Mock One
F7FR-MK1-Z16-A
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Answers & Marking Scheme
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Financial
Reporting
©2016 DeVry/Becker Educational Development Corp.
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Question
Answer
Mark
Question
Section A
Answer
Mark
Section B
C
2
16
D
2
2
D
2
17
B
2
3
B
2
18
C
2
4
A
2
19
D
2
5
D
2
20
A
2
6
C
2
21
B
7
B
2
22
C
8
C
2
23
B
9
C
2
24
A
10
B
2
25
A
11
C
2
26
12
C
2
27
13
B
2
28
14
B
2
15
A
2
2
2
2
2
Sc
2
2
C
2
D
2
29
C
2
30
B
2
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St
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B
Be
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1
2
Section A
Justification
1
C
This is a payment in advance and should not be recognised as revenue until the
contract between the two parties has been finalised and GY has satisfied any
performance obligation of the contract.
2
D
3
B
There are 500,000 ÷ 0.50 = 1 million shares in issue. Dividends are accounted for
only when declared for payment, not when they are merely proposed (as this does
not give rise to a liability). The statement of changes in equity will therefore
include dividends declared and paid in the year:
$000
20X5 Final dividend (1m × 0.1)
100
20X6 Interim dividend (1m × 0.05)
50
–––
150
–––
4
A
B is a change in estimate. IFRS 3 allows an entity to use either method for each
subsidiary separately and so C is acceptable. D is a change in business and would
therefore require a new policy on the change in business method; it is not a change
of accounting policy.
5
D
The gains of $125,000 and $12,000 are unrealised. Therefore they must be credited
to a revaluation reserve. This is a component of total equity, but is not included in
retained profits.
ud
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Sc
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Item Answer
St
If an asset which has previously been revalued suffers an impairment, the fall in
value may be debited to the revaluation reserve, provided there is a credit balance –
relating to that asset – which exceeds the impairment.
C
In the first action, Dash has been informed it is likely to lose and therefore a
provision for the loss should be made.
ck
6
er
Therefore, the revaluation reserve will have increased by $137,000 ($125,000 +
$12,000) over the first two years. The impairment of $30,000 in the most recent
year will reduce this to $107,000.
Be
The second action gives rise to a contingent asset and disclosure of the transaction
should be made.
7
B
Carrying amount
Tax base
Taxable temporary difference
Provision required at 20%
Brought forward
Increase (charge to profit or loss)
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3
$
754,860
543,875
–––––––
210,985
–––––––
42,197
39,853
–––––––
2,344
–––––––
8
C
$
(5,000)
20,000
12,000
(10,000)
–––––––
17,000
–––––––
Operating loss
Depreciation
Interest expense
Interest paid
C
Cash inflows from the continuing use of the asset, so this will included (3) revenue
based on items produced by the plant. It will also take into account cash outflows
that are necessary to help generate any cash inflows, this will include the annual
labour costs (1) and the servicing cost (5). Item (2) is an enhancing cost and item
(4) is specifically excluded by IAS 36.
10
B
Unrealised profit = ($30,000 × 20/120) × 80% = $4,000
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9
Sc
Able
Cain post-acquisition
((151,000 – 107,000) – 4,000 (unrealised profit)) × 75%
$
427,000
30,000
–––––––
457,000
–––––––
11
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The unrealised profit for 20X5 will have no effect on the calculation of retained
earnings at 31 December 20X6. It will only affect the statement of profit or loss.
C
St
Initial proceeds (500,000 × 0.95)
Interest at 10.5%
Cash paid (500,000 × 6%)
Balance at 31 Dec 20X5
C
13
B
Liability as at 31 December 20X6
= 12,000 + (12,000 × 12%) – 7,080 = 6,360
IAS 40 gives examples of property that would be classified as investment property;
it includes land with uncertain use (3). The standard states that owner occupied
property is not investment property, but if the occupied portion is insignificant, as in
(1) then the property will still be classed as investment property.
Be
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20X6 Interest at 10.5%
$
475,000
49,875
(30,000)
–––––––
494,875
–––––––
51,962
14
B
ROCE = Profit before interest and tax ÷ Capital employed (i.e. equity + non-current
liabilities)
PBIT = 17,600 + 6,270 + 9,465 = $33,335
Capital employed = 127,920 + 63,200 = $191,120
ROCE = 17.4%
15
A
IAS 23 requires that all borrowing costs incurred in the construction of a qualifying
asset be capitalised into the cost of that asset. Any funds invested, the return on
those funds should be offset against the amount of borrowing costs capitalised.
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4
Section B
Item Answer
Justification
16
D
IAS 36 defines recoverable amount as the higher of value in use and fair value less
costs of disposal
17
B
Lower of:
Cost
Net realisable value (SP – cost to sell) (117 – 5)
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18
$120,000 and
$112,000
C
Impairment loss is $100,000, of which $50,000 will be written off against goodwill
leaving a further $50,000 to be allocated to remaining assets other than inventory.
Factory building ÷ Total assets (excluding inventory) = (260 ÷ 530) × 50 = $24,528
D
A decrease in market rates of interest will increase value in use and output
significantly below budget is an internal indicator of impairment
20
A
PV of future cash flows using effective interest rate of 8%:
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$000
186
275.2
118.5
––––––
579.7
––––––
Total cash flow from the contract is $720; this must be allocated to the stand-alone
selling prices of the handset and airtime (300 and 600). Therefore revenue earned
from handset is 720 × (300 ÷ 900) = $240; this is the amount of revenue recognised
from the sale of the handset.
20X7 (($260 – $60) × 0.93)
20X8 ($320 × 0.86)
20X9 (($140 + $10) × 0.79)
B
St
21
Sc
19
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Airtime is a performance indicator fulfilled over time, in this case 12 months.
Revenue allocated to airtime is $480 (720 – 240) leading to revenue of $40 per
month.
Revenue earned in 20X6 is therefore $240 + $120 (40 × 3) = $360
C
23
B
An agent earns commission and they sell goods on behalf of the principal, who is
the party that will bear any inventory risk
Be
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22
Revenue is the selling price discounted 2 years (7,497 ÷ 1.052)
Finance income is interest (5% × 6,800 × 6/12)
Total credit to profit or loss
$
6,800
170
–––––
6,970
–––––
Tutorial note: The question asks for the total credit to profit or loss, not just
revenue.
24
A
IFRS 15 specifically states (1) to be an indicator that performance obligation is
fulfilled over a period of time. Whereas, that the customer has significant risks and
rewards of ownership of an asset is an indicator that the performance obligation is
satisfied at a point in time.
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5
25
A
Revenue will be recognised for the full $100.
Tutorial note: A provision will be recognised to reflect the 5% probability that
customers will ask for a refund within the six month time frame.
B
$000
18,937
1,515
(1,000)
––––––
19,452
––––––
Balance 1 January (trial balance)
Interest at 8% (effective rate)
Cash paid
Balance at 31 December
27
C
Deferred tax 31 December (26,000 × 30%)
Deferred tax 1 January
Theoretical ex-rights price
4 shares @ $1.60
1 share @ $1.20
5 shares
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Tax expense for year
28
B
er
30
$
6.40
1.20
––––
7.60
––––
1.52
IAS 12 requires recognition of all taxable temporary differences even if an entity
does not intend to sell the revalued asset; the standard does not allow any
discounting of deferred tax balances. As the asset has been revalued with any gain
going through other comprehensive income the deferred tax consequences will also
be recognised in other comprehensive income
Convertible preference shares and share options are both examples of potential
ordinary shares and will be included in the diluted earnings per share calculation
Be
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C
St
Therefore 1 share (7.60 ÷ 5)
29
$000
7,800
(6,070)
–––––
1,730
1,480
200
–––––
3,410
–––––
Sc
Increase in deferred tax
Current tax for period
Under-provision prior year
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6
Section C
31
BIGWOOD CO
(a)
Statement of cash flows for the year to 30 September 20X6
Note: figures in brackets are in $000
Profit before tax
Adjustments for:
depreciation – non-current assets (W1)
loss on disposal of fixtures (W1)
interest expense
$000
Operating profit before working capital changes
increase in inventory (2,900 – 1,500)
increase in trade receivables (100 – 50)
increase in trade payables (3,100 – 2,150)
ud
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Net cash from operating activities
Cash flow from investing activities
Purchase of property, plant and equipment (W1)
Disposal costs of fixtures (W1)
St
Cash flows from financing activities
Issue of ordinary shares (2,000 + 1,000)
Long term loans (3,000 – 1,000)
Equity dividend paid
er
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Be
ck
Cash and cash equivalents at end of period
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5,350
–––––
6,050
(1,400)
(50)
950
–––––
5,550
(300)
(480)
–––––
4,770
Sc
Cash generated from operations
Interest paid
Income tax paid (W2)
7
½
1
½
½
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3,800
1,250
300
–––––
$000
700
(10,500)
(50)
–––––
3,000
2,000
(600)
–––––
(10,550)
–––––
(5,780)
4,400
–––––
(1,380)
450
–––––
(930)
–––––
½
½
½
½
1
1
½
1
1
½
½
½
————
max 10
————
WORKINGS (all figures in $000)
(1)
Property, plant and equipment – cost
Balance b/f
Disposal
Balance c/f
9,500
(3,000)
(17,000)
––––––
(10,500)
––––––
Difference cash purchase
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Depreciation
Balance b/f
Disposal (3,000 – 1,200)
Balance c/f
(3,000)
1,800
5,000
––––––
3,800
––––––
Difference charge for year
y
Net book value
Cost of disposal
St
Provision b/f
Tax charge (profit or loss)
Provision c/f
ud
Total loss on disposal
Income tax paid
Difference cash paid
3,000
(1,800)
––––––
1,200
50
––––––
(1,250)
––––––
(450)
(250)
220
––––––
(480)
––––––
½
½ for bals and
½ for P or L
Analysis of performance
er
(b)
½ for bals and
½ for disposal
Sc
Disposal
Cost
Depreciation
(2)
½ for bals and
½ for disposal
1 mark per relevant
comment to max 5
ck
Operating performance
Be
Bigwood’s overall performance as measured by the return on capital employed has
deteriorated markedly. This ratio is effectively a composite of the company’s profit margins
and its asset utilisation. The expansion represented by the acquisition of the five new stores
has considerably increased investment in net assets. Asset turnover (a measure of asset
utilisation) has fallen from 3·3 times to just 2·1 times. This is a relatively large fall and is
partly responsible for the deteriorating performance. However, it often takes some time
before new investment generates the same level of sales as existing capacity so it may be that
the situation will improve in future years.
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8
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Of more concern in the current year is the deteriorating gross profit margin of Bigwood’s
clothes sales. This has fallen from 18·6% to 9·4%. The effect of this is all the more marked
because clothes sales (in the current year) represent nearly 70% of turnover. It should also be
noted that the inventory holding period of clothes has also increased significantly from 39
days in 20X5 to 68 days in the current year. This may be a reflection of a company policy to
increase inventory levels in order to attract more sales, but it may also be an indication that
there is some slow-moving or obsolete inventory. The clothes industry is notoriously
susceptible to fashion changes, the new designs may not have gone down well with the
buying public. By contrast, the profit margin on food sales has increased substantially (from
25% to 32·1%) as indeed have sales (up 75% on last year). These improvements have helped
to offset the weaker performance of clothes sales.
Comparing the profit margins of clothes and food it can be seen that food retailing has been
far more profitable than clothes retailing and the gap in margins has increased during the
current year.
Sc
This deterioration in trading margins has continued through to net profit margins (falling from
7·1% to only 2·0%). It can be observed that operating expenses have increased considerably,
but this is to be expected and is probably in line with the increase in the number of stores.
y
In summary, the increase in capacity has focused on clothes rather than food retailing. This
seems misguided as the performance of food retailing was better than that of clothes (in
20X5) and this has continued (even more so) during the current year.
1 mark per relevant comment to max 3
ud
Liquidity/solvency
St
The increase in the investment in new stores and the refurbishment of existing stores has been
largely financed by increasing long term loans by $2 million and issuing $3 million of equity.
The effect of this is an increase in gearing from 17% to 28%. Although the level of gearing is
still modest, the interest cover has fallen from a very healthy 25 times to a worrying low 3·3
times. The investment has also taken its toll on the bank balance falling from $450,000 in
hand to an overdraft of $930,000. This probably explains why Bigwood has stretched its
payment of accounts payable to 59 days in 20X6 from 50 days in 20X5.
ck
er
Bigwood’s current liquidity position has deteriorated slightly from 0·77 : 1 to 0·71 : 1. No
quick ratios have been given, nor would they be useful. Liquidity ratios are difficult to assess
for retailers. Most of the sales generated by retailers are for cash (thus there will be few trade
receivables) and normal liquidity benchmarks are not appropriate. The cash flow statement
reveals cash flows generated from operating activities of $5,550,000. This is a far more
reliable indicator of Bigwood’s liquidity position. $5,550,000 is more than adequate to
service the tax and the dividend payments. Indeed the operating cash flows have contributed
significantly to the financing of the expansion programme.
Be
Share price and dividends
1 mark per relevant comment to max 2
Bigwood’s share price has halved from $6·00 to $3·00 during the current year. The dilution
effect of the share issue at $1·50 per share (2 million shares for $3 million) would account for
some of this fall (to approximately $4·20), but the further fall probably represents the
market’s expectations of Bigwood’s performance. It is worth noting that Bigwood has
maintained its dividends at $600,000 despite an after tax profit of only $450,000. Although
this dividend policy cannot be maintained indefinitely (at the current level of profits), the
directors may be trying to convey to the market a feeling of confidence in the future
profitability of Bigwood. It may also be a reaction designed to support the share price. It
should also be noted that although the total dividend has been maintained, the dividend per
share will have decreased due to the share issue during the year.
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9
Summary
1 mark for good summary
The above analysis of performance seems to give mixed messages; Bigwood has invested
heavily in new and upgraded stores, but operating performance has deteriorated and the
expansion may have been mis-focused. This appears to have affected the share price
adversely. Alternatively, it may be that the expansion will take a little time to bear fruit and
the deterioration may be a reflection of the current state of the economy. Cash generation
remains sound and if this continues, the poor current liquidity position will soon be
reversed.
max 10
32
GOLD CO
(a)
Goodwill on acquisition of Silver
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__
$000
Cost of investment
½
3,328
1½
Sc
Non-controlling interest (400 ÷ 0.50) × 40% × $10.40
Net assets on acquisition
Share capital
Share premium
Retained earnings
Fair value adjustment
$000
5,020
ud
y
400
900
6,740
60
______
½
1
(8,100)
______
248
______
Silver was acquired two years ago and goodwill has been impaired by $68,000 in the year
ended 30 September 20X5, leaving a value of $180,000. The value of goodwill at 30
September 20X6 is given as $120,000 meaning that the impairment charge against profits
for 20X6 is $60,000.
1
__
max 4
St
__
(see (b))
Value of investment in Bronze
ck
(b)
er
The fair value adjustment relates to plant and equipment which has a remaining life of
four years at the date of acquisition. This additional $60,000 is depreciated in the
consolidated financial statements, giving a charge to the current year’s statement of profit
or loss of $15,000 and an adjustment against the opening consolidated retained earnings
of $15,000.
$000
Be
Cost of investment
Share for share exchange (400 × 30%) × $3
Cash payment
360
83.4
______
443.4
Post-acquisition profit
Profit for year (96 × 8/12 × 30%)
19.2
______
1
462.6
______
½
As the recoverable amount of the investment in Bronze is greater than its year-end carrying
amount there is no impairment of the investment to charge to the statement of profit or loss.
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½+½
½
10
__
3
__
Consolidated statement of profit or loss for the year ended 30 September 20X6
Revenue
Cost of sales
$000
5,312
(4,233)
______
1½*
3½*
Gross profit
Operating expenses
Dividend income
Income from associated companies
1,079
(444)
40
19.2
______
3*
1½
2½
694.2
(225)
______
½
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(c)
Profit before tax
Tax
Profit after tax
469.2
______
64.4
404.8
______
Sc
Non-controlling interest
Shareholders of Gold
Profit for year
469.2
______
½
__
13
__
ud
Revenue (W1)
Do not double count the following marks
Gold
$000
3,016
Silver
$000
2,636
(2,413)
(2,108)
(8)
(44)
St
Consolidation schedule
y
*Includes ½ for adding together Gold and Silver = 1½
Cost of sales (W1)
er
Unrealised profit (W2)
Be
ck
Gross profit
Operating expenses
(212)
Goodwill
Depreciation on fair value
Depreciation on intra-group sale
11
Dividends from non-group companies (W4) 30
Income from investment in associate (W3)
Profit before tax
Tax
(135)
Profit after tax
Non-controlling interest
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Total
$000
5,312
1+1
1,079
(444)
10
19.2
(90)
______
40
19.2
______
½ per (a)
1
1
1+½
2½
694.2
(225)
______
469.2
(64.4)
______
404.8
______
11
½+½
½+½
(4,233)
______
(168)
(60)
(15)
161
40%
Profit for year
Adjustments
$000
(120)
(220)
120
220
½ method
WORKINGS
(1)
Intra-group sales
Reduce both revenue and cost of sales for intra-group sales between Gold and Silver,
$120,000 and $220,000. Do not adjust for transaction with Bronze; the revenue and costs of
associates are not included in the consolidated statement of profit or loss.
(2)
Unrealised profit
ho
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Gold sells to Silver
$120,000 × 25/125 = 24,000 × 1/3 = $8,000
Increase Gold’s cost of sales by $8,000
Silver sells to Gold and Gold treats the goods as non-current assets
Sc
$220,000 × 25/125 = $44,000
Increase Silver’s cost of sales by $44,000
(3)
Income from associate
(4)
St
ud
Profit after tax ($96,000 × 8/12)
Gold’s share
y
As Gold treats the goods as non-current assets which are being depreciated over 4 years there
is a need to reduce Gold’s operating expenses to the extent of one year’s depreciation of
$11,000.
Do not double count these marks
64,000
30%
______
19,200
______
Dividend income
Be
ck
er
Silver paid a dividend of $150,000 during the year of which $90,000 would have been
included in Gold’s profit or loss. This would leave dividend income from non-group
companies of $30,000; adding this to the $10,000 income in Silvers’ profit or loss gives
dividend income from non-group companies to be included in the consolidated profit or loss
of $40,000.
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12
1½
1
MOCK EXAM FEEDBACK SUMMARY – PAPER F7 MOCK 1 SECTION C
Interpretation
of financial
statements
25
Q51 Harbin
Q52 Victular
ho
ol
Q55
Crosswire
Q56 Deltoid

Ensure you gain the easy marks, many of the numbers to be entered are a lift from the question

The format is important, you could lose marks if you do not produce a statement of cash flows in
good format

When it comes to movement in working capital items ensure that you have the correct sign for the
number, the examiner has stated in the past that if the sign is wrong, then no marks will be earned
even if the figure is correct.

Reconstruct NCA and find the missing figures, in this question it is the cost of purchase and
depreciation charge that is missing.

Issue of share capital doesn’t need to be split into nominal value and share premium, one
combined figure will do.

The starting point for a cash flow statement is the profit before tax; this is then adjusted for any
non-cash items included in that profit figure.

Do not waste time calculating ratios; they have been done for you.

Comment on both the food and the clothing sectors, as well as the company as a whole.

Make comments relevant, it is no good saying the ratio has gone up.

Refer back to the cash flow statement in your analysis, as required by the question.

It will be useful to include a summarising statement.
er
31(b)
26
Commentary
Sc
Cash flow
statement
RQB
coverage
y
31(a)
Study
Text ref
ud
Topic
St
Q
Use information that has been given in the question, you are informed that share price has fallen
from $6 to $3 per share – comment on why this might have happened.
Be
ck

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1
MOCK EXAM FEEDBACK SUMMARY – PAPER F7 MOCK 1 SECTION C
21-23
Q38 Patronic
Q41 Pandar
Commentary
ho
ol
Consolidated
SOCI, with
goodwill
calculation
RQB
coverage

Take account of fair value adjustment when calculating net assets on acquisition.

If goodwill is incorrect in (a) marks will still be awarded for the correct follow through treatment
in the profit or loss.

Time apportion Bronze profit for year in net asset on acquisition calculation.

Question gives mark-up on cost to find unrealised profit; do not use a margin calculation.

Gold is treating goods purchased as non-current assets; take account of depreciation adjustment.

Do not include any revenue or expenses of associate; use equity accounting to reflect single one
line entry.

NCI calculation is based on adjusted profit after dealing with unrealised profit and goodwill
impairment. As NCI are valued at fair value on acquisition and credited with goodwill, any
impairment loss must be shared between parent and NCI.
Sc
32
Study
Text ref
y
Topic
Be
ck
er
St
ud
Q
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2