ACCOUNTANCY 2A Semester 1 2021/2022
SAMPLE EXAM PAPER
Time: 3 hours + 1 additional hour to account for electronic submission format
Sample Paper adapted from the 2020/21 course exam assessment
SECTION A: Answer EITHER Question A.1 OR Question A.2
[30 marks]
SECTION B: Answer BOTH Question B.1 AND Question B.2
[35 marks]
SECTION C: Answer EITHER Question C.1 OR Question C.2
[35 marks]
Total marks for Examination
[100 marks]
Answers to be submitted in the answer sheets provided
1
SECTION A
Answer EITHER Question A.1 OR Question A.2
Question A.1
In recent years the large accountancy firms have been subject to much criticism.
Discuss the reasons for this criticism and assess whether it is justifiable.
(Maximum 700 words)
[Total 30 marks]
OR
Question A.2
Critically discuss why there is a demand for globally uniform accounting standards, and how
local endorsement processes of global accounting standards may help (or not) in satisfying this
demand.
(Maximum 700 words)
[Total 30 marks]
2
SECTION B
Candidates must answer BOTH Question B.1 AND Question B.2
Question B.1
The following information is available for Norton Ltd.
Statement of Financial Position as at 31 March
Non-current assets
Property, plant and equipment
Intangible assets
Investments
Total non-current assets
Current assets
Inventory
Trade receivables
Investment income receivable
Bank
Total current assets
Total Assets
Equity
Ordinary share capital
Share premium
Revaluation reserve
Retained earnings
Total equity
Non-current liabilities
Loans
Provisions for liabilities
Total non-current liabilities
Current liabilities
Trade payables
Taxation payable
Interest payable
Total current liabilities
Total equity and liabilities
3
2021
£000
2020
£000
42,000
19,000
16,400
77,400
35,300
17,400
11,700
64,400
20,700
19,600
4,200
48,900
93,400
170,800
24,200
18,800
3,800
26,400
73,200
137,600
1,630
13,070
5,200
113,800
133,700
1,600
12,300
4,700
87,900
106,500
700
3,300
4,000
1,000
1,800
2,800
30,300
2,792
8
33,100
170,800
19,200
9,100
28,300
137,600
Additional information:
1.
Total comprehensive income for the year to 31 March 2021 is £71,800,000 comprising
profit after tax of £71,300,000 and other comprehensive income of £500,000 relating to
revaluation of property, plant and equipment.
2.
Profit after tax is the operating profit for the year after charging tax expense of
£18,100,000 and Interest expense of £42,000.
3.
The following items are included in the calculation of operating profit:
-
4.
depreciation of £8,800,000 and impairment losses of £300,000 relating to property,
plant and equipment
- amortisation of £6,100,000 and impairment losses of £280,000 on intangibles.
- gain of £325,000 on disposal of Items of equipment costing £1,800,000. The property,
plant and equipment note to the financial statements shows that £1,200,000 of
depreciation had been charged on these items since acquisition.
- investment income totalling £6,800,000 has been earned during the year.
- changes in estimates for provisions for liabilities are incorporated into the calculation
of operating profit through operating expenses.
The company paid a dividend during the year to 31 March 2021 and this, together with the
profit after tax, are the only movements in retained earnings.
REQUIRED:
a) Prepare the statement of cash flows for Norton Ltd. for the year ended 31 March 2021
in accordance with IAS 7 (using the indirect method). Taxation and interest paid are to
be classified as operating cash flows. Clearly show all workings.
[20 marks]
b) IAS 7, Statement of Cash Flows allows for some flexibility in the presentation and
categorisation of certain aspects of the statement. Outline some of these differences
and consider how they may impact the reader’s understanding of the information
presented.
[6 marks]
[Total marks Question B.1: 26 marks]
4
Question B.2
Haldane Ltd.
Haldane Ltd. prepares its financial statements to 31 March each year. The company operates as
a homeware retailer with retail outlets in many cities throughout the UK and some
international locations. Most of the shops are rented but some sites in the major UK cities are
owned by the company and are included in property, plant and equipment. The company
applies International Financial Reporting Standards and uses the cost model for the
measurement of buildings.
On 1 June 2020, the company appointed an agent to actively market the sale of one of its shops
in Glasgow. The shop will continue to operate but as soon as a buyer is found, the existing
inventory will be moved to another shop in the city. Management expect that the sale will be
completed by the end of May 2021.
The following additional information relating to this property is available:
1 June 2020:
Building carrying amount £430,000
Fair value less costs to sell £410,000
31 March 2021:
At the year-end the property remained unsold but strict planning regulations that previously
applied to the building have been relaxed. This resulted in a revised independent valuation,
based on the selling price of a similar property on the same street, of £455,000.
10 May 2021:
The building sale was completed on 10 May 2021 and the sale proceeds after selling costs
totalled £463,000.
REQUIRED:
Explain how Haldane Ltd. will account for this building, including any reasons or assumptions
you make in arriving at this treatment and calculating any impairment losses or gains that
should be recognised:
- when the building is first put on the market on 1 June 2020
- at 31 March 2021, clearly stating the amounts that will appear on the Statement of
Comprehensive Income and Statement of Financial Position at that date
- at the date of sale on 10 May 2021 to record the disposal of the building.
[9 marks]
[Total marks Question B.2: 9 marks]
[Total marks Section B: 35 marks]
5
SECTION C
Answer EITHER Question C.1 OR Question C.2
Question C.1
Below are the summarised statements of financial position of two companies, Sparkle Ltd.
(Sparkle) and Gleam Ltd. (Gleam) as at 31 December 2020
Non-current assets
Property, plant and equipment
Investment in Gleam
Current Assets
Inventory
Trade and other receivables
Loan due from Gleam
Bank
Total assets
Equity
Ordinary share capital (£1 shares)
Preference share capital (£1 shares)
Share premium
Revaluation reserve
Retained earnings
Current Liabilities
Trade payables
Loan due to Sparkle
Total equity and liabilities
SPARKLE
31 Dec. 2020
£000s
GLEAM
31 Dec. 2020
£000s
3,184
959
4,143
1,290
1,290
357
312
17
21
707
4,850
198
144
16
358
1,648
2,000
500
440
240
980
4,160
800
200
120
190
1,310
690
690
4,850
326
12
338
1,648
The following additional information is available:
1. Sparkle acquired 70% of Gleam’s ordinary share capital and 15% of preference share
capital on 1 January 2020. At that date, Gleam’s retained earnings were £150,000. Gleam
uses the cost model (rather than the revaluation model) for its non-current assets. At the
date of acquisition, the fair value of Gleam’s property, plant and equipment was assessed
as being £100,000 higher than the carrying amount. There has been no change in Gleam’s
share capital since the date of acquisition.
2.
Goodwill on acquisition has suffered an impairment loss of 40%.
3.
Non-controlling interests in subsidiaries are to be measured at the appropriate portion of
the subsidiary’s identifiable net assets.
4.
During the year, Sparkle made sales of £96,000 to Gleam. The cost of these goods was
£56,000. At 31 December 2020, Gleam had only sold three quarters of these goods to
customers outside the group.
5.
In June 2020 Sparkle provided an interest free loan to Gleam with the agreement that the
full amount of the loan would be repaid within 18 months. On the last day of December
2020, Gleam repaid £5,000 of this loan and has correctly recorded this payment, however
Sparkle has not yet recorded the receipt of this amount. The balance of the loan will be
repaid before December 2021.
6
REQUIRED:
a)
Prepare the consolidation adjustment journal entries AND the consolidated statement of
financial position for the Sparkle Group as at 31 December 2020 in accordance with
International Financial Reporting Standards. Clearly show all workings
[20 marks]
b)
If the intra-group trading which occurred during the year (described in item 4 of the
additional information above) had been sales made by Gleam to Sparkle, explain how this
would have been treated in the preparation of the Group Statement of Financial Position
(SFP). Identify which items would be affected in the Group SFP and the amounts that
would appear for these items. (Note: there is no requirement to prepare a revised Group
SFP).
[3 marks]
c)
On 1st January 2021, Sparkle paid £350,000 to acquire 264,000 ordinary shares of Bright
Ltd (Bright). At that date Bright’s ordinary share capital was £600,000 (Nominal value 50p)
and it had retained earnings of £180,000.
-
-
Identify the nature of the ownership relationship that exists between Sparkle and
Bright and explain the method used to account for this investment in accordance
with the relevant International Financial Reporting Standards.
Show the figures that will appear in Sparkle’s financial statements for the year end
31 December 2021 in relation to the investment in Bright assuming Bright’s profits
after tax for the year to 31 December 2021 are £150,000 and Bright pays out total
dividends of £20,000 during the year to 31 December 2021.
[6 marks]
d) After the publication of the 31 December 2020 financial statements, Sparkle became
aware of two issues relating to items that were presented in the published financial
statements. The first issue relates to a significant reduction in the expected useful life of
a building. In an email to the financial controller, a member of the accounts team has
highlighted that if this shorter useful life had been used from when the asset was first
acquired 5 years ago then deprecation charged each year for the past 5 years would
have been £100,000 higher. The second issue relates to an error with regard to revenue
recognition during the year to 31 December 2020. Sales invoices totalling £450,000
were recorded as sales in December 2020 but these items were not delivered to
customers until February 2021. The cost of these goods, £290,000, was included in
inventory at 31 December 2020.
Explain how each of these events should be dealt with in accordance with the
appropriate International Financial Reporting Standards.
[6 marks]
[Total marks C.1: 35 marks]
7
Question C.2
Melville plc. (Melville) is preparing its financial statements for the year ended 31 March 2021.
The following items are still being considered. You are required to explain the treatment of
these items in Melville’s financial statements for the year-ended 31 March 2021 in accordance
with the appropriate International Financial Reporting Standards.
Item 1: Warehouse construction
Melville is constructing a new building which will become their new distribution warehouse.
Total construction costs to date amount to £2,700,000 and this amount is showing as an asset
under construction in the draft statement of financial position. Much of the financing of the
project has come from a surplus of cash flows from operations. Due to higher than usual
demand for its products the need for the warehouse became more urgent and additional costs
were incurred to speed up the construction. A loan of £600,000 was taken out on 1 September
2020 to provide additional finance. Interest on that loan is charged at a rate of 5% per annum.
The interest costs are showing as interest expense on the draft income statement. The full
amount of the loan is being used to finance the additional construction costs of the warehouse.
The warehouse became fully operational on 1 April 2021. The loan is still outstanding and will
be repaid in full on 31 August 2021. The asset is considered to be a “qualifying asset” in
accordance with IAS23 (revised), Borrowing Costs.
REQUIRED:
- Explain the appropriate treatment of the interest costs on the loan in the year to 31 March
2021, and the year to 31 March 2022, clearly outlining the rationale behind the treatment.
- Show the figures that will appear on the Statement of Comprehensive Income and Statement
of Financial Position for the year ended 31 March 2021 in relation to this warehouse.
[7 marks]
Item 2: Goodwill
Melville has spent £2,000,000 on raising brand awareness this year and already sales have risen
sharply. Excellent sales and profit growth are expected next year. As a result of this enhanced
reputation and its impact on future sales, profitability, and sustainable future cash flows,
Melville has re-categorised this £2,000,000 as an intangible asset of Goodwill on its draft
statement of financial position and plans to amortise it over the next 3 years.
REQUIRED:
- Explain whether this is the appropriate categorisation of this spending in accordance with
International Financial Reporting Standards.
- Show the figures that will appear on the Statement of Comprehensive Income and
Statement of Financial Position for the year ended 31 March 2021 in relation to this item.
[5 marks]
8
Item 3: Discontinued operations
Melville has sold a division of its business in South America during the year to 31 March 2021.
The division had sales of £10,000,000 but had made losses of £3,200,000 this year. The division,
which had a carrying value in Melville’s accounts of £22,000,000 was eventually sold to a large
US company for £18,000,000. All aspects of the disposal of the division have been correctly
accounted for in the draft financial statements and Melville’s management understand that it
must disclose information regarding this discontinued operation but are unclear as to why
users of financial statements would find such detailed information useful.
REQUIRED:
- Explain how this information would be disclosed in the financial statements and
particularly why these disclosures are useful to Melville’s investors/potential investors.
[5 marks]
Item 4: De-recognition of Revalued Land
During the year to 31 March 2021, Melville disposed of one of its plots of land which
had been acquired some years ago for £1,100,000. Melville uses the revaluation
model to accounts for land (which is not held for investment purposes) and
revaluations have taken place twice since acquisition.
The land was sold for £1,950,000 on 29 March 2021. At the date of disposal this land
was included in the accounts at a carrying amount of £1,600,000. The revaluation
reserve includes £500,000 relating to the revaluation of this land.
This transaction has not yet been accounted for in the draft financial statements.
REQUIRED:
- Explain the treatment of this sale and show the appropriate journal entry.
-
Show the figures that will appear on the Statement of Comprehensive Income,
Statement of Changes in Equity and Statement of Financial position for the year ended
31 March 2021 in relation to the de-recognition of this land.
[6 marks]
9
Item 5: Underestimate of taxation
Melville’s income statement for the year ended 31 March 2020 (last year) showed a tax
expense of £1,100,000 which was the estimated charge calculated by the company’s tax
advisers. Following a review by HMRC (UK tax authority) the tax bill issued amounted to
£1,620,000 and this amount had been paid in full before the end of December 2020.
An amount of £520,000 is showing as a Debit balance for Corporation Tax on the Trial Balance
at 31 March 2021.
Having considered the results of the HMRC review, the tax advisers have estimated that the tax
charge based on the profits for the year to 31 March 2021 will be £2,300,000.
REQUIRED
- Explain the distinction between a change in accounting estimate and a prior period error.
Based on your understanding of this distinction, explain how the information relating to the
taxation should be accounted for in the financial statements for the year ended 31 March
2021.
- Show the figures that will appear in relation to taxation on the Statement of Comprehensive
Income and the Statement of Financial Position for the year ended 31 March 2021.
[6 marks]
Item 6: Earnings per share
On 1 April 2019, the company’s issued share capital consisted of 2,000,000 ordinary shares and
no shares were issued during the year to 31 March 2020.
On 1 July 2020 the company made a 1 for 4 bonus issue of shares.
On 1 January 2021 the company issued a further 150,000 shares at full market price.
Profit after tax figures are as follows:
31 March 2020
£6,450,000
31 March 2021
£7,200,000 (Based on draft figures)
REQUIRED:
- Calculate Melville Ltd.’s Basic EPS as published in the financial statements issued for the
year to 31 March 2020 in accordance with IAS33, Earnings per Share.
- Show the information that will be provided relating to Earnings per share in the
published financial statements for the year ended 31 March 2021, explaining the
rationale for your calculations. (Use the draft March 2021 profit)
[6 marks]
[Total marks C.2: 35 marks]
END OF PAPER
10