Financial Acc

May 2016

1st Year Paper

Financial Accounting
1st Year Examination

May 2016
Solutions & Marking Scheme & Examiners Comments

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Fin. Accounting S2016 (FA)

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1st Year Paper

NOTES TO USERS ABOUT THESE SOLUTIONS

The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide
guidance to students and their teachers regarding possible answers to questions in our examinations.

Although they are published by us, we do not necessarily endorse these solutions or agree with the views
expressed by their authors.

There are often many possible approaches to the solution of questions in professional examinations. It should
not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative
answers will be marked on their own merits.

This publication is intended to serve as an educational aid. For this reason, the published solutions will often be
significantly longer than would be expected of a candidate in an examination. This will be particularly the case
where discursive answers are involved.

This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians
Ireland.

Accounting Technicians Ireland, 2016.

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Fin. Accounting S2016 (FA)

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May 2016

1st Year Paper

Accounting Technicians Ireland

First Year Examination: Summer 2016
Paper: FINANCIAL ACCOUNTING
Tuesday 10 May 2016
9.30 a.m. to 12.30 p.m.
INSTRUCTIONS TO CANDIDATES
PLEASE READ CAREFULLY
Candidates must indicate clearly whether they are answering the paper in accordance with the law and
practice of Northern Ireland or the Republic of Ireland.
In this examination paper the / symbol may be understood and used by candidates in Northern Ireland
to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro.
Answer ALL THREE questions in Section A and TWO of the three questions in Section B. If more than
TWO questions are answered in Section B, then only the first two questions, in the order filed, will be
corrected.
Candidates should allocate their time carefully.
All workings should be shown.
All figures should be labelled as appropriate e.g. s, s, units, etc.
Answers should be illustrated with examples, where appropriate.
Candidates may ignore any VAT implications to transactions throughout this paper unless the question
specifically instructs them to do otherwise.
Question 1 begins on Page 2 overleaf.

Note:
The terminology in use for 2016 exams will be in line with the FRS 102. In some cases this differs slightly
from the terminology previously used (IFRS). For the 2016 exams, students who use IFRS terminology
will not be penalised, however it is preferred that students use FRS 102 terminology throughout.

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1st Year Paper

May 2016

SECTION A
Answer ALL THREE QUESTIONS (Compulsory) in this Section

QUESTION 1 (Compulsory)
The following trial balance was extracted from the books of B. Buster, a sole trader, on 31 December 2015:
/
/
Buildings
200,750
Accumulated depreciation on buildings
78,210
Fixtures and fittings
154,410
Accumulated depreciation on fixtures and fittings
12,150
Delivery Vans
74,100
Accumulated depreciation on delivery vans
34,520
Inventory as at 1/1/2015
13,120
Receivables and payables
74,320
41,970
Allowance for receivables
2,150
Bank and cash
7,130
PRSI/NIC liability
3,150
Accruals
780
Sales and purchases
312,400
613,410
Returns
2,170
4,520
Discounts
1,780
2,950
Delivery van fuel
3,250
Power
6,410
Telephone and internet
7,520
Business insurance
14,420
Rates and water charges
5,250
Wages and salaries
87,135
Employers PRSI/NIC
9,160
5% Long term bank loan
135,000
Long term loan interest
3,740
Repairs on delivery vans
1,520
Irrecoverable debts
1,250
Drawings
9,100
Accumulated profits/losses
23,170
Suspense account
225
Capital
22,470
981,805
981,805

The following information, which has not been accounted for above, is also available:
1.

The inventory count as at 31 December 2015 showed the following information. Based on this
information the value of closing inventory to be incorporated into the financial statements must be
calculated.
Product
A
B
C

2.

Quantity
in Units
915
3,110
5,100

Cost per unit

/
2.10
0.90
1.45

Sales Price per unit

/
4.75
0.85
1.50

Costs to Sell per unit

/
0.35
0.15

On 30 June 2015 B. Buster paid /2,220 for his personal house insurance out of the business bank
account funds. No part of the house is used in the business.

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3.

May 2016

1st Year Paper

Rates and water charges are /350 per month. On 31 December 2015 B. Buster paid an invoice for
rates and water charges for quarter 1, 2016.

4.

B. Buster was overcharged for power during 2015. The balance in the suspense account relates to a
refund of these power expenses. The refund was debited to the bank and no other entry was made.

5.

On 30 June 2015 delivery van B was sold. Delivery van B had been purchased for /31,000 and had
accumulated depreciation of /24,455 as at 1 January 2015. /11,000 was received and lodged to the
bank for the sale of delivery van B. None of the above entries were recorded in the books and records
of B. Buster.
(See additional information at point six for depreciation policy).

6.

Allowance to be made for depreciation as follows:

Buildings

2% straight line

Fixtures and fittings

5% reducing balance

Delivery Vans

15% straight line

The depreciation policy is to charge depreciation on a monthly basis from the month of purchase to the
month of sale/disposal.

7.

B. Buster believes that the allowance for receivables is appropriate and does not need to be adjusted.

You are required to prepare:

a)

The Income Statement for the year ended 31 December 2015.

b)

The Statement of Financial Position as at that date.

11 Marks
9 Marks
Total 20 Marks

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May 2016

QUESTION 2 (Compulsory)
You have been provided with Bank Statement and the Bank T Account for S Sam for the month ended 30 April
2016.

07/04
11/04
12/04
18/04
25/04
29/04

Lodgement 51
Lodgement 52
Standing Order
Lodgement 53
Lodgement 54
Lodgement 55

30/04

Balance c/d

Bank T Account
/
3,650 01/04 Balance b/d
120 04/04 Cheque 1024
850 11/04 Cheque 1023
490 15/04 Cheque 1025
2,130 18/04 Cheque 1026
1,410 22/04 Standing Order
25/04 Cheque 1027
4,856 29/04 Cheque 1028
29/04 Cheque 1029

/
4,150
1,420
789
610
2,150
250
1,312
850
1,975

13,506
01/05

Date

Details

01/04
01/04
01/04
05/04
06/04
07/04
11/04
12/04
12/04
13/04
14/04
16/04
18/04
19/04
23/04
25/04
25/04
28/04
29/04

Balance
Lodgement 50
Cheque 1022
Cheque 1024
Quarterly charges
Lodgement 51
Lodgement 52
Cheque 1023
Credit transfer
Standing Order
ESB direct debit
Cheque 1025
Lodgement 53
Cheque 1026
Standing Order
Cheque 1027
Lodgement 54
Annual interest
Credit transfer

13,506
4,856

Balance

S Sam
Bank Statement as at 30 April 2016
DR
CR
/
/
150
2,150
1,240
202
3,560
120
789
103
850
741
610
940
2,750
250
312
2,130
16
312

Balance
/
-2,150
-2,000
-4,150
-5,390
-5,592
-2,032
-1,912
-2,701
-2,598
-3,448
-4,189
-4,799
-3,859
-6,609
-6,859
-7,171
-5,041
-5,025
-4,713

(Guidance: if the amount for the same item in the bank account and the bank statement differs you should
assume that the bank statement is correct.)
You are required to prepare:
a)
Reconcile the opening balance as per the cash book to the balance as per the bank statement.
3 Marks
b)

Prepare the corrected Bank T Account for S Sam for the month ended 30 April 2016.

c)

Prepare the Bank Reconciliation Statement as at 30 April 2016.

9 Marks

d)

4 Marks
With the aid of examples from the Bank Statement and Bank T account above, outline two reasons as
to why it is important to prepare bank reconciliations regularly. Your answer should be presented in
report format.
4 Marks
Total 20 Marks
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1st Year Paper

QUESTION 3 (Compulsory)
Answer ANY FOUR of the SIX Parts below
Part A
Prepare a note:
Describing the terms internal audit and external audit and
Outline two differences between the processes.
5 Marks

Part B
B. Blake is a sole trader. The trial balance extracted as at 29 February 2016 failed to agree. The credits
exceeded the debits by /9,210 and the difference was entered in a suspense account.
B. Blake undertook an investigation which yielded the following:
1.
2.

Purchases returns of /6,610 has been credited to the sales returns account as /6,450, the
corresponding entry was correctly treated;
A credit sale of /4,100 (excluding VAT) was recorded by debiting sales with /2,100 and crediting
receivables with /4,100. The rate of VAT tax is 15%.

You are required to:

i.
Calculate the suspense account balance after adjusting for these errors.
2 Marks
ii.

Prepare the journal entry for error 2.

3 Marks

Part C
D. Don has a term loan. The following details are available in relation to the term loan for the year ended 31
December 2015:

On 1 January 2015 D. Don owed the bank /75,000 by way of a term loan.
On 1 May 2015 D. Don borrowed an additional /20,000.
On 28 December 2015 D. Don repays /10,000 of the loan.
During the year ended 31 December 2015 the interest rate applicable on D. Dons loan was 5%.

You are required to:

i.
Prepare the Loan T Account for D. Don for the year to 31 December 2015.
2 Marks
ii.

In brief outline the difference between capital and revenue expenditure.

3 Marks

Part D
Outline your understanding of each of the error types below and state whether the error would leave the trial
balance in balance or not.

Error of omission
Error of transposition
Casting (arithmetical) error
Error of principle
Error of original entry
5 Marks

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1st Year Paper

Part E
Outline your understanding of the terms relevance and reliability as they relate to financial accounting
information. Are these characteristics of accounting information ever in conflict?
5 Marks

Part F
The following information is available for a sole trader for a financial year:
Inventory at the start of the accounting period was /9,750.
During the period, the sole trader purchased goods for resale totalling /87,200.
Purchases returns amounted to /1,210
Carriage inwards costs totalled /930.
The closing inventory at the year-end was at /8,740.
Discounts received during the year amounted to /540.
The mark up of the business during the year is 50%.
You are required to:
Calculate the gross profit made by the sole trader during the financial year.

5 Marks
Total 20 Marks

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May 2016

1st Year Paper

SECTION B
Answer any TWO of the three questions in this Section
QUESTION 4
Part A
With the aid of a relevant example outline your understanding of the prudence concept.
3 Marks

Part B
Many businesses which sell goods and services on credit use credit limits.
i.
Outline two advantages of selling goods on credit;
2 Marks
ii.

Outline your understanding of the term credit limit.

2 Marks

Part C
The following information is available for sole trader G. Dungan for the year ended 31 December 2015:
/
Draft receivables debit balances as at 31 December 2015
632,150
Allowances for receivables as at 1 January 2015
48,500
Draft irrecoverable debts written off during the year
41,210
Irrecoverable debts previously written off recovered during the year
3,520
As at 31 December 2015 G. Dungan reviewed his receivables listing and decided the following (none of these
adjustments have been reflected in the draft figures above):
An additional /11,790 of debts should be written off as irrecoverable;
G. Dungan considers that /15,380 of debts should be made the subject of a specific allowance;
The general allowance for receivables should be set at 5% of the remaining receivable balances.

You are required to:

Prepare the following for G. Dungan for the year ended 31 December 2015:
i.

The allowance for receivables T account;

ii.

Irrecoverable debts expense T account;

iii.

Outline your understanding of why businesses set up specific allowance for receivables;

5 Marks
2 Marks

iv.

2 Marks
Prepare appropriate extracts from the Current Asset Section of the Statement of Financial
Position and the Expenses Section from the Income Statement.
4 Marks
Total 20 Marks

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Fin. Accounting S2016 (FA)

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May 2016

1st Year Paper

QUESTION 5
The assets and liabilities of Green Lawns Tennis Club as at 1 April 2015 and the 31 March 2016 include the
following:
1 April 2015
31 March 2016
/
/
Courts and clubhouse
324,410
324,410
Fixtures and fittings cost
21,110
?
Fixtures and fittings accumulated depreciation
4,150
?
5% long term loan
175,000
?
Bar inventory
18,410
20,700
Bar payables
13,540
14,740
Insurance prepaid
3,150
2,750
Annual subscriptions in arrears
47,960
51,330
Annual subscriptions in advance
3,750
4,970
Bar wages due
2,875
3,150
Life subscriptions fund
120,000
?
The bank T account is as follows:

Members subscriptions (all annual)

Bank interest
Bar receipts
Annual dinner dance ticket sales
Fees from non-members

Balance b/d (1/4/16)

Bank Account
/
94,410 Balance b/d (1/4/2015)
107 Advertising for dinner dance
121,150 General repairs & expenses
17,630 Payments to bar payables
9,450 Payments for bar wages
Loan interest
Power & Internet
Repayment of loan principle (31/3/2016)
Fixtures and fittings
Insurance
Catering for dinner dancer
General expenses for dinner dance
Bank charges
Balance c/d
242,747
32,167

/
32,100
515
29,140
51,760
45,350
7,000
6,190
10,500
3,150
18,120
4,175
2,220
360
32,167
242,747

Additional Information
The life subscription fund relates to a once off deal that was offered to members in 2013 to help part
finance an extension to the clubhouse. The value of the life membership fund originally was
/150,000 and is being credited to the income and expenditure account over 10 years.
Fixtures and fittings are being depreciated at 10% p.a. on the straight line method. During the financial
year /3,150 of additional fixtures and fittings were purchased. The clubs depreciation policy is to
charge a full year of depreciation in the year of purchase and none in the year of sale. The courts and
clubhouse are not depreciated.

You are required to:

i.
Calculate the accumulated fund as at 1 April 2015.
3 Marks
ii.

Prepare the Bar Trading account for the year ended 31 March 2016.

iii.

Calculate the profit/loss of the dinner dance.

iv.

Prepare the Income and Expenditure Account for the year ended 31 March 2016

5 Marks
2 Marks
10 Marks
Total 20 Marks

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1st Year Paper

May 2016

QUESTION 6
Part A
The following books of prime entry are available for a sole trader for the month of March 2016.

Purchases Day Book

Date
Analysis
03-March Goods for resale
19-March Goods for resale

Purchase Returns Day Book

Date
Analysis
11-March Goods for resale

Sales Day Book

Date
Analysis
9-March Sale of goods
24-March Sale of goods

Sales Returns Day Book

Date
Analysis
28-March Sale of goods

Cheque Payments Book

Date
Analysis
7-March Payables
19-March VAT
28-March Fixtures & Fittings

Cash Receipts Book

Date
Analysis
16-March Receivables

Total
/
6,050
4,125
10,175

Total
/
1,298
1,298

Net
/
5,500
3,750
9,250

VAT
/
550
375
925

Net VAT
/
/
1,180 118
1,180 118

Total
/
1,375
21,890
23,265

Net
/
1,250
19,900
21,150

VAT
/
125
1,990
2,115

Total
/
2,365
2,365

Net
/
2,150
2,150

VAT
/
215
215

Total
/
15,250
6,410
5,420
27,080

VAT
/
6,410

Payables
/
15,250

6,410

15,250

Total
/
18,210
18,210

NCA
/

5,420
5,420

Receivables
/
18,210
18,210

You are required to:

Post the books of prime entry above to the relevant T accounts and balance these T accounts. (Guidance: please
note that some closing balances may appear unusual as you have not been given opening balances above)
8 Marks

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May 2016

QUESTION 6 (Contd)
Part B
The following information is available for sole trader C. Connor for the year ended 31 December 2015:

Opening receivables debit balances

Opening receivables credit balances
Sales (90% credit, 10% cash)
Sales returns (90% credit, 10% cash)
Cash received from customers (92% from credit customers)
Irrecoverable debts
Irrecoverable debts previously written off recovered (these
funds have been included in cash receipts above)
Opening allowance for receivables
Contra entry with balances on payables ledger
Interest charged on over-due accounts
Discount allowed
Closing receivables credit balances

/
101,740
2,320
1,074,600
21,110
995,600
16,150
1,170
17,620
4,320
930
1,785
1,510

Included in the cash received from credit customers above was a cheque for /3,125 which was dishonoured.
C. Connor does not believe that this debt is irrecoverable.
Requirement:
With the aid of a receivables control account, calculate the closing receivables figure for C. Connor as at 31
December 2015.
9 Marks

Part C
Outline any two of the purposes of Control Accounts within the financial accounting process.
3 Marks
Total 20 Marks

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Financial Acc

1st Year Paper

May 2016

1st Year Examination: May 2016

Financial Accounting
Suggested Solutions
and
Examiners Comments
Students please note: These are suggested solutions only; alternative answers may also be deemed to be
correct and will be marked on their own merits.

Statistical Analysis By Question

Question No.
Average Mark (%)

1
68%

2
59%

3
53%

4
42%

5
61%

6
59%

Nos. Attempting

1190

1127

1179

716

714

817

Statistical Analysis - Overall

65%
Pass Rate
56%
Average Mark
Range of Marks
Nos. of Students
0-39
298
40-49
124
50-59
216
60-69
211
70 and over
347
Total No. Sitting Exam
1196
290
Total Absent
37
Total Approved Absent
1523
Total No. Applied for Exam

General Comments:

GENERAL COMMENTS ON THE PAPER OVERALL:

Weak scripts were characterised by two main issues:
1.) Not all questions answered
Often but not always this was a result of candidates spending too much time on Q1 or
answering all 6 parts of Q3 despite the instructions clearly stating to only answer 4 parts.
2.) Poor knowledge meaning parts of questions were left blank in particular question 2.
3.) Failed to show workings for questions, particularly question 1.
4.) Concentration on theory parts of questions with little or no attempt at calculations.
5.) Performance in Q2 & Q4 was very disappointing.
Candidates should be reminded of the need to revise the entire syllabus in preparation for their exam
and to follow the instructions given by the examiner on the paper.

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1st Year Paper

May 2016

Examiners Comments on Question One

Generally this question was well answered.

Candidates struggled in the following areas:
Calculation of the closing inventory. Candidates are valuing all inventory items at cost or
NRV as opposed to taking inventory items by category.
Failed to adjust business insurance in the Statement of Profit and Loss.
Failed to account for the interest accrual.
Calculation of the profit on the sale of the TFA. Many failed to even attempt this calculation.
Calculation of the depreciation on delivery vans.
Also of concern was that a number of candidates who calculated depreciation for the year
but failed to include it in the Statement of Profit and Loss indicating that they were focused
solely on the impact on accumulated depreciation.
Treated the accumulated profit/loss reserve as a loss in error.
Included allowance for receivables as an expense.
Solution One
B. Buster
Statement of Profit and loss for the year ended 31 December 2015

Ref to
Workings

0.25 Marks

Sales
Sales returns
Net sales

613,410
(2,170)
611,240

Cost of sales
Opening inventory
Purchases
Purchases returns

Less closing inventory

Cost of sales
Gross Profit
Discount received
Less Expenses
Depreciation buildings
Depreciation fixtures and fittings
Depreciation delivery vans
Business insurance
Rates and water charges
Delivery van fuel
Delivery van repairs
Wages and salaries
Employers PRSI/NIC Costs
Discount allowed
Telephone and internet
Irrecoverable debts
Interest
Profit on sale of TFA
Power
Total expenses

13,120

0.25
0.5
0.5

312,400
(4,520)

307,880
321,000
(11,450)

0.25
(309,550)
301,690
2,950

6
6
6
2
3

7
5
4

Total
Marks
Allocated
0.5
0.5

4,015
7,113
8,790
12,200
4,200
3,250
1,520
87,135
9,160
1,780
7,520
1,250
6,750
(6,780)
6,185

0.5

0.75
0.75
1
0.5
0.5
0.25
0.25
0.25
0.5
0.5
0.25
0.25
0.5
1
0.5
(154,088)

Operating profit

150,552

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1st Year Paper

May 2016

Solution One (Contd)

B. Buster
Statement of financial position as at 31 December 2015
Non-current assets

Buildings
Fixtures and fittings
Delivery vans

Current assets
Closing inventory
Receivables
Closing allowance
Prepayments
Cash and bank

Ref to
Workings

5&6

0.25 Marks
/

200,750
154,410
43,100

(82,225)
(19,263)
(16,530)

118,525
135,147
26,570
280,242

11,450
74,320
(2,150)

3
5

Total
Marks
Allocated

0.5
0.5

1.5
0.25
0.25
0.5
1

72,170
1,050
3,870
88,540

Total assets
Equity and Liabilities
Equity
Capital
Accumulated profit/loss
Profits for 2015
Accumulated profits
Drawings

368,782

22,470
23,170
150,552
196,192
(11,320)

0.5
0.5
0.5
0.75
184,872
135,000

Non-current liabilities
Current liabilities
Payables
Accruals
PRSI/NIC liability

41,970
3,790
3,150

0.5

0.5
0.5
0.5
48,910

Total Equity and Liabilities

368,782

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May 2016

Solution One (Contd)

Working 1
Product Quantity

A
B
C

in Units
915
3,110
5,100

Lower of cost & NRV

per unit
/
2.10
0.85
1.35

1st Year Paper

Total
/
1,921.5
2,643.5
6,885
11,450

Workings 2
Drawings as per TB
Drawings of insurance
Restated drawings

/
9,100
2,220
11,320

Insurance as per TB
Drawings
Restated insurance

/
14,420
(2,220)
12,200

Workings 3
Quarter 1 is January to March 2016 = 350*3 = 1,050 of a prepayment
/
Rates and water charges as per TB
5,250
Prepayment
(1,050)
Restated rates and water charges
4,200
Workings 4
/
6,410
(225)
6,185

Power as per TB
Refund of charges

Workings 5
Delivery Van B purchase price
Delivery Van B depreciation 6 months 2015
Delivery Van B accumulated depreciation 1/1/15
NRV
Sold for
Profit

Bank as per TB
Delivery van receipts
Restated bank

/
31,000
(2,325)
(24,455)
4,220
11,000
6,780
/
(7,130)
11,000
3,870

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May 2016

1st Year Paper

Solution One (Contd)

Workings 6
Buildings
Depreciation

/
200,750
2%
4,015

Delivery van B
Depreciation
Annual
6 Months

/
31,000
15%
4,650
2,325

Remaining delivery vans

Depreciation
Annual

/
43,100
15%
6,465

Total depreciation 6,465 + 2,325 = 8,790

Accumulated depreciation delivery vans

Accumulated on delivery van sold
Depreciation

Fixtures and fittings

Accumulated depreciation
Deprecation

/
34,520
(24,455)
6,465
16,530

/
154,410
(12,150)
142,260
5%
7,113

Workings 7
Loan
Annual interest
Paid
Accrual

/
135,000
5%
6,750
(3,740)
3,010

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May 2016

Examiners Comments on Question Two

This question was very poorly answered and for many candidates who failed a poor performance in
this question was a significant factor. There appears to be evidence of question spotting here by many
candidates. Bank reconciliation statements are generally very well answered by candidates. However,
this question type has not been asked as a full question in several sittings and it appears that many
candidates did not prepare/omitted this section of the syllabus.
Some significant areas of concern were as follows:
Many candidates could not make a meaningful effort for this question
Part A was very challenging, many candidates appeared not to know how to attempt this part
For Part B many candidates prepared the cashbook from scratch as opposed to the corrected
cash book as requested in the examination. Mark were no deducted for this however this
was an example of poor examination strategy as preparing the cashbook from scratch was
time consuming.
Part D some candidates are not preparing their answer in the format requested.
Where this question was answered well candidates were generally on their way to passing the exam.

Solution Two
Part A
/
(2,150)

Opening balance as per bank balance

Total Marks
Allocated
1

150

(2,150)
(4,150)

Add outstanding Lodgement

Less O/S Cheques
1022
Balance as per Bank T Account

3 Marks

Part B
Corrected Bank T Account

Part B
Total
Marks
Allocated
1
0.5
1
1
0.5
0.5

Corrected Bank T Account

/

Error: cheque 1024

Credit transfer
Lodgement 53
Error: cheque 1027
Interest
Credit transfer
Corrected balance

180
103
450
1,000
16
312
6,128

01/05

Balance b/d
Charges
Error: Lodgement 51
Standing order error
ESB - DD
Cheque 1026

4,856
202
90
1,700
741
600

01/05

Corrected balance

8,189
6,128

8,189

Total
Marks
Allocated
0.5
0.5
1
1
0.5
1

9 Marks

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Part C
Bank Reconciliation as at 30 April 2016

0.5 Marks

/
(4,713)

Balance per bank

Add outstanding Lodgement 55

1,410

Total Marks
Allocated
1
1

Less O/S Cheques

1028
1029

0.5
0.5

850
1,975
(2,825)
(6,128)

Balance

0.5
4 Marks

0.5 Mark for/6,128 is for having the bank rec and cashbook account reconcile to the same number.
Part D
To:
From:
Subject:
Date:

Whom it May Concern

An Accounting Technician
Importance of Preparing Bank Reconciliations
May 2016

I have been asked to prepare a report outlining the importance of regular preparation of bank
reconciliations. It is important for all businesses to prepare regular bank reconciliations for the
following reasons:

Preparation of regular bank reconciliations will help to identify errors, such errors may have
been made either by the bank, the sole trader or both. For example, a business may have
omitted to post receipts from customers. In the above example there were credit transfers
which the business would not be aware of until preparing the bank reconciliation statement.
Preparation of bank reconciliation will also highlight items such as bank interest, charges,
standing orders, direct debits and dishonoured cheques. These will be known by the bank but
not identified by a business until it receives the bank statement and prepares the bank
reconciliation. Bank charges of 202 would not have been known to the sole trader until the
bank reconciliation was prepared.

Should you have any further queries please feel free to contact me.
An Accountant Technician
1 Mark for format, 1 Mark for each reason and 0.5 Mark each example
4 Marks
Total 20 Marks

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Examiners Comments on Question Three

Part A
This question part was not well answered. Some candidates described management accounting when
describing internal audit. The explanation of internal audit in the main was very vague and candidates
struggled to score marks with many candidates simply talking around internal audit being an internal
function. External audit was better explained. Many candidates did not include the differences
between internal and external audit.
Part B
Not well answered. The suspense account was completed incorrectly by many candidates. Candidates
also struggled to provide the correct journal entry.
Part C
A popular question part that was well answered. Many candidates included interest in the loan T
account in error. Part ii was well answered though most candidates failed to realise that the loan was
a capital item and the interest a revenue item from part I of the question.
Part D
Answers were mixed with some candidates having prepared this well. Some explained the error type
and then omitted to state whether it left the trial balance in balance or not.
Part E
Very unpopular question which was in the main poorly answered by those that attempted it.
Part F
Well answered although a number of candidates made no attempt to calculate the mark up or simply
doubled the cost of sales which indicated they did not understand the mark up of 50% instruction.
Perhaps more worryingly some students labelled the cost of sales as gross profit which indicated their
grasp of the basics of this subject is not what it should be.

Solution Three
Part A
External Audit
An external audit is where an independent accountant, an auditor, examines the books and records of the
company with the objective of forming an opinion and prepares an audit report that must be included in the
financial statements. If the auditors are satisfied that the books and financial statements of the company have
been prepared in line with the relevant statutory requirements and professional standards, the audit report will
state that the financial statements of the company gives a true and fair view of the state of affairs of the
company at the end of the accounting year. The audit report gives shareholders an impression as to the extent to
which they can rely upon the financial statements prepared and presented to them by the directors.
1.5 Marks
Internal Audit
Large companies in addition to external auditors tend to have an internal audit department. This is because in
order to run a company effectively and meet their legal responsibilities, directors need assurance in a number of
areas in addition to the accuracy of their published financial statements (external audit). Internal audits help
directors confirm that the internal controls and procedures of entities are adequate and working appropriately. It
is becoming more expected for large companies to have internal auditors.
1.5 Marks

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Differences
External auditors are appointed by shareholders and answer to them. Internal auditors are employed by
and answer to the companys management.
Internal auditors have a deeper focus when compared to external auditors. For example an internal
auditor will scrutinise the companys accounting procedures.
There is a legal requirement for most companies to conduct an annual external audit. Internal audit
functions are generally only required by PLCs.
Any other relevant difference will be accepted for full marks

2 Marks
Part B (i)

Total
Marks
Allocated
Suspense account balance
0.5
0.75 Error 1

Suspense Account
/

/ Total Marks
Allocated

9,210 Error 2
160 Adjusted suspense account
balance

2,000
7,370

9,370

9,370

0.75

2 Marks
(ii)
Debit

Credit

/
4,100

Total
Marks
Allocated

Dr
Cr
Cr

Receivables
Sales
Suspense

2,100
2,000

0.5
0.5
0.25

Dr
Cr
Cr

Receivables
4,715
Sales
4,100
VAT
615
Being the correction of error. Credit sales incorrectly posted.

0.5
0.5
0.5
0.25
3 Marks

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Part C
(i)
Total
Marks
Allocated
0.5
0.5

Loan Account
/

Loan repayment
Balance

10,000
85,000
95,000

1/1/15
1/5/15

Opening Balance
Additional Loan

1/1/16

Balance

75,000
20,000
95,000
85,000

Total
Marks
Allocated
0.5
0.5

2 Marks

(ii)
Capital Expenditure: this is expenditure on goods that will last for more than one year and are not bought for
resale but to be used by the business to help generate sales. Examples include premises, equipment, delivery
vans etc. That is capital expenditure is expenditure on non-current assets or the repayment of loans.
Revenue (Current) Expenditure: this is expenditure on goods that will be used up within one year and are not
bought for resale. They relate to the day-to-day running of the business and are incurred in the for the purpose
of the trade of the business. Examples include wages, rent, rates, telephone etc.
3 Marks

Part D
Error of omission is where a transaction is completely omitted from the books. The trial balance will remain in
balance.
Error of transposition this is where there is a debit and a credit entry but they are not the same. The trial
balance will not balance.
Casting error this is where a numerical error has occurred in the balancing process. The trial balance will not
balance.
Error of principle is where an item is entered into the wrong class of accounts. The trial balance will remain in
balance.
Error of original entry is where the original figure used to make the double entry is incorrect. The trial
balance will remain in balance.
5 Marks
Part E
Relevance
Information is relevant if it has the ability to influence an economic decision of users and is provided in time to
influence those decisions. To be useful information must be provided within the time period in which is has the
ability to influence the economic decisions of users.
1.5 Marks
Reliable
Financial accounting information is generally taken as reliable if: it can be depended upon to represent a true
and fair view, is free from bias, is free from material error, is complete and under conditions of uncertainty has
been prepared in line with the prudence concept.
1.5 Marks

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Relevance in conflict with Reliability

The information that is the most relevant many not necessarily be the most reliable and vice versa. For example
the historical cost versus current cost account. While the historical cost of a building is the most reliable it may
not be the most relevant if the building was purchased several years ago. However while the current value of
the building may be the most relevant for inclusion in financial statements it may not be the most reliable given
that the current value will, in all probability, come from a valuation of the property which ultimately is based on
the opinion of a property valuer.

The general rule here is that the information that is the most relevant or whichever information is reliable
should be included in the financial statements. Thus unreliable information should never be included.
2 marks
5 Marks
Part F
/

Sales
Cost of sales
Opening inventory
Purchases
Purchases returns
Carriage inwards

Total
Marks
Allocated

131,895

9,750
87,200
(1,210)

Less closing inventory

Cost of sales (100%)
Gross Profit (50% mark up on cost)
Discount received

0.5
0.5
0.5
0.5

85,990
930
96,670
(8,740)

0.5
(87,930)
43,965
540

5 Marks
0.5 Mark for leaving out discount received from the calculation
2 Marks for the process and procedure to calculate gross profit.
Total 20 Marks

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Examiners Comments on Question Four

Part A
Solutions to the prudence theory question were mixed.
Part B
Selling on credit and credit limit were both reasonably well explained, though some candidates for
credit limit stated that it was the amount of time customers before paying in error.
Part C
(i)
The calculation of the allowance for receivables was mixed. Some candidates re-wrote off
irrecoverable debts previously written off in error while others were not aware of how to handle the
specific allowance.
(ii)
Specific allowances theory was not well explained with a lot of candidates explaining allowances in
general and not distinguishing between a specific and general allowance.
There were easy marks for the extracts which were often picked up by the students who attempted it.
A significant number of the students that attempted this question did not answer all parts of the
question.
Solution Four
Part A
Prudence
In conditions of uncertainty, a cautious approach should be taken, so that gains and assets are not overstated
and losses and liabilities are not understated. This means that:

Sales and profit should not be included in the statement of profit and loss until the cash has been
received or that there is reasonable certainty that the cash maybe received.
In contrast, losses should be recognised in the statement of profit and loss as soon as they are
foreseen and considered reasonably certain.

An example of prudence can be seen in the allowance for receivables. As at the year end the entity does not
know which receivables will not be able to pay the balances due. If it did these balances would need to be
written off as irrecoverable debts. However based on past experience and knowledge of the economy the entity
knows that in all probability not all receivables will be able to discharge the balances owed. The entity therefore
sets up an allowance for receivables to reflect balances that the entity expects not to receive and this is deducted
from receivables in the statement of financial position. Therefore the figure reported for receivables can be
thought of as the funds the entity expects to receive as opposed to the total balances owed as at the year end.
Prudence should only be used under conditions of uncertainty. Where there is no uncertainty there is no
justification to use prudence.
3 Marks (2 for explanation and 1 Mark for example)

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Part B
(i)

Advantages of selling goods on credit

The business customer base may increase (increased sales)

It helps improve the business cash flow by increasing sales, if the cash is collected on time from
receivables

It helps build a relationship with the customer in the long run.

(Any two of these advantages or other relevant advantages)
2 Marks

(ii)

Credit Limit

It is normal practice for businesses to set credit limits for individual customers. A credit limit is the max
amount of credit that the business is willing to offer to a customer and credit limits will vary from customer to
customer. If a customer uses a credit limit wisely the credit limit can be extended over time, giving the
receivable access to interest free credit. It is the function of the credit control department to set credit limits.
The major function of credit limits is that they should help to reduce the risk of irrecoverable debts for a
business.
2 Marks

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Solution Four (Contd)

Part C
/

Draft receivables debit balances as at 31 December 2015

Additional irrecoverable debt
Restated receivables

632,150
(11,790)
620,360

Total
Marks
Allocated
0.5
1

General Allowance workings

/
620,360
(15,380)
604,980
5%
30,249
15,380
45,629
(48,500)
2,871

Restated receivables
Specific allowances
General Allowance
Closing general allowance
Specific allowance
Total closing allowance
Opening allowance for receivables
Decrease in allowance for receivables

0.75

0.5
0.75
0.5

(i)

Total
Marks
Allocated

4.5

Details

Statement of P&L
Balance c/d

Allowance for receivables T Account

/ Details

2,871
45,629
48,500

Balance b/d

48,500

Balance c/d

48,500
45,629

Total
Marks
Allocated

0.5

0.5 Mark for balancing the account

4.5 Marks for /2.871 broken down above

(ii)
Total
Marks
Allocated
0.75
0.75

Details

Receivables
Receivables

Irrecoverable Debt Expenses T Account

/ Details

41,210
11,790

Allowance for rec.

2,871

Statement of P&L

50,129
53,000

53,000

Page 26 of 34

Total
Marks
Allocated
0.5

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May 2016

(iii)
A specific allowance is set up when a business has a specific concern that a debt owed by a receivable may not
be recoverable. The business may have knowledge that the receivable is having financial difficulty, the debt
may have been owed for a long period of time or the receivable may be disputing the balance owed. Therefore a
key difference between the general allowance and the specific allowance for receivables is that the specific
allowance will be tied to a list of specific receivables as opposed to the general population of receivables.
2 Marks
Solution Four (Contd)
(iv)
D. Dungan
Statement of Profit and Loss for the year ended 31 December 2015 (Extract)
Total
Marks
allocated
Less Expenses
Irrecoverable debts
50,129
1
Irrecoverable debts recovered
(3,520)
1
(Irrecoverable debts and movement in the allowance for receivables can be shown separately).

D. Dungan
Statement of financial position as at 31 December 2015 (Extract)
Current assets

Receivables
Allowances for receivables

620,360
(45,629)
574,731

Total
Marks
allocated
1
1
4 Marks
Total: 20 Marks

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Examiners Comments on Question Five

In general, this question was well answered and a significant number of students scored heavily.
Where challenges did arise was around the treatment of insurance, the calculation of bar wages and
bar purchases and the release of one year of the life subscription.
Some students incorrectly calculated the value of accumulated funds at 31 March 2016 rather than the
opening accumulated funds at 1 April 2015 as was required.

Solution Five
Part i

Assets
Court and clubhouses
Fixtures and fittings
Fixtures and fittings (accumulated depreciation)
Bar inventory
Subscriptions in arrears
Insurance prepaid

1/4/2015

1/4/2015

324,410
21,110
(4,150)
18,410
47,960
3,150

Total
Marks
Allocated

0.25
0.25
0.25
0.25
0.25
0.25
410,890

Liabilities
Bar payables
Subscriptions in advance
Bar wages due
5% long term loan
Bank
Life subscriptions fund

13,540
3,750
2,875
175,000
32,100
120,000

0.25
0.25
0.25
0.25
0.25
0.25
(347,265)
63,625

Opening Accumulated Fund

3 Marks
Part ii
Green Lawns Tennis Club
Bar Trading Account for the year ended 31 March 2016.
/

Sales

121,150

Cost of sales
Opening inventory
Purchases

18,410
52,960
71,370
(20,700)

Less closing inventory

Cost of sales
Gross Profit
Less expenses
Bar wages
Bar profit

0.5 Mark
Total
Marks
Allocated
0.5

0.5
1.5
0.5
(50,670)
70,480
(45,625)
24,855

1.5
5 Marks

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Working 1
Marks above broken down as follows:
Total
Marks
Allocated
Bank
0.5
Balance c/d
0.5

Bar Payables A/C

/

Total
Marks
Allocated
13,540
0.5
52,960
66,500
14,740
/

51,760 Balance b/d

14,740 Bar Trading Account Purchases
66,500
Balance b/d

Solution Five (Contd)

Working 2
Marks above broken down as follows:
Total
Marks
Allocated
Bank
0.5
Balance c/d
0.5

Wages A/C
/

45,350 Balance b/d

3,150 Bar Trading Account
48,500
Balance b/d

Part iii
Dinner Dance

Proceeds
Advertising
Catering for dinner dancer
General expenses for dinner dance

Total
Marks
Allocated
2,875
0.5
45,625
48,500
3,150
/

17,630
(515)
(4,175)
(2,220)
10,720

Total
Marks
Allocated
0.5
0.5
0.5
0.5
2 Marks

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Part iv
Green Lawns Tennis Club
Statement of Profit and Loss for the year to 31 March 2016
/

Income
Subscriptions
Release of one year life subscriptions
Profit on bar
Interest received
Proceeds of dinner dance
Fees from non-members

96,560
15,000
24,855
107
10,720
9,450
156,692

Expenditure
Power and internet
Bank charges
Insurance
Loan interest
General repairs and maintenance
Depreciation fixtures and fittings

6,190
360
18,520
8,750
29,140
2,426

0.5 Mark
Total
Marks
Allocated
2.5
1
0.5
0.5
0.5
0.5

0.25
0.25
1.5
1
0.5
0.5
(65,386)
91,306

Excess of income over expenses

10 Marks
Total: 20 Marks
0.25 Mark if no accrual for loan interest is calculated.

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Solution Five (Contd)

Workings
Marks above broken down as follows:
Total
Marks
Allocated
0.5
0.5

Details

Opening subs in arrears

I/E value for subs
Closing subs in advance
Opening subs in arrears

Total
Marks
Allocated
0.5
0.5

47,960
96,560
4,970
149,490
51,330

Details

Opening subs in advance

Cash received for subs
Closing subs in arrears
Opening subs in advance

Insurance Account
/ Details

Details

Opening balance
Bank

3,150
18,120

Opening balance

21,270
2,750

Income and Exp A/C

Closing balance

3,750
94,410
51,330
149,490
4,970

18,520
2,750

Total
Marks
Allocated
0.5
0.5
0.5

Total
Marks
Allocated
0.5

21,270

Loan Interest Working

Loan principle
Interest at 4%
Loan interest paid
Loan interest to be accrued

/
175,000
5%
8,750
7,000
1,750

Depreciation on fixtures and fittings

Fixtures and fittings
Depreciation

Fixtures and fittings additions

Depreciation
Annual

/
21,110
10%
2,111

/
3,150
10%
315

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Examiners Comments on Question Six

This question was also particularly well answered by those who attempted it.
Some candidates were not familiar with how to treat the VAT element when posting to the T
Accounts.
The control account part of the question was again generally well answered.

Solution 6
Part A
Payables A/C
/
1,298 Purchases book
15,250 Balance c/d

Purchases returns
Cheque payments

16,548
6,373

Balance b/d

/
10,175
6,373
16,548

1.5 Marks (0.5 per entry)

Receivables A/C
/
23,265 Sales returns book
Cash receipts book
Balance c/d
23,265
2,690

Sales book

Balance b/d

/
2,365
18,210
2,690
23,265
1.5 Marks (0.5 per entry)

Purchases book
Sales returns
Cheque payments

VAT
/
925 Purchases returns
215 Sales book
6,410 Balance c/d

Balance b/d

7,550
5,317

/
118
2,115
5,317
7,550
2.5 Marks (0.5 per entry)

Cheque payments

Fixtures and Fittings Account

/
5,420

0.25 Mark (0.25 per entry)

Cash receipts book

Balance b/d

Bank
/
18,210 Cheque payments
8,870
27,080
Balance c/d

Page 32 of 34

/
27,080
27,080
8,870
0.5 Mark (0.25 per entry)

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May 2016

Receivables

Sales Returns Account

/
2,150

0.25 Mark (0.25 per entry)

Purchases Returns Account

/
Payables

/
1,180
0.25 Marks (0.25 per entry)

Sales Account
/
Sales book

/
21,150
0.25 Marks (0.25 per entry)

Purchases book

Purchases Account
/
9,250

8 Marks
0.25 Mark (0.25 per entry)
0.75 Mark to be awarded based on balancing T accounts & general presentation. Not every T account
needs to be balance. But students must have shown with at least one T account that they
know how to balance the

Part B

Receivables Control Account

/

Total Marks
Allocated
0.5
1
1
0.5
0.5
1

Balance b/d.
Credit Sales
Irrecoverable debts, recovered
Interest charged
Dishonoured cheques
Balance c/d
Balance b/d

101,740 Balance b/d

967,140 Sales returns
1,170 Cash receipts
930 Irrecoverable debts
3,125 Contra
Discounts allowed
1,510 Balance c/d
1,075,615
116,089 Balance b/d

2,320
18,999
915,952
16,150
4,320
1,785
116,089
1,075,615
1,510

Total
Marks
Allocated
0.5
1
1
0.5
0.5
0.5

9 Marks
0.5 Marks for leaving out opening allowance for receivables

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Part C
Any two of the following purposes of control accounts
The function on control accounts is to keep the nominal ledger free of details and yet have the
receivables and payables balances for the Trial Balance.
They are a means of proving the accuracy of the ledger accounts of receivables and payables. Control
accounts help to locate errors and mistakes within the nominal ledger system
Control accounts can help calculate missing figures in the case where an business had not maintained
complete records.
Control accounts tend to act as an internal check as the individual who prepares the control account is
not normally the person who posts entries to the personal ledgers.

Any two for full marks or any other valid reason

3 Marks
Total: 20 Marks

Page 34 of 34