s
Brighton Business School
Undergraduate Programmes
Level Five Examination
28th May 2021
FA283: Financial Accounting and Reporting
_________________________________________________________________________
Instruction to candidates:
Time allowed: 6 hours (7 ½ hours if you have a Learning Support Plan in place) to
complete the paper
Rubric: You are required to answer FOUR questions in total
Section A: The question in this section is COMPULSORY and MUST be answered
Section B: You are required to answer any THREE questions from this section
Please show all your workings to maximise marks. All questions carry 25 marks
Submission:
You are required to submit your exam answers to the relevant Turnitin Submission
Point on Student Central in the Assessment and Grades Area. This should be in the
form of a word document. Please do not include your name on the answer document
as papers will be marked anonymously. You must however include your student
number on the work submitted.
Word Count:
1,000 words for each hour of the original duration of your exam. The maximum word
count for this exam is 3,000 words. Please do not exceed the word count as the work
will not be marked.
Handwritten calculations and diagrams:
You may use Excel for calculations and workings which form part of your answer or for
presenting financial information, but these must not be submitted separately,
but must be embedded into your Word document submission. Similarly, any
handwritten calculations or diagrams that form part of your answer should be
photographed and embedded into the Word document.
Nature of examination: Unseen
Allowable Material: Non-programmable calculators are permitted
Page 1 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Section A: You MUST answer QUESTION ONE in this section
Question 1
The summarised trial balance of Startick Plc as at 30 September 2021 as follows:
£000
Plant and equipment – at cost (note (ii))
292,500
Land (£25 million) and buildings – at cost (note (ii))
175,000
Investment properties at fair value (note (iii))
100,000
Intangible assets (note (iv))
Current assets
£000
80,000
266,500
Draft Profit for the year (notes (i) and (vi))
Share capital (£1 each)
98,500
100,000
Retained earnings as at 1 October 2020
145,500
Accumulated depreciation at 1 October 2020:
buildings
plant and equipment
100,000
172,500
Current liabilities
194,500
Deferred tax (note (v))
12,500
Current tax (note (v))
5,500
Proceeds from disposal of property (note (iii))
85,000
914,000
914,000
Notes:
(i) In deriving the draft profit for the year, Startick had reported a sale amounting to £36.45
million, which took place on 1 October 2020. The terms of the sale involved the transfer of
goods, which took place on 1 October 2020, but terms of payment whereby payment by the
customer was to be in two years’ time on 1 October 2022. Startick borrows from their bank at
a rate of 8% per annum.
(ii) Property plant and equipment:
Land and buildings have been carried at cost up to 30 September 2020. Of the cost of £175
million, £25 million was attributable to land.
However, the price of property has increased significantly in recent years and so the
directors decided to revalue the land and buildings. On 1 October 2020, an independent
surveyor valued the land at £40 million and the buildings at £195 million at that date. The
remaining life of these buildings at 1 October 2020 was 15 years. Startick does not make an
annual transfer to retained profits to reflect the realisation of the revaluation gain.
Plant and equipment is depreciated at 12½% per annum using the reducing balance
method.
No depreciation has yet been charged on any non-current asset for the year ended 30
September 2021.
Page 2 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Question 1 ctd
(iii) Investment properties
On 1 October 2020, Startick owned two investment properties. The first property had a
carrying amount of £75 million and was sold on 1 December 2020 for £85 million. The
disposal proceeds are recorded in the trial balance above. On 30 September 2021, the
directors decided to use the second property as the company’s head office. So, the property
was transferred to land and buildings at its fair value at that date of £30 million.
(iv) Intangible assets
Intangible assets comprise two separate elements.
The first of these represents training costs of £12 million, which had been incurred in training
staff on new legislation and procedures coming into force as a consequence of the UK
leaving the European Union.
In addition. £68 million was spent during the year in developing automated processes at the
company’s warehouses. It was intended this would make product selection and packaging
more efficient and reduce labour costs. The finance director has reported that the budgeted
further development costs of £28 million are expected to be sufficient, that the new
processes will be in operation by January 2022 and that the company will recover all its
development costs.
(v) A provision of £22 million is required for taxation on the profit for the year to 30
September 2021. The balance on current tax in the trial balance is the over provision of tax
for the previous year.
Startick has taxable temporary differences of £50 million as at 30 September 2021.
The rate of taxation applicable to Startick is 20%.
(vi) The draft profit reported in the trial balance does not include the adjustments that may be
required as a result of the above information.
Required:
(i)
Prepare a statement showing the adjustments required to Startick’s draft profit for
the year ended 30 September 2021.
(12 marks)
(ii)
Prepare Startick’s statement of financial position at 30 September 2021.
(13 marks)
(25 marks)
Page 3 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Section B: You MUST answer THREE questions in this section
Question 2
Set out below are the financial statements of Nicholls Plc:
Statement of Profit and Loss for the year ended 31 January 2021
Revenue
Cost of sales
Staff costs
Depreciation
Loss on sale of non-current assets
Operating profit
Finance costs
Profit before taxation
Taxation
Profit after taxation
Statements of Financial
Position as at 31 January
2021
2021
2020
2020
£000
£000
£000
£000
Assets
Non-current assets at cost
Less: accumulated
depreciation
Current assets
Inventories
Receivables
Cash
Equity and liabilities
Share capital
Share premium
Retained profit
Total equity and liabilities
3,177
(620)
3,277
(454)
2,557
2,823
54
122
190
Total assets
Long-term liabilities
Loans
Current liabilities
Trade payables
Taxation
£000
1,400
(165)
(185)
(256)
(43)
751
(50)
701
(154)
547
44
116
98
366
2,923
258
3,081
770
50
1,611
2,431
700
50
1,204
1,954
290
890
72
130
62
175
202
2,923
237
3,081
Note:
During the year, the company bought new plant & machinery at a cost of £175,000.
Page 4 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Question 2 ctd
Required:
Prepare a statement of cash flows for the year ended 31 January 2021 in accordance with
IAS 7 – Cash flow statements using the indirect method.
(25 marks)
Question 3
On 1 April 2020, Freedom Ltd (which prepares accounts to 31 March each year) enters into
a lease of computer equipment. The company is required to make six half-yearly lease
payments of £7,674 each and the first payment falls due on 1 April 2020. The rate of interest
implicit in the lease is 6% per half-year. At the end of the lease term, Freedom Ltd will obtain
legal ownership of the computer equipment. The computer equipment will be depreciated on
a straight-line basis.
Required:
(a)
(b)
(c)
(d)
Calculate the initial amount of the right of use asset that should be recognised on 1
April 2020.
(6 marks)
Calculate the finance charge that will be shown as an expense in the company's
financial statements for each of the years to 31 March 2021, 2022 and 2023.
(6 marks)
For each of the years ended 31 March 2021, 2022 and 2023, show how the asset and
liability in relation to the lease would be reported.
(6 marks)
Discuss why IFRS16 Leases requires companies to report lease transactions in this
way rather than charging rental payments directly to the Statement of Profit & Loss.
(7 marks)
(Total 25 marks)
Page 5 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Question 4
(i)
Statements of Financial Position at 31 March 2020
London plc
£000
Non-current assets
Property, plant and equipment
Investment in Brighton Ltd
Current assets
Inventory
Receivables
Cash and cash equivalents
Equity and reserves
£1 share capital
Share premium
Retained earnings
Non-current liabilities
Loan
Current liabilities
Payables
Tax
Brighton Ltd
£000
1,250
450
450
-
125
130
89
2,044
25
90
100
665
500
25
1,096
100
50
366
320
50
78
25
2,044
89
10
665
The following information is also available:
a)
London plc acquired 75,000 ordinary shares of Brighton Ltd on 1 April 2018 and at that date
the retained earnings of Brighton Ltd was £250,000.
b)
At acquisition the fair value of Brighton Ltd.’s property, plant and equipment was £100,000
above the book value. This has not been reflected in the financial statements.
c)
Brighton Ltd has issued no shares since being acquired by London plc.
d)
Included within the receivables of London plc is £45,000 that is owed by Brighton Ltd.
e)
At the year end the directors decide that the goodwill relating to Brighton Ltd needs to be
impaired by £30,000.
f)
During the year ended 31 March 2020 London plc sold inventory to Brighton Ltd for £40,000.
London plc had invoiced these goods to Brighton Ltd at cost plus 60%. During the year
ended 31 March 2020 Brighton Ltd resold 80% of this inventory.
g)
The non-controlling interest was, in the case of this acquisition, calculated by the proportionate
share of net assets method.
Page 6 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Question 4 ctd
Required:
(a)
Calculate goodwill:
(i)
arising on the acquisition of Brighton Ltd at 1 April 2018
(ii)
at 31 March 2020.
(3 marks)
(b)
Calculate consolidated retained earnings at 31 March 2020.
(3 marks)
(c)
Calculate the non-controlling interest at 31 March 2020.
(3 marks)
(d)
Prepare the consolidated statement of financial position for the
London group at 31 March 2020.
(10 marks)
(ii)
Epsilon is a listed company, which intends to apply the provisions of IFRS 8 Operating
Segments in its financial statements for the year ended 31 March 2021.
There are 5 significant operational areas of the business, for which a monthly operating and
financial report is received by Epsilon’s board of directors. Relevant financial information
relating to the five operations for the year to 31 March 2021, and in respect of the head
office, is as follows:
Operational
area
A
B
C
D
E
Sub-total
Head office
Entity total
Revenue for
year to 31
March 2021
£000
23,000
18,000
4,000
1,000
3,000
49,000
Nil
49,000
Profit/(loss)
for year to 31
March 2021
£000
3,000
2,000
(3,000)
150
450
2,600
Nil
2,600
Assets at
31 March
2021
£000
8,000
6,000
5,000
500
400
19,900
6,000
25,900
Required:
1. Explain the basis on which reportable operating segments should be identified.
(2 marks)
2. Explain whether the Head Office should be reported as an operating segment.
(1 mark)
3. Identify which of the operational areas should be reported as operating segments.
(3 marks)
(Total: 25 marks)
Page 7 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Question 5
Penny plc acquired 60% of the ordinary shares in Sunny plc a number of years ago.
At the same time Penny plc also acquired 30% of the preference shares in Sunny
plc. The accumulated retained earnings in Sunny plc at the time of acquisition were
£88,000. In the year under review the parent sold goods to the subsidiary for
£30,000 which included a mark-up of 20%. At the end of the year 35% of this
inventory was still in the stock of Sunny plc.
A review of the goodwill suggested an impairment charge of £22,000 was
appropriate for the year. Non-controlling interests were, in the case of this
acquisition, calculated using method 1 i.e. the proportionate share of the net assets
method.
Statements of comprehensive income for the year ended 31 December 2020
Revenue
Cost of Sales
Gross Profit
Penny
£'s
998,000
630,000
368,000
Sunny
£'s
444,500
222,400
222,100
Expenses
122,000 75,400
246,000 146,700
Dividends received - ordinary shares
Dividends received - preference shares
Profit before Tax
Income tax
expense
Profit for the
period
8,000
3,000
257,000 146,700
56,540
32,275
200,460 114,425
Required:
(a)
(b)
Prepare the consolidated income statement for the Penny group at
31 December 2020
Explain the effect of a provision for unrealised profit on a
non-controlling interest. Consider both where the sale is
made by the parent to the subsidiary, and where the sale is
made by the subsidiary to the parent.
(18 marks)
(7 marks)
(Total 25 marks)
Page 8 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Question 6
(1)
IAS 37 – Provisions, contingent liabilities and contingent assets refers to legal and
constructive obligations.
Required:
Explain what is meant by constructive obligations.
(3 marks)
(2)
On 1st December 2017 the board of directors of Delta plc took the decision to close
one of its manufacturing units. The closure was to be effective on 31 March 2018. A formal
plan was formulated and the 250 employees of the manufacturing unit were advised on 1
January 2018 of the intention to close the unit. Of the 250 affected employees, 50
employees would be retrained and re-deployed to other manufacturing units at a cost of
£120,000. The remaining 200 employees would be made redundant and would be entitled to
redundancy payments averaging £12,000 per employee.
Required:
Explain whether a provision for redundancy costs would be required in Delta plc’s financial
statements for the year ended 31 March 2018 and, if so, the amount of the provision
required.
(5 marks)
(3)
A division of Delta plc provides a one year warranty with the products it sells to
customers. During the year ended 31 March 2018 it sold 200,000 units of the product to
customers. Past experience has shown the incidence of warranty claims and the costs of
warranty claims to be as set out below:
%
Sales give rise to no warranty claim
70
Cost of
repair/replacement
£
NIL
Warranty claims requiring repairs
20
25
Warranty claims requiring complete
replacement
10
80
Required:
a) Calculate the value of the warranty provision Delta plc should carry in its financial
statements.
(4 marks)
b) Discuss why there is a need for an accounting standard in this area. Illustrate your answer
with three practical examples of how the standard addresses controversial and potential
abuses of provisions issues.
(7 marks)
Page 9 of 10
FA283: Financial Accounting and Reporting
28th May 2021
Question 6 ctd
(4)
AAA Ltd buys used cars which it reconditions and sells on to customers. The company's
inventory at the end of its most recent accounting period included the following cars:
Purchase
price
Car A
Car B
Car C
Car D
£
20,600
31,500
36,900
16,600
105,600
Repair costs
incurred to
date
£
1,300
1,700
1,000
--4,000
Expected
further costs
before sale
£
--800
4,200
1,800
6,800
Expected
selling
price
£
25,000
35,000
46,000
19,000
125,000
Selling expenses are expected to absorb 4% of the expected selling price.
Required:
Compute the value at which the inventory of each car should be measured in the company's
financial statements.
(6 marks)
(Total 25 marks)
Page 10 of 10
FA283: Financial Accounting and Reporting
28th May 2021