Suggested answers and examiner’s comments Important notice When reading these suggested answers, please note that the answers are intended as an indication of what is required rather than a definitive “right” answer. In many cases, there are several possible answers/approaches to a question. Please be aware also that the length of the suggested answers given here may be somewhat exaggerated compared with what might be achieved in the reality of an unseen, time-constrained examination.
Examiner’s general comments The pass rate for this paper increased to 74%, from 48% for the previous session. A competent group of candidates continue to provide a balanced set of answers across all three Sections of the paper. However, some candidates appeared to have been poorly prepared for the paper and need to reflect on their preparation strategy. Another group of candidates neglected to include workings in their final solution in parts of Section C. Candidates need to focus on the whole syllabus and not seek to overlook what may be deemed as minor areas, as any area from the whole syllabus could be used to write the examination questions at each sitting.
The entry has been posted to the correct side of the ledger but the incorrect account.
(ii) D Original Entry
Examiner’s explanation: The incorrect amount has been posted in the accounts. (iii) B Capital increases and liabilities decrease.
Examiner’s explanation: When Sundaye pays the rent he introduces cash into the business and the capital of the business is increased. The rent is a liability and discharging the £6,250 the liability of the business is being decreased.
(iv) D £2,150 income
Provision for doubtful debts account
Date Details Dr Cr Bal
30.06.09 Balance b/d 4,100 (4,100)
31.12.03 Profit & loss account 2150 (1,950)
(v) B Debit Credit Bank Loan Examiner’s explanation: The bank is an asset account and will increase as a result of receiving the loan. The loan, which is a liability account, will increase as a result of loan being given to Sundaye Bakers. In short the bank receives the value hence the debit entry and the loan provides the value thus the credit entry.
(vii) C Entity Examiner’s explanation: A business is separate from its owners or managers. The concept applies regardless of whether the business is a limited company or a sole trader. Therefore, the owner’s bank balance must not be included in the trial balance of the business.
(viii) A Payment to upgrade the oven £3,195 Examiner’s explanation: Capital expenditure is expenditure which results in the acquisition of a fixed asset or an improvement in its earning capacity. The upgrade of the oven is the only expenditure that satisfies these criteria. The alternatives are revenue expenditures. (ix) B £23,147
4. On 1 July 2009 Merci Less Designs had fixed assets at cost of £195,680 and provision for depreciation balance of £89,750. On 15 June 2010 an item of machinery purchased for £60,000 with accumulated depreciation of £29,280 was sold for £30,000.
Prepare the fixed asset account, the provision for depreciation account and the fixed
asset disposal account for Merci Less Designs for the year ended 30 June 2010. (6 marks)
Date Narrative Dr Cr Balance
1-Jul-09 Balance b/d 195,680 195,680
15-Jun-10 Disposal Account 60,000 135,680
30-Jun-10 Balance c/d 135,680
Date Narrative Dr Cr Balance
15-Jun-10 Fixed Asset 60,000 60,000
15-Jun-10 Provision for depreciation 29,280 30,720
15-Jun-10 Cash 30,000 720
30-Jun-10 Profit and loss account 720 0
Provision For Depreciation
Date Narrative Dr Cr Balance
1-Jul-09 Balance b/d 89,750 89,750
15-Jun-10 Disposal Account 29,280 60,470
30-Jun-10 Balance c/d 60,470
5. With the aid of one suitable example of each, explain the difference between a
prepayment and an accrual. (6 marks)
Suggested answer Accrual:
An expense incurred during the accounting period but remaining unpaid at the end of the period. Accruals are shown on the balance sheet as a current liability.
For example, unpaid suppliers who have supplied goods during the year. Prepayment: A payment made in one accounting period but chargeable to profit of a later period.
Prepayments are shown on the balance sheet as a current asset.
For example, the advance payment of an expense such as telephone bill.
The combination of numerical and qualitative-based short-answer questions in Section B continues to assess candidates’ broad understanding of the syllabus. The spread of the answers provided demonstrated that some concepts such as “prepayment” and “accrual” were readily understood and well explained, whereas other terms such as “money measurement” presented a greater challenge. Many candidates are not demonstrating fundamental bookkeeping skills when managing routine transactions such as disposal of fixed assets as found in question 4. Candidates scored best in question 5 and scored poorly in question 3.
Section C (Answer two questions only) 7. (a) Identify nine groups who might be interested in financial information about a public
company. (9 marks)
Providers of capital
(b) For eight of the above groups, discuss their interest in financial information about a public company.
Any eight of the following: Managers of the company: These are people appointed by the company's owners to supervise the day-to-day activities of the company. They need information about the company's financial situation as it is currently and as it is expected to be in the future. This is to enable them to manage the business efficiently and to take effective control and planning decisions. Shareholders of the company, i.e. the company's owners: These will want to assess how effectively management is performing its stewardship function. They will want to know how profitably management is running the company's operations and how much profit they can afford to withdraw from the business for their own use. Trade contacts: Trade contacts including suppliers who provide goods to the company on credit and customers who purchase the goods or services provided by the company. Suppliers will want to know about the company's ability to pay its debts; customers need to know that the company is a secure source of supply and is in no danger of having to close down. Providers of finance to the company: These might include a bank which permits the company to operate an overdraft, or provides longer-term finance by granting a loan. The bank will want to ensure that the company is able to keep up with interest payments, and eventually to repay the amounts advanced. Tax Authorities: Tax Authorities will want to know about business profits in order to assess the tax payable by the company.
Employees of the company: These should have a right to information about the company's financial situation, because their future careers and the size of their wages and salaries depend on it. Financial analysts and advisers: Financial analysts and advisers need information for their clients or audience. For example, stockbrokers will need information to advise investors in stocks and shares; credit agencies will want information to advise potential suppliers of goods to the company; and journalists need information for their reading public. Government and their agencies: Governments and their agencies are interested in the allocation of resources and therefore in the activities of enterprises. They also require information in order to provide a basis for national statistics. The public: Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to a local economy by providing employment and using local suppliers. Another important factor is the effect of an enterprise on the environment, for example, with regard to pollution.
The following scenario applies to questions 8 and 9. Brent Wood owns a computer supplies business called HD-Byte (‘HD’), selling mainly to trade customers. Brent manages the business with the assistance of his partner who oversees all the finances and bookkeeping. HD’s trading year-end is 30 June. Set out below is HD’s trial balance, plus notes detailing the adjustments needed before the year-end 30 June 2010 accounts can be prepared.
£ £ Sales 105,000 Stock at 1 July 2009 14,700 Purchases 29,000 Salaries 13,000 Telephone 3,000 Motor expenses 7,800 Administration 980 Premises 55,000 Computers at cost 14,000 Plant & equipment at cost 16,000 Provision for doubtful debtors 500 Debtors and creditors 4,800 16,400 Bank 1,560 Cash 620 Drawings 11,000 Capital 42,060 Provision for depreciation: Computers 3,500 Plant & equipment 4,000
9. (a) Show how each of the adjustments contained in notes (ii) to (vii) to HD’s trial balance would be recorded in its ledger accounts. Where relevant, include the opening and closing balances and any transfers to the profit and loss account.
(b) Explain the reasons why HD has control accounts. (12 marks)
They provide a check on the accuracy of entries made in the personal accounts in the sales ledger and purchase ledger. It is very easy to make a mistake in posting entries, because there might be hundreds of entries to make. Figures might get transposed. Some entries might be omitted altogether so that an invoice or a payment transaction does not appear in a personal account as it should.
The control accounts could also assist in the location of errors, where postings to the control accounts are made daily or weekly or even monthly. If an entry is not recorded in a personal account, or a transposition error occurs, it would be a formidable task to locate the errors or errors at the end of a year given the volume of transactions during the year. By using the control account, a comparison with the individual balances in the sales or purchase ledger can be made on a regular basis and speeds up the finding of any errors.
Where there is a separation of clerical (bookkeeping) duties, the control account provides an internal check. The person posting entries to the control accounts will act as a check on a different person whose job it is to post entries to the sales and purchase ledger accounts.
To provide debtors' and creditors' balances more quickly for producing a trial balance or balance sheet. A single balance on a control account is obviously extracted more simply and quickly than many individual balances in the sales or purchase ledger. This means also that the number of accounts in the double-entry bookkeeping system can be kept down to a manageable size, since the personal accounts are memorandum accounts only and the control accounts instead provide the accounts required for a double-entry system.
Question 7 was the most popular question in Section C and generally very well answered. Question 9 was the least popular question with few candidates scoring good marks.
Question 8 required candidates to produce a profit and loss account and balance sheet from a trial balance and a set of notes to the trial balance. This question was also popular and generally answered well. However, the following points were noted:
Some candidates were unable to treat revenue and capital items appropriately in the profit and loss account.
Some candidates appeared not to know the importance of labelling “cost of sales”, “gross profit” or “operating profit”.
Inappropriate location of items in each financial statement.
The omission or non-treatment of notes to the trial balance.
Overall, it was noted that the performance of candidates is not split between numerical and non-numerical questions but between particular topics within the syllabus.
The scenarios included here, except where expressly identified, are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental.