FINANCIAL ACCOUNTING

Transcription

1 FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2012 NOTES: You are required to answer Question 1. You are also required to answer any three out of Questions 2 to 5. (If 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. PRO-FORMA STATEMENT OF COMPREHENSIVE INCOME BY NATURE, STATEMENT OF COMPREHENSIVE INCOME BY FUNCTION AND STATEMENT OF FINANCIAL POSITION ARE PROVIDED. 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 the 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(s) attempted. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

2 THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2012 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) Discuss the main advantages and disadvantages of operating as a limited company. (6 marks) (b) The following trial balance was extracted from the books of Dilura Ltd. as at 31st December 2011: Debit Credit Accountancy 5,600 Advertising 33,000 Bad Debt Provision 1,000 Bank 26,890 Buildings 1,400,000 Buildings Accumulated Depreciation at ,000 Equipment 320,000 Equipment Accumulated Depreciation at ,000 Insurance 39,700 Intangible Assets 640,000 Land 2,670,000 Light & Heat 7,000 Long Term Loan 140,000 Opening Inventory 800,000 Other Reserves 26,000 Prepayment 8,000 Proceeds from Sales of Vehicles 9,000 Purchases 2,100,000 Rates 19,000 Rent 18,000 Repairs & Maintenance 37,450 Retained Earnings 3,264,970 Revaluation Surplus 53,000 Revenue 3,630,000 Revenue Return/Purchases Returns 28,730 12,880 Share Capital 300,000 shares at 2 each 600,000 Telephone 7,600 Trade Receivable/Trade Payable 93,500 86,300 Travelling Expenses 15,950 Truck Expenses 12,900 VAT 7,480 Vehicles 265,000 Vehicles Accumulated Depreciation at ,000 Wages & Salaries 346,350 8,902,150 8,902,150 Page1

3 The following information, based on your investigations, has also come to your attention: (i) (ii) Dilura Ltd. had an inventory count at the year-end which revealed that the year-end inventories at cost amounted to 900,000. Included in this figure is 30,000 of slow moving inventories at cost. The post yearend sales register shows that these were subsequently sold just after the year-end at 80% of cost price. Depreciation is to be charged as follows: Buildings 3% on Cost (100% to Administration Expenses) Equipment 10% of Reducing Balance (100% to Distribution Costs) Vehicles 20% on Cost (100% to Distribution Costs) Depreciation for the year is charged in full in the year of purchases and up to the date of sale, in the year of sale. (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) The proceeds on the sale of Vehicles, in the trial balance, relates to the disposal on the 1st March 2011 of some vehicles which were purchased for 15,000 on 1st April The land was revalued to 2,750,000 at the year-end. A preliminary Corporation Tax payment of 36,000 was made on the 31st August 2011 for the 2011 financial year by credit transfer. This transaction has not been included in the above trial balance. The prepayment in the trial balance above is the opening prepayment brought forward in relation to Rent. The Rent figure in the trial balance is the amount which has been paid for during This amount covers rent for the year-ending 31st March There are closing accruals for Telephone and Advertising amounting to 1,100 and 4,350 respectively which have not yet been included in the above trial balance. Bad Debts of 2,500 should be written off and this adjustment has not yet been included in the above trial balance. Due to the current uncertain times, the Bad Debt Provision should be increased to 4% of Trade Receivables. Corporation Tax is now correctly calculated at 25,000 being owing at the year-end. The Intangible Assets in the trial balance include an amount of 155,000 which relates to a brand that has been successfully developed internally by Dilura Ltd. This amount is based on a valuation performed by consultants who specialise in valuing brands. VAT represents a refund due from the Revenue Commissioners at 31st December The Revenue Commissioners have correctly disallowed 2,360 of the figure as relating to non-allowable travelling expenses. The following expenses are to be allocated in the following proportions: Distribution Costs Administration Expenses Accountancy Fees 50% 50% Advertising 0% 100% Insurance 50% 50% Light & Heat 25% 75% Rates 25% 75% Rent 0% 100% Repairs & Maintenance 100% 0% Telephone 50% 50% Travelling Expenses 100% 0% Truck Expenses 100% 0% Wages & Salaries 50% 50% Bad Debts Write Off 0% 100% Bad Debt Provision 0% 100% Page 2

4 REQUIREMENT: Prepare, in a form suitable for publication, a Statement of Comprehensive Income and a Statement of Financial Position for Dilura Ltd. for the financial year-ending 31st December All workings should be shown and generally, the overall adjustment for a working, should be in the form of a double entry or journal (there is no need for a narrative). (34 marks) [Total: 40 Marks] Page 3

5 2. The bank account of Proplanner Ltd. for the month of December 2011 was as follows: Dr. Bank Account of Proplanner Ltd. Cr. Date Receipts Date Payments Cheque No. 01/12/2011 Balance b/d 15,245 02/12/2011 R. Patterson /12/2011 Cash Lodgement 2,450 05/12/2011 A. Harty /12/2011 M. Kirby 6,000 08/12/2011 M. McDonnell /12/2011 T. Brennan Ltd. 3,553 10/12/2011 L. Sexton /12/2011 Mulcahy Printers 2,000 13/12/2011 Rent D.D /12/2011 Lodgement 3,540 14/12/2011 Cheque - Cancelled /12/2011 Bank Charges D.D /12/2011 Conlon Resources S.O /12/2011 F. Davies ,990 29/12/2011 J. Roche ,640 01/01/2012 Balance b/d 24,793 31/12/2011 Balance c/d 24,793 32,788 32,788 The following is the bank statement for Proplanner Ltd. for the month of December Bank Statement for Proplanner Ltd. for December 2011 Date Description Payments Lodgment Balance 01/12/2011 Balance 15,345 04/12/2011 Lodgement 2,450 17,795 05/12/2011 Cheque ,550 06/12/ ,500 07/12/2011 Lodgement 6,000 24,500 12/12/2011 Cheque ,755 13/12/2011 Rent D.D ,105 14/12/2011 Credit Transfer 3,535 26,640 15/12/2011 Bank Interest ,374 16/12/2011 Cheque ,549 17/12/2011 Bank Charges 25 25,524 18/12/2011 Electricity Supplier ,089 19/12/2011 Conlon Resources S.O ,589 20/12/2011 Lodgement 2,000 26,589 21/12/ ,989 23/12/2011 Telephone Company ,777 27/12/2011 Cheque ,677 28/12/2011 Credit Transfer 7,450 33,127 31/12/2011 Bank Fees re Dishonoured Cheque 2 33,125 The bank has confirmed to Proplanner Ltd. that it made errors in Proplanner s bank account on the 6th December 2011 and 21st December 2011 amounting to 950 and 600 respectively. REQUIREMENT: (a) Prepare the bank reconciliation statement for Proplanner Ltd. as at 31st December (15 Marks) (b) Explain the rationale for preparing a bank reconciliation. (2 Marks) (c) Provide reasons for differences that may occur between the bank account and the bank statement. (3 Marks) [Total: 20 Marks] Page 4

6 3. (a) In the context of IAS 2 - Inventories, define what is meant by the terms inventory and net realisable value and explain how inventories should be measured (6 Marks) (b) In the context of IAS 2 - Inventories, describe what is meant by the allowable costs of purchase and use an example to help explain your answer. (3 Marks) (c) Bacon Timothy (BT) has opened a new luxury retail outlet located in Grafton Street in Dublin. BT s accountant previously worked abroad and is not familiar with international financial reporting standards and has asked you, the trainee accountant, to give advice on the accounting treatment necessary for the following items: (i) (ii) One of BT s product lines is beauty products, particularly cosmetics such as lipsticks, moisturisers and compact make-up kits. BT sells hundreds of different brands of these products. Each product is quite similar, is purchased at similar prices and has a short lifecycle before a new similar product is introduced. The point of sale and inventory system in BT is not yet fully functioning in this department. The Sales Manager of the cosmetic department is unsure of the cost of each product but is confident of the selling price and has reliably informed you that BT, on average, make a gross margin of 65% on each line. BT also sells handbags which are manufactured in its own factory in the United Kingdom(UK). This is because BT wishes to be assured of the quality and craftsmanship which goes into each handbag. The UK factory which has made handbags for the last fifty years is located in BT s head office. Normally, BT manufactures 100,000 handbags a year in it s handbag division which uses 15% of the space and overheads of the factory. The division employs ten people and is seen as being an efficient division within the overall company. REQUIREMENT: In accordance with IAS 2 - Inventories, explain how the items referred to in (i) and (ii) above should be measured. (5 Marks) (d) Ginga Ltd. manufactures shovels. The company has consistently used Last In First Out (LIFO) in valuing inventories but has recently been told by it s accountant that this method is not acceptable under accounting standards and it has agreed to adopt the Weighted Average Cost (WAC) valuation method. At the 1st March 2012, the company had inventories of 4,000 shovels and has computed its value on each basis as follows: Basis Unit Cost - Total Value - FIFO ,000 LIFO ,000 WAC ,000 The following is the amount of shovels which the inventory department has received from the manufacturing department during March 2012: Received from Factory Manufacturing Cost Date No. of Units per Unit - 08/03/12 3, /03/12 6, The following are the sale dates and quantity of shovels sold in March 2012: Date No. of Units Sold 10/03/12 5,000 17/03/12 2,000 29/03/12 3,000 (Queston continued on page 6) Page 5

7 REQUIREMENT: Calculate the correct closing inventory value as at 31st March 2012 using the Weighted Average Cost (WAC) method. (6 Marks) Note: In arriving at the total inventory values, one should make calculations to two (2) decimal places where necessary and deal with each inventory movement in date order. [Total: 20 Marks] Page 6

8 4. Matthew and James are in partnership sharing profits and losses in the ratio of 3:1. James receives a salary of 30,000 per annum. They both earn interest on capital at 12% per annum, based on their capital balances at the beginning of the year. Both the salary and interest occur evenly throughout the year. The following is the Statement of Financial Position of the partnership as at 31st December 2010: James & Matthew s Statement of Financial Position as at 31st December 2010 Non-Current Assets Property, Plant & Equipment 400,000 Total Non-Current Assets 400,000 Current Assets Trade Receivables 30,000 Cash & Cash Equivalents 100,000 Total Current Assets 130,000 Total Assets 530,000 Equity & Liabilities Capital Accounts Matthew 300,000 James 150, ,000 Current Accounts Matthew 60,000 James 20,000 80,000 Total Equity & Liabilities 530,000 On the 30th April 2011, Matthew decides to retire and agrees to leave the entire amount owing to him as a loan to the partnership bearing interest at 6% per annum which accrues evenly over the year. James and Matthew agree that the goodwill of the business at that date amounts to 150,000 and that it should be brought into the books. John joins James in a new partnership on the 30th April 2011 and introduces capital of 100,000. They agree the following: (i) This new partnership is to share profits from 1st April in the ratio James 3: John 2. (ii) James salary stays the same and John s salary is 24,000 per annum. (iii) James and John took drawings of 12,000 each on the 30th September (iv) They pay interest on drawings of 10% per annum. (v) The new partnership decided to leave the interest on capital at 12% per annum and have agreed that John can earn interest on his capital from the date of the new partnership. (vi) The profits, which occurred evenly throughout the year and before any adjustments, amounts to 150,000. (vii) The new partnership agrees to eliminate the goodwill from their statement of financial position. REQUIREMENT: For the year ended 31st December 2011: (a) Prepare the partnership s appropriation account. (10 Marks) (b) Prepare the partner s current accounts. (10 Marks) [Total: 20 Marks] Page 7

9 5. PriceRite Plc is one of the major food retailers in Ireland with a listing on the Irish Stock Exchange. It s 2011 and 2010 Statements of Comprehensive Income and Statements of Financial Position are shown below: PriceRite Plc Statement of Comprehensive Income for Year Ending 31st December '000 '000 Sales 90,000 80,000 Cost of Sales 70,000 63,000 Gross Profit 20,000 17,000 Net Profit for the year 4,500 3,900 Dividends Profit Retained 4,000 3,400 PriceRite Plc Statement of Financial Position as at 31st December '000 '000 Assets Non-Current Assets 325, ,000 Current Assets Inventory 3,000 2,900 Trade Receivables 3,200 3,000 Cash & Cash Equivalents 60,000 53,000 Current Assets 66,200 58,900 Total Assets 391, ,900 Equity & Liabilities Equity Ordinary Share Capital each 20,000 20,000 Retained Profit 275, ,500 Total Equity & Reserves 295, ,500 Non-Current Liabilities Long Term Debt 70,700 38,400 Total Non-Current Liabilities 70,700 38,400 Current Liabilities Trade Payables 15,000 12,000 Bank Overdraft - - Taxation 5,000 7,000 Accrued Expenses 5,000 5,000 Total Current Liabilities 25,000 24,000 Total Equity & Liabilities 391, ,900 Notes Current Share Price per share Page 8

10 In 2011, the industry averages for the relevant ratios for the food retail sector are as follows: Food Retail Current Ratio 2.1:1 Acid or Quick Ratio 2.2:1 Trade Receivable Days 15 Days Trade Payable Days 60 Days Inventory Turnover Days 20 Days REQUIREMENT: (a) Using suitable ratio analysis and discussion, assess the liquidity and efficiency of PriceRite Plc from 2010 to (15 Marks) (b) At a recent accountancy conference you attended, the following argument was made by a presenter: In the airline industry, the closing year-end balances for inventories and trade receivables are very small and for non-current assets are very large relative to the overall size of their statement of financial position. REQUIREMENT: Comment on the above claim and explain, with reasons, whether you agree or disagree with this statement. (5 Marks) [Total: 20 Marks] END OF PAPER Page 9

11 SUGGESTED SOLUTIONS THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND FINANCIAL ACCOUNTING FORMATION 2 EXAMINATION - APRIL 2012 SOLUTION 1 (a) Advantages of operating as a limited company (3 Marks) i) Separate legal identity A limited company has a legal existence separate from management and its members (the shareholders) ii) iii) iv) Members' liability is limited The protection given by limited liability is perhaps the most important advantage of incorporation. The members' only liability is for the amount unpaid on their shares. Since most private companies issue shares as "fully paid", if things go wrong, a members' only loss is the value of the shares and any loans made to the company. Personal assets are not put at risk. Protection of company name The choice of company names is restricted and, providing a chosen name complies with the rules, no-one else can use it. The only protection for sole traders and partnerships is trademark legislation. Continuity Once formed, a company has everlasting life unless the directors decide to wind up or liquidate the company. Directors, management and employees act as agent of the company and if they leave, retire, or die, the company still remains in existence. A company can only be terminated by winding up, liquidation or other order of the courts or Registrar of Companies. v) New shareholders and investors can be easily introduced The issue, transfer or sale of shares is a relatively straightforward process vi) vii) Obtain finance The process of lending to a company is also easier than with other business forms as the lending bank may be able to secure its loan against the business by either a floating or fixed charge. Tax A company is taxed as a separate entity from its owners and the tax rate on companies can be lower than the tax rate for individuals. Disadvantages of operating as a limited company (3 Marks) i) Cost There are more costs involved with a limited company such as company registration fees, annual filing fees and potentially, depending on the size of the company, audit fees. ii) iii) iv) Legal and Accounting Requirements To comply with company law and accounting rules, a limited company will require more time from the owners than a sole trader or partnership. Information can be viewed by others Any information filed for company and accounting requirements can be viewed by the public or competitors which may place the company at a disadvantage. Dilution of powers Owners can lose control of the company if they do not own or control enough shares to allow them run the company in the way they see fit. This is not an issue for a sole trader. v) Share issues Share issues are regulated by law making it difficult to reduce the share capital of a company. (b) Page 10 [Total: 6 Marks]

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13 Working - Journal Entries Working - Closing Inventory Total Inventories at Cost per Inventory Count 900,000 Damaged Inventories - Cost 30,000 NRV - Selling Price is 80% of Cost - 24,000 Inventory Write Down 6,000 Value of Closing Inventories 894,000 1.i Dr. Inventory + Current Assets SOFP 894,000 Cr. Closing Inventory - Cost of Sales SOCI 894, v Dr. Corporation Tax + Current Assets SOFP 36,000 Cr. Bank + Current Liabilities SOFP 36, vi Payment of 18,000 covers from i.e. 3 months is Prepaid Rent Account Balance b/d 8,000 Expense - SOCI 21,500 Balancing Figure Bank Payment 18, Balance c/d 4,500 26,000 26, Months 18,000 3 Months - Prepayment 4,500 Dr. Rent + Expenses SOCI 8, Cr. Opening Prepayment - Current Assets SOFP 8,000 Being reversal of opening rent prepayment Dr. Rent + Expenses SOCI 18,000 Cr. Bank - Current Assets SOFP 18,000 being payment of rent to which has already been completed in the accounts Dr. Closing Prepayment + Current Assets SOFP 4, Cr. Rent - Expenses SOCI 4,500 being closing prepayment for the rent paid for the period vii Dr. Telephone + Expenses SOCI 1,100 Dr. Advertising + Expenses SOCI 4, Cr. Accruals + Current Liabilities SOFP 5,450 1.viii Dr. Bad Debt Write Off + Expenses SOCI 2, Cr. Trade Receivables - Current Assets SOFP 2,500 1.ix Dr. Bad Debt Provision + Expenses SOCI 2, Cr. Trade Receivables - Current Assets SOFP 2,640 Trade Receivables Balance per TB 93,500 - Bad Debt Write Off W1.viii - 2,500 91,000 - Bad Debt Provision - 4% - 3,640 Revised Trade Receivable 87,360 Current Bad Debt Provision TB 1,000 New Bad Debt Provision See Above 3,640 Increase in Bad Debt Provision 2,640 1.x Dr. Corporation Tax Expense + Expenses SOCI 25, Cr. Corporation Tax - Current Assets SOFP 25,000 1.xi Dr. Brand + Expense SOCI 155, Cr. Intangible Assets - Non-Current Assets SOFP 155,000 1.xii Information only, no double entry required, amount will be treated as a current asset seeing as it is a receivable to the company Dr. Travelling Expenses + Expenses SOCI 2, Cr. Other Receivables - Vat - Current Assets SOFP 2,360 CURRENT MARKS Page 12

14 Cost of Distribution Administration Working 2 - Expenses Sales Costs Expenses Opening Inventory Per TB 800, Cost of Purchases Per TB 2,100, Sales Purchase Returns Per TB - 12, Closing Inventory W1.i - 894, Accountancy Per TB - 2,800 2,800 Advertising Per TB + W1.vii ,350 Brands W1.xi ,000 Distribution Insurance Per TB - 19,850 19,850 Costs Light & Heat Per TB - 1,750 5, Rates Per TB - 4,750 14,250 Rent W1.vi ,500 Repairs & Maintenance Per TB - 37,450 - Admin. Telephone Per TB + W1.vii - 4,350 4,350 Expenses Travelling Expenses Per TB + W1.xii - 18, Truck Expenses Per TB - 12,900 - Wages & Salaries Per TB - 173, ,175 Bad Debt Write Off W1.viii - - 2,500 Bad Debt Provision W1.ix - - 2,640 Depreciation - Buildings W ,000 Depreciation - Equipment W3-23,000 - Depreciation - Vehicles W3 + W3 Note 3-50,500 - Total 1,993, , ,665 Working 3 - Property, Plant & Equipment Land Buildings Equipment Vehicles Total Cost Per TB 2,670,000 1,400, , ,000 4,655,000 - Accumulated Depreciation b/d Per TB ,000-90,000-89,000-1,079,000 Carrying Value b/d at 1st January ,670, , , ,000 3,576, Disposal - Cost Note ,000-15, Disposal - Accumulated Depreciation Note ,500 12, Carrying Value 2,670, , , ,500 3,573,500 Depreciation - Buildings - 3% of Cost , , Depreciation - Equipment - 10% of Reducing Balance , , Depreciation - Vehicles - 20% of Cost Note ,500-50, Carrying Value 2,670, , , ,000 3,458,000 Revaluation Gain 80, , Carrying Value c/d at 31st December ,750, , , ,000 3,538, Note 1 - Disposal of Vehicle Cost 15,000 Accumulated Depreciation - 20% on Cost per annum Depreciation ,000 Depreciation ,000 Depreciation ,000 Depreciation ,000 Depreciation Depreciation this year 12,500-12,500 Carrying Value of Vehicle disposed 2,500 Disposal Account - Vehicle 15,000 Vehicles - Non-Current Assets SOFP 15,000 Accumulated Depreciation - Vehicles Non-Current Assets SOFP 12,500 Disposal Account - Vehicle 12,500 Note 2 - Disposal of Vehicle Amount Deprn. Rate No. Of Mths Depreciation Cost (265,000 - Disposal 15,000) 250,000 20% 12 50,000 Disposal - Depreciate until date of disposal 15,000 20% Depreciation for the Year 50,500 Disposal Account - Vehicle Cost 15,000 Accumulated Depreciation 12,500 Disposal Proceeds 9,000 Profit on Disposal 6,500 21,500 21, Note 3 - Depreciation of Vehicles Of the total depreciation on Vehicles in 2011, 50,000 relates to assets in the business at the year-end and 500 relates to the vehicle disposed Proceeds from Sale of Vehicle Per TB 9,000 Disposal Account - Vehicle 9,000 Disposal Account - Vehicle 6,500 Profit on Disposal of Vehicle + Other Income SOCI 6,500 Land + Non-Current Assets SOFP 80,000 Revaluation Gain + Other Comprehensive Income SOCI 80,000 Working 4 - Bank Overdraft Balance per TB - Asset Balance 26,890 Corporation Tax Payment W1.v - 36,000 Closing Balance - 9, Working 5 - Corporation Tax Asset Corporation Tax Bill 2011 W1.x - 25,000 Corporation Tax Payment W1.v 36,000 Closing Balance - Asset 11, Working 6 - Accruals Telephone W1.vii 1,100 Advertising W1.vii 4,350 5, (9.50 Marks to a Total of 9 Marks) CURRENT MARKS TOTAL MARKS Page 13

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16 SOLUTION 2 Q 2 (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/ ,245 Add Items not yet Debited - 15, Balance per Bank Account - 01/12/ ,345 Less Unpresented Cheques Cheque , Adjusted Bank Account December December 31 Balance 24, Lodgement (12/12/11) - Difference Cheque Difference Bank Interest Lodgement 7, ESB Eircom Bank Fees re Dishonoured Cheque Closing Balance 31, ,270 32,270 Bank Reconciliation Statement Closing Balance per Bank Statement - 31/12/ , Less Unpresented Cheques Cheque Cheque , Cheque ,640-4, Add Lodgement not yet Cleared Lodgement - 30/12/2011 3,540 3, Bank Errors /12/ /12/ Balance as per Adjusted Bank Account 31, MARKS Q 2 (b) Q 2 (c) The rationale for preparing a bank reconciliation is to ensure that the bank account balance can be reconciled to the bank statement thereby ensuring that all transactions have been recorded, recorded correctly and that no fraud has 2.00 taken place. Timing Differences This happens as it takes the bank 2 to 3 days to draw the cheques/lodgements through the system. Therefore, there is a timing delay between the time the company write a cheque/receive a lodgement and the cheque/lodgement appearing in the bank statements. However, the cheque/lodgement appears immediately in the company's bank account as they enter it in their accounting system. Errors The person entering the data in the company may make errors in their posting of the data to the bank account of the 3.00 company for example, the wrong cheque amount posted or an amount not entered at all etc. Bank Account not Updated The bank account may not be updated to reflect the current situation i.e. the bank account needs to take into account any unrecorded items that have gone through the bank statement i.e. Direct Debits, Standing Orders, Returned Cheques etc. TOTAL MARKS Page 15

17 SOLUTION 3 Q 3 (a) Per IAS 2, Inventories are assets; (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the process of materials or supplies to be consumed in the production process or in the rendering of services 2.00 Net Realisable Value is the estimated selling price in the ordinary course of business less the estimated costs of 2.00 completion and the estimated costs necessary to make the sale Inventories should be measured at the lower of cost and net realisable value 2.00 Q 3 (b) The allowable costs of purchase per IAS 2 comprise; the purchase price import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities) 3.00 transport costs handling and other costs directly attributable to the acquisition of finished goods, materials and services less any trade discounts, rebates and other similar items. Q 3 (c) i Q 3 (c) ii In this example, the Retail Method can be used for measuring inventories of the beauty products. This method is suitable for measuring inventories of large numbers of rapidly changing items with similar margins for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value 3.00 of the inventory by the appropriate percentage gross margin. An average percentage for each retail department is often used. The percentage used takes into consideration inventory that has been marked down to below its original selling price. The handbags could be measured using standard cost particularly if the results approximate cost. Standard costing takes into account normal levels of materials and supplies, labour, efficiency and capacity utilisation They are regularly reviewed and, if necessary, revised in the light of current conditions. Q 3 (d) WAC WAC per Total Units Cost Unit Cost Balance B/F 01/03/2012 4, , Received from Factory 08/03/2012 3, , , ,600 (7.51 = 58,600/7,800) 0.75 Sale 10/03/2012-5, , ,800 21, Sale 17/03/2012-2, , , Received from Factory 22/03/2012 6, , , ,030 (8.83 = 60,030/6,800) 0.75 Sale 29/03/2012-3, , ,800 33, The closing value of 3,800 shovels using WAC is 33,540. TOTAL MARKS Page 16

18 SOLUTION 4 Q 4 (a) The annual profit before adjustment is 150,000 which occurs evenly throughout the year; The old partnership ceased on the 30th April 2011 i.e. 4/12th of the year. Therefore, the new partnership is in existence for 8/12th of the 2011 year. Consequently, the split of the profit before any adjustment is as follows: Old New Partnership Partnership 4/12ths 8/12ths Annual Profit - 150, ,000 Old Partnership - 4/12ths of 150,000 50,000 New Partnership - 8/12ths of 150, ,000 Old New Partnership Partnership Now, begin to work out the appropriation of profits Net Profit before Adjustment 50, , Less Salaries - James 30,000 x 4/12ths and 30,000 x 8/12ths (10,000) (20,000) John 24,000 x 8/12ths (16,000) 0.50 Less Interest on Capital - Matthew 300,000 * 12% * 4/12ths (12,000) James 150,000 * 12% * 4/12ths and 150,000 * 12% * 8/12ths (6,000) (12,000) John 100,000 * 12% * 8/12ths (8,000) 0.50 Less Interest on Loan Note 1 (20,040) 2.00 Add Interest on Drawings - James 12,000 * 10% * 3/12ths John 12,000 * 10% * 3/12ths Residual Profits 22,000 24, Residual Profits Split - Matthew 3:1 16, James 1:3 in 1st Partnership and 3:2 in 2nd Partnership 5,500 14, John 2:3-9, ,000 24,560 Note 1 - Interest on Loan from Matthew Opening Capital Account Balance 300,000 Opening Current Account Balance 60,000 Goodwill 150,000 split 3:1 112,500 Profit after Adjustments 16,500 Interest on Capital 12,000 Loan Amount 501,000 Interest on loan 6% per annum by 8/12ths 20,040 Q 4 (b) TOTAL MARKS Partners Current Account Matthew James John Matthew James John Balance B/D Balance B/D 60,000 20, Interest on Drawings Interest on Capital 12,000 18,000 8, Drawings - 12,000 12,000 Salary - 30,000 16, Goodwill Eliminated - 90,000 60,000 Goodwill Created 112,500 37, Loan to Partnership 221, Residual Profits 16,500 20,236 9, Interest on Loan 20, Balance C/D - 23,436 Balance C/D , , ,736 72, , ,736 72,300 Balance B/D ,476 Balance B/D - 23,436 - TOTAL MARKS OVERALL MARKS Page 17

19 SOLUTION 5 (a) PriceRite plc Current Ratio 66,200/25,000 = 2.65:1 58,900/24,000 = 2.45:1 Acid/Quick Ratio (66,200-3,000)/25,000 = 2.53:1 (58,900 2,900)/24,000 = 2.33:1 Trade Receivable Days 3,200/90,000*365 = 13 Days 3,000/80,000*365 = 14 Days Trade Payable Days 15,000/70,000*365 = 78 Days 12,000/63,000*365 = 70 Days Inventory Turnover Days 3,000/70,000*365 = 16 Days 2,900/63,000*365 = 17 Days Calculation of, Commentary on & Presentation of Results (15 Marks) Current Ratio This ratio has increased from 2.45:1 to 2.65:1 this year which is an improvement of over 8% year on year percentage wise. The ratio is also greater than the norm for company s in their industries which is a positive. The main reason for the increase is the fact that current assets increased by over 12% driven mainly by the increase in cash and cash equivalents which increased by 13.21% year on year. Current liabilities increased by 4.17% year on year driven by the increase in trade payables of 25% and offset by the decrease in taxation of 28.57% year on year. Obviously, the retailer has slowed paying their trade payables and increased their cash flow as a result as well as retaining their profits within the company. The retailer has also expanded significantly during the year as their property plant and equipment has increased by 30 million which has been funded by long-term debt which increased by 32.3 million. This is good financial management as the company has funded long-term assets by long-term debt and preserved their current ratio as a result. This company has no bank overdraft and are in a very good position financially. Acid or Quick Ratio This ratio has increased from 2.33:1 to 2.55:1 this year which is an improvement of over 9.44% year on year percentage wise and again is higher than the industry average of 2.2:1. As mentioned in the analysis of the current ratio, the main driver of the increase in the ratio has been the increase in cash and cash equivalents with lower increases in overall current liabilities. Trade Receivable Days This has decreased marginally from 14 to 13 days, a decrease of over 7% year on year which again is a positive result. This result is slightly lower than the industry average. The main reason for the decrease in the ratio is that trade receivables increased by 6.67% whereas revenue increased by 12.5% year on year. It is heartening to see the ratio improving but further improvement should be achievable as the retailer is operating in a cash business thereby ensuring that trade receivables should be low and therefore, the company should continue to focus on reducing this ratio. Trade Payable Days This increased from 70 days to 78 days which is an increase of over 11.43% year on year. This again is a good result as it means that the company have delayed paying their suppliers longer ensuring that the cash flow has improved from day to day trading. Given that the retailer has such strong purchasing power allows it to delay paying as its suppliers are quite dependent on the retailer for their sales. The industry average is 60 days so PriceRite plc. is more aggressive in delaying payment to its suppliers and the stock market will be happy with this. The main reason for the increase is due to the increase in the cost of sales (11.11% increase) due to the increase in the business whereas the trade payables increased by 25% year on year but albeit from a low base of 12 million. Inventory Turnover Days There is no opening stock for 2010 or purchases given so in calculating this ratio, the closing inventory and cost of sales is taken. The ratio decreased slightly from 17 days to 16 days which is a 5.88% year on year as the retailer turned over its products quicker which is a positive. The retailer is also doing better than the industry average of 20 days and is to be commended for the efficiency of its internal operations. This overall proper management of the company has ensured that the market has taken notice by increasing the share price by over 15% year on year. The main reason for the decrease in the inventory turnover ratio is due to the increase in cost of sales of 11.11% year on year whereas the inventory in the business has increased by only 3.45% year on year. Therefore, the company is playing close attention to its inventory control. (b) I agree with the comment as in the airline business, most of their non-current assets are aeroplanes which are very costly and are the main asset of an airline company. Airlines generally would have very little trade receivables as most of their customers are passengers who have paid up front. They also would have very limited inventory on hand at the year-end as it would only be set amounts of fuel on the planes and items like meals or drinks for flights. (5 Marks) [Total: 20 Marks] Page 18

20 Marking Scheme Q1 a) 6 Points x 1 Mark each 6 Q1 b) Workings As shown in detailed solution 34 Total Marks Q1 40 Q2 a) Reconciling Opening Balance 3 Reconciling and Adjusting Bank Account 5 Reconciling Bank Statement 7 Q2 b) Overall Comment 2 Q2 c) 3 Reasons x 1 mark each 3 Total Marks Q2 20 Q3 a) Inventory 2 Measurement of Inventory 2 Net Realisable Value 2 Q3 b) Allowable Costs of Purchase 3 Q3 c) Retail Method 3 Standard Cost 2 Q3 d) Opening Balance 0.5 Receipt of Inventory 0.5 Updating the WAC for receipt 0.75 Sales of Inventory 0.5 Updating inventory quantity and value after sale 0.5 Sales of Inventory 0.5 Updating inventory quantity and value after sale 0.5 Receipt of Inventory 0.5 Updating the WAC for receipt 0.75 Sales of Inventory 0.5 Closing Balance of inventory quantity and value 0.5 Total Marks Q3 20 Q4 a) Calculation of Profit 1 Salaries 1 Interest on Capital 2 Interest on Loan 2 Interest on Drawings 1 Residual Profits 1 Split of Residual Profits 2 Q4 b) Opening Balances 0.5 Interest on Drawings 1 Interest on Capital 1 Drawings 0.5 Salaries 0.5 Goodwill Created 1 Goodwill Eliminated 1 Loan to Partnership 1 Interest on Loan 1 Residual Profits 1 Closing Balances 1.5 Total Marks Q4 20 Page 19

21 Q5 a) Calculation of Ratios 20 * 0.4 marks each 8 Commentary on Ratios 10 x 0.5 marks each 5 Presentation of Results and Commentary 1 Q5 b) Riteprice plc. discussion 2 Dough plc. discussion 1 Q5 c) Airline discussion 3 Total Marks Q5 20 Page 21