FINANCIAL ACCOUNTING

FORMATION 2 EXAMINATION - AUGUST 2015

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 - AugusT 2015

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) outline benefits that financial statements provide to users of financial statements. (10 marks)

The following trial balance was extracted from the books of ramona limited, an importer of garden furniture
as at 31 december 2014:
(b)

Debit Credit

Accumulated depreciation - buildings at 31 december 2013 360,000

€ €

Accumulated depreciation - equipment at 31 december 2013 415,000

Accumulated depreciation - motor Vehicles at 31 december 2013 162,000
Administrative expenses 289,510
Allowance for bad debts 7,800
bank 79,620
Cash 960
Current Tax Payable 24,180
distribution Costs 540,384
equipment 728,000
Income Tax 24,180
Investments 286,000
buildings 1,600,000
long Term loan 1,099,800
opening Inventory 124,600
Purchases 2,525,130
retained earnings at 31 december 2013 77,624
revaluation surplus 18,600
revenue 4,076,200
share Capital - 100,000 at €2 each 200,000
share Premium 20,000
Trade Payables 252,980
Trade receivables 195,000
motor Vehicles 320,800
6,714,184 6,714,184

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

(i) ramona limited’s year-end inventory amounted to €142,800 valued at cost. Included in this amount is some
timber garden furniture which has been damaged by a forklift and is beyond repair. The cost of this damaged
inventory was €4,650. ramona limited sold it to a local wood chip company for €1,200 and incurred transport
costs of €170.

(ii) ramona limited purchases goods from the united states on 31 october 2014 costing usd$80,000. This was
included in Trade Payables on that date as €90,000 by mistake. The rate of exchange on 31 october 2014
was €1.00 equals usd$1.25. The full amount remains owing at 31 december 2014. The closing exchange
rate between the us dollar and the euro at the 31 december 2014 is €1.00 equal usd$1.20. foreign
exchange gains or losses are not to be included in either Cost of sales, Administrative expenses or distribution
Costs but as a separate line item.

Page1
(iii) depreciation is to be charged as follows:

building 5% straight line on Cost

equipment 15% reducing balance
motor Vehicles 15% straight line on Cost

depreciation is charged in full in the year of purchase and none in the year of sale.

(iv) All of the relevant expenses in the trial balance are to be split evenly between Administrative expenses and
distribution Costs.

(v) ramona limited owed €2,000 and €600 respectively for accountancy fees and light and heat at the year-end.

(vi) ramona limited received a government grant of €60,000 in relation to the building of an extension to its
buildings which cost €200,000 in total. ramona limited paid the net amount out of its bank account. ramona
limited believe that the grant should be amortised over twenty years.

(vii) Income tax for the year is €21,620. The amount in the trial balance is the previous estimate for the year
2014.

(viii) The Allowance for bad debts should be at 5% of Trade receivables.

(ix) The interest rate received on the investments is 3%. The amount had not been received by year-end.

REQUIREMENT:

Prepare, in a form suitable for publication, a statement of Profit or loss and other Comprehensive Income and
statement of financial Position for ramona limited for the financial year-ending 31 december 2014.

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

[Total: 40 Marks]

Page 2
 mr. John deegan rents premises from which he operates a hardware shop. he also owns two offices which
he lets to tenants during the year. he has provided you with information of his transactions for the year-ended
2.

31 december 2014 and wants you to provide information to him as outlined in the requirements below:

(i) mr. deegan rents his premises at a rate of €30,000 per annum. his rental terms are that he pays
quarterly in advance commencing on 1 february 2014. on 1 August 2014, he agreed to rent additional
space from his landlord commencing on 1 november and his rate changed to €36,000 per annum from
1 november 2014 under the same terms and conditions as the original rental agreement (i.e. payable
quarterly in advance).

(ii) mr. deegan had no tenants in his offices at the start of the year due to building repairs that were required.
on 1 march 2014, mr. deegan rented one of the offices to Tam Accountancy solutions at the rate of
€6,000 per quarter receivable in arrears (i.e. the day after quarter end).

(iii) due to continuing success of Tam Accountancy solutions, the director, ms. Tammy horan rented the
other office from mr. deegan on 1 october 2014. on that date, both parties agreed to cancel the original
agreement for the rental of the first office (referred to in point (ii) above). Instead, from 1 october 2014,
both parties agreed to enter into a new rental agreement covering the two offices which were rented for
a total of €10,000 per quarter receivable in arrears (i.e. the day after quarter end).

(iv) mr. deegan pays insurance for his rented premises and offices that he owns. The insurance is split and
paid evenly in two amounts on 1 January and 1 August each year. The annual insurance premium in
2014 was €9,000.

(v) All payments and receipts were paid and lodged to the bank on the relevant dates as outlined above.

Prepare the following ledger accounts for the year-ended 31 december 2014:
REQUIREMENT:

(i) rent expense

(ii) rental Income
(iii) rent receivable
(iv) rent Prepaid
(v) bank
(vi) Insurance

note: for each account, you are required to show all transactions (with appropriate dates) and identify the
figure for inclusion in the trial balance of mr. John deegan as at 31 december 2014.

[Total: 20 Marks]

Page 3
 mr. Jacob Condon owns a number of retail outlets selling a variety of different products. Jacob has a number
of questions relating to the calculation of revenue that should be recorded in his financial statements and has
3.

approached you for advice in relation to IAs 18 - Revenue.

mr. Condon has asked you to prepare a report which addresses the following questions:
REQUIREMENT:

What conditions need to be satisfied before revenue from the sale of goods can be recognised in the financial
statements in accordance with IAs 18 - Revenue.
(a)

(5 marks)

for retail goods, at what stage will the significant risk and rewards of ownership have passed to the customer?
(2 marks)
(b)

Provide two examples of situations where his retail outlets may retain the significant risk and rewards of
ownership.
(c)

(4 marks)

In relation to the financial statements for the year ended 31 december 2014, inform mr. Condon of the correct
amount of revenue that can be included arising from each of the following scenarios:
(d)

(i) mr. Condon sells washing machines for €500 each. This includes installation and inspection that each
washing machine is working properly. he sold and delivered fifteen washing machines in the last week
of december. his installation worker was not in a position, due to Christmas holidays, to install and
inspect four of the washing machines. These were installed and inspected in the first week of January
2015. All of the washing machines were paid for in december 2014.
(3 marks)

(ii) In one of mr. Condon’s retail outlets, there is a tradition of operating on a ‘cash on delivery’ basis for
sales of televisions. This outlet sold ten televisions worth €700 each in the week leading up to
Christmas. The delivery staff worked extra hours to ensure that all the televisions were delivered before
Christmas. All customers paid the delivery staff when the televisions were delivered.
(3 marks)

(iii) To boost the sale of bicycles to younger people in his outlets, mr. Condon decided to offer the option of
purchasing bicycles prior to Christmas with the right of return of the bicycles up to 15 January 2015. he
felt that this would allow younger people to try out these new bicycles post Christmas and return these
to his outlets if they were unhappy with any part of the bicycles. mr. Condon was very pleased with the
strategy as sales increased by over 30% to €28,000 and no bicycles were returned up to 15 January
2015.
(3 marks)

[Total: 20 Marks]

Page 4
 The following is a summary of the receipts and payments of fassa football club for the year ended 31
december 2014:
4.

Receipts € Payments €
bank balance at 01 January 2014 6,000 rent 1,000
Cash balance at 01 January 2014 800 stationery 150
donation 700 Phone 800
membership subscriptions 4,000 light & heat 900
dance night 1,200 Coaching expenses 2,100
grant towards day to day running of club 2,100 dance Prizes 300
sponsorship 1,600 football gear 1,400
equipment 2,000
balance at 31 december 2014 7,750
16,400 16,400

The following information is also available at 31 december:

2013 2014
€ €
Clubhouse (net book Value) 60,000 60,000
equipment (net book Value) 11,000 12,500
subscriptions in Arrears 600 400
subscriptions in Advance 200 300
light & heat due 200 300

The rent paid was for the year-ending 30 June 2014 and it is paid on 1 July of each year. The rent for the year-
ending 30 June 2013 amounted to €1,100.

REQUIREMENT:

(a) Calculate the value of the Accumulated fund for fassa football Club at 1 January 2014. (6 marks)

(b) Prepare the Income and expenditure Account for fassa football Club for the year ended 31 december 2014.

(10 marks)

from an accounting perspective, identify and briefly explain the main advantages and disadvantages of a
receipts and payments account.
(c)

(4 marks)

[Total: 20 Marks]

Page 5
 Consider the following financial information for Patterdale limited, a manufacturer of sauces for the food
industry, as at 31 december 2014 (with comparatives).
5.

Patterdale Limited Statement of Financial Position as at 31 December

2014 2013
€'000 €'000

Property, Plant & equipment 230,000 180,000

Non-Current Assets

Total non-Current Assets 230,000 180,000

Inventories 19,500 15,200

Current Assets

Trade receivables 14,200 14,700

Cash & Cash equivalents 8,240 12,400
Total Current Assets 41,940 42,300

TOTAL ASSETS 271,940 222,300

Equity & Liabilities

share Capital 80,000 50,000

Equity

share Premium 10,000 5,000

retained earnings 65,290 63,500
Total equity 155,290 118,500

100,000 90,000
Non-Current Liabilities

Total non-Current liabilities 100,000 90,000

Long-term Loan

Current liabilities
Trade Payables 15,900 13,300
Current Tax Payable 750 500
Total Current liabilities 16,650 13,800

TOTAL EQUITY & LIABILITIES 271,940 222,300

revenue 86,400 81,100

Other Relevant Information

Cost of sales 68,990 67,074

Administrative expenses 2,460 2,146
distribution Costs 4,750 4,080
finance Costs 5,300 4,600
Income Tax 710 400
Profit after tax 4,190 2,800

dividends Paid 2,400 1,700

using the above information:

REQUIREMENT:

(a) Calculate six appropriate ratios in order to comment on, and assess, the liquidity, profitability and gearing of
Patterdale limited.
(12 marks)

review the above financial statements and identify any additional long-term funding raised by Patterdale
limited in 2014. Indicate where this funding was spent.
(b)

(4 marks)

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

(4 marks)

[Total: 20 Marks]

Page 6
END OF PAPER
 SUGGESTED SOLUTIONS

The InsTITuTe of CerTIfIed PublIC ACCounTAnTs In IrelAnd

FINANCIAL ACCOUNTING
formATIon 2 exAmInATIon - AugusT 2015

SOLUTION 1

a) Possible benefits of financial statements to users of financial statements include the provision of information;

(i) To allow decisions to be made for the good of the company.

(ii) on the value of shareholders investments and the income they derive from their shareholding.

(iii) To allow employees to look for alternative work in a different company, or look for pay increases and pro-
motions based on the financial health of the company.

(iv) To allow trade payables and banks to identify if the company can meets it financial obligations and com-
mitments to them.

(v) To government agencies like revenue Commissioners and Central statistics office.

(vi) To allow accountants audit or prepare tax returns on behalf of the company.

(10 marks)

Page 8
b) Ramona Limited Statement of Profit or Loss and Other Comprehensive Income for the year-ended 31st December 2014
! ! ! ! !
Revenue 4,076,200 0.25
Cost of Sales Total W2 2,484,550

Gross Profit 1,591,650 0.25

Other Income W1.ix 8,580 0.25
Amortisation of Government Grants W1.vi 3,000 0.50
Distribution Costs W2 635,194
Administrative Expenses W2 384,320
Foreign Exchange Loss W1.ii 2,667 1,010,601 0.50
Profit/(Loss) before Tax 581,049 0.25
Income Tax TB + W1.vii 24,180 - 2,560 21,620 0.25
PROFIT/(LOSS) FOR THE YEAR 559,429 0.25
Other Comprehensive Income for the year, net of tax - 0.25
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 559,429 0.25

Ramona Limited Statement of Financial Position as at 31st December 2014

! ! ! ! !
Non-Current Assets
Property, Plant & Equipment W3 1,726,730 0.25
Investments TB 286,000 0.25
Total Non-Current Assets 2,012,730 0.25
Current Assets
Inventories W1.i 139,180 0.25
Trade Receivables W1.viii 185,250 0.25
Other Receivables W1.ix 8,580 0.25
Total Current Assets 333,010 0.25
TOTAL ASSETS 2,345,740 0.25
Equity & Liabilities
Equity
Share Capital TB 200,000 0.50
Share Premium TB 20,000 0.25
Retained Earnings TB + W1.vii 77,624 559,429 637,053 0.25
Revaluation Surplus TB 18,600 0.25
Total Equity 875,653 0.25
Non-Current Liabilities
Long-term Loan TB 1,099,800 0.25
Government Grants W1.vi 60,000 - 3,000 57,000 0.25
Total Non-Current Liabilities 1,156,800 0.25
Current Liabilities
Trade Payables TB + W1.ii 252,980 - 26,000 2,667 229,647 0.25
Current Tax Payable TB + W1.vii 24,180 - 2,560 21,620 0.25
Cash & Cash Equivalents TB + W1.vi+W1.ix - 79,620 - 960 - 60,000 200,000 59,420 0.25
Accruals W1.v 2,600 0.25
Total Current Liabilities 313,287 0.25
TOTAL EQUITY & LIABILITIES 2,345,740

PRESENTATION 0.50

TOTAL MARKS 9.00

Page 9
 Working - Journal Entries
Working - Closing Inventory ! !
Total Inventories at Cost per Inventory Count 142,800
Damaged Inventories - Cost 4,650
NRV - Selling Price less costs to sell (!1,200 - 170) - 1,030
Inventory Write Down 3,620
Value of Closing Inventories 139,180

!'000 !'000
1.i Dr. Inventory + Current Assets SOFP 139,180 2.00
Cr. Closing Inventory - Cost of Sales SOPL & OCI 139,180
1.ii What Happened
31.10.14 Dr. Purchases + Cost of Sales SOPL & OCI 90,000
Cr. Trade Payables + Current Liabilties SOFP 90,000

What Should Have Happened

31.10.14 Dr. Purchases + Cost of Sales SOPL & OCI 64,000
Cr. Trade Payables + Current Liabilties SOFP 64,000

To Correct Entry
Dr. Trade Payables + Current Liabilties SOFP 26,000 1.00
Cr. Purchases + Cost of Sales SOPL & OCI 26,000

Foreign Currency Gain/Loss at Year-End

31.12.14 At exchange rate of !1.00 = USD$1.20, the amount outstanding should be worth 66,667
Therefore, there is an exchange loss of !2,667 rounded which needs to be accounted for as follows:

Dr. Foreign Exchange Loss +Expenses SOPL & OCI 2,667 1.00
Cr. Trade Payables + Current Liabilties SOFP 2,667
1.v Dr. Accountancy Fees + Expenses SOPL & OCI 2,000 1.00
Dr. Light & Heat + Expenses 600
Cr. Accruals + Current Liabilities SOFP 2,600
1.vi Dr. Bank - Current Liabilties SOFP 60,000 2.00
Cr. Government Grants - Non-Current Liabilities SOFP 60,000

Amortisation of the Government Grants

Dr. Government Grants + Non-Current Liabilities SOFP 3,000 1.00
Cr. Amortisation - Government Grants + Other Income SOPL & OCI 3,000

Addition of Extension to Property, Plant & Equipment

Dr. Buildings - Property, Plant & Equipment + Non-Current Assets SOFP 200,000 1.00
Cr. Bank + Current Liabilities SOFP 200,000

Depreciation of the addition to PPE will be performed in Working 3

1.vii Dr. Current Tax Payable + Current Liabilities SOFP 2,560 1.00
Cr. Income Tax - Expenses SOPL & OCI 2,560
1.viii Dr. Allowance for Bad Debts + Expenses SOPL & OCI 1,950 1.00
Cr. Trade Receivables - Current Assets SOFP 1,950

Trade Receivables Balance per TB 195,000

- Allowance for Bad Debts - 5% 9,750

Revised Trade Receivable 185,250

Current Allowance for Bad Debts TB 7,800

New Allowance Bad Debts See Above 9,750
Increase in Allowance for Bad Debts 1,950

1.ix Dr. Other Receivables + Current Assets SOFP 8,580

Cr. Investment Income + Other Income SOPL & OCI 8,580 1.00

Investment TB 286,000
Interest on Investments 3% 8,580

CURRENT MARKS 12.00

Cost of Distribution Administration

Working 2 - Expenses Sales Costs Expenses
Opening Inventory Per TB 124,600 - - Cost of
Purchases Per TB 2,525,130 - - Sales
Closing Inventory W1.i - 139,180 - - 2.00
Exchange Error W1.ii - 26,000
Expenses Per TB - 540,384 289,510 Distribution
Accountancy Fees W1.v - 1,000 1,000 2,000 Costs
Light & Heat W1.v - 300 300 600 2.00
Allowance for Bad Debts W1.viii - 975 975 1,950
Depreciation - Buildings W3 - 45,000 45,000 90,000 Admin
Depreciation - Equipment W3 - 23,475 23,475 46,950 Expenses
Depreciation - Motor Vehicles W3 - 24,060 24,060 48,120 2.00
Total 2,484,550 635,194 384,320
Working 3 - Property, Plant & Equipment Motor
Buildings Equipment Vehicles Total
! ! ! !
Cost 1,600,000 728,000 320,800 2,648,800
- Accumulated Depreciation b/d - 360,000 - 415,000 - 162,000 - 937,000
Carrying Value b/d at 1st January 2014 1,240,000 313,000 158,800 1,711,800 0.50
Disposal - Accumulated Depreciation 200,000 - - 200,000 0.50
Carrying Value 1,440,000 313,000 158,800 1,911,800
Depreciation - Buildings - 5% Straight Line - 90,000 - - - 90,000 0.50
Depreciation - Plant & Equipment - 15% Reducing Balance - - 46,950 - - 46,950 0.50
Depreciation - Vehicles - 15% Straight Line - - - 48,120 - 48,120 0.50
Carrying Value c/d at 31st December 2014 1,350,000 266,050 110,680 1,726,730 0.50

CURRENT MARKS 9.00

TOTAL MARKS 21.00

Page 10
 Adjustment Statement of Profit or Loss and Statement of Financial Position
Other Comprehensive Income
Debit Credit Debit Credit Debit Credit Debit Credit
! ! ! ! ! ! ! !
Accumulated Depreciation - Buildings at 31.12.13 360,000 90,000 450,000
Accumulated Depreciation - Equipment at 31.12.13 415,000 46,950 461,950
Accumulated Depreciation - Motor Vehicles at 31.12.13 162,000 48,120 210,120
Administrative Expenses 289,510 94,810 384,320
Allowance for Bad Debts 7,800 1,950 9,750
Bank 79,620 60,000 200,000 60,380
Cash 960 960
Current Tax Payable 24,180 2,560 21,620
Distribution Costs 540,384 94,810 635,194
Equipment 728,000 728,000
Income Tax 24,180 2,560 21,620
Investments 286,000 286,000
Buildings 1,600,000 200,000 1,800,000
Long Term Loan 1,099,800 1,099,800
Opening Inventory 124,600 124,600 139,180 139,180
Purchases 2,525,130 26,000 2,499,130

Page 11
Retained Earnings at 31.12.13 77,624 559,429 637,053
Revaluation Surplus 18,600 18,600
Revenue 4,076,200 4,076,200
Share Capital - 100,000 at !2 each 200,000 200,000
Share Premium 20,000 20,000
Trade Payables 252,980 26,000 2,667 229,647
Trade Receivables 195,000 195,000
Motor Vehicles 320,800 320,800
Foreign Exchange Loss 2,667 2,667
Accruals 2,600 2,600
Government Grant 3,000 60,000 57,000
Amortisation of Government Grant 3,000 3,000
Other Receivables 8,580 8,580
Investment Income 8,580 8,580
6,714,184 6,714,184 492,427 492,427 4,226,960 4,226,960 3,478,520 3,478,520
SOLUTION 2
(a)
Rent Expense Account
! !
01.02.14 Bank 7,500 01.02.14 Rent Prepaid 7,500 0.50
01.05.14 Rent Prepaid 7,500 01.05.14 Rent Prepaid 7,500 0.50
01.05.14 Bank 7,500 01.08.14 Rent Prepaid 9,000 0.50
01.08.14 Rent Prepaid 7,500 01.11.14 Rent Prepaid 9,000 0.50
01.08.14 Bank 9,000 0.50
01.11.14 Rent Prepaid 6,000 31.12.14 SOPL & OCI 21,000 1.25
01.11.14 Bank 9,000 0.50
54,000 54,000

Rent Prepaid Account

! !
01.02.14 Rent Expense 7,500 01.05.14 Rent Expense 7,500 0.50
01.05.14 Rent Expense 7,500 01.08.14 Rent Expense 7,500 0.50
01.08.14 Rent Expense 9,000 01.11.14 Rent Expense 6,000 1.00
01.11.14 Rent Expense 9,000 0.50
31.12.14 SOFP 12,000 1.00
33,000 33,000

Rental Income Account

! !
01.10.14 Rent Receivable 4,000 01.03.14 Rent Receivable 6,000 0.50
01.06.14 Rent Receivable 6,000 0.50
31.12.14 SOPL & OCI 24,000 01.09.14 Rent Receivable 6,000 1.25
01.10.14 Rent Receivable 10,000 0.50
28,000 28,000

Rent Receivable Account

! !
01.03.14 Rental Income 6,000 01.06.14 Bank 6,000 0.50
01.06.14 Rental Income 6,000 01.09.14 Bank 6,000 0.50
01.09.14 Rental Income 6,000 01.10.14 Rental Income 4,000 0.50
01.10.14 Rental Income 10,000 01.10.14 Bank 2,000 0.50

31.12.14 SOFP 10,000 1.00

28,000 28,000

Bank Account
! !
01.06.14 Rent Receivable 6,000 01.01.14 Insurance Expense 4,500 0.50
01.09.14 Rent Receivable 6,000 01.02.14 Rent Expense 7,500 0.50
01.10.14 Rent Receivable 2,000 01.05.14 Rent Expense 7,500 0.50
01.08.14 Insurance Expense 4,500 0.50
01.08.14 Rent Expense 9,000 0.50
01.11.14 Rent Expense 9,000 0.50
31.12.14 SOFP 28,000 1.00
42,000 42,000

Insurance Expense Account

! !
01.01.14 Bank 4,500 01.08.14 Insurance Due 750 0.50
01.07.14 Insurance Due 750 0.50
01.08.14 Bank 4,500 0.50
31.12.14 SOPL & OCI 9,000 1.00
9,750 9,750

TOTAL MARKS 20.00

Page 12
SOLUTION 3

REPORT
To: Mr. Jacob Condon
From: Financial Accountant
Re: IAS 18 – Revenue
Date: August 2015

Per paragraph 14 of IAs 18 revenue, revenue from the sale of goods shall be recognised when all of the fol-
lowing conditions have been satisfied:
(a)

(i) The entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
(ii) The entity retains neither continuing managerial involvement to the degree usually associated with own-
ership nor effective control over the goods sold;
(iii) The amount of revenue can be measured reliably;
(iv) It is probable that the economic benefits associated with the transaction will flow to the entity; and
(v) The costs incurred or to be incurred in respect of the transaction can be measured reliably.

(5 marks)

Per paragraph 15 of IAs 18, the assessment of when an entity has transferred the significant risks and rewards
of ownership to the buyer requires an examination of the circumstances of the transaction. In most cases for
(b)

retail sales, the transfer of the risks and rewards of ownership coincides with the transfer of the legal title or
the passing of possession to the buyer.
(2 marks)

Per paragraph 16 of IAs 18, examples of situations in which an entity may retain the significant risks and re-
wards of ownership are;
(c)

(i) When the entity retains an obligation for unsatisfactory performance not covered by normal warranty pro-
visions;
(ii) When the receipt of the revenue from a particular sale is contingent on the derivation of revenue by the
buyer from its sale of the goods;
(iii) When the goods are shipped subject to installation and the installation is a significant part of the con-
tract which has not yet been completed by the entity; and
(iv) When the buyer has the right to rescind the purchase for a reason specified in the sales contract and
the entity is uncertain about the probability of return.
(4 marks)

(d)

(i) Per 2 (a) of Appendix 1 of IAs 18 on the sale of goods shipped subject to conditions, revenue is normally recog-
nised when the buyer accepts delivery and installation and inspection are complete. The revenue from the
sale of eleven washing machines can only be included in the 2014 financial statements as the remaining four
were not installed and inspected until January 2015. The journal entry to account for this transaction in the
2014 financial statements would be as follows:

dr. Cash and Cash equivalents €7,500

Cr. revenue €5,500
Cr. deferred Income €2,000

(ii) Per 2 (d) of Appendix 1 of IAs 18 on the sale of goods shipped subject to conditions, revenue is recognised
when delivery is made and cash is received by the seller or its agent. Therefore, the full amount of revenue
for the ten televisions at €700 each i.e. €7,000 should be recognised in the 2014 financial statements as the
delivery man had delivered and collected all the cash on these sales prior to year-end. The journal entry to
account for this transaction in the 2014 financial statements would be as follows:

dr. Cash and Cash equivalents €7,000

Cr. revenue €7,000

(iii) Per 2 (b) of Appendix 1 of IAs 18 on the sale of goods shipped subject to conditions, if there is uncertainty
about the possibility of return, revenue is recognised when…. the goods have been delivered and the time pe-
riod for rejection has elapsed. Therefore, even though no sale was returned up to 15 January 2015, the rev-
enue from these sales cannot be included in the 2014 financial statements as at 31 december 2014,
customers still had the right to return the bicycles and therefore, the time period for rejection of the sales had
Page 13
not elapsed. Therefore, the journal entry to account for this transaction in the 2014 financial statements is as
follows:

dr. Cash and Cash equivalents €28,000

Cr. deferred Income €28,000 (9 marks)

I hope that the above responses clarify and answer your queries. If you have any further queries, please do
not hesitate to contact me.

Yours sincerely,

financial Accountant
[Total: 20 marks] 

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SOLUTION 4
a) Fassa Football Club Opening Accumulated Fund Figure
Non-Current Assets
Property, Plant & Equipment 71,000 1.00
Total Non-Current Assets 71,000
Current Assets
Subscription 600 0.50
Prepayments - Rent (1,100 * 6/12) 550 1.00
Cash & Cash Equivalents (6,000 + 800) 6,800 1.00
Total Current Assets 7,950

Total Assets 78,950 0.50

Equity & Liabilities

Accumulated Fund Balancing Figure 78,550 1.00
Total Accumulated Fund 78,550

Non-Current Liabilities -
Total Non-Current Liabilities -

Current Liabilities
Accruals 200 0.50
Subscriptions 200 0.50
Total Current Liabilities 400

Total Equity & Liabilities 78,950

SUBTOTAL MARKS 6.00

b) Fassa Football Club Income & Expenditure Account for the year-ended 31st December 2014
Income
Donation 700 0.50
Subscriptions Note 1 3,700 2.00
Dance Night (1,200 - 300) 900 1.00
Grant re day to day running of club 2,100 0.50
Sponsorship 1,600 0.50
Total Income 9,000

Expenditure
Rent Note 2 1,050 1.50
Stationery 150 0.50
Phone 800 0.50
Light & Heat (-200 + 900 + 300) 1,000 1.00
Coaching 2,100 0.50
Football Gear 1,400 0.50
Depreciation (11,000 + 2,000 - 12,500) 500 1.00
Total Expenditure 7,000

Excess of Expenditure over Income 2,000

Note 1 - Subscriptions Calculation

Subscriptions Account
Balance B/D 600 Balance B/D 200
I&E A/c - Balancing Figure 3,700 Bank Receipt 4,000

Balance C/D 300 Balance C/D 400

4,600 4,600

Balance B/D 400 Balance B/D 300

Note 2 - Rent Calculation
Rent Account
Balance B/D 550
Bank Payment 1,000 I&E A/c - Balancing Figure 1,050

Balance C/D 500 6/12th

1,550 1,550

Balance B/D 500

SUBTOTAL MARKS 10.00

c) The receipts and payments account is effectively a summary of a club's cash book
Advantages
1. Very easy to produce and understand
2. Serves as a basis for the preparation of the income and expenditure account and statement of financial position 2.00
Disadvantages
1. Takes no account of any amounts owing or prepaid
2. Includes items of capital expenditure and makes no distinction between capital and revenue items 2.00
3. Takes no account of depreciation of property, plant & equipment

OVERALL MARKS 20.00

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SOLUTION 5

Please note that different variations of ratio formulae will be accepted provided that they are correct.

(a) Calculation of Six Relevant Ratios

Patterdale Limited Possible Ratios in relation to its liquidity, profitability and gearing

2014 2013
Current 2.52 times 3.07 times

Quick 1.35 times 1.96 times

T. Receivable 60 days 66 days

T. Payable 84 days 72 days

Inventory 103 days 83 days

ROCE 4.00% 3.74%

Gross Profit 20.15% 17.29%

Net Profit 4.85% 3.45%

Gearing 39.17% 43.17%

Interest Cover 1.92 times 1.70 times

Debt to Equity 64.40% 75.95%

The current and quick ratio are good. however, the company is carrying too much inventory unless the com-
Commentary

pany is stockpiling for future sales. Inventory days are too high and have increased by over 24% year on year
which is worrying and management need to investigate the reasons for this increase in case there will be
losses from obsolete inventory. Trade receivable days have decreased by size 6 days year on year and
Trade Payable days have increased by 12 days year on year which is pleasing. both ratios appear to be high
for the industry. It appears as if management have focused on getting in trade receivables quicker and held
off payment to trade payables so as to manage the working capital and pay for the increase in inventory and
property, plant and equipment. gross and net Profit are strong but the return on capital employed is low high-
lighting that the return on the sizeable amount of assets is poor. Interest cover is low especially considering
the amount of profit versus the interest repayments on the loan. The gearing and debt to equity ratio have
improved year on year which is pleasing, the gearing ratio is acceptable but one would like to see the debt to
equity ratio continue to decline for the company. overall, the ratio analysis shows some positive indications
when comparing 2014 to 2013 but a lot of work is needed to manage the working capital and liquidity of the
company as well as earning a stronger return on its investment which reducing debt levels.
(12 marks)

The external funds raised were an increase in long term loans of €10 million as well as the issuance of new
shares which generated funds of €35 million. This funding was used to finance the purchase of new prop-
(b)

erty, plant and equipment.

(4 marks)

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(c) Possible limitations of ratios are as follows:

(i) underlying accounting principles: involves the application of both rules and judgement. This may result
in differing accounting numbers for similar circumstances for example, assets may be included at cost
or revalued amount which will lead to different ratio results for the same asset or different methods of
valuing inventory will provide different results and potentially render the ratios meaningless.
(ii) Timing problems: some businesses are subject to heavy seasonality e.g. milling, construction etc. This
may lead to final accounts being unrepresentative of the normal situation.
(iii) The impact of price changes: Comparing the accounts of an enterprise with updated figures due to in-
flation with those showing historic costs may be misleading.
(iv) ratio analysis just gives a solution shown as a number – it does not provide the explanation behind the
ratio.
(v) different formulae used to calculate ratios may make it difficult to compare ratios from different sources.
(vi) financial information can be “massaged” in several ways to make the figures used for ratios more at-
tractive. for example, many businesses delay payments to trade payables at the end of the financial
year to make the cash balance higher than normal and the trade payables days figure higher too

(4 marks)

[Total: 20 marks] 

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 MARKING SCHEME

SOLUTION 1

(a) 5 benefits to users of preparing financial statements 5 x 2 marks each 10

Workings 21
statement of Profit or loss and other Comprehensive Income + 9
(b)

statement of financial Position

Total Marks 40

SOLUTION 2

Accounts - 6 20

Total Marks 20

SOLUTION 3

(a) Conditions necessary to satisfy recognition of revenue from sale of goods – 5 x 1 mark each 5

(b) risks and rewards transferred on retail goods 2

(c) examples of where retail outlets may retain the risks and rewards of ownership 4

(d) examples of IAs 18 in practice – 3 x 3 marks each 9

Total Marks 20

SOLUTION 4

(a) opening Accumulated fund 6

(b) Income & expenditure Account 10

(c) list and explanation of advantages and disadvantages of receipts and payment account 4

Total Marks 20

(a) Calculation & Commentary on 6 ratios – 6 x 2 marks each 12

SOLUTION 5

(b) raising and use of external funds 4

(c) limitations of ratios 4

Total Marks 20

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