FINANCIAL ACCOUNTING

FORMATION 2 EXAMINATION - APRIL 2019

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 2019

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) The International Accounting Standards Board (IASB) follows a process for the setting of International Financial
Reporting Standards. Outline the main stages of this process.
(10 Marks)

(b) Whytome Limited is a company involved in the manufacture of heating systems for the construction industry.
The following trial balance was extracted from its books as at 31 December 2018:

Debit Credit
€ €
Accumulated Depreciation - Buildings - 1 January 2018 580,000
Accumulated Depreciation - Equipment - 1 January 2018 220,000
Accumulated Depreciation - Motor Vehicles - 1 January 2018 190,000
Admininstrative Expenses 248,750
Allowance for Bad & Doubtful Debts 12,601
Bank 394,600
Buildings at Cost at 1 January 2018 2,242,500
Current Tax Payable 36,000
Distribution Costs 786,520
Equipment at Cost at 1 January 2018 864,050
Finance Costs 36,200
Income Tax Expense 163,000
Inventory at 1 January 2018 284,650
Investments (4% interest rate) 200,000
Investment Income 4,000
Issued Share Capital - €1 shares each 180,000
Long-Term Loan 1,457,500
Motor Vehicles at Cost at 1 January 2018 468,500
Other Receivables 40,000
Purchases / Revenue 4,875,260 7,542,520
Retained Earnings 478,534
Trade Receivables / Trade Payables 345,875 248,750
10,949,905 10,949,905

The following information has also come to your attention:

(i) Whytome Limited held an inventory count at the year-end which revealed the year-end inventories at cost
amounted to €268,460. Included in this figure is €3,200 of slow moving inventories at cost. It is estimated
that these will need to be sold at a 40% discount on selling price in order to sell them. Whytome Limited sells
at a mark-up of 20% for these goods.

Page 1
(ii) Depreciation is to be charged as follows:

Buildings 2% Straight Line on Cost

Equipment 16% Reducing Balance
Motor Vehicles 20% Straight Line on Cost

Depreciation for the year is charged in full in the year of disposal and none in the year of acquisition and is
allocated evenly between distribution costs and adminstrative expenses.

(iii) Equipment costing €150,000 was purchased and paid by cheque in November 2018.

(iv) A building was sold for €140,000 on 31 October 2018. The cheque received from this sale was lodged to the
bank account. This building was purchased in 2000 for €200,000.

(v) In January 2019, Whytome Limited declared dividends of €40,000 for the year-ended 31 December 2018. The
financial statements are not authorised for issue until May 2019. Whytome Limited included the following
entry into its financial statements in respect of this declaration:

Debit Other Receivables €40,000

Credit Retained Earnings €40,000

(vi) Investment income of €4,000 was received during 2018. The remaining balance of investment income was
received in February 2019.

(vii) Inventory costing €8,000 was stolen from Whytome Limited in November 2018. The company has an
insurance policy which covers theft of inventory and Whytome Limited was compensated in full by its insurance
company in February 2019.

(viii) Whytome Limited recovered 80% of a bad debt of €6,000 which was previously written off to admininstration
expenses in August 2018. The Allowance for Doubtful Debts should be set at 4%.

(ix) In 2018, Whytome Limited spent €60,000 by cheque on the initial design work of a new product – it is
anticipated that this design will be taken forward over the next two year period to be developed and tested with
a view to production in three years’ time. Seperately, it spent €100,000 (paid by cheque) on the testing of a
new production system which has been designed internally and which will be operational during the following
accounting year. This new system should reduce the costs of production by 10%. Whytome Limited has not
accounted for this money spent in its financial statements. The rate of amortisation that Whytome Limited uses
is 10% per annum and is taken to cost of sales.

REQUIREMENT:

Prepare, in a form suitable for publication, based on IFRS, a Statement of Profit or Loss and Other Comprehensive
Income and Statement of Financial Position for Whytome Limited for the financial year ended 31 December 2018.

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

[Total: 40 Marks]

Page 2
2. The Statement of Financial Position of the Janemount Dancing Club as at 31 December 2017 was as follows:

Non-Current Assets € €
Land at cost 150,000
Equipment & Furniture (Cost - €40,000) 23,000
Total Non-Current Assets 173,000

Current Assets
Bar inventories 9,200
Subscriptions Owing 2,500
Bank Current Account 2,250
Bank Deposit Account 12,000
Total Current Assets 25,950

TOTAL ASSETS 198,950

Equity & Liabilities

Equity
Accumulated Fund 139,450
Total Equity 139,450

Non-Current Liabilities
Long-term Loan 48,000
Total Non-Current Liabilities 48,000

Current Liabilities
Bar Trade Payables 8,400
Subscriptions in Advance 800
Bar Wages Due 2,300
Total Current Liabilities 11,500

TOTAL EQUITY & LIABILITIES 198,950

The club’s summarised bank account for 2018 was as follows:

€ €
Balance at 1 January 2,250 Bar purchases 74,700
Bar sales 166,000 Bar expenses 29,200
Subscriptions 68,000 Bar wages 75,600
Competition entries 14,800 Rates 10,000
Loan repayments 19,600
Competition entries 10,400
Equipment 7,000
Sundry expenses 2,540
Transfer to deposit account 10,000
Balance at 31 December 12,010
251,050 251,050

Page 3
The following information is also provided:

(i) Balances at 31 December 2018

€
Bar inventories 9,900
Subscriptions owing 2,000
Bar trade payables 8,000
Subscriptions in advance 1,200
Bar wages due 1,600

(ii) The long term loan is repaid in annual instalments of €15,000 excluding interest. The interest in 2018 is
€4,600.

(iii) Interest receivable on the deposit account is €500.

(iv) Depreciation is provided on equipment and furniture at 10% per annum on cost.

REQUIREMENT:
Prepare for the year ended 31 December 2018:
(a) A Bar Trading account for Janemount Dancing Club. (6 Marks)

(b) An Income & Expenditure account for Janemount Dancing Club. (7 Marks)

(c) A Statement of Financial Position for Janemount Dancing Club. (7 Marks)

[Total: 20 Marks]

Page 4
3. Proviseo Limited has asked you, a Certified Public Accountant, for advice on how to account for provisions,
contingent liabilities and contingent assets. The company’s year-end is 31 March.

REQUIREMENT:

PART A
The financial controller of Proviseo Limited has asked you to prepare a report which addresses the following:

(a) In accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, describe what is meant
by the following:

(i) A provision;

(ii) A contingent liability;

(iii) A contingent asset. (6 Marks)

(b) Discuss the recognition criteria for the following:

(i) A provision;

(ii) A contingent liability;

(iii) A contingent asset (6 Marks)

PART B
Proviseo Limited provides a one year guarantee on equipment that it sold directly to customers. At the company's
year end, it is being sued by one of its customers for refusing to repair equipment within the guarantee period.
Proviseo Limited believes the fault is not covered by the guarantee on the grounds that the customer did not comply
with the instructions for using the equipment.

Proviseo Limited’s lawyer has advised that it is more likely than not that the company will be found liable. This
would result in it incurring repair costs, including legal expenses amounting to approximately €30,000.

The company also manufactures another line of equipment which it sells to wholesalers. The company sold 4,000
items of this type, including in the past year. This equipment also has a one year repair guarantee. Based on past
experience, 10% of items sold are returned for repair. In each case, 70% of the items returned are able to be
repaired at a cost of €80, while the remaining 30% need significant repair at a cost of €250.

REQUIREMENT:

Show and justify the correct accounting treatment to deal with the above issues in the books of Proviseo Limited for
the year ended 31 March 2019.
(8 Marks)

[Total: 20 Marks]

Page 5
4. The trial balance for Ms. Frances Kennedy, an IT contractor in Dublin, for the year ended 31 December 2018
does not balance. Ms. Kennedy had identified the following issues but is unsure how to account for them and
has approached you for help and guidance in rectifying the issues:

1. Discount received of €210 has been debited to the discount allowed account.

2. A rent expense of €1,000 paid during the year was recorded by debiting the rates account.

3. A €2,000 payment in relation to insurance expenses has been debited to insurance and debited to
trade payables in error. The balancing entry was posted to suspense.

4. The total of the purchases day book has been carried forward as €12,348, whereas the correct amount
was €12,843. The correct amount has been posted to trade payables.

5. Ms. Kennedy personally paid €10,000 towards the purchase of a motor vehicle for her business. The
following entry was made in her financial statements:

Debit Bank €10,000

Credit Motor Vehicle €10,000

6. A VAT credit of €2,000 on motor expenses was incorrectly assumed to be recoverable.

7. A prepayment of rent amounting to €8,000 was correctly entered in the bank account and was also
credited to rent payable. The balancing entry was posted to suspense.

Ms. Kennedy included a suspense debit balance of €12,075 to balance the trial balance.

REQUIREMENT:

(a) Prepare journal entries for Ms. Frances Kennedy to record and correct relevant transactions from the above
information for the financial statements for the year ending 31 December 2018.
(16 Marks)

(b) Prepare the suspense account for Ms. Kennedy in relation to the above transactions (4 Marks)

[Total: 20 Marks]

Page 6
5. Shacarn Limited is a company which supplies meat to the retail trade. The following are their results for the
last two years.

Shacarn Limited Statement of Profit or Loss and Other Comprehensive Income Statement
for the Year-ended 31 December 2018

2018 2017
€’000 €’000
Sales 24,000 18,000
Cost of Sales 16,800 12,000
Gross Profit 7,200 6,000
Distribution Costs 1,200 1,000
Administration Costs 800 750
Finance Costs 620 840
Profit before tax 4,580 3,410
Taxation 573 426
Profit for the Year 4,007 2,984
Other Comprehensive Income 0 0
Total Comprehensive Income 4,007 2,984

Shacarn Limited Statement of Financial Position for the Year-ended 31 December 2018

2018 2018 2017 2017

€’000 €’000 €’000 €’000
Non-Current Assets 13,200 11,000

Current Assets
Inventory 1,400 1,800
Trade Receivables 2,000 1,200
Cash and Cash Equivalents 1,200 400
Total Current Assets 4,600 3,400

Total Assets 17,800 14,400

Equity & Liabilities

Equity
Ordinary Share Capital (€1) 2,000 2,000
Retained Earnings 4,767 760
Total Equity 6,767 2,760

Non-Current Liabilities
Long-term Debt 9,000 10,000
Total Non-Current Liabilities 9,000 10,000

Current Liabilities
Trade Payables 1,400 1,200
Bank Overdraft 240 60
Taxation 120 180
Accruals 273 200
Total Current Liabilities 2,033 1,640

Total Equity and Liabilities 17,800 14,400

Page 7
Notes:
(i) The Opening Inventory for 2017 was €2,000,000.

(ii) The number of ordinary shares in issue is 2,000,000 for both years.

31/12/2018 31/12/2017
(iii) Current Share Price per Ordinary Share €26.00 €15.00

REQUIREMENT:

(a) Calculate for the following ratios for both years in relation to Shacarn Limited.

(1) Gross Profit Percentage

(2) Net Profit Percentage
(3) Quick Ratio
(4) Trade Receivable Days
(5) Trade Payable Days
(6) Interest Cover
(7) Earnings Per Share
(8) Price Earnings Ratio (8 Marks)

(b) Draft a report to the Board of Directors of Shacarn Limited in which you provide a commentary on the
company’s position and performance. Use the ratios calculated at (a) above as the basis for your commentary.

(10 Marks)

(Format and Presentation: 2 Marks)

[Total: 20 Marks]

END OF PAPER

Page 8
 SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

FINANCIAL ACCOUNTING
FORMATION 2 EXAMINATION - APRIL 2019

SOLUTION 1

(a) Outline the main points of the standard setting process by the International Accounting Standards Board (IASB) in
relation to International Financial Reporting Standards.
(10 Marks)

The Standard Setting Process

International Financial Reporting Standards (IFRSs) are developed through an international consultation process,
the "due process", which involves interested individuals and organisations from around the world.

The due process comprises six stages, with the Trustees of the IFRS Foundation having the opportunity to ensure
compliance at various points throughout:

1. Setting the agenda

2. Planning the project
3. Developing and publishing the discussion paper
4. Developing and publishing the exposure draft
5. Developing and publishing the standard
6. After the standard is issued

1. Setting the agenda

The IASB, by developing high quality financial reporting standards, seeks to address a demand for better
quality information that is of value to those users of financial reports.

When deciding whether a proposed agenda item will address users’ needs the IASB considers:
• The relevance to users of the information and the reliability of information that could be provided,
• Existing guidance available,
• The possibility of increasing convergence,
• The quality of the IFRS to be developed,
• Resource constraints.

To help the IASB in considering its future agenda, its’ staff is asked to identify, review and raise issues that
might warrant the IASB’s attention. New issues may also arise from a change in the IASB’s Conceptual
Framework for Financial Reporting.

In addition, the IASB raises and discusses potential agenda items in the light of comments from other
standard-setters and other interested parties, the IFRS Advisory Council and the IFRS Interpretations
Committee, and staff research and other recommendations.

In making decisions regarding its agenda priorities, the IASB also considers factors related to its convergence
initiatives with accounting standard-setters. The IASB’s approval to add agenda items, as well as its decisions
on their priority, is by a simple majority vote at an IASB meeting.

2. Planning the project

When adding an item to its active agenda, the IASB decides whether to conduct the project alone or jointly
with another standard-setter. Similar due process is followed under both approaches.

When considering whether to add an item to its active agenda, the IASB may determine that it meets the
criteria to be included in the annual improvements process. The IASB assesses the issue against criteria
such as
• Clarifying,
• Correcting,
• Well defined and sufficiently narrow in scope that the consequences of the proposed change have been
considered,
Page 10
 • Completed on a timely basis,
All criteria must be met to qualify for inclusion in annual improvements.

Once this assessment is made, the amendments included in the annual improvements process will follow the
same due process as other IASB projects. The primary objective of the annual improvements process is to
enhance the quality of IFRSs by amending existing IFRSs to clarify guidance and wording, or correcting for
relatively minor unintended consequences, conflicts or oversights.

After considering the nature of the issues and the level of interest among constituents, the IASB may establish
a working group at this stage and a project team for the project will be selected. The project manager draws
up a project plan under the supervision of the directors of the technical staff and the project team may also
include members of staff from other accounting standard-setters, as deemed appropriate by the IASB.

3. Developing and publishing the discussion paper

A discussion paper is not a mandatory step in the IASB’s due process. Normally the IASB publishes a
discussion paper as its first publication on any major new topic as a vehicle to explain the issue and solicit
early comment from constituents. If the IASB decides to omit this step, it will state its reasons.

Typically, a discussion paper includes a comprehensive overview of the issue, possible approaches in
addressing the issue, the preliminary views of its authors or the IASB, and an invitation to comment. This
approach may differ if another accounting standard-setter develops the research paper.

Discussion papers may result either from a research project being conducted by another accounting standard-
setter or as the first stage of an active agenda project carried out by the IASB. If research has been performed
by another accounting standard-setter, issues related to the discussion paper are discussed in IASB
meetings, and publication of such a paper requires a simple majority vote by the IASB. If the discussion paper
includes the preliminary views of other authors, the IASB reviews the draft discussion paper to ensure that
its analysis is an appropriate basis on which to invite public comments.

For discussion papers on agenda items that are under the IASB’s direction, or include the IASB’s preliminary
views, the IASB develops the paper or its views on the basis of analysis drawn from staff research and
recommendations, as well as suggestions made by the IFRS Advisory Council, working groups and
accounting standard-setters and presentations from invited parties. All discussions of technical issues related
to the draft paper take place in public sessions.

When the draft is completed and the IASB has approved it for publication the discussion paper is published
to invite public comment. The IASB normally allows a period of 120 days for comment on a discussion paper,
but may allow a longer period on major projects (which are those projects involving pervasive or difficult
conceptual or practical issues).

After the comment period has ended the project team analyses and summarises the comment letters for the
IASB’s consideration. Comment letters are posted on the IASB’s website. In addition, a summary of the
comments is posted on their website as a part of IASB meeting observer notes.

If the IASB decides to explore the issues further, it may seek additional comment and suggestions by
conducting field visits, or by arranging public hearings and round-table meetings.

4. Developing and publishing the exposure draft

Publication of an exposure draft is a mandatory step in due process. An exposure draft is the IASB’s main
vehicle for consulting the public. Unlike a discussion paper, an exposure draft sets out a specific proposal
in the form of a proposed IFRS (or amendment to an IFRS).

The development of an exposure draft begins with the IASB considering issues on the basis of staff research
and recommendations, as well as comments received on any discussion paper, and suggestions made by
the IFRS Advisory Council, working groups and accounting standard-setters and arising from public education
sessions.

After resolving issues at its meetings, the IASB instructs the staff to draft the exposure draft. When the draft
has been completed, and the IASB has balloted on it, with a minimum of nine votes necessary to publish an
exposure draft, the IASB publishes it for public comment.

An exposure draft contains an invitation to comment on a draft IFRS, or draft amendment to an IFRS, that
proposes requirements on recognition, measurement and disclosures. The draft may also include mandatory
Page 11
 application guidance and implementation guidance, and will be accompanied by a basis for conclusions on
the proposals and the alternative views of dissenting IASB members (if any).

The IASB normally allows a period of 120 days for comment on an exposure draft. If the matter is
exceptionally urgent, the document is short, and the IASB believes that there is likely to be a broad consensus
on the topic, the IASB may consider a comment period of no less than 30 days, but it will set such a short
period only after formally requesting and obtaining prior approval from 75 per cent of the Trustees. The
project team collects, summarises and analyses the comments received for the IASB’s deliberation.

After the comment period ends, the IASB reviews the comment letters received and the results of other
consultations. As a means of exploring the issues further, and soliciting further comments and suggestions,
the IASB may conduct field visits, or arrange public hearings and round-table meetings. The IASB is required
to consult the IFRS Advisory Council and maintains contact with various groups of constituents.

5. Developing and publishing the standard

The development of an IFRS is carried out during IASB meetings, when the IASB considers the comments
received on the exposure draft. Changes from the exposure draft are posted on the website.

After resolving issues arising from the exposure draft, the IASB considers whether it should expose its revised
proposals for public comment, for example by publishing a second exposure draft. If the IASB decides that
re-exposure is necessary, the due process to be followed is the same as for the first exposure draft

As it moves towards completing a new IFRS or major amendment to an IFRS, the IASB prepares a project
summary and feedback statement. These give direct feedback to those who submitted comments on the
exposure draft, identify the most significant matters raised in the comment process and explain how the
IASB responded to those matters.

At the same time, the IASB prepares an analysis of the likely effects of the forthcoming IFRS or major
amendment. The analysis will therefore attempt to assess the likely effects of the new IFRS on;

• The financial statements of those applying IFRSs,

• The possible compliance costs for preparers,
• The costs of analysis for users (including the costs of extracting data,
• Identifying how the data have been measured and adjusting data for the purposes of including them
in, for example, a valuation model,
• The comparability of financial information between reporting periods for an individual entity and
between different entities in a particular reporting period, and
• The quality of the financial information and its usefulness in assessing the future cash flows of an
entity.

When the IASB is satisfied that it has reached a conclusion on the issues arising from the exposure draft, it
instructs the staff to draft the IFRS. A pre-ballot draft is usually subject to external review, normally by the IFRS
Interpretations Committee. Shortly before the IASB ballots the standard, a near-final draft is posted on its
limited access website for paying subscribers. Finally, after the due process is completed, all outstanding
issues are resolved, and the IASB members have balloted in favour of publication, the IFRS is issued,
followed by publication of any project summary and feedback statement and any effect analysis.

6. After the standard is issued

After an IFRS is issued, IASB members and staff hold regular meetings with interested parties, including
other standard-setting bodies, to help understand unanticipated issues related to the practical implementation
and potential impact of its provisions. The IFRS Foundation also fosters educational activities to ensure
consistency in the application of IFRSs.

The IASB carries out a post-implementation review of each new IFRS or major amendment. This is normally
carried out two years after the new requirements have become mandatory and been implemented. Such
reviews are normally limited to important issues identified as contentious during the development of the
pronouncement and consideration of any unexpected costs or implementation problems encountered. A
review may also be prompted by;
• Changes in the financial reporting environment and regulatory requirements,
• Comments made by the IFRS Advisory Council, the IFRS Interpretations Committee, standard-setters
and constituents about the quality of the IFRS.

The review may lead to items being added to the IASB’s agenda. The IASB may also continue informal
consultations throughout the implementation of the IFRS or amendment.
(10 Marks)
Page 12
(b)

Whytome Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2018







Revenue TB 7,542,520 0.25
Cost of Sales W2 - 4,954,346
Gross Profit 2,588,174 0.25
Investment Income TB + W1.vi 4,000 4000 8,000 0.50
Bad Debt Recovered W1.viii 4,800 0.25
Gain on Disposal W1.iv 12,000 0.25
Finance Costs TB 36,200 0.25
Distribution Costs W2 907,936 0.25
Administrative Expenses W2 370,166 1,289,502 0.25
Profit/(Loss) before Tax 1,298,672
Income Tax Expense TB 163,000 0.25
PROFIT/(LOSS) FOR THE YEAR 1,135,672
Other Comprehensive Income for the year, net of tax -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,135,672 0.25

Whytome Limited Statement of Financial Position as at 31st December 2018

Property, Plant & Equipment W3 2,365,452 0.25
Intangible Assets W1.ix 100,000 - 10,000 90,000 0.50
Investments TB 200,000 0.25
Total Non-Current Assets 2,655,452
Current Assets
Inventories W1.i 267,564 0.25
Trade Receivables W1.viii 332,040 0.50
Other Receivables TB + W1.v + W1.vi + W1.Vii 40,000 - 40,000 8,000 4,000 12,000 0.25
Cash & Cash Equivalents TB + W1.iii + W1.iv 394,600 - 150,000 140,000 4,800 - 60,000 - 100,000 229,400 0.25
Total Current Assets + W1.viii + W1.ix 841,004
TOTAL ASSETS 3,496,456
Equity & Liabilities
Equity
Share Capital TB 180,000 0.25
Retained Earnings TB + W1.v + SOPL 478,534 - 40,000 1,135,672 1,574,206 0.25
Total Equity 1,754,206
Non-Current Liabilities
Long-term Loan TB 1,457,500 0.25
Total Non-Current Liabilities 1,457,500
Current Liabilities
Trade Payables TB 248,750 0.25
Current Tax Payable TB 36,000 0.25
Total Current Liabilities 284,750 0.25
TOTAL EQUITY & LIABILITIES 3,496,456
PRESENTATION 1.00

TOTAL MARKS 7.50

Page 13
 Working - Journal Entries

1.i Total Inventories at Cost per Inventory Count 268,460

Slow Moving Inventories - Cost 3,200
NRV - 50% of Selling Price Note 1 - 2,304
Inventory Write Down 896
Value of Closing Inventories 267,564
Dr. Inventory + Current Assets SOFP 267,564 1.00
Cr. Closing Inventory - Cost of Sales SOPL & OCI 267,564
Note 1
Cost 3,200
Markup - 20% of Cost i.e. 20% *
3,200 20% 640
Selling Price 3,840
60% of Selling Price - 3,840 * 60% 60% 2,304
1.iii Dr. Property, Plant & Equipment (ppe) - Equipment + Non-Current Assets 150,000 0.50
Cr. Bank + Current Assets 150,000
1.iv Dr. Bank + Current Assets SOFP 140,000
Cr. Disposal Account SOFP 140,000
Dr. Disposal Account 200,000
Cr. Property, Plant & Equipment (PPE) - Buildings - Non-Current Assets SOFP 200,000 2.00
Dr. Accumulated Depreciation - PPE + Non-Current Assets SOFP 72,000
Cr. Disposal Account 72,000
Dr. Disposal Account 12,000
Cr. Gain on Disposal + Other Income SOPL & OCI 12,000
1.v Per paragraph 12 of IAS 10 if an entity declares dividends to holders of equity instruments after the reporting period,
the entity shall not recognise those dividends as a liability at the end of the reporting period.
Even though the journal entry included in the financial statements for the proposed dividend is incorrectly entered the journal 1.00
entry included in the financial statements needs to be reversed.
Dr. Retained Earnings - Equity SOFP 40,000
Cr. Other Receivables - Current Assets SOFP 40,000 0.50
1.vi Dr. Other Receivables + Current Assets SOFP 4,000
Dr. Investment Income + Income SOPL & OCI 4,000 1.00

Investments 200,000
Interest rate on investments 4%
Interest to be received in 2018 on investments 8,000
Interest received 4,000
Interest receivable at 31 December 2018 4,000
1.vii Dr. Other Receivables + Current Assets SOFP 8,000
Cr. Purchases - Cost of Sales SOPL & OCI 8,000 1.00
1.viii Dr. Trade Receivables + Current Assets SOFP 4,800
Cr. Bad Debt Recovered + Income SOPL & OCI 4,800
Dr. Bank + Current Assets SOFP 4,800 1.00
Cr. Trade Receivables - Current Assets SOFP 4,800
Dr. Allowance for Doubtful Debts + Expenses SOPL & OCI 1,234 1.00
Cr. Allowance for Doubtful Debts - Current Assets SOFP 1,234
Trade Receivables TB 345,875
+ Bad Debt Recovered 4,800
- Bad Debt Recovered Received - 4,800
345,875
- Allowance for Bad & Doubtful Debts - 4% - 13,835
Revised Trade Receivable 332,040 1.00
Current Allowance for Bad & Doubtful Debts TB 12,601
New Allowance for Bad & Doubtful Debts See Above 13,835
Increase in Allowance for Bad & Doubtful Debts 1,234.00
1.ix The
60,000 are research costs as they are only in the early design stage and therefore, should be written off as part of
profit and loss for the period.
The
100,000 would appear to be development stage costs as the new production system is due to be in place fairly soon and
will produce economic benefits in the shape of reduced costs. Therefore, these should be capitalised as development costs.
Dr. Cost of Sales + Expense SOPL & OCI 60,000
Cr. Bank - Current Assets SOFP 60,000 1.00
Dr. Intangible Assets + Non-Current Assets SOFP 100,000
Cr. Bank - Current Assets SOFP 100,000 1.00

Amortisation of Intangible Assets

Dr. Amortisation of Intangible Assets - Cost of Sales + Expense SOPL & OCI 10,000
Cr. Intangible Assets - Non-Current Assets SOFP 10,000 1.00

CURRENT MARKS 13.00

Page 14
 Cost of Distribution Administration
Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 284,650 - - Cost of
Purchases Per TB 4,875,260 - - Sales
Closing Inventory W1.i - 267,564 - - 2.00
Expenses Per TB - 786,520 248,750
Inventory Stolen W1.vii - 8,000
Research expenditure incorrecly capitalised as intangible assets W1.ix 60,000
Amortisation of intangible assets W1.ix 10,000
Allowance for Bad & Doubtful Debts W1.viii - 617 617 1,234 Distribution
Depreciation - Premises W3 - 22,425 22,425 44,850 2.00
Depreciation - Equipment W3 - 51,524 51,524 103,048
Depreciation - Vehicles W3 - 46,850 46,850 93,700 Admin.
Total 4,954,346 907,936 370,166 Expenses
2.00
Working 3 - Property, Plant & Equipment Motor
Buildings Equipment Vehicles Total





Cost Per TB 2,242,500 864,050 468,500 3,575,050
Accumulated Depreciation b/d Per TB - 580,000 - 220,000 - 190,000 - 990,000
Carrying Value b/d at 1st January 2017 1,662,500 644,050 278,500 2,585,050 0.50
Addition W1.iii - 150,000 - 150,000 0.50
Disposal - Cost W1.iii + Note 2 - 200,000 - - - 200,000 0.50
Disposal - Accumulated Depreciation W1.iii + Note 2 72,000 - - 72,000 0.50
1,534,500 794,050 278,500 2,607,050
Depreciation - Premises - 2% Straight Line on Cost Note 3 - 44,850 - - - 44,850 0.50
Depreciation - Equipment - 15% Reducing Balance - - 103,048 - - 103,048 0.50
Depreciation - Vehicles - 20% Straight Line on Cost - - - 93,700 - 93,700 0.50
Carrying Value c/d at 31st December 2017 1,489,650 691,002 184,800 2,365,452
Note 2 - Disposal of Equipment
Disposal Account
Cost 200,000 Accumulated Depreciation 72,000
Disposal Proceeds 140,000
Gain on Disposal 12,000
212,000 212,000

CURRENT MARKS 9.50

TOTAL MARKS 30.00

22.50

Page 15
 Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit









Accumulated Depreciation - Buildings - 1 January 2018 580,000 72,000 44,850 552,850
Accumulated Depreciation - Equipment - 1 January 2018 220,000 103,048 323,048
Accumulated Depreciation - Motor Vehicles - 1 January 2018 190,000 93,700 283,700
Admininstrative Expenses 248,750 121,416 370,166
Allowance for Bad & Doubtful Debts 12,601 1,234 13,835
Bank 394,600 144,800 310,000 229,400
Buildings at Cost at 1 January 2018 2,242,500 200,000 2,042,500
Current Tax Payable 36,000 36,000
Distribution Costs 786,520 121,416 907,936
Equipment at Cost at 1 January 2018 864,050 150,000 1,014,050
Finance Costs 36,200 36,200
Income Tax Expense 163,000 163,000
Inventory at 1 January 2018 284,650 284,650
Investments (4% interest rate) 200,000 200,000
Investment Income 4,000 4,000 8,000
Issued Share Capital -
1 shares each 180,000 180,000

Page 16
Long-Term Loan 1,457,500 1,457,500
Motor Vehicles at Cost at 1 January 2018 468,500 468,500
Other Receivables 40,000 12,000 40,000 12,000
Purchases / Revenue 4,875,260 7,542,520 70,000 8,000 4,937,260 7,542,520
Retained Earnings 478,534 40,000 1,135,672 1,574,206
Trade Receivables / Trade Payables 345,875 248,750 4,800 4,800 345,875 248,750
Inventory at 31 December 2018 267,564 267,564 267,564 267,564
Gain on Disposal of PPE 12,000 12,000
Bad Debt Recovered 4,800 4,800
Intangible Assets 100,000 10,000 90,000
10,949,905 10,949,905 1,103,996 1,103,996 7,834,884 7,834,884 4,669,889 4,669,889
SOLUTION 2
Janemount Dancing Club Bar Trading Account for the year-ended 31 December 2018



Sales 166,000 0.50

Less Cost of Sales

Opening Inventory 9,200 0.50
+ Purchases 74,300 1.00
- Closing Inventory - 9,900 0.50
Total Cost of Sales 73,600 0.50
Gross Profit 92,400 0.50
Expenses
Bar Wages 74,900 1.00
Bar Expenses 29,200 0.50
Total Expenses 104,100 0.50
Net Profit/(Loss) - 11,700 0.50

SUBTOTAL MARKS 6.00

Janemount Dancing Club Income & Expenditure Account for the year-ended 31 December 2018
Income
Subscriptions 67,100 1.00
Profit on Competition 4,400 14,800 - 10,400 1.00
Interest Receiveable 500 0.50
Total Income 72,000 0.50
Expenditure
Loss on Bar 11,700 0.50
Rates 10,000 0.50
Loan Interest 4,600 0.50
Sundry Expenses 2,540 0.50
Depreciation 4,700 (40,000+7,000)*0.1 1.00
Total Expenditure 33,540 0.50
Excess of Income over Expenditure 38,460 0.50

SUBTOTAL MARKS 7.00

Janemount Dancing Club Statement of Financial Position as at 31st December 2018

Property, Plant & Equipment 175,300 1.00
Total Non-Current Assets 175,300
Current Assets
Inventories 9,900 0.25
Subscriptions Owing 2,000 0.50
Deposit Account 22,000 12,000 + 10,000 1.00
Interest Receivable 500 1.00
Cash & Cash Equivalents 12,010 0.50
Total Current Assets 46,410
TOTAL ASSETS 221,710 0.50
Equity & Liabilities
Equity
Accumulated Fund 139,450 0.25
Excess of Income over Expenditure 38,460 0.25
Total Equity 177,910
Non-Current Liabilities
Long-term Loan 33,000 48,000 + 4,600 - 19,600 0.75
Total Non-Current Liabilities 33,000
Current Liabilities
Trade Payables 8,000 0.25
Subscriptions in Advance 1,200 0.50
Bar Wages Due 1,600 0.25
Total Current Liabilities 10,800
TOTAL EQUITY & LIABILITIES 221,710

SUBTOTAL MARKS 7.00

OVERALL MARKS 20.00

Page 17
 Bar Purchases Calculation
T. Payables Bar Account
Bank Bar Payments 74,700 Balance B/D 8,400
Purchases - Balancing Figure 74,300
Balance C/D 8,000
82,700 82,700
Balance B/D 8,000
Subscriptions Calculation
Subscriptions Account
Balance B/D 2,500 Balance B/D 800
Income - I&E A/c - Balancing Figure 67,100 Bank Receipt 68,000
Balance C/D 1,200 Balance C/D 2,000
70,800 70,800
Balance B/D 2,000 Balance B/D 1,200
Bar Wages Calculation
Bar Wages Account
Bank Payments 75,600 Balance B/D 2,300
Expense - I&E A/c - Balancing Figure 74,900
Balance C/D 1,600
77,200 77,200
Balance B/D 1,600

Page 18
SOLUTION 3

REPORT
To: Financial Controller, Proviseo Limited
From:Financial Accountant
Re: IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
Date: April 2019

PART A
(a)

(i) A provision is a liability of uncertain timing or amount. A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic
benefits
(2 Marks)

(ii) A contingent liability is either

(a) a possible obligation arising from past events whose existence will be confirmed only by the occurrence of
one or more uncertain future events not wholly within the control of the entity; or

(b) a present obligation that arises from past events but is not recognised because

(i) It is not probable that an outflow of economic benefits will be required to settle the obligation; or

(ii) The amount of the obligation cannot be measured with sufficient reliability. (2 Marks)

(iii) A contingent asset is a possible asset arising from past events whose existence will only be confirmed
by the occurrence of one or more uncertain future events not wholly within the control of the entity.

(2 Marks)

(b)
(i) A provision should be recognised when:

(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) It is probable that an outflow of economic resources will be required to settle the obligation, and
(c) A reliable estimate can be made of the amount of the obligation.

If any one of these conditions is not met, no provision may be recognised. (2 Marks)

(ii) A contingent liability is not recognised. A contingent liability is disclosed unless the possibility of an outflow of
economic benefits is remote i.e. generally less than 5% chance.

(2 Marks)

(iii) A contingent asset is not recognised because it could result in the recognition of profits that may never be realised.
However, where the realisation of profit is virtually certain, then the related asset is not a contingent asset and
recognition is appropriate.

A contingent asset is disclosed where an inflow of economic benefits is probable i.e. >50%. (2 Marks)

Page 19
PART B
(a) The accounting treatment for the transactions for the year-ending 31 December 2018 are as follows:

1. At the end of the reporting period, Proviseo Limited disputes liability (and therefore, whether a present
obligation exists).
(1 Mark)

However, given that it more likely than not that it will be found guilty, based on the lawyers advise, a present
obligation is assumed to exist.
(1 Mark)

Given that a single obligation is being measured, a provision is made for the outflow of the most likely outcome
i.e. a provision is recognised for €30,000.
(1 Mark)

2. A present obligation exists at the end of the reporting period based on historical evidence of items being
repaired under the guarantee agreement.
(1 Mark)

Here, a large population of items is involved. A provision is therefore made for the expected value of the
outflow:
(1 Mark)
4,000 x 10% x 70% x €80 €22,400 (1.5 Marks)
4,000 x 10% x 30% x €250 €30,000 (1.5 Marks)
€52,400

Page 20
SOLUTION 4
a) Issue 1




Should Have Happened Actually Happened
Dr. Trade Payables 210 Dr. Trade Payables 210
Cr. Discount Received 210 Dr. Discount Allowed Expense 210
Cr. Suspense 420
To Correct
Dr. Suspense 420 1.00
Cr. Discount Allowed Expense 210 1.00
Cr. Discount Received 210 1.00

Issue 2
Should Have Happened Actually Happened
Dr. Rent Expense 1,000 Dr. Rate Expense 1,000
Cr. Bank 1,000 Cr. Bank 1,000
To Correct
Dr. Rent Expense 1,000 0.50
Cr. Rate Expense 1,000 0.50

Issue 3
Should Have Happened Actually Happened
Dr. Insurance Expense 2,000 Dr. Insurance Expense 2,000
Cr. Bank 2,000 Dr. Trade Payables 2,000
Cr. Suspense 4,000

To Correct
Dr. Suspense 4,000 1.00
Cr. Bank 2,000 0.50
Cr. Trade Payables 2,000 0.50
Issue 4
Should Have Happened Actually Happened
Dr. Purchases 12,843 Dr. Purchases 12,348
Cr. Trade Payable 12,843 Dr. Suspense 495
Cr. Trade Payable 12,843
To Correct
Dr. Purchases 495 1.00
Cr. Suspense 495 1.00

Issue 5
Should Have Happened Actually Happened
Dr. Bank 10,000 Dr. Bank 10,000
Dr. Motor Vehicles 10,000 Cr. Motor Vehicles 10,000
Cr. Bank 10,000
Cr. Capital Introduced 10,000
To Correct
Dr. Motor Vehicles 20,000 1.00
Cr. Bank 10,000 1.00
Cr. Capital Introduced 10,000 1.00
Issue 6
Should Have Happened Actually Happened
Dr. Nothing Dr. Vat Receivable/Bank 2,000
Cr. Cr. Motor Expenses 2,000
To Correct
Dr. Motor Expenses 2,000 1.00
Cr. Vat Receivable/Bank 2,000 1.00
Issue 7
Should Have Happened Actually Happened
Dr. Rent Prepaid 8,000 Dr. Suspense 16,000
Cr. Bank 8,000 Cr. Bank 8,000
Cr. Rent Payable 8,000

To Correct
Dr. Rent Prepaid 8,000 1.00
Dr. Rent Payable 8,000 1.00
Cr. Suspense 16,000 1.00

TOTAL MARKS 16.00

b) Suspense Account
Opening Balance 12,075 0.50
1 Discount Allowed Expense 210 4 Purchases 495 1.00
1 Discount Received 210 7 Rent Prepaid 8,000 1.00
3 Bank 2,000 7 Rent Payable 8,000 1.00
3 Trade Payables 2,000 0.50
16,495 16,495

SUBTOTAL MARKS 4.00

OVERALL MARKS 20.00

Page 21
SOLUTION 5

2018 2017
Gross Profit Percentage 7,200/24,000 = 30.00% 6,000/18,000 = 33.33%

Net Profit Percentage 4,007/24,000 = 16.70% 2,984/18,000 = 16.58%

Quick Ratio (4,600 - 1,400)/2,033 = 1.57:1 (3,400 – 1,800)/1,640 = 0.98:1

Trade Receivable Days 2,000/24,000*365 = 30 Days 1,200/18,000*365 = 24 Days

Trade Payable Days 1,400/16,800*365 = 30 Days 1,200/12,000*365 = 37 Days

OR 1,400/16,400*365 = 31 Days 1,200/11,800*365 = 37 Days

Interest Cover 5,200/620 = 8.39 TimeS 4,250/840 = 5.06 Times

Earnings per Share 4,007/2,000 = €2.00 2,984/2,000 = €1.49

Price Earnings Ratio €26.00/€2.00 = 13.00 €15.00/€1.49 = 10.07

Gross Profit Percentage

The Gross Profit percentage has decreased from 33.33% to 30.00%, a decrease of over 9.99% on the percentages year
on year which is a negative trend for the company. Revenues increased by 33.33% year on year but unfortunately, the
cost of sales increased by 40% year on year. If we look at Purchases, these have increased from €11.8 million to €16.4
million which is an increase of 38.98%. This increase is greater than the increase in Revenue and for the Company’s point
of view, it appears that they have experienced price increases in purchases which the company have been unable to
pass on to its customers and is something that management need to address in 2019.

2018 2017 % Increase

Opening Inventory 1,800 2,000 - 10.00%
Purchases (Balancing Figure) 16,400 11,800 + 38.98%
Closing Inventory 1,400 1,800 - 22.22%

Cost of Sales 16,800 12,000

Net Profit Percentage

The Net Profit % has increased from 16.58% to 16.70% which is an increase of just over 0.72% year on year on the
percentages. This is a decent performance considering the decrease in the gross profit percentage. The main reason
for the change in fortunes from Gross to Net Profit is due to the decrease in the finance costs year on year. The company
has decreased the amount of long term debt by 10% year on year but they have seen a 26.19% decrease in finance
costs which suggests that they have refinanced their debt at a better interest rate (especially given an increase in bank
overdraft in 2018 versus 2017) which management should be commended for. The company also kept a reasonable
check on administration costs which increased by 6.67% year on year. Distribution costs increased by 20% year on year
but again this was a decent result given the percentage increase in sales.

Quick Ratio
This ratio has increased from 0.98:1 to 1.57:1 this year which is an improvement of over 60% year on year percentage
wise. The main reason for the increase is the fact that Current Assets minus Inventory increased by 100% driven mainly
by the increase in Bank which increased by 200% and Trade Receivables increasing by €800,000 or over 66% year on
year. Current Liabilities increased by under 24% driven mainly by the increase in the Bank Overdraft of €180,000. This
was a good result overall as the company have increased their revenue significantly which can put some strain on working
capital. Yet the quick ratio has increased this year and the company have also purchased some extra Non-Current Assets
and paid off some of Non-Current Debt (decreased by 10%). Some of this decrease in debt may have been funded
through the Bank Overdraft so Shacarn Limited should ensure that their source of funding is appropriate from a time point
of view. Shacarn Limited should reduce some of their cash and cash equivalents in Current Assets in order to reduce the
Bank Overdraft and ultimately save even more on bank interest costs.

Trade Receivable Days

This has increased from 24 to 30 days, an increase of 25% year on year which is a deterioration even if a trade receivable
days of 30 is still a good overall result. Revenue has increased by over 33.33% but Shacarn Limited should have tried
to ensure that there was no deterioration in Trade Receivables Days. The company need to try and ensure that the
increase in Revenue is not being fuelled by having customers who are demanding longer credit before they would
Page 22
purchase goods from Shacarn. The company should continue to focus on managing their Trade Receivables in the
coming year.

Trade Payable Days

This decreased from 37 days to 30 days which is a deterioration of nearly 19% year on year. This is not a good result
given the fact that the company should be aiming for closer to 45-60 days. The increase in purchases probably ensured
that some of the supplier company’s set limits on the amount of Inventory they would sell before getting paid and therefore,
this meant that the trade payable days decreased. If we compare to 2017, the difference between when money was
received in from Trade Receivables and paid out to Trade Payables has decreased from 13 days to 0 days which has
obviously put pressure on the cash flow of the company and probably has contributed to the increase in the Bank Overdraft.

Earnings per Share

This has increased from 149 cent per share to 200 cent per share, which is an increase of over 34%. This is a positive
trend and is driven by the increase in profit which the company has gained in 2018. The company will be able to use this
profit within the company to fuel current and future growth.

Price Earnings Ratio

This ratio has increased from 10.07 to 13.00, an increase of over 29% year on year. This increase is primarily due to the
increase in the share price which has increased by 73.33% year on year. As we saw in previous section, the earnings
per share increased by a sizeable percentage this year but the share price really changed during the course of the year.
A P/E ratio of 13 is a decent P/E ratio when compared to the average P/E ratio for companies and obviously investors are
seeing this company as a ‘buy’ which primarily must be due to the sales, net profit growth and good management of cash
and loans from 2017 to 2018.

Calculation of, Commentary on & Presentation of Results (20 Marks)

Page 23
 MARKING SCHEME

Q1
(a) Outline the main points of the standard setting process by the IASB in relation to IFRS 10

(b) Workings
22.5
Statement of Profit or Loss and Other Comprehensive Income + 7.5
Statement of Financial Position

Total Marks – Q1 40

Q2
(a) Bar Trading Account 6

(b) Income & Expenditure Account 7

(c) Statement of Financial Position 7

Total Marks – Q2 20

Q3 IAS 37 – Provisions, Contingent Liability and Contingent Assets

Part A
(a) (i) Definition of a Provision 2

(ii) Definition of a Contingent Liability 2

(iii) Definition of a Contingent Asset 2

(b) (i) Recognition of a Provision 2

(ii) Recognition of a Contingent Liability 2

(iii) Recognition of a Contingent Asset 2

Part B
(a) Scenario 1 3

Scenario 2 5

Total Marks – Q3 20

Q4
(a) Journal Entries 16

(b) Suspense Account 4

Total Marks – Q4 20

Q5 Calculation of Ratios 8

Analysis of Ratios 10

Presentation & Format 2

Total Marks – Q5 20

Page 24