B7AF102

QQI
BA (HONS) ACCOUNTING & FINANCE

SUMMER 2020 EXAMINATIONS

Module Code: B7AF102

Module Description: Financial Accounting

Examiner: James Browne

Internal Moderator: Andrew Quinn

External Examiner: Eoin Langan

Date: Tuesday, 5th May 2020

Time: 09:30-12:30

INSTRUCTIONS TO CANDIDATES
Time allowed is 3 hours
Section A: Compulsory question, 25 marks.
Section B: Compulsory. Answer ALL questions, total 45 marks.
Section C: Answer ANY TWO questions, 15 marks each.
Total: 100 marks.

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Section A: COMPULSORY

Question 1

The following trial balance has been extracted from the financial records of Lightening
Co as at 31 December 2019:

€000 €000

Property – at valuation 1 Jan 2019 (Note (i)) 28,000

Plant and equipment – at cost (Note (i)) 12,000
Plant and equipment – accumulated depreciation as at 1 Jan 2019 2,400
Investment property – at cost 1 Jan 2019 (Note (ii)) 5,000
Inventory at 31 December 2019 19,000
Trade receivables and trade payables 41,500 22,000
Bank 250
Provision for bad debts (Note (iii)) 1,800
Revenue 355,800
Cost of sales 225,300
Distribution costs 51,000
Administration costs 61,000
Interest paid on long term loan 300
Interest on bank overdraft 20
Equity dividend paid 3,000
Proceeds of ordinary share issue (Note (vi)) 4,800
Equity shares (€0.50) 20,000
Share premium 6,000
Long term loan (Note (iv)) 10,000
Retained earnings at 1 Jan 2019 22,490
Income tax provision 80
Property revaluation reserve 500
446,120 446,120

The following additional information is relevant:

(i) Non-current assets:

The property has a remaining life of 40 years at 1 January 2019. The company
policy is to revalue all property at each year end and at 31 December 2019 it was
valued at €29 million.

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All plant and equipment is depreciated at 20% per annum using the reducing
balance method. Depreciation of all non-current assets is charged to cost of
sales.

(ii) Investment property:

This property is held for its investment potential and meets the criteria of IAS
40 to be classified as an investment property. Lightening Co purchased this
property on 1 January 2019 at a cost of €5 million. The agreed valuation as at
31 December 2019 is €5.5 million. The property has an expected useful life of
25 years from the date purchased.

(iii) Included in Trade Receivables is an amount of €500,000 relating to a customer

who went bankrupt during December. This fact has only become known during
the review of “Events After the Reporting Date” under IAS 10. Company
policy is to make a provision for general bad debts equal to 5% of final Trade
Receivables. All amounts in relation to bad debts should be included in cost of
sales.

(iv) The long term loan of €10 million in the trial balance was received on 1 April
2019 and carries an annual interest rate of 6% per annum.

(v) The Directors have estimated the provision for income tax for the year ended 31
December 2019 at €3 million. The balance of income tax shown in the trial
balance represents the over / under provision for the previous year.

(vi) During the year there was a 1 for 5 issue of ordinary shares at a premium of
20% to the nominal value. The directors are unsure how to record this and have
lodged the cash into the bank and shown the proceeds as a single figure in the
trial balance.

Required:

(a) Prepare the Statement of Comprehensive Income for the year ended 31
December 2019.
(10 marks)

(b) Prepare the Statement of Changes in Equity for the year ended 31 December
2019.
(5 marks)

(c) Prepare the Statement of Financial Position as at 31 December 2019.

(10 marks)

(Total: 25 Marks)

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Section B: COMPULSORY (Answer BOTH questions)

Question 2

The following information has been extracted from the financial statements of Rila Co a
company which prepares its accounts up to 31 December each year.

Income Statements
€ €
2019 2018
Revenue 1,255,050 1,111,820
Cost of Sales (613,450) (550,825)
Gross Profit 641,600 560,995
Operating expenses (170,150) (141,450)
Profit before interest & Tax 471,450 419,545
Finance costs (16,000) (12,000)
Profit before tax 455,450 407,545

Taxation (61,300) (52,800)

Net Profit 394,150 354,745

Statements of Financial Position

2019 2018
€_ €_
Non-current Assets 741,400 509,590

Current Assets
Inventory 78,760 109,400
Trade Receivables 196,550 419,455
Bank 45,400 -
320,710 528,855

Total Assets 1,062,110 1,038,445

Equity
Ord shares (Nominal 50 cent) 200,000 200,000
Share premium 50,000 50,000
Revaluation reserve 70,000 50,000
Retained earnings 423,520 279,370
743,520 579,370
Non-current Liabilities
Long-term loans 95,000 150,000
838,520 729,370
Current Liabilities
Trade Payables 171,590 205,875
Bank Overdraft - 38,200
Taxation payable 52,000 65,000
223,590 309,075

Equity & Liabilities 1,062,110 1,038,445

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The following additional information has been provided.

2019 2018

Average share price (cent) 407 382

Average P/E ratio (for the industry) 5 4

Required:

(a) Write a report to critically assess the financial performance and position of
Loyalty Co over the period using ratio analysis under the headings of
profitability, liquidity, efficiency, solvency and shareholders.

Calculate no more than two ratios under each heading, clearly show your
workings and state any assumptions you consider necessary. All ratios should be
calculated to 2 decimal places.
(20 marks)

(b) Explain two limitations of ratio analysis as an analytical technique and provide a
suggestion as to how the limitation might be overcome.
(5 marks)

(Total 25 marks)

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Question 3

The following extracts are from the financial statements of Grindolo Co. for the year
ended 31 December 2019:

Income Statement for the year ended 31 December 2019

€m
Sales revenue 1,162
Cost of Sales (866)
Gross profit 296
Distribution costs (47)
Administrative expenses (110)
Profit from operations 139
Interest receivable 79
Interest payable (55)
Profit before tax 163
Income tax expense (24)
Profit after tax 139

Statement of Financial Position as at:

31 Dec 2019 31 Dec 2018
€m €m €m €m
Non-current assets
Property, plant and equipment 1,023 600
Intangible assets 277 234
Investments 69 68
1,369 902
Current Assets
Inventories 246 128
Trade receivables 460 373
Cash 250 124
956 625
Total Assets 2,325 1,527

Equity
Issued share capital (20 cent nominal value) 29 24
Share premium 447 377
Revaluation reserve 251 -
Retained earnings 116 26
843 427
Non-current liabilities
Loan 755 555

Current liabilities
Trade payables 244 311
Bank Overdraft 437 207
Taxation 46 27
727 545
Total equity and liabilities 2,325 1,527

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Additional information:

(i) Profit from operations is after charging depreciation on the property, plant
and equipment of €22 million and amortisation on the intangible fixed assets
of €7 million.
(ii) The revaluation reserve relates wholly to property, plant and equipment.
(iii) During the year ended 31 December 2014, plant and machinery costing
€1,464 million, and with a carrying amount of €424 million at 31 December
2013, was sold for €250 million.
(iv) During the year ended 31 December 2014, 25 million 20c shares were issued
at a premium of €2.80.
(v) Dividends paid during the year were €49 million

Required:

Prepare a Statement of Cash Flow for Grindolo Co for the year ended 31 December
2019 in compliance with IAS 7.

(Total 20 marks)

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Section C Answer any TWO questions

Question 4

IFRS 16 Leases comes into operation for accounts periods begining on or after 1 January
2019 to replace IAS 17. This new standard implements long awaited changes to how
leases are accounted for by lessees in published financial statements.

Required:

(a) Explain how a lease liability and a right of use asset should be measured on
initial recognition.
(5 marks)

(b) On 1 January 2019, LeesCo entered into a four year lease for a machine with a
useful life of 8 years. The contract contains an option to extend the lease term for
a further year and the Directors believe that it is reasonably certain they will
exercise this option.

Lease payments are €10,000 per year for the initial term and €15,000 per year for
the option period. All payments are due at the end of the year. To obtain the
lease, LeesCo incurs initial direct costs of €3,000. The lessor reimburses €1,000
of these costs.

The interest rate implicit in the lease is 10%.

Required:

Calculate the initial carrying amount of the lease liability and the right-of-use
asset as they would be recorded on 1 January 2019 (i.e. Day 1 of the contract).
Provide the journal entries needed to record these amounts.
(10 marks)
Note:

Discount factors @ 10% are: DCF @

10%
0.909
0.826
0.751
0.683
0.621
(Total 15 marks)

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Question 5

When preparing international financial reporting standards (IFRS), the International

Accounting Standards Board (IASB) place great emphasis on ensuring each standard
provides explicit guidance on the disclosure requirements necessary to achieve “faithful
representation” of commercial activities.

Required:

(a) Explain the process conducted by the IASB in the development of an IFRS.
(5 marks)

(b) Select three areas governed by specific accounting standards and explain how
their disclosure requirements enhance stakeholder understanding of the
underlying commercial activities.
(10 marks)

(Total 15 marks)

Question 6

Abu Co purchased a piece of equipment on 1 July 2005 incurring the following costs:

€
Full price of machine 8,550
Trade discount (855)
Delivery costs 105
Set-up costs incurred within the company 356
Total 8,156

Additional information:

• Expected useful life of 12 years and a residual value of €2,000.

• Abu Co’s policy is to charge a full year’s depreciation in the year of purchase
and no depreciation in the year of sale.
• Abu Co follows the revaluation model. No revaluation had been necessary until
30 September 2008 when the price of these machines increased. A specific
market value for the original machine was not available, but an equivalent new
machine would now cost €15,200.
• Abu Co’s year end is 30 September.

Required:

Show the accounting effect of the above transaction at 30 September 2005, 2008 and
2009. Clearly indicate the amounts that will appear in the Statement of Financial
Position at each period end.
(Total 15 marks)

END OF EXAMINATION

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