FORMATION 2 EXAMINATION - APRIL 2007

Answer question 1 and three of the remaining four. Note: Students have optional use of the Extended Trial Balance, which if used, must be included in the answer booklet. PRO-FORMA INCOME STATEMENT BY NATURE, INCOME STATEMENT BY FUNCTION AND BALANCE SHEET ARE PROVIDED

ACCOUNTING FRAMEWORK

NOTES

TIME ALLOWED: INSTRUCTIONS:

3.5 hours, plus 10 minutes to read the paper. 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 that candidates are expected to pay particular attention to their 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 the candidates' 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, 9 Ely Place, Dublin 2.

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

ACCOUNTING FRAMEWORK
FORMATION 2 EXAMINATION - APRIL 2007 Time allowed: 3.5 hours plus 10 minutes to read the paper Answer question 1 and three of the remaining four. Note: Students have optional use of the Extended Trial Balance, which if used, must be included in the answer booklet.

1.

(a)

List and briefly describe five desirable characteristics of published financial statements. (10 marks)

(b)

The following trial balance was extracted from the books of XYZ Industries plc. at the close of business on 31 December 2006. Debit Buildings Plant and Equipment Vehicles Retained Earnings Ordinary shares 50c each Share Premium account 10% Debentures Provision for depreciation: Buildings Plant and Equipment Vehicles Inventory Purchases Sales Trade receivables Trade payables Returns Discounts Provision for doubtful debts Bank Ordinary dividends Rent and rates Sundry expenses Wages and salaries Bad debts 5,870 3,500 69,000 16,000 386,800 10,360 3,019,070 3,019,070 3,780 10,300 85,960 51,510 4,870 15,200 3,760 127,500 865,000 1,515,800 100,000 225,000 142,750 800,000 375,000 260,000 510,180 350,000 50,000 50,000 Credit

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The following additional information is available: 1. 2. Inventory on hand at 31 December 2006: 152,350. Included in sales is an amount of 7,500 for goods sent on approval to a customer. On the 10 January 2007 the customer decided to accept part of the goods paying 4,500, and returning the balance. The mark up on the goods was 50%. Included in the sales figure is an amount of 5,000, which was the proceeds from the issue of 5,000 ordinary shares. Wages includes 20,350 paid to staff while constructing an extension to a warehouse. A customer has been declared bankrupt owing 2,060. This is to be written off. It has been decided that a 2% provision for discounts allowed should be made. The provision for doubtful debts should be 5% of trade receivables. The annual charge for rates is 30,000 and these are paid up to 30 September 2006. Depreciation is provided on assets held at the balance sheet date as follows: a) b) c) 10. Property: 2% on cost Plant and Equipment: 20% on cost Vehicles: 25% on written down value

3. 4. 5. 6. 7. 8. 9.

It is proposed to pay a final dividend on the ordinary shares of 1.5c per share.

REQUIRED: Prepare, for internal use, the income statement for the year ending 31 December 2006 and a balance sheet as at that date. Please support all accounting adjustments on the trial balance. (30 Marks) [Total: 40 marks]

2.

(a)

Outline the matters dealt with in the Memorandum of Association and Articles of Association of a company. (5 marks) Apart from the normal accounting records companies are required by law to keep other records and registers known as statutory books. Name and give a brief description of these. (15 marks) [Total: 20 marks]

(b)

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3.

Adam, Barney and Charlie are in partnership sharing profits and losses in the ratio of 5:3:2 respectively. At the 1 May 2006 their capital and current account balances were: Capital Account 16,000 20,000 24,000 Current Account 1,160 Credit 700 Debit 420 Credit

Adam Barney Charlie

The partners are entitled to interest on capital at the rate of 5% per annum. On the 1 November 2006 Adam increased his capital by paying a further 4,000 into the partnership bank account, while Barney reduced his capital to 12,000 but left his withdrawn capital in the partnership as a loan bearing interest at 5% per annum. Partners are allowed to withdraw from current accounts at any time during the financial year but are charged interest on the amounts involved. Details of drawings made and interest chargeable in respect of each partner for the financial year ended 30 May 2007 are: Drawings 4,800 3,600 6,000 Interest on Drawings 180 60 50

Adam Barney Charlie

Barney is paid an annual salary of 5,000. The trading profit (before interest) for the year ended 30 April 2007 was 39,810. REQUIRED: For the year ended 30 April 2007 (a) (b) Prepare the profit and loss appropriation account for the partnership. Post to and balance the capital and current accounts of the individual partners. (14 marks) (6 marks) [Total: 20 marks]

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4.

The bank account for the month of March 2007 for Paper Products Ltd. was as follows:

Bank Account
March 1 1 1 12 18 Receipts Balance b/d R Moloney Garden Suppliers Ltd Hardware Ltd. John Ryan 253 57 65 1,668 2,397 March 4 5 8 10 14 18 22 25 26 27 29 31 Payments M Mulcahy J Kearney Cahill & Co. Ltd JO'Donnell KL Distributers plc M Caplice Acme Consultants P Walsh ABCplc Salaries transfers XYZ Ltd Balance cd Cheque 205 206 207 208 209 210 DD 211 SO 212 27 29 119 1,382 12 653 35 87 132 956 7 1,001 4,440

4,440 April Balance b/d 1,001

The bank statement for March 2007 was as follows: ACCOUNT STATEMENT BANK OF BREFFNI plc 95 Main Street Dundalk Date of Statement: 1 April 2007 March 1 2 4 9 12 12 14 16 17 18 23 24 26 27 28 31 31 31 Description Balance 204 203 205 DD Electricity Credit 207 208 206 Credit DD Acme Consultants 209 Standing Order Transfer Interest (Loan Account) Bank charges 210 Balance Debit 84 102 27 25 1,686 119 1,382 29 2,397 35 21 132 956 13 9 653 Credit Balance 645 561 459 432 407 2,093 1,974 592 563 2,960 2,925 2,904 2,772 1,816 1,803 1,794 1,141 1,141

Account Holder: Paper Products Ltd.

REQUIRED: Prepare the bank reconciliation statement for Paper Products Ltd. as at 31 March 2007. [Total: 20 marks]

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5.

The following are extracts from the financial statements of Wood plc: Balance sheets as at 31 December 2006. '000 '000 Non-Current assets Deferred development expenditure 107 Freehold land 1,200 Plant and machinery 390 Investments (at cost) 240 1,937 Current assets Inventory 670 Trade Receivables 410 Short term investments 114 Cash 13 1,207 Current Liabilities Trade payables 420 Taxation 55 Bank overdraft 159 634 Working capital 573 2,510 12% Debentures 2005 - 2010 (500) 2,010 Capital and reserves Share capital (50c ordinary shares) Reserves Share premium Land revaluation Retained Earnings '000 1,200 100 300 410 2,010

2005 '000

'000 93 900 423 250 1,666

580 520 56 29 1,185 375 40 436 851 334 2,000 (600) 1,400 '000 1,000 50 350 1,400

Income account for the year ended 31 December 2006. '000 Net profit before tax Tax Profit after tax Dividends Retained profit for the year Notes: 1.

'000 160 60 100 40 60

Profit for the year is after charging: Depreciation on plant and machinery Development expenditure

'000 77 6

2.

During the year plant with a net book value of 50,000 was sold for 98,000. The assets had originally cost 200,000. Debentures were redeemed on 30 June 2006.

3.

REQUIRED: Prepare a cash flow statement for Wood plc for the year ended 31 December 2006. [Total: 20 marks] END OF PAPER

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SUGGESTED SOLUTIONS
THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

ACCOUNTING FRAMEWORK
FORMATION 2 EXAMINATION - MAY 2007 Solution 1 (a) 1. Relevance: Information in financial statements is relevant when it influences the economic decisions of users. It can do that both by (a) helping them evaluate past, present, or future events relating to an enterprise and by (b) confirming or correcting past evaluations they have made. 2. Materiality is a component of relevance. Information is material if its omission or misstatement could influence the economic decisions of users. Timeliness is another component of relevance. To be useful, information must be provided to users within the time period in which it is most likely to bear on their decisions. Understandability: Information should be presented in a way that is readily understandable by users who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently. Too much detail can be as much a defect as too little. Reliability: Information in financial statements is reliable if it is free from material error and bias and can be depended upon by users to represent events and transactions faithfully. Information is not reliable when it is purposely designed to influence users' decisions in a particular direction. The users should have confidence that the information is correct, and that there are no material errors. Completeness: All material transactions or circumstances should be recorded so that the user gets a full picture of an enterprise's position and performance. Objectivity: The information presented should not be distorted by the wishes of those presenting it. The application of accounting standards which are neutral as between competing interests should enhance objectivity. Timeliness: Financial statements should be produced and issued while the contents are still relevant to users. Comparability: Users must be able to compare the financial statements of an enterprise over time so that they can identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises. Disclosure of accounting policies is essential for comparability.

3.

4.

5.

6.

7.

8.

9.

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(b) XYZ Industries Ltd Trading and profit and loss account for the year ending 31 December 2006. Sales less returns Cost of sales Inventory 1/1/06 Purchases less returns less stock 31/12/06 Gross Profit Discounts received Discounts allowed Rent and rates Sundry expenses Wages and salaries Bad debts Provision for doubt debts Provision for discounts Depreciation: Buildings Plant and equipment Vehicles Debenture interest Net Profit Dividends: Ordinary Retained Balance b/f Balance c/f

1,503,300 3,780 1,499,520

127,500 865,000 4,870 860,130 987,630 157,350

830,280 669,240 15,200 684,440

10,300 76,500 16,000 366,450 12,420 60 1,452 16,407 75,000 29,313 5,000

608,902 75,538 3,500 72,038 510,180 582,218

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XYZ Industries Ltd Balance sheet as at 31 December 2006. Non current assets Buildings Plant and machinery Vehicles Current assets Inventory Trade receivables Less: Provisions Bad debts Discounts Bank Equity and liabilities Ordinary share capital Share Premium account Retained earnings Total equity Non current liabilities 10% Debentures Currrent liabilities Trade payables Rent Debenture int. Total equity and liabilities Cost 820,350 375,000 260,000 1,455,350 Depreciation 116,407 300,000 172,063 588,470 157,350 76,400 3,820 1,452 703,943 75,000 87,937 866,880

5,271

71,129 5,870

234,349 1,101,229 352,500 52,500 582,219 987,219

50,000

51,510 7,500 5,000

64,010 1,101,229

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Solution 2 (a) The Memorandum of a private limited company must contain the following clauses: (1) (2) (3) (4) The name of the company. The objects of the company. A statement that the liability of its members is limited. Details of the share capital which the company is authorised to issue.

In the case of a Plc the memorandum must state that the company is a public limited company. The Articles of Association of a company govern the relationships which exists between the members of the company (the shareholders) and the company itself, between one member and the other members and other regulations. Matters dealt with include: (1) Rights of shareholders (2) The powers and duties of directors (3) Meetings (4) Borrowing powers of the company (5) Dividends and reserves (6) Accounts (7) Winding up. A company may adopt Table A which is a model set of articles contained in the Companies Act 1963. (b) (1) Register of members Gives names, addresses and amount of shares held by each shareholder. It enables those interested to establish the identities of the shareholders. Register of debenture holders Gives names, addresses and amount of debentures held. It enables those interested to establish the identities of the debenture holders. Register of charges Gives details of charges on the company. It enables those interested to establish the amounts of charges, what they have been secured on and the parties involved. Register of Directors and Secretaries Gives particulars of those concerned. Open to those interested. Register of Directors' interests in shares and debentures Gives details of shares and debentures held by directors or their close relatives. Minute Book: General meetings Gives account of items discussed and resolutions passed. Minute Book: Directors' meetings. Gives account of items discussed and decisions taken. It is not open for inspection. Record of declarations by directors of interests in company contracts. This gives details of declarations by directors of personal interests in company contracts. Its purpose is to avoid ethical problems and conflict of interest claims arising from directors having a personal interest in company business.

(2)

(3)

(4)

(5)

(6)

(7)

(8)

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Solution 3 (a) Appropriation account for the year ended 30 April 2007

Net profit b/f Add: Interest on drawings Adam Barney Charlie Less: Partnership salary (Barney) Interest on capital Adam Barney Charlie Residual profit: Adam (5/10) Barney (2/10) Charlie (3/10) Interest on capital

*39,610 180 60 50 5,000 900 800 1,200

290 39,900

7,900 32,000

16,000 9,600 6,400

32,000

Adam 5% 5% 5% 5% 5% x x x x x 16,000 20,000 20,000 12,000 12,000 x x x x 6/12 6/12 6/12 6/12 400 500

Barney

Charlie

500 300 900 800 1,200 1,200

* Interest on Barney's loan deducted. (b) Capital Accounts Adam Barney Charlie Adam Barney Charlie

1/11/06 Loan 30/4/07 Bal. c/d 20,000 20,000

8,000 12,000 20,000 24,000 24,000

1/5/06

Bal b/d

16,000 4,000 20,000 20,000

20,000

24,000

1/11/06 Bank

20,000 12,000

24,000 24,000

1/5/07 Current Accounts Charlie 1/5/06 6,000 50 1,970 8,020

Bal. b/d

Adam 1/5/06 Bal. b/d Drawings Interest on drawings 30/4/07 Bals c/d

Barney 700 3,600 60 11,040 15,400

Adam 1,160 900 16,000 18,060 13,080

Barney

Charlie 420

4,800 180 13,080 18,060

Bal. b/d Salary Interest on capital Profit

5,000 800 9,600 15,400 11,040

1,200 6,400 8,020 1,970

1/5/07 Bal. b/d

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Solution 4 Balance per cash book less items not yet debited: DD Electricity Interest (Loan Account) Bank charges 1,001 25 13 9 47 954 Error cheq No. 209 Error lodgment Hardware Ltd 9 18 9 963 Balance per bank statement less u/p cheques: 211 212 opening u/p cheque* 1,141 87 7 84

178

963

* Balance per bank statement 1/3/07 less u/p cheques 203 102 204 84 645 186 Balance per cash book 1/3/07 Items not debited: R Moloney Garden Suppliers Ltd Balance ( u/p cheque) 459 253 57 65

122 375 84 459

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Solution 5 Wood plc. Cash Flow statement for the year ended 31 December 2006. Cash flows from operating activities. Operating profit (160 + 66) Add: Depreciation charges (77 + 6) Decrease in trade receivables Increase in trade payables '000 226 83 110 45 238 48 90 138

Profit on sale of non-current assets Increase in inventories Cash generated from operations Interest paid Dividends paid Corporation tax paid Net cash generated by operating activities Cash flows from investing activities Capital expenditure Payments to acquire tangible non-current assets Development expenditure Receipts from sale of tangible non-current assets Receipts from sale of investments Net cash outflow from investing activities

100 326

(66) (40) (45)

151 175

(94) (20) 98 10 (6)

Cash flows from financing activities Issue of shares Debentures redeemed Net cash flows from financing activities Increase in cash and cash equivalents

250 (100) 150 319

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Marking scheme Question 1 2 marks for each (a) (b) Notes adjustments Income statement Balance sheet

10 20 5 5 Total 40

Question 2 (a) 5 marks (b) 2 each up to 15

5 15 Total 20

Question 3 (a) 14 (b) 6 Question 4 2 marks per adjustment up to 20 Question 5 Net operating profit operating activities net operating activities investing activities financing activities Analysis Layout and other

14 6 Total 20 20 Total 20

2 6 3 4 3 2 2 Total 20

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