ACCA REVISION MOCK C
March 2018
Question paper
Time allowed
3 hours and 15 minutes
Section A: All FIFTEEN questions are compulsory and MUST be
attempted.
Section B: All THREE questions are compulsory and MUST be
attempted.
Section C: BOTH questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
This question paper must not be removed from the examination
hall.
Kaplan Publishing/Kaplan Financial
Paper F7
Financial Reporting
P AP E R F7 : FINAN CIAL RE POR TIN G
© Kaplan Financial Limited, 2018
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2
KA PLAN PUBLISHING
REV IS ION MO CK C QUE STI ONS
SECTION A
All FIFTEEN questions are compulsory and MUST be attempted
1
2
3
4
Which of the following items does NOT represent the correct accounting treatment in
accordance with IFRS 15 Revenue from Contracts with Customers?
A
Treating a sale and repurchase as a loan rather than a sale if control over the goods
has not passed to the buyer
B
Where a sale agreement has a significant financing component, recognising the initial
sale at the present value
C
When a package of goods are sold together at a discount, applying the discount to all
parts if none are ever sold separately at a discount
D
Recognising no revenue in relation to a three year service contract until the service is
completed at the end of the third year
In what order should the assets in a Cash Generating Unit (CGU) be impaired?
A
Any obviously impaired asset, purchased goodwill, then all other assets pro‐rata
B
Purchased goodwill, all other assets pro‐rata, then any obviously impaired asset
C
Any obviously impaired asset, all other assets pro‐rata, then purchased goodwill
D
All assets pro‐rata
Which of the following conditions must be met in order to capitalise borrowing costs per
IAS 23?
(i)
Expenditure for the asset is being incurred
(ii)
The loan to finance the construction of the asset has been taken out
(iii)
Borrowing costs are being incurred
(iv)
Activities necessary to prepare the asset for its intended use or sale are in progress
A
(i), (ii) and (iii)
B
(i), (ii) and (iv)
C
(i), (iii) and (iv)
D
All of them
Frog Co purchased an asset on 1 January 20X7 at a cost of $90,000. Frog received a grant in
relation to the cost of this asset of $15,000. It has decided to write off the grant income
against the cost of the non‐current asset. The asset has a useful economic life of nine years.
What is the carrying amount of the asset as at 31 December 20X7?
A
$90,000
B
$80,000
C
$67,500
D
$66,667
KA PLAN PUBLISHING
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P AP E R F7 : FINAN CIAL RE POR TIN G
5
Coral Co has net profit for the year ended 30 September 20X5 of $10,500,000. Coral Co has
had 6 million shares in issue for many years.
On 1 October 20X4 Coral Co issued a convertible bond. The liability element was worth
$2,500,000, and carries an effective interest rate of 8%.
The bond is convertible in five years’ time, with 50 shares issued for every $100 nominal
value of convertible bond held. Coral plc pays tax at a rate of 28%
What is the Diluted Earnings Per Share figure to be disclosed in Coral Co’s financial
statements for the year ended 30 September 20X5?
6
A
$1.77
B
$1.75
C
$1.48
D
$1.47
Lestrade Co has the following balances included on its trial balance at 30 June 20X4
Taxation
Deferred taxation
$6,000 Credit
$24,000 Credit
The balance on Taxation relates to an overprovision from 30 June 20X3.
At 30 June 20X4, the directors estimate that the provision necessary for taxation on current
year profits is $30,000. The carrying amount of Lestrade Co’s non‐current assets at this date
exceeds the tax written‐down value by $60,000. The rate of tax is 30%.
What are the balances that will appear in the Statement of Financial Position as at 30
June 20X4?
7
A
Deferred tax $24,000, Taxation $30,000
B
Deferred tax $18,000, Taxation $30,000
C
Deferred tax $18,000, Taxation $18,000
D
Deferred tax $18,000, Taxation $24,000
An enterprise sells goods with a warranty covering customers for the cost of repairs of any
defects that are discovered within the first two months after purchase. Past experience
suggests that 95% of the goods sold will have no defects, 3% will have minor defects and
2% will have major defects. If minor defects were detected in all products sold, the cost of
repairs would be $12,000. If major defects were detected in all products sold, the cost
would be $80,000.
What provision should be made for the cost of repairs?
4
A
Provision should be made for $2,640.
B
Provision should be made for $1,960.
C
Provision should be made for $92,000.
D
No provisions should be made but both items should be disclosed by note.
KA PLAN PUBLISHING
REV IS ION MO CK C QUE STI ONS
8
Watts Co acquired 70% of the share capital of Pilkington Co on 1 January 20X2 for
$300,000.
The goodwill arising on consolidation has been impaired by $43,000 as at 31 December
20X5.
The share capital and reserves of the two companies as at 31 December 20X5 were as
follows:
Share Capital
Retained earnings
Watts Co
$400,000
$300,000
Pilkington Co
$150,000
$200,000
At the date of acquisition Pilkington Co had retained earnings of $125,000. Watts Co
measures the non‐controlling interest as the proportion of net assets of the subsidiary.
In the consolidated statement of financial position of at 31 December 20X5 what amount
should appear for the non‐controlling interest?
9
A
$105,000
B
$90,000
C
$82,500
D
$60,000
Ben Co bought its 90% share of the 200,000 $1 ordinary share capital in Abi Co for $800,000
on 1 July 20X4 when the balance on Abi Co's retained earnings stood at $475,000.
Ben Co measures non‐controlling interest using the fair value method. The fair value of the
10% not owned by Ben Co was $60,000 on 1 July 20X4.
At 31 October 20X8 the balances of retained earnings of the two companies were as
follows:
Ben Co
$1,072,000
Abi Co
$895,000
A review for impairment indicated that 30% of the goodwill on acquisition should be
written off.
What will be the balance on the consolidated retained earnings as at 31 October 20X8 to
the nearest $000?
A
$1,334,500
B
$1,346,050
C
$1,400,050
D
$1,394,500
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P AP E R F7 : FINAN CIAL RE POR TIN G
10
Wombat Co is a retailer whose only non‐current assets are fixtures and fittings. The
company has been experiencing trading problems for some time. The directors have
concluded that the company is no longer a going concern and have changed the basis of
preparing the financial statements to the break‐up basis.
Which of the following will be the immediate effect of changing to the break‐up basis?
11
A
All fixtures and fittings are transferred from non‐current to current assets
B
Fixtures and fittings are valued at their purchase cost
C
The company ceases to trade
D
A liquidator is appointed
Negative goodwill (gain on bargain purchase) arises when the acquirer's interest in the fair
value of the acquiree's identifiable net assets exceeds the cost of the business combination.
Which of the following does IFRS 3 state must be carried out when this arises?
12
(i)
Reassess the amount at which consideration has been measured
(ii)
Reassess the amount at which the acquiree's identifiable net assets have been
measured
(iii)
Take any excess immediately to the statement of profit or loss
(iv)
Recognise the excess in the statement of profit or loss over the life of the non‐
monetary assets (recognising the gain as the assets are used)
A
(iii) only
B
(ii) and (iii)
C
(i), (ii) and (iii)
D
(i), (ii) and (iv)
The plant and machinery of Crawley Co were shown at a carrying amount of $350,000 at 31
March 20X4. The comparative figure at 31 March 20X5 was $425,000.
During the year to 31 March 20X5, property with a carrying amount of $45,000 was sold at
a profit of $4,000. The depreciation charge for plant and machinery was $52,000.
At 31 March 20X5 a $20,000 payable existed in relation to the purchase of plant and
equipment during the year.
What figure should be shown for the purchase of property, plant and equipment in
Crawley Co’s statement of cash flow for the year ended 31 March 20X5?
6
A
$172,000
B
$152,000
C
$192,000
D
$176,000
KA PLAN PUBLISHING
REV IS ION MO CK C QUE STI ONS
13
Cash generated from operations in the statement of cash flow is considerably lower than
the profit from operations recorded in the statement of profit or loss.
Which of the following could be possible reasons for this?
14
15
(i)
A non‐current asset has been sold during the year at a large profit
(ii)
A large payable was paid off just before year end
(iii)
A large sale was made just before year end, resulting in many lines being out of stock
at the year‐end date
(iv)
Purchase of new premises during the year has led to an increase in the depreciation
charge
A
All of them
B
(ii) and (iii)
C
(i) and (iii)
D
(i) and (ii)
Which ONE of the following would NOT normally explain an increase in receivable days?
A
Negotiating a contract extension with a major customer, making up 75% of the
company’s revenue and who had threatened to go elsewhere
B
High staff turnover in the credit control department
C
Entry into an overseas market for the first time
D
Starting up a new website, meaning products are now sold directly to the public
Which ONE of the following would NOT usually cause the ROCE to fall?
A
A dividend has been paid to shareholders
B
Profit has fallen in the year
C
Properties have been revalued upwards during the year
D
Assets have been acquired under a lease during the year
KA PLAN PUBLISHING
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P AP E R F7 : FINAN CIAL RE POR TIN G
SECTION B
All THREE questions are compulsory and MUST be attempted
The following scenario relates to questions 16–20
The following trial balance relates to Millar Co at 30 September 20X4:
$000
38,000
32,500
Owned property carrying amount
Investment property (note (ii))
Convertible loan note (note (iii))
Revenue (note (i))
Cost of sales (note (i))
Tax
Deferred tax (note (iv))
$000
10,000
387,500
293,130
125
10,500
The following information is relevant:
(i)
Revenue includes $10 million for goods it sold acting as an agent for Thomas Co. Millar Co
earned a commission of 15% on these sales and remitted the difference of $8.5 million
(included in cost of sales) to Thomas Co.
(ii)
Investment property is considered to have a fair value of $31.5 million at 30 September
20X4. Owned property has a fair value of $41 million at 30 September 20X4. Millar uses the
fair value model where appropriate.
On 1 October 20X3, Millar Co issued a $10 million 4% convertible loan note, which is
repayable on 30 September 2017. Millar Co chose to issue the convertible as it meant that
there would be a lower finance than the 8% interest rate charged on similar loan notes. The
present value of $1 payable at the end of each year, based on discount rates of 4% and 8%
are:
(iii)
End of year
1
2
3
4
4%
0.96
0.92
0.89
0.85
8%
0.93
0.86
0.79
0.735
(iv)
The directors have estimated the provision for income tax for the year to 30 September
20X4 at $5.7 million. The tax balance in the trial balance relates to the under/overprovision
from the prior year. The required deferred tax provision at 30 September 20X4 is $7 million.
16
Which, if any, of the following statements regarding the agency sale is/are correct?
Statement 1: Revenue should be reduced to $377.5 million
Statement 2: Cost of sales should be reduced to $284.63 million
8
A
Statement 1 only is correct
B
Statement 2 only is correct
C
Neither statement is correct
D
Both statements are correct
KA PLAN PUBLISHING
REV IS ION MO CK C QUE STI ONS
17
18
19
20
What should be recorded in other comprehensive income in relation to the property
revaluations?
A
$2 million loss
B
$2 million gain
C
$1 million loss
D
$3 million gain
What should be recorded as the initial liability in relation to the convertible loan note?
A
$2 million
B
$8.676 million
C
$8 million
D
$1.324 million
How should the convertible liability be accounted for in subsequent periods?
A
Present value
B
Not remeasured
C
Amortised cost
D
Fair value through profit or loss
What tax expense should be recorded in the statement of profit or loss?
A
$9,075,000
B
$9,325,000
C
$2,075,000
D
$2,325,000
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P AP E R F7 : FINAN CIAL RE POR TIN G
The following scenario relates to questions 21–25
Extracts from the financial statements of Canmore Co are given below:
Current assets
Inventory
Receivables
Cash at bank and in hand
Non‐current liabilities
Deferred taxation
Current liabilities
Trade payables
Overdraft
Taxation
20X7
$000
20X6
$000
10,931
4,429
1,658
9,480
3,892
7,518
234
108
24,299
2,123
300
23,162
–
250
Statement of profit or loss for the year ended 31 March 20X7
Profit from operations
Taxation
2,064
(672)
Additional information:
(i)
An item of plant was sold for $915,000 during the year, resulting in a loss of $50,000.
Depreciation for the year was $2,925.
21
Which of the following items should be added to profit from operations in order to
calculate cash generated from operations?
22
(i)
Movement in inventories
(ii)
Movement in receivables
(iii)
Movement in payables
A
(i) and (ii) only
B
(i) only
C
(iii) only
D
(ii) and (iii) only
Which, if any, of the statements below is/are correct?
Statement 1: Depreciation should be added back to profit from operations in calculating
cash generated from operations
Statement 2: Loss on disposal should be added back to profit from operations in calculating
cash generated from operations
10
A
Statement 1 only is correct
B
Statement 2 only is correct
C
Neither statement is correct
D
Both statements are correct
KA PLAN PUBLISHING
REV IS ION MO CK C QUE STI ONS
23
24
25
What amount should be recorded in the statement of cash flows in relation to tax paid?
A
$496,000
B
$672,000
C
$622,000
D
$546,000
What should be shown in the statement of cash flow as the net increase/decrease in cash
and cash equivalents for the year?
A
$3,797,000 decrease
B
$7,053,000 decrease
C
$7,983,000 decrease
D
$5,860,000 decrease
Where should the proceeds from the sale of the plant be shown?
A
Cash generated from operations
B
Operating activities
C
Investing activities
D
Financing activities
The following scenario relates to questions 26–30
Padgate Co leased an item of plant on 1 April 20X5 at a cost of $100,000 per annum, with rentals
payable in advance. The primary lease term is for five years and the machine is expected to have
a useful economic life of seven years, with no residual value. The interest rate implicit within the
lease agreement is 8% per annum and the present value of the minimum lease payments is
$431,200.
Padgate Co also entered into a sale and leaseback transaction for a machine at the beginning of
the year. At the date of the transaction, the machine had a carrying amount of $2.4m and was
sold for its fair value of $6.0m. The sale represents satisfaction of a performance obligation in
accordance with IFRS 15 Revenue From Contracts with Customers. The machine was leased back
for five years and the present value of the annual lease payments amounted to $4m. The
machinery had a remaining useful life of 10 years at the date of the sale.
Padgate Co leased equipment with a 20 year life under a 5 year lease on 1 October 20X5. Padgate
Co were given the first year rent‐free, but will pay $200,000 a year for the other 4 years.
26
Which, if any, of the statements below regarding the lease of plant is/are correct?
Statement 1: If the plant was only to be leased for two years, there would be no need to
capitalise the right‐of‐use asset.
Statement 2: If ownership of the plant transfers to Padgate Co at the end of the lease, the
plant should be depreciated over seven years
A
Statement 1 only is correct
B
Statement 2 only is correct
C
Neither statement is correct
D
Both statements are correct
KA PLAN PUBLISHING
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P AP E R F7 : FINAN CIAL RE POR TIN G
27
28
29
30
What will the non‐current liability be in relation to the leased plant at 31 March 20X6?
A
$257,696
B
$357,696
C
$100,000
D
$278,312
What is the value of the right‐of‐use asset recognised by Padgate Co immediately
following the sale and leaseback transaction?
A
$4 million.
B
$1.6 million
C
$2.4 million.
D
$2 million.
If Padgate Co had incurred initial direct costs of $250,000 prior to signing the lease of
equipment, how should these costs be accounted for?
A
The costs should be written off immediately as an expense
B
The costs should be capitalised as part of the right‐of‐use asset.
C
The costs should be included as part of the present value of the lease obligation
D
The costs should be written‐off to profit or loss on a straight‐line basis over the lease
term.
Which, if any, of the statements below regarding the lease of assets is/are correct?
Statement 1: All leases should be accounted for to recognise a right‐of use asset in all cases
Statement 2: If a sale and leaseback arrangement does not meet the definition of
satisfaction of a performance obligation, the receipt of cash should be accounted for as the
receipt of a loan
12
A
Statement 1 only is correct
B
Statement 2 only is correct
C
Neither statement is correct
D
Both statements are correct
KA PLAN PUBLISHING
REV IS ION MO CK C QUE STI ONS
SECTION C
BOTH questions are compulsory and MUST be attempted
31
During the year ended 31 March 20X4, Huston Co had been subject to much press interest
concerning its poor performance and as a result its share price had fallen considerably.
To remedy the situation and help improve share price and market confidence Huston Co
employed Sparkes, a firm of strategic consultants to recommend the best course of action
to improve both its statement of profit or loss and statement of financial position.
The board of Huston Co were quick to act on many of Sparkes’ recommendations and are
pleased with the effect that it has had on performance during the current year to 31 March
20X5.
The draft financial statements are shown below:
Statement of profit or loss for the year to:
Revenue
Cost of sales
Gross profit
Distribution costs
Administration expenses
Profit from operations
Profit on sale of property
Interest expense
Profit before tax
Taxation
Profit for the year
31 March 20X5
$000
9,600
(5,760)
––––––
3,840
(620)
(1,860)
––––––
1,360
200
(280)
––––––
1,280
(40)
––––––
1,240
––––––
31 March 20X4
$000
10,000
(7,200)
––––––
2,800
(380)
(660)
––––––
1,760
Nil
(320)
––––––
1,440
(600)
––––––
840
––––––
Statement of financial position as at:
31 March 20X5
$000
$000
Non‐current assets
Property, plant and equipment
Goodwill
Development costs
31 March 20X4
$000
$000
3,800
800
Nil
–––––––
800
5,000
800
1,120
–––––––
–––––
4,600
Current assets
Inventory
Trade and other receivables
Bank
1,800
760
840
–––––––
–––––––
6,920
3,200
1,880
Nil
–––––––
3,400
–––––
8,000
–––––
KA PLAN PUBLISHING
1,920
5,080
–––––––
12,000
–––––––
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P AP E R F7 : FINAN CIAL RE POR TIN G
Equity
Ordinary shares of $1 each
Retained earnings
Non‐current liabilities
8% Convertible loan note
12% Loan note
Deferred tax
Provision for overhaul
Current liabilities
Trade and other payables
Taxation
Bank overdraft
2,400
1,040
–––––
3,440
1,600
Nil
440
Nil
–––––––
1,680
840
Nil
–––––––
2,040
2,520
2,400
400
–––––––
2,800
Nil
2,000
1,200
1,480
–––––––
2,720
460
1,340
–––––––
–––––
8,000
–––––
4,680
4,520
–––––––
12,000
–––––––
Additional information:
During the current year the development expenditure was written off to administration
expenses in the statement of profit or loss as the recognition criteria per IAS 38 Intangible
Assets were no longer met.
In addition, following on from one of the recommendations of Sparkes, Huston Co is
outsourcing the manufacturing of one of its products. This has enabled the company to
dispose of some surplus plant. This plant had been due for an overhaul in 20X5.
Huston Co had been providing for this over a four year period, but due to the disposal this
was no longer required and the provision was released to cost of sales.
The following ratios were provided by Sparkes:
Return on year‐end capital employed
Gross profit margin
Net profit (before tax) margin
Current ratio
Quick ratio
Inventory holding period
Receivables collection period
Payables payment period
Gearing (debt as a percentage of debt plus equity)
20X5
31%
1.3:1
20X4
28%
28%
14%
1.1:1
0.4:1
162 days
69 days
138 days
42%
Required:
(a)
Calculate the missing ratios in relation to Huston Co
(7 marks)
(b)
Write a report for the directors to assess the financial performance and position of
Huston Co for the year ended 31 March 20X5 compared to the previous year. Your
answer should refer to the information above and the impact that Sparkes has had
during the year.
(13 marks)
(Total: 20 marks)
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REV IS ION MO CK C QUE STI ONS
32
On 1 October 20X4 Pansy Co purchased 64 million of the 80 million $1 ordinary shares of
Sunflower Co. The acquisition was through a share exchange of two shares in Pansy Co for
every four shares in Sunflower Co. The market price of Pansy Co’s shares at 1 October 20X3
was $5 per share and the market price per share of Sunflower Co was $2.44. The reserves
of Sunflower Co on 1 October 20X4 were $82 million.
The summarised statements of profit or loss for the two companies for the year ended 31
March 20X5 are:
Revenue
Cost of sales
Gross profit/(loss)
Other income (note (iii))
Distribution costs
Administrative expenses
Finance costs
Profit/(loss) before tax
Income tax expense
Profit for the period
Pansy Co
$000
420,000
(272,000)
–––––––
148,000
1,600
(16,000)
(30,500)
(4,800)
–––––––
98,300
(34,800)
–––––––
63,500
–––––––
Sunflower Co
$000
248,000
(146,000)
–––––––
102,000
nil
(8,000)
(28,000)
(3,600)
–––––––
62,400
(10,400)
–––––––
52,000
–––––––
The following information is relevant:
(i)
The fair values of Sunflower Co at the date of acquisition were equal to their carrying
amounts with the exception of land and plant. Land and plant had fair values of $2
million and $4 million respectively in excess of their carrying amounts. Plant had a
remaining useful economic life at the date of acquisition of 4 years. Plant
depreciation is included in cost of sales. The fair values have not been reflected in
Sunflower Co’s financial statements.
Sunflower Co had been selling its products under the brand name of ‘Seeds’ for many
years. At the date of acquisition the brand was considered to have a fair value of $5
million and a remaining useful economic life of 10 years. The brand is not included in
Sunflower Co’s statement of financial position.
(ii)
After the date of acquisition, Pansy Co sold goods to Sunflower Co at a selling price of
$28 million. Pansy Co made a profit of cost plus 25% on these sales. $15 million (at
cost to Sunflower Co) of these goods were still in the inventories of Sunflower Co at
31 March 2015.
(iii)
The other income is a dividend received from Sunflower Co on 1 February 20X5.
(iv)
On 1 October 20X4, Pansy Co also acquired 40% of Amaryllis Co. Amaryllis Co made a
loss of $54 million in the year. Due to this loss, Pansy Co’s investment in Amaryllis
was deemed to be impaired by $6.2 million.
(iv)
Pansy Co has a policy of valuing non‐controlling interests at fair value at the date of
acquisition. For this purpose the share price of Sunflower Co at this date should be
used.
KA PLAN PUBLISHING
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P AP E R F7 : FINAN CIAL RE POR TIN G
(v)
Impairment tests for Sunflower Co were conducted on 31 March 20X5. They
concluded that the goodwill of Sunflower Co should be written down by $5 million.
(vi)
All items in the above statements of profit or loss are deemed to accrue evenly
throughout the year.
Required:
(a)
Calculate the goodwill arising on the purchase of Sunflower Co as at 1 October
20X4.
(6 marks)
(b)
Prepare the consolidated statement of profit or loss for the Pansy Co Group for the
year ended 31 March 20X5.
(14 marks)
(Total: 20 marks)
16
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