 Profit and loss account (balance) Recovered debt Decrease in provision (2,000,200) ,050,050 2) Balance sheet extract: Debtors 24,000 Provision for doubtful debts (,200) 22,800 3

5 Q0) Dr Profit and loss account 75,000 Cr Joanne s current account 40,000 Cr Kevin s current account 35,000 Dr Joanne s current account 5,000 Cr Bank 5,000 Working Total Joanne Kevin Salary 5,000 5,000 Profit share 60,000 40,000 20,000 2: 75,000 40,000 35,000 Q) Dr Bank (W) 500,000 Cr Share capital account 250,000 (W) 50p 25,000 Cr Share premium account (balance) 375,000 Working: for 4 rights issue, so number of shares =,000,000/4 = 250,000 Cash raised from rights issue = 2 250,000 = 500,000 Q2) Corporation Tax creditor account January 205 Bank 48,000 April 204 Balance b/f 50,000 Corporation Tax charge (overprovision y/e 3 March 204) 2,000 Balance c/f 75,000 Corporation Tax charge 75,000 (y/e 3 March 205) 25,000 25,000 Balance b/f 75,000 Corporation Tax creditor (CT charge for y/e 3 March 205) Corporation Tax charge account 75,000 Corporation Tax creditor 2,000 (overprovision for y/e 3 March 204) Profit and loss account 73,000 75,000 75,000 4