CAF-5: FINANCIAL ACCOUNTING AND REPORTING - I

WEEKLY QUIZ # 1
ARTT BUSINESS SCHOOL

INSTRUCTIONS:
1. There is a total of ​3 hours​ to solve this paper and ​15
minutes​ reading time.
2. Calculators are allowed in this paper.
3. Write your answers in a separate booklet provided
along with this question paper.
4. Write your ​Name​, ​CRN #​ and ​ARTT ID #​ on the booklet
in BLOCK LETTERS as on your ​ARTT ID Card​.
5. Start every new answer on a ​fresh page​.
6. Use ​blue​ or ​black​ pen to write your answers. Avoid
using markers.
7. The total number of pages is ​4​.
8. Marks are allocated for ​proper workings​.
9. Cheating is strictly prohibited.
10. Total Marks = ​100​.

Question # 1:
(Adapted from CPA Ireland)

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance​ sets out the requirements for
recognising as income any grants received from government agencies, together with any repayments of such grants.
On 1 January 2014, Gilmartin Plc (Gilmartin) applied to a government agency for a grant to assist with the construction
of a factory in Portlaoise. The proposed construction cost of the factory was €52 million and the company projected that
350 people would be employed on its completion. The land was already owned by Gilmartin.
On 1 March 2014, the government agency offered to grant a sum amounting to 25% of the factory’s construction cost to
a maximum of €13 million. The grant aid was to be payable on completion, and would be repayable on demand if total
employment at the factory fell below 300 people within 5 years of completion.
At the financial year end, 31 March 2014, Gilmartin had accepted the offer of grant aid, and had signed contracts for the
construction of the factory at a total cost of €52 million. Construction work was due to commence on 1 April 2014.
By 31 March 2015, the factory had been completed on budget, 400- people were employed ready to commence
manufacturing activities, and the government agency agreed that the conditions necessary for the drawdown of the
grant had been met.
On 1 April 2015, the factory was brought into use. It was estimated that it would have a ten-year useful economic life.
On 1 June 2015, the government agency paid over the agreed €13 million. In addition, the company sought and was paid
an employment grant of €1.2 million as employment exceeded original projections. This is expected to be payable
annually for 5 years in total, at a rate of €12,000 per additional person employed over 300 in each year. There are no
repayment provisions attached to the employment grant. The directors of Gilmartin expect employment levels to exceed
350 people for at least 4 further years from 31 March 2016.

Required:
(a) Explain how Gilmartin Plc should record the above transactions and events in its financial statements for years
ended 31 March 2014, 2015 and 2016. (14 Marks)
(b) Advise what accounting adjustments which would be necessary should it become apparent at 31 March 2017 that
employment at the factory would soon drop below 300 people. (6 Marks)

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ARTT Examining Team
Question # 2:
(Adapted from CPA Ireland)

In March 2016, Duyan Plc installed and paid for €500,000 of property, plant and equipment (PPE) on a farm. The PPE will
be depreciated over twenty five years. In July 2016, the government provided a grant of 40% to the company towards
this PPE. The company’s depreciation policy is to charge a full year’s depreciation in the year of purchase and none in
the year of sale.

Required:
(a) Outline the two methods of presenting a government grant in the financial statements in accordance with ​IAS 20
Accounting for Government Grants and Disclosure of Government Assistance​. (4 Marks)
(b) For each method of presenting a Government Grant in financial statements as referred to in your answer to ​(a)
above, provide the journal entries based on the above information. (6 Marks)

Question # 3:
(Adapted from CPA Ireland)

IAS 23 - Borrowing Costs​ sets out the conditions that must be met in order to capitalise borrowing costs incurred by
entities purchasing or constructing non-current assets.
(i) Henry Ltd commenced construction of a non-current asset on 1 June 2017. On 1 July 2017, it borrowed €5 million at
an annual interest rate of 8% to finance the development. On 15 November 2017, the workers went on strike and no
work was done until the dispute was settled on 15 December 2017. The project was still in progress at 31 March
2018. Interest was paid monthly in arrears.
(ii) Georgina Ltd drew down a loan of €2 million on 1 April 2017 to part-finance the construction of a new building. The
rate of interest applicable was 6% per annum. Building commenced on 1 April 2017, but no money was spent until
30 June 2017 when the construction company was paid their first installment of €1.2m. The €2m borrowed was
invested for 3 months (April – June) in government bonds carrying an annual interest rate of 2%. Once the
construction company was paid, the remaining €0.8m was placed with a bank on deposit at a rate of 3% per annum.
This was withdrawn on 30 September 2017 and spent on the development. The asset was completed on 30
November 2017.

Required:
Journalise the above transactions. Show your calculations and explanations. (12 marks)

Question # 4:
(Adapted from CPA Ireland)

Careforall PLC, a manufacturer and supplier of mobility devices for the elderly, has recently established a new facility in
Condrum, Co. Laois. To help in this new operation, Careforall PLC have secured a number of grants from Irish and EU
sources and are unsure how the grants are to be accounted for in the financial statements. The company has a year end
31 December 2019 and all the following transactions took place at the beginning of 2019.
(i) Careforall PLC has received a grant for €80,000, to be received over three years, in respect of providing employment
in a deprived area.
(ii) Careforall PLC received a €5,000 grant from the EU for the initial training of the new employees.

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ARTT Examining Team
(iii) The company also received a grant of €120,000 from the European Social Economic Fund towards the cost of a
€600,000 machine. The machine has a useful economic life of 8 years and an estimated residual value of €60,000.
Depreciation is on the straight line basis.
(iv) The company extended its premises to house the new machine at a cost of €340,000. It financed this new build with
a five year loan at 8% annual interest. The extension was completed in seven months.

Required:
Explain how each of the above should be accounted for in the financial statements of Careforall PLC for the year ended
31 December 2019, in accordance with ​IAS 20​ and ​IAS 23.​ (16 Marks)

Question # 5:
(Adapted from ICAEW)

Litton plc is a large multinational company in the power industry. It adopts the revaluation model for its solar power
plants. The following information relates to the solar power plants:
£
Cost at acquisition on 1 July 2013 4,500,000
Valuation at 30 June 2017 4,200,000
Valuation at 30 June 2019 5,092,000
Estimated useful life of plant at 1 July 2013 25 years
Gyokuro plc has a policy of making annual transfers between the revaluation surplus and retained earnings

Required:
Prepare journal entries for the years ended 30 June 2017 and 30 June 2019 to record the revaluation surplus/loss. ​(Show
your workings. Entries to record incremental depreciation, depreciation and cancellation of accumulated depreciation
are not required) (10 Marks)

Question # 6:
(Adapted from ICAI)

A fire occurred in the premises of M/s. Raxby & Co. on 30-06-2017. From the salvaged accounting records, the following
particulars were ascertained:
Rs.
Stock at cost as on 01-04-2016 120,000
Stock at cost as on 31-03-2017 130,000
Purchases less return during 2016-17 325,000
Sales less return during 2016-17 600,000
Purchases from 01-04-2017 to 30-06-2017 97,000
Sales from 01-04-2017 to 30-06-2017 166,000
Purchases upto 30-06-2017 did not include Rs. 35,000 for which purchase invoices had not been received from suppliers,
though goods have been received in godown. In valuing the stock for the Balance Sheet at 31" March, 2017, Rs. 5,000
had been written off on certain stock which had a poor selling line having the cost of Rs. 8,000. A portion of these goods
were sold in May, 2017 at a loss of Rs. 1,000 on original cost of Rs. 7,000. The remainder of the stock was now estimated
to be worth its original cost. Subject to that exception, gross profit had remained at a uniform rate throughout the year.
The value of the salvaged stock was Rs. 10,000. M/s. Raxby & Co. had insured their stock.

Required:
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ARTT Examining Team
Compute the amount of claim to be lodged to the insurance company. (12 Marks)

Question # 7:
(Adapted from ICAI)

The following information relates to the business of ABC Enterprises.

(a) Assets and Liabilities as at 1 April 2016 and 31 March 2017 were as follows.
Balances in Rs. 1 April 2016 31 March 2017
Furniture 60,000 63,500
Inventory 80,000 70,000
Trade Receivables 1,60,000 —
Trade Payables 1,10,000 1,50,000
Prepayments 6,000 7,000
Accruals 20,000 18,000
Cash and Cash Equivalents 12,000 26,250

(b) Cash transactions during the year :

(i) Collection from Trade Receivables, after allowing discount of Rs. 15,000 amounted to Rs. 585,000.
(ii) Collection on discounting of Bills of Exchange, after deduction of discount of Rs. 1,250 by bank, totalled to Rs.
61,250.
(iii) Trade Payables of Rs. 400,000 were paid Rs. 392,000 in full settlement of their dues.
(iv) Payment of Freight inward of Rs. 30,000.
(v) Amount withdrawn for personal use Rs. 70,000.
(vi) Payment for office furniture amounted to Rs. 10,000.
(vii) Investments carrying annual interest of 6% were purchased at Rs. 95 per share (200 shares, face value Rs. 100
each) on 1 October 2016 and payment made thereof.
(viii) Expenses including salaries paid amounted to Rs. 95,000.
(ix) Miscellaneous receipts of Rs. 5,000. They are to be recognised as other income.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to Rs. 100,000. Of these, bills of
exchange of Rs. 20,000 were endorsed in favour of trade payables. An endorsed bill of exchange of Rs. 4,000 was
dishonoured.
(d) Goods costing Rs. 9,000 were used as advertising material.
(e) Goods are invariably sold to show a gross profit of 20% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction of capital by proprietor of ABC
enterprises.
(g) Provide at 2% for doubtful debts on closing debtors.

Required:
Prepare the statement of profit of loss for the year ended 31 March 2017 and a Statement of Financial Position as at 31
March 2017. (30 Marks)

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ARTT Examining Team