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BPP Learning Media Ltd 2021 H G q Contents Page Finding questions Questionindex iv Revising Financial Reporting Topicsto revise Questionpractice Passingthe FRexam Examinformation viii viii ix xi Helping you with your revision xii Essential skillareas xiii Questions and answers Questions Answers 3 147 Exam practice Mockexam1(September2016CBE) Questions Planof attack Answers 267 285 286 Mockexam2 (SpecimenCBE) Questions Planof attack Answers 299 315 316 Mockexam3 (December2016CBE) Questions Planof attack Answers 327 343 344 Mockexam4 Questions Planof attack Answers 355 371 372 Reviewform Contents iii H q Question index Theheadingsinthischecklist/indexindicatethe maintopicsof questions,but many questions coverseveraldifferenttopics. Past examquestionsare designatedwiththe date of the examinwhichthey featured, although somehave been amendedto reflectsubsequentchanges to the syllabusor inthe formatof the exam.Priorto September2018,FinancialReporting(FR)was knownas F7FinancialReporting. SinceSeptember2015,there have been fourexamsittingsper year, but ACCAonlypublishtwo exams'worthof questionsper year. Thesereleasesare compiledfromquestionsselectedfromthe precedingsessions.Thesecompilationexamsare denoted as 'Mar/Jun' and 'Sept/Dec'inthe indexbelow. Time Marks allocation (Mins) Page number Question Answer Part A: The conceptual and regulatory framework for financial reporting Section Aquestions 1-8 OTQbank – conceptualframework 16 29 3 147 9-18 OTQbank – regulatoryframework 20 15 5 148 10 18 8 150 Section Bquestions 19-23 LisbonCo case G H Part B: Accounting for transactions financial statements (I) in Section Aquestions 24-32 OTQbank – Tangiblenon-currentassets 18 32 10 151 33-37 OTQbank – Intangiblenon-current assets 10 18 13 153 38-46 OTQbank – Impairmentof assets 18 32 15 155 47-51 Plethoraplc case 10 18 18 157 52-56 LinettiCo case (Mar/Jun2019) 10 18 19 157 57-61 EliteLeisureCo case 10 18 21 158 62-66 DexterityCo case 10 18 22 158 67-71 AdventCo case 10 18 24 159 72-76 SystriaCo case 10 18 26 160 Section Bquestions iv Questionindex G q Time Marks Part B: Accounting for transactions financial statements (II) allocation (Mins) Page number Question Answer in Section Aquestions 77-88 OTQbank – revenue 24 43 28 162 89-95 OTQbank – introductionto groups 14 25 33 164 96-102 OTQbank – financialinstruments 14 25 35 165 103-114 OTQbank – leasing 24 43 37 166 115-124 OTQbank – provisionsand events after the reportingperiod 20 36 41 168 125-133 OTQbank – inventoriesand biological assets 18 32 44 170 134-140 OTQbank – accountingfortaxation 14 25 47 172 141-145 DerringdoCo case 10 18 50 174 146-150 BridgenorthCo case 10 18 51 174 151-155 ApexCo case 10 18 52 175 156-160 BertrandCo case 10 18 54 175 161-165 FinoCo case 10 18 55 176 166-170 Jeffers Co case 10 18 57 177 171-175 JulianCo case 10 18 59 177 176-187 OTQbank – reportingfinancial performance 24 43 61 178 188-195 OTQbank – earningsper share 16 32 65 179 10 18 68 182 Section Bquestions Part B: Accounting for transactions financial statements (III) in Section Aquestions Section Bquestions 196-200 TunshillCo case (Dec2010amended) Questionindex v H G q Time Marks allocation (Mins) Page number Question Answer Part C: Analysing and interpreting the financial statements of single entities and groups Section Aquestions 201-206 OTQbank – calculatingand interpretationof accountingratiosand trends 12 22 70 183 207-214 OTQbank – limitationsof financial statements and interpretationtechniques 16 29 72 183 215-221 OTQbank – specialised,not-for-profit and publicsectorentities 14 25 75 184 10 18 77 186 227 WoodbankCo (Jun 2014amended) 20 36 79 187 228 HassleCo 20 36 81 189 229 FunjectCo (Mar/Jun2017) 20 36 83 190 230 HarbinCo 20 36 84 193 231 QuartileCo (Dec2012amended) 20 36 87 195 232 MowairCo (Sept/Dec2017) 20 36 88 196 233 PerkinsCo (Mar/Jun2018) 20 36 89 198 234 PirloCo (Mar/Jun2019) 20 36 91 201 235 KostnerCo 20 36 92 202 Section Bquestion 222-226 Sandbag plc case Section C questions Time Marks Part D: Preparation statements allocation (Mins) Page number Question Answer of financial Section Aquestions 236-248OTQbank – consolidatedstatement of financialposition 26 47 95 205 249-258OTQbank – consolidatedstatement of profitor lossand othercomprehensiveincome 20 36 100 207 259-265OTQbank – accountingforassociates 14 25 103 209 266-270OTQbank – presentationof published financialstatements 10 18 105 209 271-275OTQbank – statement of cash flows 10 18 106 210 vi Questionindex H G q Time Marks allocation (Mins) Page number Question Answer Section Bquestions 276-280RootCo &BranchCo case 10 18 108 212 281-285PortCo &AlfredCo case 10 18 109 212 286-290PolestarCo case 10 18 110 213 291-295Plateau Co case 10 18 112 214 296-300PintoCo case 10 18 113 214 301-305WoolfCo case 10 18 115 215 306 PedanticCo (Dec2008 amended) 20 36 118 217 307 HighveldtCo 20 36 119 219 308 ParadigmCo (Dec2011amended) 20 36 120 221 309 BooCo and GooseCo 20 36 122 224 310 ViagemCo (Dec2012amended) 20 36 123 226 311 ProdigalCo (Jun 2011amended) 20 36 124 228 312 PlastikCo (Dec2014amended) 20 36 125 230 313 LaurelCo 20 36 126 233 314 TysonCo 20 36 128 235 315 PaladinCo (Dec2011amended) 20 36 128 236 316 DargentCo (Mar/Jun2017) 20 36 130 239 317 Party Co (Sep/Dec2017) 20 36 131 241 318 FrescoCo (Jun 2012amended) 20 36 132 243 319 Dexonplc 20 36 133 246 320 XtolCo (Jun 2014amended) 20 36 135 248 321 AtlasCo 20 36 136 251 322 MobyCo (Dec2013amended) 20 36 137 253 323 VernonCo 20 36 139 255 324 DicksonCo 20 36 140 257 325 HaverfordCo (Mar/Jun2018) 20 36 142 259 Section C questions Mock exam 1 (September 2016 CBE) Mock exam 2 (Specimen exam CBE) Mock exam 3 (December 2016 CBE) Mock exam 4 Questionindex vii H G q Revising Financial Reporting (FR) Theexamwillcomprisethree examsections: Proportion of exam, % Section Style of question type Description A Objectivetest (OTQ) 15questions2 marks 30 B Objectivetest (OTQ)case 3 questions10marks Eachquestionwillcontain5 subparts, each worth2 marks 30 C ConstructedResponse(long questions) 2 questions20 marks 40 Total 100 Allquestionsare compulsory. SectionsAand Baccount for60%of the markson the exam.Theuse of OTQsinSectionsAand B givethe examiningteam greater scope to examinethe wholeof the syllabusand bringintopics that do not feature inthe longerquestions.Itis reallynot possibleto pass thisexamby only revisingcertaintopics. SectionC willcontainone accounts preparationquestionand one interpretationquestion.The accounts preparationquestioncouldbe a groupaccountingquestionwhichmay requirethe preparationof a statement of financialpositionor statement of profitor lossor extractsthereof, and it may includean associate.Youmustreviseallthe consolidationworkings,and you must knowhowto account foran associate. Asinglecompanyaccounts preparationquestionallowsthe examiningteam to bringinmore complexfinancialreportingstandards. Makesure you can deal withthe morecomplexareas of leases,revenuerecognition,deferredtax, calculatingfinancecosts usingthe effectiveinterest rate, priorperiodadjustmentsand discontinuedoperations. Theinterpretationquestionmay be based on a singlecompanyor groupscenario.Youwillbe asked to calculatespecificratiosfortwoyears and to providereasonsfortheirmovement.You may also be asked to criticallyanalyse the informationyou have been providedwithby managementby consideringthe validityof the informationinthe contextof the ratioscalculated. Youmustensurethat you use the scenarioprovidedwhendiscussingthe movementinratiosand do not providegenericstatements. Question practice Questionpracticeis a core part of learningnewtopicareas. Whenyou practicequestions,you shouldfocuson improvingthe Examsuccessskills– personalto yourneeds – by obtaining feedbackor througha processof self-assessment. Sittingthisexamas a computer-basedexamand practicingas many exam-stylequestionsas possibleinthe ACCACBEpracticeplatformwillbe the keyto passingthisexam.Youshould attempt questionsundertimedconditionsand ensureyou producefullanswersto the discussion parts as wellas doingthe calculations.Alsoensurethat you attempt allmockexamsunderexam conditions. ACCAhave launcheda freeon-demandresourcedesignedto mirrorthe liveexamexperience helpingyou to becomemorefamiliarwiththe examformat.Youcan access the platformviathe StudySupportResourcessectionof the ACCAwebsitenavigatingto the CBEquestionpractice sectionand logginginwithyourmyACCAcredentials. viii RevisingFinancialReporting(FR) H q Passing the FR exam Ifyou coveredthe technicalcontentinthe workbookand attempted a sufficientnumberof questionsthen you shouldgo intothe examfeelingconfidentthat you can pass thisexam.What you mustdo is remaincalmand tackleit ina professionalmanner.Thereare a numberof points whichyou shouldbear inmind: Youmustread the questionproperly.Studentsoftenfailto read the questionproperlyand misssomeof the information.Timespent readingthe questiona secondtimewouldbe time wellspent. Makeyourselfdo this,don't justrushintoan answer. WorkingsinSectionC mustbe clear and cross-referenced.Ifthe markercan read and understandyourworkingsthey can giveyou creditforusingthe rightmethod,evenifyour answeris wrong.Ifyouransweris wrongand there are no workings,or they are illegible and incomprehensible,you willget no marksforthat part of the question.Many candidates simplyprovidethe finalanswerinthe CBEspreadsheet responsearea and do not provideworkingsor formula,whichmakesit verydifficultto scoremarks. Stickto the timingsand answerallquestions.Donot spend too longon one questionat the expenseof others.Thenumberof extra marksyou willgain on that questionwillbe minimal,and you couldhave at least obtainedthe easy markson the nextquestion. Makesure you get the easy marks.Ifan accounts preparationquestioncontains somethingthat you are unableto do, justignoreit and do the rest. Youwillprobablyonly losea fewmarksand ifyou start tryingto puzzleit out you mightwaste a lotof minutes. Answerthe question.Ina discussion-typequestion,such as an interpretationquestion,you may be tempted to justwritedowneverythingyou knowabout the topic.Thiswilldo you no good.Themarkingparametersforthese questionsare quiteprecise.Youwillonlyget marksformakingpointsthat answerthe questionexactlyas it has been set. Sodon't waste yourtimewaffling– you couldbe scoringmarkssomewhereelse. G H Avoiding weaknesses Thereis no choiceinthisexam– allquestionshave to be answered.Youmusttherefore study the entiresyllabus– there are no short-cuts. Abilityto answerOTQsand cases improveswithpractice.Tryto get as muchpracticewith these questionsas you can. Thelongerquestionswillbe based on scenariosand answersmustbe focusedand specific to the informationprovidedinthe scenario. Passingthe FRexam ix G q Exam technique tips Section A Objective test questions (OTQs) SomeOTQsare easierthan others.Answerthose that you feelfairlyconfidentabout as quickly as you can. Comeback later to those you findmoredifficult.Thiscouldbe a way of makinguse of the timeinthe examinationmostefficientlyand effectively.Somequestionsare moretimeconsumingthan others. Thefirstmoretime-consumingOTQwillinvolvedoinga computation.Youwillprobablyneed to jotdowna quickproformato answera computationalquestion.Ifthe OTQis a multiplechoice question,rememberthat the wronganswerswillusuallyinvolvecommonerrors,so don't assume that because you have the same answeras one of the optionsthat youransweris necessarily correct!Doublecheckto makesure you haven't made any sillymistakes,Ifyou haven't got the same answeras any of the options,reworkyourcomputation,thinkingcarefullyabout what errorsyou couldhave made. Ifyou stillhaven't got one of the options,choosethe one whichis nearest to youranswer. Thesecondmoretime-consumingOTQis one whereyou are asked to considera numberof statements and identifywhichone (ormore)of themis correct.Makesure that you read each statement at least twicebeforemakingyourselection.Becarefulto followthe requirementsof the OTQexactly– forexample,ifyou are asked to identifytwo correctstatements.Makesure that you understandthe wordingof 'written'OTQsbeforeselectingyouranswer. Section B Objective test questions (OTQs) ThegeneraladviceforSectionAOTQsstands forSectionB.Additionaladviceis to makesure that you read the wholecase scenario.Makea note of any specificinstructionsor assumptions,such as 'Ignorethe calculationof depreciation'fora non-currentasset question.Thenskimthroughthe requirementsof the fivequestions.Thequestionsare independentof each otherand can be answeredinany order. Calculations in Section C questions Therewillbe somerelativelystraightforwardcalculationsinthe questionand somewillbe more difficult.Alwaysdo the bits you can and don't be tempted to writeoffa wholequestionjust because somebits are difficult.Ifyou get stuck,makean assumption,state it and moveon. Do not missout on easy marksby not learningyourproformasproperly. Discussions in Section C questions Interpretationsshouldbe focusedon the specificorganisationinthe questionand you shoulduse the informationprovidedto provideanalysisthat is relevantto the organisationyou are faced with.Thiswillgain moremarksthan regurgitationof knowledge.Readthe questioncarefullyand morethan once, to ensureyou are actuallyansweringthe specificrequirements. Pickout keywordssuch as 'describe','evaluate'and 'discuss'.Theseallmean somethingspecific. 'Describe'means to communicatethe keyfeatures of 'Evaluate'means to assess the valueof 'Discuss'means to examineindetailby argument Clearlylabelthe pointsyou makeindiscussionsso that the markercan identifythemallrather than gettinglostinthe detail. Provideanswersinthe formatrequested.Manyinterpretationquestionsnowincludea preformattedresponsearea that you shoulduse to giveyouranswerstructure. x Passingthe FRexam H G q Exam information Computer-based exams AppliedSkillsexamsare allcomputer-basedexams. Format of the exam Theexamformatwillcomprisethree examsections: Proportion of exam, % Section Style of question type Description A Objectivetest (OTQ) 15questions2 marks 30 B Objectivetest (OTQ)case 3 questions10marks Eachquestionwillcontain5 subparts, each worth2 marks 30 C ConstructedResponse(long questions) 2 questions20 marks 40 Total 100 SectionAand Bquestionswillbe selectedfromthe entiresyllabus.Thepaper versionof these objectivetest questionscontainmultiplechoiceonlyand the computerbased versionswillcontain a variety.Theresponsesto each questionor subpart inthe case of OTcases are marked automaticallyas eithercorrector incorrectby computer. SectionC questionswillmainlyfocuson the followingsyllabusareas but a minorityof markscan be drawnfromany otherarea of the syllabus Interpretationof financialstatements of a singleentityor groups(syllabusarea C) Preparationof financialstatements of a singleentityor groups(syllabusarea D) Theresponsesto these questionsare humanmarked. Additional information TheStudyGuideprovidesmoredetailedguidanceon the syllabusand can be foundby visiting the examresourcefinderon the ACCAwebsite. Useful websites Thewebsitesbelowprovideadditionalsourcesof informationof relevanceto yourstudiesfor FinancialReporting. www.accaglobal.com ACCA'swebsite.Thestudents' sectionof the websiteisinvaluablefordetailedinformation about the qualification,past issuesof StudentAccountant(includingtechnicalarticles)and a freedownloadableStudentPlannerApp. www.bpp.com Ourwebsiteprovidesinformationabout BPPproductsand services,witha linkto the ACCA website. Examinformation xi H G q Helping you with your revision BPP Learning Media – ACCA Approved Content Provider AsanACCAApproved ContentPartner, BPPLearning Mediagivesyoutheopportunity touse revision materials reviewed bytheACCAexamining team.Byincorporating theexamining team comments andsuggestions regarding thedepthandbreadth ofsyllabus coverage, theBPP Learning MediaPractice &Revision Kitprovides excellent, ACCA-approved support foryour revision. These materials arereviewed bytheACCAexamining team.Theobjective ofthereview istoensure thatthematerial properly covers thesyllabus andstudyguideoutcomes, usedbytheexamining teaminsetting theexams, intheappropriate breadth anddepth. Thereview doesnotensure that everyeventuality, combination orapplication ofexaminable topicsisaddressed bytheACCA Approved Content. Nordoesthereview comprise a detailed technical checkofthecontent as theApproved Content Provider hasitsownquality assurance processes inplaceinthisrespect. BPPLearning Mediadoeverything possible toensure thematerial isaccurate anduptodate whensending toprint.Intheeventthatanyerrors arefoundaftertheprintdate,theyare uploaded tothefollowing website: www.bpp.com/learningmedia/Errata. The structure of this Practice and Revision Kit Usingfeedback obtained fromACCAexamining teamreview: Welookatthedosanddon'ts ofrevising for,andtaking,ACCAexams WefocusonFinancial Reporting (FR);wediscuss revising thesyllabus, whattodo(and whatnottodo)intheexam,howtoapproach different typesofquestion andwaysof obtaining easymarks There arealsofourmockexams whichprovide youtheopportunity torefine your knowledge andskillsaspartofyourfinalexampreparations. Selecting questions Weprovide a fullquestion indextohelpyouplanyourrevision. Making the most of question practice AtBPPLearning Mediawerealise thatyouneedmorethanjustquestions andmodel answers to getthemostfromyourquestion practice. Ourtoptipsincluded forcertain questions provide essential adviceontackling questions, presenting answers andthekeypoints thatanswers needtoinclude. Weshowyouhowyoucanpickupeasymarksonsomequestions, asweknow thatpicking upallreadily available marks oftencanmakethedifference between passing andfailing. Weinclude marking guidestoshowyouwhattheexamining teamrewards. Weinclude comments fromtheexamining teamtoshowyouwhere students struggled or performed wellintheactualexam. Werefertothe2021BPPWorkbook (forexams inSeptember 2021,December 2021,March 2022andJune2022)fordetailed coverage ofthetopicscovered inquestions. Attempting mock exams There arefourmockexams thatprovide practice atcopingwiththepressures oftheexamday. Westrongly recommend thatyouattempt themunder examconditions. Mockexam1isthe September 2016CBE.Mockexam2 isthespecimen examCBE.Mockexam3 istheDecember 2016 CBE.Mockexam4 hasbeenformed froma mixture ofexamstandard questions. Sections AandB contain questions which comefromvarious recent pastexams. Section C isfromtheSep/Dec 2020 CBE. xii Helping youwithyourrevision H q Essential Reporting skills areas to be successful in Financial We thinkthere are three areas you shoulddevelopin order to achieveexam success in Financial Reporting(FR). (1) Knowledgeapplication- technicalknowledgewillbe gained as you progressthroughthe Workbook.Knowledgeis combinedwiththe followingexamskills: (2) SpecificFRskills (3) Examsuccessskills Theseare showninthe diagrambelow: G H Essentialskillareas xiii q Specific FR skills These aretheskillsspecific toFRthatwethinkyouneedtodevelop inordertopasstheexam. IntheBPPWorkbook forFRtherearefiveSkillsCheckpoints whichdefineeachskillandshow howitisapplied inanswering a question. Abriefsummary ofeachskillisgivenbelow. Skill 1: Approach to OTQs As60%ofyourmarkswillbegainedbycorrectly answering OTQquestions, youneedtoensure thatyouarefamiliar withthedifferent typesofOTQandthebestapproach totackling themin theexam. Astep-by-step technique forensuring thatyouapproach theOTQquestions inthemostefficient andeffective wayisoutlined below: STEP1:Answer thequestions youknow first. Ifyou’re having difficulty answering aquestion, move onandcome backtotackle it onceyou’ve answered allthequestions youknow. Itisoften quicker toanswer discursive style OTquestions first, leaving more time forcalculations. STEP2:Answer allquestions. There isnopenalty foranincorrect answer inACCAexams; there isnothing tobe gained byleaving anOTquestion unanswered. Ifyouarestuck onaquestion, asa lastresort, itisworth selecting theoption youconsider most likely tobecorrect andmoving on.Flagthequestion, soifyouhave timeafter youhave answered the restofthequestions, youcanrevisit it. G H STEP3:Readtherequirement first! Therequirement willbestated inboldtextintheexam.Identify what youare being asked todo,anytechnical knowledge required andwhattypeofOT question youaredealing with. Lookforkeywords intherequirement such as "Which TWOofthefollowing," or"Which ofthefollowing isNOT". STEP4:Applyyourtechnical knowledge tothedatapresented inthequestion. Work through calculations taking your timeandreadthrough eachanswer option withcare. OTquestions aredesigned sothateachanswer option isplausible. Work through eachresponse option andeliminate those youknow areincorrect SkillsCheckpoint 1 coversthistechnique in detailthrough application to a seriesof examstandard questions. xiv Essential skillareas G q Skill 2: Approach to objective test (OT) case style questions Intheexam,youwillhavethreeOTCasestylequestions, eachworth10markseach.Theyare OTQstylequestions, however, theywillbelinkedalonga common theme, suchas recognising revenue (including government grants)or accounting fornon-current assetacquisitions and resulting deferred taxadjustments. ThisallowstheExamining Teamtoaskquestions onspecific areasingreater detailthanjustoneOTQwillpermit. Therefore, itisimperative thatyouarefamiliar withtheOTQstyleofquestion andrecognise the styleofa casequestion. A casequestion willbescenario based,sotherewillbea shortdescription together withsome financial information, andfivequestions willbe askedabouttheinformation. Therewillbe a combination ofnarrative andnumerical questions. Keystepsindeveloping andapplying thisskillareoutlined below: STEP1:Readthescenario carefully Readtheintroduction tothequestion carefully, ensuring youunderstand what the questions areasking youtodo.Skimming thequestions requirement willhelpyou toidentify whether thequestions arenarrative ornumerical instyle. STEP2:Startwithnarrative questions Attempt thenarrative questions firstasthiswillallow youtouseanyremaining timetofocus onthenumerical andcalculation questions. Thecaseisusually split intothree narrative questions withtwofurther, calculation based questions. STEP3:Workthrough numerical questions methodically Apply your technical knowledge tothedatapresented inthequestion. Work through calculations taking your timeandreadthrough eachanswer option withcare. OTquestions aredesigned sothateachanswer option isplausible. Work through eachresponse option andeliminate those youknow areincorrect. STEP4:Beaware oftime Sticktoyour timecarefully, aseachquestion isworth twomarks, sospending more than theallocated timeof18minutes oneachcasequestion isaninefficient useof your time, asyouwillneedtomove ontotheSection C questions. Ifyouare running outoftime, oryoucannot answer anyofthequestions, guess theanswer from theoptions provided. Youdonotlosemarks forincorrect answers. SkillsCheckpoint 2 coversthistechnique in detailthrough application to an exam-standard question. Essential skillareas xv H q Skill 3: Using spreadsheets effectively SectionC willrequire theuseofthespreadsheet functionality intheexam,soyouneedtobe familiar withthesoftware andwhattheFR examining teamis expecting to seein termsof presentation. TheSection C question whichrequires youtoprepare extracts fromthefinancial statements (this maybefora singleentityorfora group,anditmaybeanyoftheprimary financial statements) should beattempted usingthespreadsheet software. Astep-by-step technique forusingspreadsheets intheexamisoutlined below. STEP1:Understanding thedatainthequestion Where aquestion includes asignificant amount ofdata, readtherequirements carefully tomake sure thatyouunderstand clearly whatthequestion isasking youtodo.Youcanusethehighlighting function topulloutimportant datafrom thequestion. Usethedataprovided tothink about what formula youwillneedto use.Forexample, ifthecompany calculates theallowance forreceivables asa percentage ofthebalance, usethepercentage function. STEP2:Useastandard proforma working. Youwillbeasked toprepare anextract orasetoffinancial statements. Setout your statement ofprofit orlossorthestatement offinancial position before you start towork through thequestion. Thiswillgiveyouthebasic structure from where youcanenter thedatainthequestion. Format your cellstoensure theworkings lookconsistent, forexample, using the comma function tomark thethousands innumerical answers. G H STEP3:Usespreadsheet formulae toperform basiccalculations. Ensure youareshowing your workings byusing thespreadsheet formula forsimple calculations, forexample, thecostofsalefigure willbemade upofdifferent balances, soaddthem together using theformula. Cross refer anymore detailed workings, andlinkworkings intoyour main answer. Step4:Include theresults ofworkings intheproforma Youmust ensure thatyouinclude your workings form intheproforma and complete your final answer. Remember toshow howyouhave included your workings bycross referencing totherelevant working andbyusing theformula within thecelltoadd/subtract thebalance. SkillsCheckpoint 3 coversthistechnique in detailthrough application to an exam-standard question. xvi Essential skillareas G q Skill 4: Application of IFRS standards Knowledge oftheIFRSstandards willberequired inallsections oftheFRexam.Youareunlikely to beaskedtoexplain therequirements ofanIFRSstandard ina narrative question, butmaybe askedquestions abouttheapplication orimpact ofaccounting standards inanOTQ,oritmaybe relevant intheinterpretation ofanentity’s performance andposition inSection C. Astep-by-step technique forapplying yourknowledge ofaccounting standards isoutlined below. STEP1:Overview ofkeystandards Ensure youhave ahigh-level overview ofthekeystandards covered intheFR exam. Usethesummary diagrams attheendofthechapters intheWorkbook to actasyour summaries. These areauseful wayofremembering thekeypoints. STEP2:Numerical question practice Practice thenumerical questions intheWorkbook andinthePractice &Revision Kit.These willtestyour knowledge ofthemechanics oftheaccounting standards. Often there canbeadifference between understanding what thestandard does andhowitapplies toaspecific scenario. Practice OTQsaswellaslonger, Section C questions toconsolidate your knowledge. STEP3:Narrative question practice Practice thenarrative questions which testyour understanding ofhowthestandard canaffect thefinancial statements. Thiswillhelpyoutorevise your understanding ofwhytheaccounting standard isimportant inascenario. Forexample, what are thekeytests forimpairment ofassets andwhywould thisbeimportant forthe financial statements? SkillsCheckpoint 4 coversthistechnique in detailthrough application to an exam-standard question. Essential skillareas xvii H q Skill 5: Interpretation skills One of the SectionC questionswillrequireyou to interpretthe financialstatements, or extracts from a set of financialstatements for either a single entity or a group. The interpretationwill requirethe calculationof ratios, but your focusshouldbe on the interpretationof those ratios to explainthe performanceand positionof the singleentityor groupyou are presentedwith. Giventhat the interpretationof financialstatements willfeature in SectionC of everyexam,it is essentialthat you master the appropriate techniquefor analysing and interpretinginformation and drawingrelevantconclusionsinorderto maximiseyourchance of passingthe FRexam. STEP1: Readandanalysethe requirement. Readtherequirementcarefully to seewhatcalculations arerequiredandhowmany marksaresetforthecalculation andhowmanyforthecommentary. Workouthowmanyminutesyouhaveto answereachsub-requirement. STEP2: Readandanalysethe scenario. Identifythetypeofcompanyyouaredealingwithandhowthefinancial topicsin therequirementrelateto thattypeofcompany.Asyougo throughthescenario, youshouldbe highlighting keyinformation whichyouthinkwillplaya keyrolein answeringthespecificrequirements. STEP3: Planyouranswer. Youwillhavecalculatedtheratiosandunderstandtheperformance andpositionof thecompany.Youmustnowplanthepointsyouwillmakeininterpretingtheratios. Readthroughtheinformation inthescenarioandidentifythepointsthathelpyou to explainthemovementinratios.Usingeachratioasa heading,createa bullet pointlistoftherelevantpoints. G STEP4: Typeyouranswer. Youshouldnowtakethebulletpointlistcreatedat theplanningstageandexpand thepoints,remembering to useinformation giveninthescenarioandto avoid genericexplanations. Asyouwriteyouranswer,explainwhatyoumean–inone(ortwo)sentence(s) – andthenexplainwhythismattersinthe givenscenario.Thisshouldresultina seriesofshortparagraphsthataddressthespecificcontextofthescenario. SkillsCheckpoint5 covers this technique in detail through application to an exam-standard question. xviii Essentialskillareas H G q Exam success skills PassingtheFR examrequires morethanapplyingsyllabus knowledge anddemonstrating the specific FRskills;italsorequires thedevelopment ofexcellent examtechnique through question practice. Weconsider thefollowing sixskillstobevitalforexamsuccess. TheSkillsCheckpoints showhow eachoftheseskillscanbeapplied intheexam. Exam success skill 1 Managing information Questions intheexamwillpresent youwitha lotofinformation. Theskillishowyouhandle this information tomakethebestuseofyourtime.Thekeyisdetermining howyouwillapproach the examandthenactively reading thequestions. Adviceondeveloping Managing information Approach Theexamisthreehours long.There isnodesignated 'reading' timeatthestartoftheexam. Onceyoufeelfamiliar withtheexam,consider theorderinwhichyouwillattempt thequestions; alwaysattempt theminyourorderofpreference. Forexample, youmaywanttoleavetillastthe question youconsider tobethemostdifficult. If you do takethisapproach,remember to adjustthe timeavailablefor eachquestion appropriately – seeExamsuccess skill6:Goodtimemanagement. If youfindthatthisapproach doesn't workforyou,don'tworry– youcandevelop yourown technique. Activereading Youmusttakean activeapproach to readingeachquestion. Focusontherequirement first, underlining keyverbssuchas'evaluate', 'analyse', 'explain', 'discuss', toensure youanswer the question properly. Thenreadtherestof thequestion, underlining andannotating important andrelevant information, andmaking notesofanyrelevant technical information youthinkyou willneed. Exam success skill 2 Correctinterpretation oftherequirements Theactiveverbusedoftendictates theapproach thatwritten answers should take(eg'explain', 'discuss', 'evaluate'). Itisimportant youidentify andusetheverbtodefineyourapproach. The correctinterpretation of therequirements skillmeanscorrectly producing onlywhatis being askedforbya requirement. Anything notrequired willnotearnmarks. Adviceondeveloping theCorrectinterpretation oftherequirements Thisskillcanbedeveloped byanalysing question requirements andapplying thisprocess: Step1 Readtherequirement Firstly, readtherequirement a couple oftimes slowly andcarefully andhighlight the activeverbs.Usetheactiveverbstodefine whatyouplantodo.Makesureyou identify anysub-requirements. Step2 Readtherestofthequestion Byreading therequirement first,youwillhaveanideaofwhatyouarelooking out forasyoureadthrough thecaseoverview andexhibits. Thisisa greattimesaverand means youdon'tenduphaving toreadthewhole question infulltwice.Youshould dothisinanactiveway– seeExamsuccess skill1:Managing Information. Step3 Readtherequirement again Readtherequirement againtoremind yourself oftheexactwording before starting yourwritten answer. Thiswillcapture anymisinterpretation oftherequirements or anymissed requirements entirely. Thisshould become a habitinyourapproach and, withrepeated practice, youwillfindthefocus,relevance anddepthofyouranswer planwillimprove. Essential skillareas xix H G q Exam success skill 3 Answerplanning: Priorities,structure and logic Thisskillrequiresthe planningof the key aspects of an answerwhichaccurately and completely respondsto the requirement. Adviceon developingAnswerplanning: Priorities,structure and logic Everyonewillhave a preferred style for an answer plan. For example,it may be a mind map, bullet-pointedlistsor creatingshort notes usingthe scratch pad withinthe CBEsoftware.Choose the approach that you feel most comfortablewith, or, if you are not sure, try out different approaches fordifferentquestionsuntilyou have foundyourpreferredstyle. Fora discussionquestion,short notes is likelyto be insufficient.It wouldbe better to draw up a separate answerplan inthe formatof yourchoosing(eg a mindmap or bullet-pointedlists). Exam success skill 4 Efficientnumericalanalysis Thisskillaims to maximisethe marks awarded by making clear to the marker the process of arrivingat your answerin SectionC. Thisis achievedby layingout an answersuch that, evenif you make a fewerrors,you can stillscore subsequentmarksfor follow-oncalculations.It is vital that you do not losemarkspurelybecause the markercannot followwhat you have done. Adviceon developingEfficientnumericalanalysis Thisskillcan be developedby applyingthe followingprocess: Step 1 Usea standard proforma workingwhere relevant Ifanswerscan be laidout ina standard proformathen alwaysplan to do so. This willhelpthe markerto understandyourworkingand allocatethe markseasily.It willalso helpyou to workthroughthe figuresina methodicaland time-efficient way. Step 2 Showyour workings Keepyourworkingsas clear and simpleas possibleand ensurethey are crossreferencedto the mainpart of youranswer.Whereit helps,providebriefnarrative explanationsto helpthe markerunderstandthe steps inthe calculation.This means that ifa mistakeis made you do not loseany subsequentmarksforfollowon calculations. Step 3 Keepmoving! Itis importantto rememberthat, inan examsituation,it can sometimesbe difficultto get everynumber100%correct.Thekeyis thereforeensuringyou do not spend too longon any singlecalculation.Ifyou are strugglingwitha solution then makea sensibleassumption,state it and moveon. xx Essentialskillareas H G q Exam success skill 5 Effectivewriting and presentation Written answers should be presented so that the marker can clearly see the points you are making,presented in the format specifiedin the question.Theskillis to provideefficientwritten answerswithsufficientbreadth of pointsthat answerthe question,in the rightdepth, in the time available. Adviceon developingEffectivewritingand presentation Step 1 Useheadings Usingthe headingsand sub-headingsfromyouranswerplan willgiveyour answerstructure,orderand logic.Thiswillensureyouranswerlinksback to the requirementand is clearlysignposted,makingit easierforthe markerto understandthe differentpointsyou are making.Underliningyourheadingswill also helpthe marker. Step 2 Writeyour answer in short, but full,sentences Useshort,punchysentenceswiththe aimthat everysentenceshouldsay somethingdifferentand generate marks.Writeinfullsentences,ensuringyour styleis professional. Step 3 Doyour calculations first and explanation second Questionsoftenask foran explanationwithsuitablecalculations.Thebest approach is to prepare the calculationfirstbut presentit on the bottomhalfof the page of youranswer,or on the nextpage. Thenadd the explanationbeforethe calculation.Performingthe calculationfirstshouldenableyou to explainwhat you have done. Exam success skill 6 Good time management This skillmeans planning your time across all the requirementsso that all tasks have been attempted at the end of the 3 hours availableand activelycheckingon time duringyour exam. Thisis so that you can flexyour approach and prioritiserequirementswhich,in your judgement, willgenerate the maximummarksinthe availabletimeremaining. Adviceon developingGood time management The exam is 3 hours long, which translates to 1.8 minutes per mark. Thereforea 10-mark requirementshouldbe allocated a maximumof 18minutesto completeyour answer before you moveon to the nexttask. Atthe beginningof a question,workout the amount of timeyou should be spending on each requirementand note the finishingtime in your answer space or in the scratch pad. Keepan eye on the clock Aimto attempt all requirements,but be ready to be ruthlessand moveon if your answer is not goingas planned.Thechallengefor many is stickingto planned timings.Beaware this is difficult to achieveinthe earlystages of yourstudiesand be ready to let thisskilldevelopovertime. Ifyou findyourselfrunningshort on timeand knowthat a fullansweris not possiblein the time you have, considerrecreatingyour plan in overviewformand then add key terms and detailsas timeallows.Remember,some marksmay be available,for example,simplystating a conclusion whichyou don't have timeto justifyinfull. Essentialskillareas xxi H q G H xxii Essentialskillareas G q Questions H q G H 2 Financial Reporting (FR) q PARTATHECONCEPTUAL ANDREGULATORY FRAMEWORK FORFINANCIAL REPORTING Questions1to 18coverthe ConceptualFrameworkand the regulatoryframeworkforfinancial reporting.Questions13-18considerthe impactof measurementbasis appliedto assets on the financialperformanceof the company. TheSectionBQuestions19-23coverthe ConceptualFrameworkand the regulatoryframework. Conceptual 1 Howdoes the ConceptualFrameworkdefinean asset? Apresenteconomicresource,whichisa rightthat has the potentialto produce economicbenefits,ownedby an entityas a resultof past events Apresenteconomicresourceoverwhichan entityhas legalrights.Aneconomic resourceis a rightthat has the potentialto produceeconomicbenefits Apresenteconomicresourcecontrolledby an entityas a resultof past events.An economicresourceis a rightthat has the potentialto produceeconomicbenefits 2 Recklesspurchasedan investment9 monthsago for$120,000.Themarketforthese investmentshas nowfallenand Reckless'sinvestmentis valuedat $90,000 Carter has estimatedthe tax charge on its profitsforthe year justended as $165,000 Expansionis planningto investinnewmachineryand has been quoted a priceof $570,000 (2 marks) Whichof the followingwouldcorrectlydescribethe net realisablevalueof a two year old asset? Theoriginalcost of the asset lesstwoyears' depreciation Theamountthat couldbe obtainedfromsellingthe asset, lessany costs of disposal Thecost of an equivalentnewasset lesstwoyears' depreciation 4 Apresenteconomicresourceto whichan entityhas a futurecommitmentas a result of past events.Aneconomicresourceis a rightthat has the potentialto produce economicbenefits (2 marks) Whichof the followingwouldmeet the definitionof a liability? Dexter'sbusinessmanufacturesa productunderlicence.In12months'timethe licenceexpiresand Dexterwillhave to pay $50,000 forit to be renewed G 3 framework Q U E T IO N S S Thepresentvalueof the futurecash flowsobtainablefromcontinuingto use the (2 marks) asset TheConceptualFrameworkidentifieswhichof the followingas an underlyingassumption inpreparingfinancialstatements. Goingconcern Materiality Substanceoverform Accruals (2 marks) Questions 3 H q 5 TheConceptualFrameworkidentifiesfourenhancingqualitativecharacteristicsof financial information. WhichONEof the followingis NOTan enhancingqualitativecharacteristic? Verifiability Timeliness Consistency Understandability (2 marks) 6 WhichTWOof the followingare purposesof the IASB'sConceptualFramework? Toassist preparersto developconsistentaccountingpolicieswhenno Standard appliesto a particularevent Toissuerulesregardingthe accountingtreatment of elementsinthe financial statements Toassist indeterminingthe treatment of itemsnot coveredby an existingIFRS Standard Tobe authoritativewherea specificIFRSStandard conflictswiththe Conceptual Framework (2 marks) 7 Recognitionis the processof includingwithinthe financialstatements itemswhichmeet the definitionof an elementaccordingto the IASB'sConceptualFramework. Whichof the followingitemsshouldbe recognisedas an asset in the statement of financialpositionof a company? (i) Asecret formulaforthe manufactureof a best-sellingsauce. Therecipeis kept secureat the companypremisesand knownonlyby the companydirectors (ii) Ahighlylucrativecontract signedduringthe year whichis due to commenceshortly after the year end (iii) Itemsthat are to be soldviaa thirdparty agent whichthe companycan no longer controland cannot be returnedto the companyof they are unsold (iv) Areceivablefroma customerwhichhas been sold(factored)to a financecompany. Thefinancecompanyhas fullrecourseto the companyforany losses (i)and (iii) (iii)and (iv) (i)and (iv) (ii),(iii)and (iv) (2 marks) G 8 Inaccordance withthe ConceptualFrameworkwhichof the followingis/are true in relationto the enhancingcharacteristic of comparability? (1) Permittingalternativeaccountingtreatmentsforthe same economicphenomenon enhances comparability (2) Comparabilityrequiresuniformity Both1and 2 Neither1nor 2 1only 2 only (2 marks) (ACCA,ExaminersReport2017) 4 FinancialReporting(FR) H q Regulatory 9 Theprocess for developingan IFRSStandard involvesa numberof stages. Following receipt and reviewof commentson a DiscussionPaper, what willbe the next step undertakenby the IASB? 10 G 12 Publicationof an ExposureDraft Establishmentof an AdvisoryCommittee Consultationwiththe AdvisoryCommittee Issueof a finalIFRSStandard Q U E T IO N S S (2 marks) WhichTWOof the followingstatements wouldbe an advantage of adopting IFRS Standards? Itwouldbe easierforinvestorsto comparethe financialstatements of companies withthose of foreigncompetitors Cross-borderlistingwouldbe facilitated Accountantsand auditorswouldhave moredefenceincase of litigation 11 framework TheIFRSStandards can be moreeasilytailoredto reflectthe industriesof the territoryadoptingthem (2 marks) WhichTWOof the followingstatements regardingsystemsof regulationof accounting are true? Aprinciples-basedsystemwillrequiremoredetailedregulationsthan a rules-based system Arules-basedsystemwilltend to giveriseto a largernumberof IFRSStandards than a principles-basedsystem Aprinciples-basedsystemseeksto covereveryeventuality Aprinciples-basedsystemrequiresthe exerciseof morejudgementinapplication than a rules-basedsystem (2 marks) Theprocessfordevelopingan IFRSStandard involvesa numberof stages. Duringthe early stages of a project,the IASBwillundertakeconsultationon the keyissues. Whichof the followingis correct regardingthe early stages of the process: Inthe earlystages of the project,the IASBwillissuea DiscussionPaper to obtain viewsfromthe public Inthe earlystages of the project,the IASBwillconsultwiththe AdvisoryCommittee and IFRSAdvisoryCouncilto seekout the keyissues Inthe earlystages of the project,the IASBwillissuea DiscussionPaper then consult withthe AdvisoryCommittee Inthe earlystages of the project,the IASBwillissuean ExposureDraftto obtain viewsfromthe public (2 marks) Questions 5 H q 13 Historicalcost accountingremainsinuse because of its practicaladvantages. Whichof the followingis NOTan advantage of historicalcost accounting? Amountsof transactionsare reliableand can be verified Amountsinthe statement of financialpositioncan be matched to amountsinthe statement of cash flows Itavoidsthe overstatementof profitwhichcan ariseduringperiodsof inflation Itprovidesfeweropportunitiesforcreativeaccountingthan systemsof currentvalue (2 marks) accounting 14 Overstatementof profitscan ariseduringperiodsof inflation.Thisthen leads to a number of otherconsequences. Whichof the followingis NOTa likelyconsequenceof overstatementof profits? Higherwage demandsfromemployees 15 G 16 Highertax bills Reduceddividendsto shareholders OverstatedEPS Drexleracquiredan itemof plant on 1October20X2at a cost of $500,000. Ithas a useful lifeof fiveyears (straight-linedepreciation)and an estimatedresidualvalueof 10%of its historicalcost or currentcost as appropriate.Asat 30 September20X4,the manufacturer of the plant stillmakesthe same itemof plant and its currentpriceis $600,000. What is the correct carryingamount to be shownin the statement of financialpositionof Drexleras at 30 September20X4under historicalcost and current cost? Historicalcost Currentcost $ $ 320,000 600,000 320,000 384,000 300,000 600,000 300,000 384,000 (2 marks) The'physicalcapital maintenance'conceptstates that profitis the increaseinthe physical productivecapacity of the businessoverthe period. Thisconcept is appliedin: Currentcost accounting 6 (2 marks) Historicalcost accounting Currentvalueaccounting Currentpurchasingpoweraccounting FinancialReporting(FR) (2 marks) H q 17 18 Whichof the followingstatements is an advantage of usingthe Valuein Use measurementbasis? Itassistsa user to assess the futureprospectsof the business Amountsused are objectiveand freefrombias Itis an easilyunderstoodsystemof valuation Amountsare reliableand can be verifiedto invoicesand documents (2 marks) Q U E T IO N S S Undercurrent valueaccounting,what is the definitionof the Valuein Usemeasurement method? Costs incurredat the timeof acquisition Presentvalueof futurecash flows,lesscosts of disposal Open marketvalueof the asset Open marketvalueof the asset, lessthe presentvalueof the futurecash outflows (2 marks) G H Questions 7 q Section Lisbon B Co case 18 mins Informationrelevant to Questions 19–23 Theaccountant of Lisbonis consideringa numberof transactionsand eventsand howthey shouldbe treated inaccordance withthe conceptsand qualitativecharacteristicsof financial informationas set out inthe ConceptualFramework. Duringthe year ended 31March20X6,Lisbonexperiencedthe followingtransactionsor events: (i) Lisbonsoldan asset to a financecompanyand immediatelyleased it back forthe remainderof its usefullife.Thetransactionmet the criteriato be recognisedas a sale under IFRS15RevenuefromContracts withCustomers.Theaccountant determinedthat the transactionshouldbe treated as a sale and leasebackinaccordance withIFRS16Leases and has accounted forit accordingly. (ii) Thecompany'sstatement of profitor loss,prepared usinghistoricalcosts, showeda loss fromoperatingits shops.Lisbonis aware that the increaseinthe valueof its properties duringthe periodfar outweighsthe operatingloss. (iii) Inventoryhas historicallybeen valuedusingthe FIFOmethodbut the accountant is consideringchangingto the weightedaverage methodforthe year to 31March20X6. 19 G Theaccountant is aware that somemembersof the board of Lisbonhave little understandingof accountingand is worriedabout presentingthe financialstatements at the board meeting. Inaccordance withthe ConceptualFramework,howshouldthe accountant deal withthis situation? Indoingthe presentationthe accountant shouldomitany complexissues,so that everybodycan understandwhat they are saying 20 8 Theaccountant shouldopen the presentationwiththe advicethat someof them may not understandallof it Theaccountant shouldclassify,characteriseand presentthe informationclearly and precisely Theaccountant shoulddelivertheirpresentationjustto those whoare financially qualified Whichconcept or qualitativecharacteristic has influencedthe decisionin (i)above? Faithfulrepresentation Verifiability Accruals Comparability FinancialReporting(FR) H G q 21 Inlooking atissue(ii)above,theaccountant decides thattheproperties should be revalued. Whichconcept orqualitative characteristic hasbeenapplied inmaking thisdecision? Materiality 22 Q U E T IO N S S Because ofthelossarisingfromoperating theshops,theaccountant isconsidering whether Lisbon isa goingconcern. Ifitwasdecided thatLisbon wasnolongera going concern at31March20X6,whichofthefollowing iscorrect inaccordance withthe Conceptual Framework? Financial statements donotneedtobeprepared Alltheassetsshould beliquidated 23 Goingconcern Relevance Timeliness Thefinancial statements should beprepared ona different basis Thefinancial statements should beprepared asnormal andthegoingconcern status disclosed inthenotes Inapplying theenhancing qualitative characteristic ofcomparability, howshould the changeofinventory valuation basisbeaccounted for? Thechangeshould bedisclosed only Thefinancial statements for31March20X6should showbothmethods Thenotesshould showwhattheprofitwould havebeenifthechangehadnottaken place Thefinancial statements forthepriorperiod asshown at31March20X6should be restated usingtheweighted average basis (10marks) Questions9 H G q PARTBACCOUNTING FORTRANSACTIONS INFINANCIAL STATEMENTS (I) Accountingfortransactionsrequiresstudents to have a detailedunderstandingof the IFRS Standards. Thisfirstpart of Part Bcoversthe treatment of non-currentassets and therefore focuseson IAS16,IAS36, IAS38 and IAS40. Itis relevantto Chapters 3, 4 and 5 inthe Workbook. Ensurethat thisarea is wellrevisedas it is also relevantto lease accounting. SectionAquestions Questions24-32:Tangiblenon-currentassets (Chapter3) Questions33-37:Intangiblenon-currentassets (Chapter4) Questions38-46:Impairmentof assets (Chapter5) SectionBquestionson these topicsare inQuestions47-76. Section Tangible 24 A non-current assets FosterCo has builta newfactory incurringthe followingcosts: $'000 Land 1,200 Materials 2,400 Labour 3,000 Architect'sfees 25 Surveyor'sfees 15 Siteoverheads 300 Apportionedadministrativeoverheads 150 Testingof firealarms 10 Businessrates forfirstyear 12 7,112 H What willbe the total amount capitalisedin respect of the factory? $6,640,000 $6,950,000 $7,112,000 $7,100,000 10 FinancialReporting(FR) (2 marks) q 25 CarriagewaysCo had the followingbank loansoutstandingduringthe wholeof 20X8 whichformthe company'sgeneralborrowingsforthe year: $m 9%loanrepayable 20X9 15 11%loanrepayable 20Y2 24 CarriagewaysCo began constructionof a qualifyingasset on 1April20X8and withdrew fundsof $6 millionon that date to fundthe construction.On 1August20X8an additional $2 millionwas withdrawnforthe same purpose. Calculate the borrowingcosts whichcan be capitalisedin respect of this projectfor the year ended 31December20X8. $549,333 $480,000 $824,000 $533,333 (2 marks) 26 LeclercCo has borrowed$2.4millionto financethe buildingof a factory. Constructionis expectedto take twoyears. Theloanwas drawndownon 1January 20X9and workbegan on 1March20X9.$1millionof the loanwas not utiliseduntil1July 20X9so Leclercwas able to investit untilneeded. LeclercCo ispaying8%on the loan and can investsurplusfundsat 6%. Calculatethe borrowingcosts to be capitalisedforthe year ended 31December20X9in respect of thisproject. $140,000 $192,000 $100,000 G 27 Q U E T IO N S S $162,000 (2 marks) Whichof the followingstatements is correct regardinginvestmentpropertiesin accordance withIAS40 InvestmentProperty? (1) Transfersto or frominvestmentpropertyshouldonlybe made whenthere is a change intheiruse. (2) Transfersfroman investmentpropertyto an IAS16propertymustbe made at the fairvalueof the investmentpropertyat the date of the transfer. (3) Anentityshouldtreat any differencebetweenthe measurementof an IAS16 propertyand the measurementof an IAS40 investmentpropertyat the date of transferas an expenseto the profitor loss. Statement1only Bothstatements 1and 2 Bothstatements 2 and 3 Bothstatements 1and 3 (2 marks) Questions 11 H q 28 Identifywhetherthe followingstatements are true or false in accordance withIAS40 InvestmentProperty? Followinginitialrecognition,investmentpropertycan be heldat eithercost or fairvalue True False Ifan investmentpropertyis heldat fairvalue,thismustbe appliedto allof the entity'sinvestmentproperties True False Aninvestmentpropertyis initiallymeasuredat cost, including transactioncosts True False Again or lossarisingfroma change inthe fairvalueof an investmentpropertyshouldbe recognisedinthe revaluation surplus True False (2 marks) 29 G FidoFeedCo has the followingloansinplace throughoutthe year ended 31December 20X8whichconstituteits generalborrowingsforthe period. $m 10%bank loan 140 8%bank loan 200 On 1July 20X8,$50 millionwas drawndownforthe constructionof a qualifyingasset whichwas completedduring20X9. What amount shouldbe capitalisedas borrowingcosts at 31December20X8in respect of this asset? $2.0 million $2.25million 30 $4.4 million $2.2million (2 marks) WetherbyCo purchaseda machineon 1July 20X7for$500,000. Itis beingdepreciatedon a straight-linebasis overits usefullifeof ten years. Residualvalueis estimatedat $20,000. On 1January 20X8,followinga change inlegislation,WetherbyCo fitteda safety guard to the machine.Thesafety guard cost $25,000 and has a usefullifeof fiveyears withno residualvalue. What amount willbe charged to profitor lossfor the year ended 31March20X8in respect of depreciationon this machine? $ 31 (2 marks) AucklandCo purchaseda machinefor$60,000 on 1January 20X7and assignedit a useful lifeof 15years. On 31March20X9it was revaluedto $64,000 withno change inusefullife. What willbe depreciationcharge in relationto this machinein the financialstatements of AucklandCo for the year ending31December20X9? $ 12 FinancialReporting(FR) (2 marks) H G q 32 CarterCovacated itsheadofficebuilding andletitouttoa thirdpartyon30June20X8. Thebuilding hadanoriginal costof$900,000on1January20X0andwasbeing depreciated over50years.Itwasjudged tohavea fairvalueon30June20X8of $950,000.Attheyear-end dateof31December 20X8thefairvalueofthebuilding was estimated at$1.2million. CarterCousesthefairvaluemodel forinvestment property. Whatamount willbeshown inrevaluation surplus at31December 20X8inrespect ofthis building? $ (2 marks) Intangible 33 34 non-current Q U E T IO N S S assets GeekCoisdeveloping a newproduct andexpects tobeabletocapitalise thecosts. Whichofthefollowing wouldmeanthecostscannotbecapitalised? Development oftheproduct isnotyetcomplete Nopatent hasyetbeenregistered inrespect oftheproduct Nosalescontracts haveyetbeensigned inrelation totheproduct Ithasnotbeenpossible toreliably allocate coststodevelopment oftheproduct (2 marks) Assoria Cohad$20million ofcapitalised development expenditure atcostbrought forward at1October 20X7inrespect ofproducts currently inproduction anda newproject began onthesamedate. H Theresearch stageofthenewproject lasteduntil31December 20X7andincurred $1.4million ofcosts.Fromthatdatetheproject incurred development costsof$800,000 permonth. On1April20X8thedirectors ofAssoria Cobecame confident thattheproject would besuccessful andyielda profitwellinexcess ofcosts.Theproject wasstillin development at30September 20X8.Capitalised development expenditure isamortised at 20%perannum usingthestraight-line method. Whatamount willbecharged toprofitorlossfortheyearended30September 20X8in respect ofresearch anddevelopment costs? $8,280,000 $6,880,000 $7,800,000 $3,800,000 (2 marks) Questions13 Page 36 of 405 Powered By Ù q 35 Identify whether thefollowing internally generated itemsareeligible orineligible for capitalisation asintangible assetsinaccordance withIAS38Intangible Assets? (Ignore theeffectofbusiness combinations.) Acustomer listbuiltupoverthelasttenyearsoftrading updated forthecustomer's current preferences Eligible Ineligible Specialised tooling fora newproduct developed bythe business Eligible Ineligible Aworking version ofa newmachine thatusesnew technology usedfortesting oftheprototype apparatus Eligible Ineligible Thetitleheading, fontanddesign ofthefrontpageofa major broadsheet newspaper Eligible Ineligible (2 marks) 36 At30September 20X9,Sandown Co'strialbalance showed a brandatcostof$30million, lessaccumulated amortisation brought forward at1October 20X8of$9million. Amortisation isbasedona tenyearuseful life.Animpairment review on1April20X9 concluded thatthebrandhada valueinuseof$12million anda remaining useful lifeof threeyears.However, onthesamedateSandown Coreceived anoffertopurchase the brandfor$15million. Whatshould bethecarrying amount ofthebrandinthestatement offinancial position of Sandown Coasat30September 20X9?(Answer tothenearest $'000) $ (2 marks) 000 G H 37 Dempsey Co'syearendis30September 20X5.Dempsey Cocommenced thedevelopment stageofa project toproduce a newpharmaceutical drugon1January20X5.Expenditure of$40,000permonth wasincurred untiltheproject wascompleted on30June20X5when thedrugwentintoimmediate production. Thedirectors became confident oftheproject's success on1March20X5.Thedrugisexpected togenerate benefits forfiveyears. Whatisthecarrying amount ofanyintangible assetrecognised inrespect oftheproject andwhatisthetotalamount Dempsey Cowillchargetoprofitorlossfortheyearended 30September 20X5? Selectyouranswers fromtheoptions belowandplacethemintheblankboxes. Carryingamount ofintangible assetat30 Amount charged toprofitorlossforperiod ending 30September 20X5 September 20X5 $228,000 $240,000 $152,000 $141,333 $98,667 $88,000 $0 $0 (2 marks) 14 Financial Reporting (FR) Page 37 of 405 Powered By Ù q Impairment 38 of assets Acash-generating unitcomprises thefollowing assets: $'000 Building 700 Plantandequipment 200 Goodwill 90 Current assets 20 1,010 Q U E T IO N S S Oneofthemachines, carried at$40,000,isdamaged andwillhavetobescrapped. The recoverable amount ofthecash-generating unitisestimated at$750,000. Whatwillbethecarrying amount ofthebuilding aftertheimpairment losshasbeen recognised? (tothenearest $'000) $597 39 $577 $594 $548 (2 marks) Complete thestatement usingtheoptions provided: Therecoverable amount ofanassetisthehigher of and G under H IAS36Impairment ofAssets. Selectyouranswers fromtheoptions belowandplacethemintheblankboxes. Fairvalue Fairvaluelesscostsofdisposal Market value Valueinuse (2 marks) 40 Lichen Coownsa machine thathasa carrying amount of$85,000attheyearendof 31March20X9.Itsmarket valueis$78,000andcostsofdisposal areestimated at$2,500. Anewmachine would cost$150,000. Lichen Coexpects ittoproduce netcashflowsof $30,000perannum forthenextthreeyears.ThecostofcapitalofLichen Cois8%. Whatistheimpairment lossonthemachine toberecognised inthefinancial statements at31March20X9? (2 marks) $ Questions15 Page 38 of 405 Powered By Ù G q 41 IAS36Impairment ofAssets suggests potential indicators ofimpairment. WhichTWOofthefollowing wouldbeEXTERNAL INDICATORS thatoneormoreofan entity's assetsmaybeimpaired? Anunusually significant fallinthemarket valueofoneormoreassets Evidence ofobsolescence ofoneormoreassets Adecline intheeconomic performance ofoneormoreassets Anincrease inmarket interest ratesusedtocalculate valueinuseoftheassets (2 marks) 42 Thefollowing information relates toanitemofplantowned byBazaarCo: (i) Itscarrying amount inthestatement ofthefinancial position is$3million. (ii) BazaarCohasreceived anofferof$2.7million froma company inJapaninterested inbuyingtheplant. (iii) Thepresent valueoftheestimated cashflowsfromcontinued useoftheplantis $2.6million. (iv) Theestimated costofshipping theplanttoJapanis$50,000. Whatistheamount oftheimpairment lossthatshould berecognised inrespect ofthe plant? (2 marks) $ 43 Abusiness whichcomprises a singlecash-generating unithasthefollowing assets: $m Goodwill 3 Patent 5 Property 10 Plantandequipment 15 Netcurrent assets 2 35 Following animpairment review itisestimated thatthevalueofthepatent is$2million and therecoverable amount ofthebusiness is$24million. Atwhatamount should theproperty bemeasured following theimpairment review? $8million $10million $7.5million $5million (2 marks) 16 Financial Reporting (FR) Page 39 of 405 H q 44 45 RileyCoacquired a non-current asseton1October 20W9(tenyearsbefore 20X9)ata costof$100,000 whichhada useful lifeoftenyearsanda nilresidual value.Theassethad beencorrectly depreciated upto30September 20X4.Atthatdatetheassetwasdamaged andanimpairment review wasperformed. On30September 20X4,thefairvalueofthe assetlesscostsofdisposal was$30,000andtheexpected future cashflowswere$8,500 perannum forthenextfiveyears.Thecurrent costofcapitalis10%anda five-year annuity of$1perannum at10%would havea present valueof$3.79. Whatamount wouldbecharged toprofitorlossfortheimpairment ofthisassetforthe yearended30September 20X4? $17,785 $20,000 $30,000 $32,215 (2 marks) Q U E T IO N S S ThenetassetsofFyngleCo,a cash-generating unit(CGU),are: $ Property, plantandequipment 200,000 Allocated goodwill 50,000 Product patent 20,000 Netcurrent assets(atnetrealisable value) 30,000 300,000 Asa result ofadverse publicity, FyngleCohasa recoverable amount ofonly$200,000. Whatwould bethecarrying amount ofFyngleCo'sproperty, plantandequipment afterthe allocation oftheimpairment loss? $154,545 $170,000 G 46 $160,000 $133,333 H (2 marks) Selectwhether eachofthefollowing statements isanindicator ofimpairment orisnotan indicator ofimpairment under IAS36Impairment ofAssets. Advances inthetechnological environment in whichanassetisemployed hasanadverse impact onitsfuture use Indicator of impairment Notanindicator of impairment Anincrease ininterest rateswhichincreases thediscount rateanentityuses Indicator of impairment Notanindicator of impairment Thecarrying amount ofanentity's net assetsislower thantheentity's number of shares inissuemultiplied byitsshareprice Indicator of impairment Notanindicator of impairment Theestimated netrealisable valueof inventory hasbeenreduced duetofire damage although thisvalueisgreater than itscarrying amount Indicator of impairment Notanindicator of impairment (2 marks) Questions17 Page 40 of 405 Powered By Ù G q Section Plethora B plc case 18 mins Informationrelevant to questions 47–51 Thedraft financialstatements of Plethoraplcforthe year to 31December20X9are being prepared and the accountant has requestedyouradviceon dealingwiththe followingissues. (i) Plethoraplchas an administrationbuildingwhichit no longerneeds. On 1July 20X9, Plethoraplcentered intoan agreementto lease the buildingout to another company. The buildingcost $600,000 on 1January 20X0and is beingdepreciatedover50 years, based on the IAS16Property,Plantand Equipmentcost model.Plethoraplcappliesthe fairvalue modelunderIAS40 InvestmentPropertyand the fairvalueof the buildingwas assessed as $800,000 on 1July 20X9.Thisvaluationhad not changed at 31December20X9. (ii) Plethoraplcownsanother buildingwhichhas been leased out fora numberof years. Ithad a fairvalueof $550,000 at 31December20X8and $740,000at 31December20X9. (iii) Plethoraplcownsa retailbusiness,whichis considereda separate cash-generatingunit, whichsuffereda difficulttradingperiodinthe previousyear and was subjectto an impairmentreviewat 31December20X8.Atthat date, an impairmentlossof $160,000was recognised.Thedirectorsof Plethoraplc believethe indicatorsof impairmenthave reversed by 31December20X9and wishto reversethe previousimpairmentlossto the maximum extentpossible. Relevantfinancialinformationinrespect of the retailbusinessis as follows: Carrying Carrying amountat amountat Estimated 31December 31December Impairmentloss valueat 20X9had no 20X8before at 31December 31December impairment Asset impairment 20X8 20X9 occurred Building 900 100 925 875 Plantand equipment 300 20 310 290 Goodwill 40 40 60 40 Animpairmentreviewhas been carriedout as at 31December20X9and the recoverable amountof the cash-generatingunitis estimatedat $1.3million. 47 What is the amount of the revaluationsurplusthat willbe recognisedin respect of the buildingin (i)? $ 48 Inrespect of the buildingin (ii),howwillthe increase in valuefrom$550,000 to $740,000 be accounted for? Creditedto profitor loss Creditedto the revaluationsurplus Creditedto retainedearnings Creditedto an investmentpropertyreserve 18 FinancialReporting(FR) Page 41 of 405 H G q 49 Usingthepulldownlistprovided, selecttheamount atwhichanimpaired assetis measured whenanimpairment hastakenplace? Q U E T IO N S S Pulldownlist: Fairvalue Valueinuse Recoverable amount Carrying amount 50 WhichTWOofthefollowing statements regarding thereversal ofimpairment lossesare correct? Thereversal ofgoodwill impairment should berecognised inothercomprehensive income Thereversal ofimpairment losses onrevalued assetsshould berecognised inother comprehensive income Animpairment losscanonlybereversed ifthereisa changeintheestimates usedto determine therecoverable amount oftheimpaired assets Onlyimpairment losses onnon-current assetscanbereversed 51 Whatwillbetheamount credited tothestatement ofprofitorlossinrespect ofthe reversal oftheimpairment lossintheyearended31December 20X9? $215,000 $155,000 $125,000 $85,000 H (10marks) Linetti Co case (Mar/Jun 2019) 18 mins Information relevant toquestions 52–56 During theyearended 31December 20X8,Linetti Cobuiltanextension toitsheadoffice.The costsassociated withtheheadofficeextension areasfollows: $m Landacquisition 10.0 Feesforenvironmental certifications andbuilding permits 0.5 Architect andengineer fees 1.0 Construction material andlabour costs(including unused materials) 6.6 At30September 20X8,thedatewhentheheadofficeextension became available foruse,the costofunused materials onsiteamounted to$0.5million. Atthatdate,thetotalborrowing costs incurred ona loanwhichwasusedspecifically tofinance theheadofficeextension amounted to $0.8million. Linetti Coalsoacquired 100%ofa subsidiary, ScullyCo,on1January20X8.Thecarrying amount oftheassetsofScullyCointheconsolidated financial statements oftheLinetti Groupat 31December 20X8,immediately before animpairment review, wereasfollows: Questions19 Page 42 of 405 Powered By Ù G q $m 1.4 2.0 6.0 2.4 11.8 Goodwill Brandname Property,plant and equipment Currentassets (at recoverableamount) Therecoverableamountof ScullyCo was estimatedat $9.6millionat 31December20X8and the impairmentof the investmentinScullyCo was deemedto be $2.2million. 52 Forthe year end 31December20X8,howmuchshouldbe capitalisedin respect of the constructionof the extensionto the head officebuilding? $18.4million $17.6million $18.9million $18.1million 53 LinettiCo incurredfurtherexpenditureon the head extensionafter it had been completed Whichof the followingwouldqualify as capital expenditure? Propertyinsurancepremiumsincurred Installationof newofficefixturesand fittings Marketingcosts tellingthe publicthat the head officeextensionis operational Maintenanceand relocationof computersand related officeequipment 54 At31December20X9,the directorsof LinettiCo decideto adopt the revaluationmodelof IAS16Property,Plantand EquipmentforLinettiCo’sproperty. Inaccordance withIAS16,whichof the followingstatements is NOTtrue? Insubsequentyears, the depreciationwillbe based on the revaluedamountof the head officebuildingas opposedto its cost Anyrevaluationgain on the head officebuildingis recognisedinother comprehensiveincomeand any revaluationlossis recognisedinprofitor loss Theoriginalhead officebuildingand the newextensionare revaluedseparately Theresidualvalueand the usefullifeof the head officebuildingmustbe reviewed each year 55 AssumingScullyCo represents a cash generating unit, what is the carryingamount of the brand at 31December20X8followingimpairmentreview? $1.2million $1.45million $1.73million $1.8million 20 FinancialReporting(FR) Page 43 of 405 H G q 56 Which,ifany,ofthefollowing statements regarding impairment reviews is/arecorrect? (1) Attheendofeachreporting period, anentityshould assessifthereisanyindication thatassetshavebeenimpaired (2) Annual impairment reviews arerequired onallintangible assetswithindefinite lives 1only 2 only Both1and2 Neither 1nor2 Q U E T IO N S S (10marks) Elite Leisure Co case 18 mins Thefollowing scenariorelatestoquestions 57–61. EliteLeisure Coisa private limited liability company thatoperates a singlecruise ship.Theship wasacquired on1October 20W6(tenyearsbefore 20X6).Details ofthecostoftheship's components andthebasisonwhichtheyaredepreciated isasfollows: Component Original cost Depreciation basis $m Ship'sfabric(hull,decksetc) 300 25yearsstraight-line Cabinsandentertainment areafittings 150 12yearsstraight-line Propulsion system 100 Useful lifeof40,000hours At30September 20X4nofurther capitalexpenditure hadbeenincurred ontheship. Thepropulsion system hasbeenusedfor30,000hours at30September 20X4.Duetothe unreliability oftheengines, a decision wastakeninearlyOctober 20X4toreplace thewhole of thepropulsion system ata costof$140million. Theuseful lifeofthenewpropulsion system was 50,000hours and,intheyear,ended 30September 20X5theshiphadusedthesystem for 5,000hours. Atthesametimeasthepropulsion system replacement, EliteLeisure Cotooktheopportunity to doa limited upgrade tothefacilities ata costof$60million andrepaint theship'sfabricata cost of$20million. Aftertheupgrade ofthefacilities itwasestimated thattheirremaining useful life wasfiveyears(fromthedateoftheupgrade). Forthepurpose ofcalculating depreciation, allthe workontheshipcanbeassumed tohavebeencompleted on1October 20X4.Allresidual values canbetakenasnil. 57 At30September 20X4theshipiseightyearsold.Whatisthecarrying amount oftheship atthatdate? 58 H $279million $275million $229million $254million Whatistheamount ofdepreciation thatshould becharged inrespect ofthepropulsion system fortheyearended30September 20X5?(Provide youranswer tothenearest $m) $ m Questions21 Page 44 of 405 Powered By Ù q 59 Apartfromdepreciation, whatisthechargetoprofitorlossfortheyearended 30September 20X5? $ 60 EliteLeisure Co'sshiphastohavea safetycheckcarried outeveryfiveyearsata costof $50,000inordertobelicensed tooperate. Howshould thisbeaccounted for? Setupa provision forthediscounted present valueandunwind overfiveyears Accrue thecostofthecheckoverfiveyearsuntilittakesplace Charge$50,000toprofitorlosswhenincurred 61 Capitalise thecostwhenincurred andamortise overfiveyears EliteLeisure Coisbeingsuedfor$250,000bya passenger whoslipped ononeofthe gangways andtwisted anankle.Thecompany's lawyer estimates thatthereisa 55% chancethatitwilllosethecase.LegalcostsforEliteLeisure Cowillbe$40,000. Usingthepulldownlistprovided, selecttheamount atwhichEliteLeisure Coprovide in respect ofthiscase. Pulldownlist: $290,000 $250,000 $159,500 $137,500 G H (10marks) Dexterity Co case 18 mins Information relevant toquestions 62–66 Dexterity Coisa publiclistedcompany. Ithasbeenconsidering theaccounting treatment ofits intangible assetsandhowthematters below should betreated initsfinancial statements forthe yearto31March20X4. 1 2 On1October 20X3,Dexterity Coacquired Temerity Co,a smallcompany thatspecialises inpharmaceutical drugresearch anddevelopment. Thepurchase consideration wasby wayofa shareexchange andvalued at$35million. ThefairvalueofTemerity Co'snet assetswas$15million (excluding anyitems referred tobelow). Temerity Coownsa patent foranestablished successful drugthathasa remaining lifeofeightyears.Afirmof specialist advisors, Leadbrand Co,hasestimated thecurrent valueofthispatent tobe $10million, however thecompany isawaiting theoutcome ofclinical trialswhere thedrug hasbeentested totreata different illness. Ifthetrialsaresuccessful, thevalueofthedrug isthenestimated tobe$15million. Alsoincluded inthecompany's statement offinancial position is$2million formedical research thathasbeenconducted onbehalfofa client. Dexterity Cohasdeveloped andpatented a newdrugwhichhasbeenapproved forclinical use.Thecostsofdeveloping thedrugwere$12million. Basedonearlyassessments ofits salessuccess, Leadbrand Cohaveestimated itsmarket valueat$20million, whichcanbe takenasa reliable measurement. 22 Financial Reporting (FR) Page 45 of 405 q 3 4 62 63 G Dexterity Co'smanufacturing facilities haverecently received a favourable inspection by government medical scientists. Asa result ofthisthecompany hasbeengranted an exclusive five-year licence tomanufacture anddistribute a newvaccine. Although the licence hadnodirectcosttoDexterity Co,itsdirectors feelitsgranting isa reflection ofthe company's standing andhaveaskedLeadbrand Cotovaluethelicence. Accordingly, they haveplaceda valueof$10million onit. Inthecurrent accounting period, Dexterity Cohasspent$3million sending itsstaffon specialist training courses. Whilethesecourses havebeenexpensive, theyhaveledtoa marked improvement inproduction quality andstaffnowneedlesssupervision. Thisinturn hasledtoanincrease inrevenue andcostreductions. Thedirectors ofDexterity Cobelieve thesebenefits willcontinue foratleastthreeyearsandwishtotreatthetraining costsas anasset. Q U E T IO N S S Selectwhether eachofthefollowing itemsshould becapitalised asanintangible assetor recognised asanexpense. Patent forthenewdrug Capitalise Expense Licence forthenewvaccine Capitalise Expense Specialist training courses undertaken byDexterity staff Capitalise Expense Temerity Co'spatent ontheexisting drugcurrently licenced foruse Capitalise Expense SelectwhichTWOofthefollowing arerequired ifDexterity Coadoptstherevaluation model forthemeasurement ofitsintangible assets. Selectyouranswers fromtheoptions belowandplacethemintheblankboxes. Required ifDexterity Coadoptsthe revaluation model Theentire classofintangible assetsmust berevalued atthesametime H Validactivemarket fortheasset Canbeusedatinitial recognition ofthe assetifthereisanactivemarket Theassetmayinclude costsofprepaid marketing expenses andtraining costs 64 IAS38Intangible Assets givesexamples ofactivities thatwould beregarded asresearch andtherefore noteligible forrecognition asanintangible asset. Whichofthefollowing wouldbeanexample ofresearch activities? Thedesign andconstruction ofchosen alternative products orprocesses Thedesign ofpre-production prototypes andmodels Thedesign ofpossible neworimproved product orprocess alternatives Thedesign, construction andoperation ofa pilotplant Questions23 Page 46 of 405 Powered By Ù G q 65 Atwhatamount should thepatentacquired fromTemerity Cobevalued at 31March20X4? 66 $10,000,000 $9,375,000 $15,000,000 Nil Howshould Dexterity Cotreatthegoodwill arisingonitsacquisition ofTemerity Co? Itshould becapitalised andamortised over20years Itshould becapitalised andreviewed forimpairment everyyear Itshould becapitalised andreviewed forimpairment everyfiveyears Itshould bewritten offtoretained earnings (10marks) Advent Co case 18 mins Thefollowing scenario relatestoquestions 67–71. Advent Coisa publicly listedcompany. Details ofAdvent Co'snon-current assetsat1October 20X8were: Landand Telecommunications Plant Total building licence $m $m $m $m Cost/valuation 280 150 300 730 Accumulated depreciation/amortisation(40) (103) (30) (175) Carrying amount 240 45 270 555 Thefollowing information isrelevant: (i) Thelandandbuilding wererevalued on1October 20X3with$80million attributable to thelandand$200million tothebuilding. Atthatdatetheestimated remaining lifeofthe building was25years.Afurther revaluation wasnotneeded until1October 20X8whenthe landandbuilding werevalued at$85million and$180million respectively. Theremaining estimated lifeofthebuilding atthisdatewas20years. (ii) Plantisdepreciated at20%perannum oncostwithtimeapportionment where appropriate. On1April20X9,newplantcosting $45million wasacquired. Inaddition, this plantcost$5million toinstall andcommission. Noplantismorethanfouryearsold. (iii) Thetelecommunications licence wasbought fromthegovernment on1October 20X7and hasa ten-year life.Itisamortised ona straight-line basis.InSeptember 20X9,a review of thesalesoftheproducts related tothelicence showed themtobeverydisappointing. Asa result ofthisreview theestimated recoverable amount ofthelicence at30September 20X9 wasestimated atonly$100million. There werenodisposals ofnon-current assetsduring theyearto30September 20X9. 67 Whatisthecarrying amount ofthelandandbuildings at30September 20X9? $256million $265million $240million $258million 24 Financial Reporting (FR) Page 47 of 405 H q 68 Whatisthedepreciation chargeontheplantfortheyearended30September 20X9? $30million $25million $20million 69 70 $35million Having revalued itsproperty Advent Coisrequired tomakecertain disclosures inrespect of therevaluation. Identify whether thefollowing disclosures are,orarenotrequired, inrespect of revaluation. Theeffective dateofrevaluation Required Notrequired Professional qualifications ofthevaluer Required Notrequired Thebasisusedtorevalue theassets Required Notrequired Thecarrying amount ofassetsifnorevaluation had takenplace Required Notrequired Whatistheamount oftheimpairment lossonthelicence? Selectyouranswer fromthe pulldownlistoptions below. $ G Q U E T IO N S S H Pulldownlist: $100million $140million $170million $240million 71 Advent Co'slicence isnowcarried atitsrecoverable amount. Complete thestatement usingtheoptions provided. Therecoverable amount ofanassetofanassetisthehigher of and Fairvaluelesscostsofdisposal Carrying amount lesscostsofdisposal Carrying amount Valueinuse (10marks) Questions25 Page 48 of 405 Powered By Ù q Systria Co case 18 mins Thefollowing information isrelevant toquestions 72–76. SystriaCoispreparing itsfinancial statements fortheyearended 31December 20X7andhasa number ofissues todealwithregarding non-current assets. (i) SystriaCohassuffered animpairment lossof$90,000relating tooneofitscashgenerating units.Thecarrying amounts oftheassetsinthecash-generating unitpriorto adjusting forimpairment are: $'000 Goodwill 50 Patent 10 Landandbuildings 100 Plantandmachinery 50 Netcurrent assets 10 Thepatent isnowestimated tohavenovalue. (ii) During theyearto31December 20X7SystriaCoacquired Dominica for$10million, its tangible assetsbeingvalued at$7million andgoodwill onacquisition being$3million. Assets witha carrying amount of$2.5million weresubsequently destroyed. SystriaCohas carried outanimpairment review andhasestablished thatDominica Cocouldbesoldfor $6million, whileitsvalueinuseis$5.5million. (iii) Afreehold property originally costing $100,000 witha 50-yearlifehasaccumulated depreciation todateof$20,000.Theassetistoberevalued to$130,000 at31December 20X7. 72 Whatisthepost-impairment carrying amount ofplantandmachinery in(i)above? $ G 73 Thefinance director hasbeenaskedtoreport totheboardonthereasons forthe impairment review onthecash-generating unit.WhichTWOofthefollowing wouldbean internal indicator ofimpairment ofanassetunder IAS36Impairment ofAssets? Themarket valueoftheassethasfallensignificantly There areadverse changes totheusetowhichtheassetisput 74 H Theassetisfullydepreciated Theoperating performance oftheassethasdeclined Whatisthecarrying amount ofthegoodwill in(ii)following theimpairment review? Select youranswer fromthepulldownlistoptions below. $ Pulldownlist: $1.5million $2million $2.5million $3million 26 Financial Reporting (FR) Page 49 of 405 q 75 Usingthedraganddropoptions below,selectthecorrect amounts tocomplete the double entryrequired torecord therevaluation in(iii). Debit Accumulated depreciation Credit Q U E T IO N S S Property atcost Revaluation surplus $20,000 $30,000 $50,000 76 Whatwillbethedepreciation chargerelating totheassetin(iii)fortheyearended 31December 20X8? $2,000 $2,600 $3,250 $2,750 G H (10marks) Questions27 Page 50 of 405 Powered By Ù G q PartBAccounting fortransactions infinancialstatements (II) Thesecond partofPartBcovers further assetsandliabilities aswellasincome andexpense items. Groupaccounting isalsocovered, whichisanimportant area. Revenue canbea difficult topicandrequires youtocarefully understand thescenario andthe specific question asked.Accounting forgovernment grantsis,however, straightforward. Theconcept ofgroupaccounting, including fairvaluetreatment, iscovered acrossseveral chapters. Youneedtobeabletocalculate balances thatwould bepresented inthegroup financial statements, sounderstanding thekeycalculations isimportant. Financial instruments canbeseenasa complex areaandyoushould usethequestions inthis banktopractice yourtechnique. Leasing questions require closereading toensure thatyou understand whatthequestion isasking. Ensure youknowwhether theyareaskingforthe carrying amount oftheright-of-use assetorthecarrying amount oftheliability. Questions onprovisions andevents afterthereporting period arelikelytotestwhether the provision meets therequirements ofIAS37,andwhatconstitutes anadjusting post-year event. Accounting forinventories andbiological assetsisgenerally straightforward. Therequirements of IAS12- accounting forbasictaxation isunlikely tocauseyoumanyproblems butdeferred taxis moretechnical. SectionAquestions Questions 77-88:Revenue (Chapter 6 oftheWorkbook) Questions 89-95:Introduction togroups (Chapter 7) Questions 96-102:Financial instruments (Chapter 11) Questions 103-114: Leaseaccounting (Chapter 12) Questions 115-124: Provisions andevents afterthereporting period (Chapter 13) Questions 125-133: Inventories andbiological assets(Chapter 14) Questions 134-140: Accounting fortaxation (Chapter 15) SectionBquestions ontheseareasarecovered inquestions 141-175 Section A Revenue 77 Carraway Coentered intoa contract on1January20X5toconstruct a factoryforSeed Co. Thetotalcontract pricewas$2.8million whichisexpected togenerate a profitfor Carraway Co.SeedCoobtains control ofthefactoryastheassetisconstructed. Carraway Cohasanenforceable rightforpayment inrespect oftheconstruction completed todate.Thecontract statesthattheperformance obligations aremeasured according tocertificates issued bythesurveyor. Carraway Comeasures satisfaction oftheperformance obligations under thecontract by reference tothevalueofworkcertified ascomplete. At31December 20X5,thecontract wascertified bythesurveyor as35%complete. $800,000hasbeeninvoiced tothecustomer butnotyetpaid. 28 Financial Reporting (FR) Page 51 of 405 H q Identify, byselecting thecorrect options below,whether a contract assetorcontract liability willberecognised asat31December 20X5andwhatthecarrying amount willbe inthestatement offinancial position asatthatdate. Asset or liability Carrying amount Contract asset $180,000 Contract liability $240,000 Q U E T IO N S S (2 marks) 78 America Coprepares itsfinancial statement to31October eachyear,During thecurrent year,America Cosecured andreceived a government granttotalling $720,000tosupport thedigitalupskilling ofitsworkforce. $120,000 ofthegrantrelates toinvestment innewIT equipment andtheremainder istosupport training acrossa twoyearperiod from1April 20X5to31March20X7.Thegrantwasreceived on30June20X5.America Cofullyintends tocomply withtheconditions ofthegrant.Itpurchased thenewITequipment on1April 20X5asrequired andcommenced training withimmediate effect. Whatamount should beincluded innon-current liabilities ofAmerica Coattheyearend 31October 20X5? $125,000 $720,000 $425,000 $300,000 (2 marks) G H 79 On1October 20X2,Pricewell Coentered intoa contract toconstruct a bridge. Thetotal contract pricewas$50million andconstruction isexpected tobecompleted on 30September 20X4.Thecontract isexpected togenerate a profitforPricewell Co.The customer obtains control ofthebridgeasconstruction takesplace.Coststodateare: $m Materials, labour andoverheads 12 Depreciation ofspecialist plantandmachinery 3 Thevalueoftheworkcompleted at31March20X3hasbeenagreed at$22million andthe estimated costtocomplete is$10million. Pricewell Corecognises satisfaction of performance obligations determined bythevalueofworkcompleted todate. Whatistheprofitrecognised inrespect ofthecontract at31March20X3? $15,400,000 $7,000,000 $25,000,000 $Nil (2 marks) Questions29 Page 52 of 405 Powered By Ù q 80 Thecompany recognises revenue onthebasisofthecostsincurred todateasa proportion ofthetotalexpected costs.Theclientgainstheuseoftheassetduring itsconstruction. Thefollowing details applytoa contract where performance obligations aresatisfied over timeat31December 20X5. $ Totalcontract revenue 120,000 Coststodate 48,000 Estimated coststocompletion 48,000 Amounts invoiced 50,400 Amounts received fromcustomers 40,000 Whatamount should berecognised asa contract assetinthestatement offinancial position asat31December 20X5? $9,600 $12,000 81 $14,400 $50,400 (2 marks) Broom Cosuccessfully receives a government grantof$1,500,000 on1January20X5 allowing ittopurchase anassetwhichalsocosts$1,500,000 on1January20X5.Theasset hasa ten-year useful lifeandisdepreciated ona 20%reducing balance basis.Company policyistoaccount forallgrantsreceived asdeferred income. Whatamount ofincome willberecognised inrespect ofthegrantintheyearto 31December 20X5? $1,500,000 $500,000 G 82 $300,000 $150,000 (2 marks) BattyCohasreceived a government grantof$400,000on1January20X5tocover50%of thecostofa newitemofmachinery. Thegrantwascorrectly recorded atthatdate. Themachinery willbedepreciated overfiveyearsandtheresidual valueisestimated tobe $25,000.BattyCoareexpecting tomeetalltheperformance obligations ofthegrant. Usingthedraganddropoptions below,selectthedouble entries required torecord the subsequent treatment ofthegrantinthefinancial statements ofBattyCoduring theyear ended31December 20X5andthedepreciation chargefortheyearinrelation tothe machinery. Theoptions maybeusedmorethanonce. Debit Credit Otherincome Deferred income Depreciation expense Accumulated depreciation 30 Financial Reporting (FR) Page 53 of 405 H q $75,000 $80,000 Q U E T IO N S S $155,000 $160,000 (2 marks) 83 G On 25 June 20X9CambridgeCo receivedan orderfroma newcustomer,CircusCo, for productswitha sales valueof $900,000. CircusCo encloseda depositwiththe orderof $90,000. On 30 June CambridgeCo had not completedcreditcheckson CircusCo and had not despatched any goods. Accordingto IFRS15RevenuefromContracts withCustomers,howshouldCambridgeCo recordthistransactioninits financialstatements forthe year ended 30 June 20X9? Selectyouranswersfromthe optionsavailable(optionsmay be used morethan once and all three amount boxesmust be completed) Amount($) Revenue 900,000 Currentliability 810,000 Tradereceivables 90,000 H nil (2 marks) 84 ReproCo, a companywhichsellsphotocopyingequipment,has prepared its draft financial statements forthe year ended 30 September20X4.Ithas includedthe following transactionsinrevenueat the stated amountsbelow. Whichof these has been correctlyincludedin revenueaccordingto IFRS15Revenuefrom Contracts withCustomers? Agencysales of $250,000 on whichReproCo is entitledto a commission. Sale proceeds of $20,000 for motorvehicleswhichwereno longerrequiredby ReproCo. Salesof $150,000on 30 September20X4.Theamountinvoicedto and receivedfrom the customerwas $180,000,whichincluded$30,000 forongoingservicingworkto be done by ReproCo overthe nexttwoyears. Salesof $200,000 on 1October20X3to an establishedcustomerwhich,(withthe agreementof ReproCo),willbe paid infullon 30 September20X5.ReproCo has a (2 marks) cost of capital of 10%. Questions 31 Page 54 of 405 Powered By Ù q 85 YlingCoentered intoa contract whichisexpected tolast24months on1January20X4. The.Thefixedpricewhichhasbeenagreed forthecontract is$5million. At30September 20X4thecostsincurred onthecontract were$1.6million andtheestimated remaining coststocomplete were$2.4million. YlingComeasures satisfaction oftheperformance obligations under thecontract basedonthepercentage oftheproject certified as completed. At30September 20X4,thepercentage certified ascompleted todatewas38%. On20September 20X4YlingCoreceived a payment fromthecustomer of$1.74million whichwasequaltothetotaloftheamounts invoiced todate. Whatamount wouldbereported asa contract assetinYlingCo'sstatement offinancial position asat30September 20X4? Nil $160,000 $1,000,000 $300,000 (2 marks) 86 Consignment inventory isanarrangement whereby inventory isheldbyonepartybut owned byanother party.Itiscommon inthemotor trade. WhichTWOofthefollowing indicate thattheinventory inquestion isconsignment inventory? Manufacturer canrequire dealer toreturn theinventory Dealer hasnorightofreturn oftheinventory Manufacturer bearsobsolescence risk Dealer bearsslowmovement risk (2 marks) G H 87 ZaynCospent$500,000sending keystaffona one-day training course whichtookplace on1January20X6.ZaynCoisexpected tobenefit fromthistraining forthenexttwoyears. Thistraining course waspartlyfunded bya government scheme andZaynCoreceived $50,000fromthegovernment before thetraining commenced. Theremaining balance of $50,000isduetobereceived on31December 20X7.Current circumstances indicate that thereceipt ofthesecond instalment isvirtually certain. Selecting youranswer fromthepulldownlistbelow,whatamount should becharged to ZaynCo’sstatement ofprofitorlossfortheyearended31December 20X6toreflectthe abovetransactions? Pulldownlist: $150,000 $200,000 $400,000 $450,000 (2 marks) (ACCA,Examiners Report June2019) 32 Financial Reporting (FR) Page 55 of 405 q 88 NewmarketCo's revenueas showninits draft statement of profitor lossforthe year ended 31December20X9is $27million.Thisincludes$8 millionfora consignmentof goodssold on 31December20X9on whichNewmarketCo willincurongoingserviceand supportcosts fortwoyears after the sale. Thesupplyof the goodsand the provisionof serviceand supportare separate performanceobligationsunderthe termsof IFRS15RevenuefromContracts with Customers. Thecost of providingserviceand supportis estimatedat $800,000 per annum.Newmarket Co appliesa 30%mark-upto allservicecosts. Atwhat amount shouldrevenuebe recognisedin the statement of profitor lossof NewmarketCo for the year ended 31December20X9?(Ignorethe effectsof the timevalue of money.) (2 marks) $ Introduction 89 90 to groups On what basis may a subsidiarybe excludedfromconsolidationin accordance withIFRS 10ConsolidatedFinancialStatements? Theactivitiesof the subsidiaryare dissimilarto the activitiesof the rest of the group Thesubsidiarywas acquiredwiththe intentionof resellingit after a shortperiod of time Thesubsidiaryis based ina countrywithstrictexchangecontrolswhichmakeit difficultforit to transferfundsto the parent Thereis no basis on whicha subsidiarymay be excludedfromconsolidation (2 marks) G Q U E T IO N S S H Whena bargain purchase arises,IFRS3 BusinessCombinationsrequiresthat the amounts involvedincomputingthe bargain purchase shouldfirstbe reassessed. Whenthe amount of the bargain purchase has been confirmed,howshouldit be accounted for? 91 Charged as an expenseinprofitor loss Capitalisedand presentedundernon-currentassets Creditedto profitor loss Shownas a deductionfromnon-currentassets (2 marks) Whichof the followingis the criterionfor the treatment of an investmentas an associate? Ownershipof a majorityof the equityshares Abilityto exercisecontrol Existenceof significantinfluence Exposureto variablereturnsfrominvolvementwiththe investee (2 marks) Questions 33 Page 56 of 405 Powered By Ù q 92 WhichTWOof the followingstatements are correct whenpreparingconsolidated financialstatements? Asubsidiarycannot be consolidatedunlessit prepares financialstatements to the same reportingdate as the parent Asubsidiarywitha differentreportingdate may prepare additionalstatements up to the groupreportingdate forconsolidationpurposes Asubsidiary'sfinancialstatements can be includedinthe consolidationifthe gap betweenthe parent and subsidiaryreportingdates is fivemonthsor less Wherea subsidiary'sfinancialstatements are drawnup to a differentreportingdate fromthose of the parent, adjustmentsshouldbe made forsignificanttransactionsor eventsoccurringbetweenthe tworeportingdates (2 marks) 93 IFRS3 BusinessCombinationsrequiresan acquirerto measurethe assets and liabilitiesof the acquireeat the date of consolidationat fairvalue.IFRS13FairValueMeasurement providesguidanceon howfairvalueshouldbe established. Identifywhetherthe followingfactors are relevantor not relevantconsiderationswhen arrivingat the fair valueof a non-financialasset accordingto IFRS13? Thecharacteristicsof the asset Relevant Notrelevant Thepricepaid to acquirethe asset Relevant Notrelevant Theprincipalor mostadvantageous marketfor the asset Relevant Notrelevant Thehighestand best use of the asset Relevant Notrelevant G H (2 marks) 94 Aninvestorcompanyassesses controlto determinewhetheror not it is the parent of an investeecompany. Accordingto IFRS10ConsolidatedFinancialStatements, whichTHREE of the following are requiredto determinewhetheran investorhas controlof an investee? (1) 34 (2) Theabilityto use its poweroverthe investeeto affect the amountof the investor's returns Exposureto, or rightsto, variablereturnsfromits involvementwiththe investee (3) (4) Acquisitionof 50%or moreof the share capital Poweroverthe investee 1,2 and 3 2, 3 and 4 1,3 and 4 1,2 and 4 (2 marks) (ACCA,ExaminersReportJune 2019) FinancialReporting(FR) Page 57 of 405 q 95 PetreCo owns100%of the share capital of the followingcompanies.Thedirectorsare unsureof whetherthe investmentsshouldbe consolidated. Inwhichof the followingcircumstanceswouldthe investmentNOTbe consolidated? PetreCo has decidedto sellits investmentinAlphaCo as it is loss-making;the directorsbelieveits exclusionfromconsolidationwouldassist usersinpredictingthe group'sfutureprofits BetaCo is a bank and its activityis so differentfromthe engineeringactivitiesof the rest of the groupthat it wouldbe meaninglessto consolidateit DeltaCo is locatedina countrywherelocalaccountingstandards are compulsory and these are not compatiblewithIFRSStandards used by the rest of the group Gamma Co is locatedina countrywherea militarycoup has taken place and (2 marks) PetreCo has lostcontrolof the investmentforthe foreseeablefuture Financial 96 Q U E T IO N S S instruments An8%$30 millionconvertibleloannote was issuedon 1April20X5at par. Interestis payable inarrears on 31Marcheach year. Theloannote is redeemableat par on 31March 20X8or convertibleintoequityshares at the optionof the loannote holderson the basis of 30 shares foreach $100of loan.Asimilarinstrumentwithoutthe conversionoptionwould have an interestrate of 10%per annum. Thepresentvaluesof $1receivableat the end of each year based on discountrates of 8% and 10%are: Endof year G 1 2 3 Cumulative 8% 0.93 0.86 0.79 2.58 10% 0.91 0.83 0.75 2.49 H What amount willbe credited to equityon 1April20X5in respect of this financial instrument? $5,976,000 $1,524,000 97 $28,476,000 $30,000,000 (2 marks) A5%loannote was issuedon 1April20X0at its face valueof $20 million.Directcosts of the issuewere$500,000. Theloannote willbe redeemedon 31March20X3at a substantial premium.Theeffectiveinterestrate applicableis 10%per annum. Atwhat amount willthe loan note appear in the statement of financialpositionas at 31March20X2? $21,000,000 $20,450,000 $22,100,000 $21,495,000 (2 marks) Questions 35 Page 58 of 405 Powered By Ù G q 98 Usingthedraganddropoptions below,complete thestatement toshowhowIFRS9 Financial Instruments require investments inequityinstruments tobemeasured and accounted for(intheabsence ofanyelection atinitialrecognition)? withchanges going through Fairvalue profitorloss Amortised cost othercomprehensive income (2 marks) 99 On1January20X1,Penfold Copurchased a debtinstrument atitsfairvalueof$500,000. Ithada principal amount of$550,000andwasduetomature infiveyears.Thedebt instrument carries fixedinterest of6%paidannually inarrears andhasaneffective interest rateof8%.Itisheldatamortised cost. Atwhatamount willthedebtinstrument beshown inthestatement offinancial position ofPenfold Coasat31December 20X2? $514,560 $566,000 $564,560 $520,800 (2 marks) 100 Whichofthefollowing isNOTclassified asa financial instrument under IAS32Financial Instruments: Presentation? Shareoptions Intangible assets Tradereceivables Redeemable preference shares (2 marks) 101 Dexon Co'sdraftstatement offinancial position asat31March20X8shows financial assetsatfairvaluethrough profitorlosswitha carrying amount of$12.5million asat 1April20X7. These financial assetsareheldina fundwhose valuechanges directly inproportion toa specified market index. At1April20X7therelevant indexwas1,200andat31March20X8it was1,296. Whatamount ofgainorlossshould berecognised at31March20X8inrespect ofthese assets? (2 marks) $ 36 Financial Reporting (FR) Page 59 of 405 H G q 102 On 1January 20X8,ZeeperCo purchased40,000 $1listedequityshares at a priceof $3 per share. Anirrevocableelectionwas made to recognisethe shares at fairvaluethrough othercomprehensiveincome.Transactioncosts were$3,000. Atthe year end of 31December20X8the shares weretradingat $6 per share. What amount in respect of these shares willbe shownunder 'investmentsin equity instruments'in the statement of financialpositionof ZeeperCo as at 31December20X8? (2 marks) $ Q U E T IO N S S Leasing 103 On 1January 20X6,FelliniCo entered intoa contract forthe rightto use a machinefora fouryear period.Thecontract meetsthe definitionof a lease underIFRS16Leases.Fellini Co paid a depositof $700,000 on the commencementof the lease on 1January 20X6and a further3 instalmentsof $700,000 are payable annuallyinadvance. Thepresentvalueof the futurelease paymentswas $1,871,100. Theinterestrate implicitinthe lease is 6%. What amount willappear under non-currentliabilitiesin respect of this lease in the statement of financialpositionof FelliniCo at 31December20X6?[Answersto nearest $'000] $700 $1,171 $1,283 $1,871 (2 marks) H 104 Identifywhethereach of the followingstatements indicatesor does not indicatethat a contract is a lease under IFRS16Leases? Thelesseeobtainssubstantiallyallof the economicbenefitsfromuse of the asset Indicatesa lease Doesnot indicate a lease Ownershipinthe asset is transferredat the end of the lease term Indicatesa lease Doesnot indicate a lease Thecontract relatesto an identifiedasset Indicatesa lease Doesnot indicate a lease Ifit suitsthemto do so, the lessorcan substitute an identicalasset Indicatesa lease Doesnot indicate a lease (2 marks) Questions 37 Page 60 of 405 Powered By Ù q 105 Pebworth Coentered intoa contract toacquire therighttouseanitemofplantfora period ofthreeyearsfrom1April20X7.Thecontract meets thedefinition ofa leaseunder IFRS16Leases. Thepresent valueofthefuture leasepayments oncommencement ofthe leasewas$15,462,000, whichisalsotheinitial carrying amount oftheright-of-use asset. Pebworth Cowillalsomakethreerental payments of$6million perannum whicharedue tobepaidinarrears on31Marcheachyear.Theuseful lifeoftheplantisdeemed tobefive years.There isnooption tobuytheassetattheendoftheleaseterm. Theinterest rateimplicit intheleaseis8%perannum. Whatisthetotalchargetoprofitorlossinrespect ofthisleaseat31March20X8? $1,236,900 $4,329,300 $6,000,000 $6,390,900 (2 marks) 106 Atwhatamount doesIFRS16Leasesrequire a lesseetomeasure a right-of-use asset acquired under a lease? Leaseliability +otherdirectcosts+incentives received Leaseliability – otherdirectcosts– amounts paidbefore oroncommencement of thelease Leaseliability + otherdirectcosts+amounts paidbefore oroncommencement ofthe lease– incentives received Leaseliability – otherdirectcosts– amounts paidbefore oroncommencement of thelease+incentives received (2 marks) G H 107 On1October 20X3,FrescoCoacquired therighttouseanitemofplantunder a five-year contract. Thecontract meets thedefinition ofa leaseunder IFRS16Leases. Theterms of thecontract required animmediate deposit of$2million withfivepayments of$6million paidannually inarrears commencing on30September 20X4.Thepresent valueofthe future leasepayments is $22,745,000. Therateofinterest implicit intheleaseis10%per annum. Whatisthecarrying amount oftheleasecurrent liability inFrescoCo'sstatement of financial position asat30September 20X4? $1,901,950 $4,098,050 $6,000,000 $2,274,500 (2 marks) 108 Theobjective ofIFRS16Leases istoprescribe theappropriate accounting treatment and required disclosures inrelation toleases. WhichTWOofthefollowing areamong thecriteria setoutinIFRS16foranarrangement tobeclassified asa lease? Thelessee hastherighttosubstantially alloftheeconomic benefits fromuseofthe asset Theleasetermisforsubstantially alloftheestimated useful lifeoftheasset Theagreement concerns anidentified assetwhichcannot besubstituted Thelessor hastherighttodirecttheuseoftheasset (2 marks) 38 Financial Reporting (FR) Page 61 of 405 q 109 CornetCo has entered intoan eight-yearlease agreementon 1July 20X4.Thelease requiresannual paymentsof $750,000inarrears. Thepresentvalueof the lease payments at 1July 20X4,discountedat a rate of 6%is $4,657,500.Additionally,CornetCo paid directlyattributablecosts of $37,500on 1July 20X4. Selectthe total charge to the statement of profitor lossfor the year ended 30 June 20X5 in respect of the right-of-useasset usingthe optionsin the pulldownlist. Pulldown list: $586,875 $866,325 $279,450 $1,029,450 Q U E T IO N S S (2 marks) (ACCA,ExaminersReportDec2018) 110 Asale and leasebacktransactioninvolvesthe sale of an asset and the leasingback of the same asset. Ifthe arrangement meets the IFRS15RevenuefromContracts withCustomerscriteriato be recognisedas a sale, howshouldany 'profit' on the sale be treated? Recognisewholeamountof profitimmediatelyinprofitor loss Deferprofitand amortiseoverthe lease term Recogniseproportionrelatingto right-of-useretained Recogniseproportionrelatingto right-of-usetransferred (2 marks) G H 111 Duringthe year ended 30 September20X4HyperCo entered intothe following transactions: On 1October20X3,HyperCo entered intoa contract to obtainthe rightto use an asset for a fiveyear period.Thecontract meetsthe definitionof a lease underIFRS16Leases.An initialpayment of $90,000 was made on commencementof the lease, beingthe firstof five equal annual payments.Thepresentvalueof the futurelease paymentson commencementof the lease was $250,000. Theright-of-useasset has a five-yearuseful life.Thelease has an implicitinterestrate of 16%. On 1August20X4,HyperCo made a paymentof $18,000fora nine-monthlease of an itemof excavationequipment.Hyperwishesto utilisethe exceptionsavailableunderIFRS 16Leases. What amount in total wouldbe charged to HyperCo's statement of profitor lossfor the year ended 30 September20X4in respect of the above transactions? (2 marks) $ Questions 39 Page 62 of 405 Powered By Ù G q 112 On1January20X6,Platinum Coentered intoanagreement fortherighttouseanasset forthreeyears.Theagreement meets thedefinition ofa leaseunder IFRS16Leases. A deposit of$120,000 waspayable on1January20X6withthreefurther instalments of $100,000 payable on31December 20X6,31December 20X7and31December 20X8.The present valueofthefuture leasepayments was$240,200oncommencement ofthelease andtherateofinterest implicit intheleaseis12%. Whatwillbetheamount ofthefinance chargearisingfromthisleasewhichwillbe charged toprofitorlossfortheyearended31December 20X7? (2 marks) $ 113 On1April20X5,Pennyroyal Cosolditsproperty toa financial institution for$20,000,000 whichwasthefairvalueoftheproperty atthatdate.Thetransaction constitutes a salein accordance withIFRS15Revenue fromContracts withCustomers. Theproperty hada carrying amount of$18,000,000 andhadanestimated remaining useful lifeof10yearsat thedateofsale.Under theterms ofthesale,Pennyroyal Cohastherighttousethe property fora fouryearperiod commencing 1April20X5.Thepresent valueofthefuture payments under theleasehavebeencorrectly calculated as$7,092,000. Whatistheamount ofthegainthatcanberecognised inthestatement ofprofitorlossin respect ofthistransaction fortheyearended31March20X6? $709,200 $1,290,800 $2,000,000 $Nil (2 marks) 114 JetsamCoentered intoanagreement fortherighttouseanitemofplantfora period of10 yearsfrom1 April20X0.Theagreement required payments of$15,000tobemadeannually inarrears. Thepresent valueofthefuture leasepayments wasestimated tobe$100,650 at theinception oftheleaseandtherateofinterest implicit intheleasewas8%.Boththe leasetermandtheplant's estimated useful lifewastenyears. Selecting youranswer fromtheoptions below,whatisthetotalchargetoappearinthe statement ofprofitorlossinrespect oftheleasefortheyearended31December 20X0? Pulldownlist: $11,250 $6,039 $7,549 $13,588 (2 marks) (ACCA,Examiners Report Sep2017,amended) 40 Financial Reporting (FR) Page 63 of 405 H q Provisions and events after the reporting period 115 CandelCoisbeingsuedbya customer for$2million forbreach ofcontract overa cancelled order. CandelCohasobtained legalopinion thatthereisa 20%chancethat CandelCowilllosethecase.Accordingly, CandelCohasprovided $400,000($2million 20%)inrespect oftheclaim.Theunrecoverable legalcostsofdefending theactionare estimated at$100,000. These havenotbeenprovided forasthecasewillnotgotocourt untilnextyear. Whatistheamount oftheprovision thatshould bemadebyCandelCoinaccordance withIAS37Provisions, Contingent Liabilities andContingent Assets? Q U E T IO N S S (2 marks) $ 116 During theyearPeterlee Coacquired anironoremineata costof$6million. Inaddition, whenalltheorehasbeenextracted (estimated tenyears'time)thecompany willface estimated costsforlandscaping theareaaffected bythemining thathavea present value of$2million. These costswould stillhavetobeincurred evenifnofurther orewas extracted. Howshould this$2million future costberecognised inthefinancial statements? Provision $2million and$2million capitalised aspartofcostofmine Provision $2million and$2million charged tooperating costs Accrual $200,000perannum fornexttenyears Should notberecognised asnocosthasyetarisen (2 marks) (ACCA,Examiners Report June2019) G H 117 Selectwhether a provision isrequired orisnotrequired inthefinancialstatements of thefollowing companies. Aston Cohasa company policyofcleaning upany environmental contamination caused byitsoperations, even though itisnotlegallyobliged todoso Provision Noprovision required required Brum Cohasa fixedpricecontract tosupplywidgets to Erdington Co.Brum Cohascalculated thatitwillcostmore tomanufacture thewidgets thanbudgeted, whichismore thantherevenue agreed fromErdington Co Provision Noprovision required required Coleshill Coisclosing downa division. Theboardhas prepared detailed closure planswhichhavenotyetbeen communicated tocustomers andemployees Provision Noprovision required required Dudley Cohasacquired a machine whichrequires thestaff toberetrained onitssafeoperation. Thestafftraining will occurinthenextfinancial period Provision Noprovision required required (2 marks) Questions41 Page 64 of 405 Powered By Ù G q 118 FluteCoundertakes drilling activities andhasa widely publicised environmental policy stating thatitwillincurcoststorestore landtoitsoriginal condition oncedrilling activities havebeencompleted. Drilling commenced ona particular pieceoflandon1July20X8.Atthistime,FluteCo estimated thatitwould cost$3million torestore thelandwhendrilling wascompleted in fiveyears'time.FluteCo'scostofcapitalis7%andtheappropriate present valuefactor is0.713. Atwhatamount willtheprovision forrestoration costsbemeasured inFluteCo's statement offinancial position asat31December 20X8? $2.4million $3.0million $2.29million $2.21million (2 marks) (ACCA,Examiners Report June2019) 119 Identify whether thefollowing statements aretrueorfalseinaccordance withIAS37 Provisions, Contingent Liabilities andContingent Assets. Provisions should bemadeforbothconstructive andlegal obligations True False Discounting maybeusedwhenestimating theamount ofa provision True False Arestructuring provision mustinclude theestimated costsof retraining orrelocating continuing staff True False Arestructuring provision mayonlybemadewhena company hasa detailed planfortherestructuring andhascommunicated True tointerested parties a firmintention tocarryitout H False (2 marks) 120 EilishCohada provision of$100,000 initsfinancial statements at31December 20X4in relation toanongoing courtcase.On10February 20X5,EilishCosettled thiscasefor $120,000. Whatistheaccounting entryrequired byEilishCoon10February 20X5inrelation tothis provision? ○ DebitProvision $100,000, DebitProfitorloss$20,000;CreditCash$120,000 ○ DebitCash$120,000; CreditProvision $100,000, CreditProfitorloss$20,000 ○ DebitExpense $120,000; CreditProvision $120,000 ○ DebitProvision $120,000: CreditExpense $120,000 42 Financial Reporting (FR) Page 65 of 405 (2 marks) G q 121 On1October 20X3,Xplorer Cocommenced drilling foroilfromanundersea oilfield. The extraction ofoilcausesdamage totheseabedwhichhasa restorative cost(ignore discounting) of$10,000permillion barrels ofoilextracted. Xplorer Coextracted 250million barrels intheyearended 30September 20X4. Xplorer Coisalsorequired todismantle thedrilling equipment attheendofitsfive-year licence. Thishasanestimated costof$30million on30September 20X8.Xplorer Co'scost ofcapitalis8%perannum and$1hasa present valueof68centsinfiveyears'time. Whatisthetotalprovision (extraction plusdismantling) whichXplorer Cowouldreport initsstatement offinancial position asat30September 20X4inrespect ofitsoil operations? Q U E T IO N S S (2 marks) $ 122 Hopewell Cosellsa lineofgoodsunder a six-month warranty. Anydefectarising during thatperiod isrepaired freeofcharge.Hopewell Cohascalculated thatifallthegoodssold inthelastsixmonths oftheyearrequired repairs thecostwould be$2million. Ifallofthese goodshadmoreserious faultsandhadtobereplaced thecostwould be$6million. Thenormal pattern isthat80%ofgoodssoldwillbefault-free, 15%willrequire repairs and 5%willhavetobereplaced. Usingthepulldownlistoptions, selectwhatistheamount oftheprovision required. Pulldownlist: $0.6million $0.8million $1.6million $2million H (2 marks) 123 WhichTWOofthefollowing events whichoccurafterthereporting dateofa company butbefore thefinancial statements areauthorised forissueareclassified asADJUSTING events inaccordance withIAS10Events AftertheReporting Period? Achangeintaxrateannounced afterthereporting date,butaffecting thecurrent taxliability Thediscovery ofa fraudwhichhadoccurred during theyear Thedetermination ofthesaleproceeds ofanitemofplantsoldbefore theyearend Thedestruction ofa factorybyfire (2 marks) Questions43 Page 66 of 405 Powered By Ù G q 124 ColeridgeCo is a manufacturingcompany. Thefinancialaccountant of ColeridgeCo isconsideringwhetherany of the events,which tookplace inApril20X5,requireadjustmentinthe financialstatements forthe year ended 31March20X5 WhichTWOof the followingeventsrequireadjustingin the financialstatements for the year ended 31March20X5,as requiredby IAS10EventsAfterthe ReportingPeriod? ThomasCo, a customerof ColeridgeCo, whichowesthe company$200,000 at 31March20X5,entered insolvencyon 3 April20X5 Anemployeehas commencedlegalproceedingsagainst ColeridgeCo followingan industrialaccidenton 10April20X5.Thecompanyis expectedto losethe case and estimatesthat damages of $350,000 willbe paid to the employee Inventorythat was heldat cost of $200,000 on 31March20X5was soldon 21April20X5for$150,000 Thecompanyhad agreed the sale of the Wordsworthdivisionat a board meetingon 25 March20X5.Thepublicannouncementwas made on 1April20X5 (2 marks) Inventories and biological assets 125 CaminasCo has the followingproductsininventoryat the year end. Product Quantity Cost Sellingprice Sellingcost A 1,000 $40 $55 $8 B 2,500 $15 $25 $4 C 800 $23 $27 $5 Atwhat amount shouldtotal inventorybe stated in the statement of financialposition? Selectyouranswersfromthe pulldownlistprovided. Pulldown list: $95,900 $95,100 $103,100 $105,100 (2 marks) 126 Inwhichof the followingsituationsis the net realisablevalueof an itemof inventorylikely to be lowerthan its cost? Theproductioncost of the itemhas been falling 44 Thesellingpriceof the itemhas been rising Theitemis becomingobsolete Demandforthe itemis increasing (2 marks) FinancialReporting(FR) Page 67 of 405 H q 127 Atwhat amount is a biologicalasset measuredon initialrecognitionin accordance with IAS41Agriculture? Productioncost Fairvalue Cost lessestimatedcosts to sell Fairvaluelessestimatedcosts to sell (2 marks) Q U E T IO N S S 128 Whichof the followingis NOTthe outcomeof a biologicaltransformationaccordingto IAS41Agriculture? Growth Harvest Procreation Degeneration (2 marks) 129 Howis a gain or lossarisingon a biologicalasset recognisedin accordance withIAS41 Agriculture? Includedinprofitor lossforthe year Adjustedinretainedearnings Shownunder'other comprehensiveincome' Deferredand recognisedoverthe lifeof the biologicalasset (2 marks) G H 130 Identifywhetherthe followingstatements about IAS2 Inventoriesare correct or incorrect: Productionoverheadsshouldbe includedincost on the basis of a company'sactual levelof activityinthe period Correct Incorrect Inarrivingat the net realisablevalueof inventories,settlement discountsmustbe deducted fromthe expectedsellingprice Correct Incorrect Inarrivingat the cost of inventories,FIFO,LIFOand weighted average cost formulasare acceptable Correct Incorrect Itis permittedto valuefinishedgoodsinventoriesat materials pluslabourcost only,withoutadding productionoverheads Correct Incorrect (2 marks) Questions 45 Page 68 of 405 Powered By Ù q 131 IsaacCoisa company whichbuysagricultural produce fromwholesale suppliers for retailtothegeneral public. Itispreparing itsfinancial statements fortheyearending 30September 20X4andisconsidering itsclosing inventory. Inaddition toIAS2 Inventories, whichofthefollowing accounting standards maybe relevant todetermining thefiguretobeincluded initsfinancial statements forclosing inventories? IAS10Events AftertheReporting Period IAS38Intangible Assets IAS16Property, PlantandEquipment IAS41Agriculture (2 marks) 132 Inpreparing financial statements fortheyearended 31March20X6,theinventory count wascarried outon4 April20X6.Thevalueofinventory counted was$36million. Between 31Marchand4 Aprilgoodswitha costof$2.7million werereceived intoinventory and salesof$7.8million weremadeata mark-up oncostof30%. Usingthepulldownlistprovided, selectatwhatamount inventory should bestatedinthe statement offinancial position asat31March20X6? Pulldownlist: $39.3million $36.0million $33.3million $41.1 million (2 marks) G 133 At31March20X7Tentacle Cohad12,000unitsofproduct W32ininventory, included at costof$6perunit.During AprilandMay20X7unitsofW32werebeingsoldata priceof $5.40each,withsalesstaffreceiving a 15%commission onthesalespriceoftheproduct. Thefinancial statements ofTentacle Cowereapproved bytheBoardon14July20X7. Atwhatamount should inventory ofproduct W32berecognised inthefinancial statements ofTentacle Coasat31March20X7? (2 marks) $ 46 Financial Reporting (FR) Page 69 of 405 H G q Accounting for taxation 134 Ullington Co'strialbalance shows a debitbalance of$2.1million brought forward on current taxanda creditbalance of$5.4million ondeferred tax.Thetaxchargeforthe current yearisestimated at$16.2million andthecarrying amounts ofnetassetsare $13million inexcess oftheirtaxbase.Theincome taxrateis30%. Whatistheamount ofincome taxrecognised inthestatement ofprofitorlossof Ullington Cofortheyear? $15.6million $12.6million $16.8million $18.3million (2 marks) Q U E T IO N S S 135 JasperOrange Co'strialbalance at31December 20X3shows a debitbalance of$700,000 oncurrent taxanda creditbalance of$8,400,000ondeferred tax.Thedirectors have estimated theprovision forincome taxfortheyearat$4.5million andtherequired deferred taxprovision is$5.6million, $1.2million ofwhichrelates toa property revaluation. Whatistheamount ofincome taxamount recognised inJasperOrangeCo'sstatement ofprofitorlossfortheyearended31December 20X3? $1million $2.4million $1.2million $3.6million (2 marks) H 136 Thefollowing information relates toanentity: (i) At1January20X8thecarrying amount ofnon-current assetsexceeded theirtax written downvalueby$850,000. (ii) Fortheyearto31December 20X8theentityclaimed depreciation fortaxpurposes of$500,000andcharged depreciation of$450,000inthefinancial statements. (iii) During theyearended 31December 20X8theentityrevalued a property. The revaluation surplus was$250,000.There arenocurrent planstoselltheproperty. (iv) Thetaxratewas30%throughout theyear. Whatistheprovision fordeferred taxrequired byIAS12Income Taxesat 31December 20X8? $240,000 $270,000 $315,000 $345,000 (2 marks) Questions47 Page 70 of 405 Powered By Ù G q 137 Thestatements offinancial position ofNedburg Coinclude thefollowing extracts: Statements offinancial position asat30September 20X2 20X1 $m $m Non-current liabilities Deferred tax 310 140 Current liabilities Taxation 130 160 Thetaxchargeinthestatement ofprofitorlossfortheyearended 30September 20X2is $270million. Whatamount oftaxwaspaidduring theyearto30September 20X2? $ (2 marks) million 138 Thetrialbalance ofHighwood Coat31March20X6showed creditbalances of$800,000 oncurrent taxand$2.6million ondeferred tax.A property wasrevalued during theyear givingrisetodeferred taxof$3.75million. Thishasbeenincluded inthedeferred tax provision of$6.75million at31March20X6. Theincome taxliability fortheyearended 31March20X6isestimated at$19.4million. Whatistheamount oftheincome taxchargeinthestatement ofprofitorlossof Highwood at31March20X6? $ (2 marks) million 139 Astral Copurchased anitemofplantfor$40,000on1September 20X1.Theplanthasan estimated useful lifeoffiveyearsandanestimated residual valueof$5,000.Theplantis depreciated ona straight-line basis.Localtaxlawdoesnotallowdepreciation asan expense, buta taxallowance of60%ofthecostoftheassetcanbeclaimed intheyearof purchase and20%perannum ona reducing balance basisinthefollowing years.Therate ofincome taxis30%. Whatchargeorcreditfordeferred taxation should berecorded inAstralCo'sstatement ofprofitorlossfortheyearto31August 20X2? $17,000 charge $5,100charge $5,100credit $17,000 credit (2 marks) (ACCA,Examiners Report June2018) 48 Financial Reporting (FR) Page 71 of 405 H q 140 Isaac &Joseph Co purchasednewmachineryon 1January 20X5for$1,000,000.Ithas a residualvalueof $200,000, withthe usefullifedeemedto be 8 years. Theplant is depreciatedon a straight-linebasis. Taxallowancesof 50%of the cost of the asset can be claimedinthe year of purchase,as depreciationis not allowedfortax purposes.Therate of incometax is 30%. Identifyby selectingthe optionsprovidedbelow,whethera deferredtax asset or liability shouldbe recognisedat 31December20X5and at what amount? tax asset or liability Amount ($) Asset 60,000 Liability 82,500 Q U E T IO N S SDe 120,000 (2 marks) G H Questions 49 Page 72 of 405 Powered By Ù G q Section B Derringdo Co case 18 mins Information relevant toquestions 141-145 Derringdo Coisa broadband provider whichreceives government assistance toprovide broadband toremote areas.Derringdo Coinvested ina newserver ata costof$800,000on 1October 20X2.Theserver hasanestimated useful lifeoftenyearswitha residual valueequalto 15%ofitscost.Derringdo Cousesstraight-line depreciation ona timeapportioned basis. Thecompany received a government grantof30%ofitscostpriceoftheserver atthetimeof purchase. Theterms ofthegrantarethatifthecompany retains theassetforfouryearsormore, thennorepayment liability willbeincurred. Derringdo Cohasnointention ofdisposing ofthe server within thefirstfouryears.Derringdo Co'saccounting policyforcapital-based government grantsistotreatthemasdeferred income andrelease themtoincome overthelifeoftheassetto whichtheyrelate. 141 Whatisthenetamount thatwillbecharged tooperating expenses inrespect ofthe server fortheyearended31March20X3? $10,000 $28,000 $22,000 $34,000 142 Whatamount willbepresented under non-current liabilities at31March20X3inrespect ofthegrant? $228,000 $216,000 $240,000 $204,000 143 Derringdo Cosellsa package whichgivescustomers a freelaptopwhentheysigna twoyearcontract fortheprovision ofbroadband services. Thelaptophasa stand-alone price of$200andthebroadband contract isfor$30permonth. Inaccordance withIFRS15Revenue fromContracts withCustomers, whatamount willbe recognised asrevenue oneachpackageinthefirstyear? Selectthecorrect answer fromtheoptions below. Pulldownlist: $439 $281 $461 $158 50 Financial Reporting (FR) Page 73 of 405 H G q 144 Determining theamount toberecognised inthefirstyearisanexample ofwhichstagein theprocess ofapplying IFRS15Revenue fromContracts withCustomers? Determining thetransaction price Recognising revenue whena performance obligation issatisfied Identifying theseparate performance obligations Allocating thetransaction pricetotheperformance obligations Q U E T IO N S S 145 Derringdo Coiscarrying outa transaction onbehalfofanother entityandthefinance director isunsure whether Derringdo Coshould beregarded asanagentora principal in respect ofthistransaction. Whichofthefollowing wouldindicate thatDerringdo Coisactingasanagent? Derringdo Coisprimarily responsible forfulfilling thecontract Derringdo Coisnotexposed tocreditriskfortheamount duefromthecustomer Derringdo Coisresponsible fornegotiating thepriceforthecontract Derringdo Cowillnotbepaidintheformofcommission (10marks) Bridgenorth Co case 18 mins Information relevant toquestions 146–150 Bridgenorth Cohasundertaken a $5million contract torepair a railway tunnel. Thecontract was signed on1January20X8andtheworkisexpected totakethreeyears.Thisisa contract in whichperformance obligations aresatisfied overtimeandprogress insatisfying performance obligations istobemeasured according to%ofworkcompleted ascertified bya surveyor. The customer gainscontrol oftheassetaseachstageofthetunnel iscompleted. Bridgenorth Cohas anenforceable righttopayment forperformance completed todate. At31December 20X8and20X9thedetails ofthecontract wereasfollows: 20X9 20X8 $ $ Totalcontract value 5,000,000 5,000,000 Coststodate 3,600,000 2,300,000 Estimated coststocompletion 700,000 2,100,000 Workinvoiced todate 3,000,000 2,000,000 Cashreceived todate 2,400,000 1,500,000 %certified complete 80% 50% H 146 Whatistheamount ofprofitrecognised fortheyearended31December 20X8? $ Questions51 Page 74 of 405 Powered By Ù q 147 Usingthepulldownlistprovided, selectwhatamount wouldhavebeenincluded intrade receivables at31December 20X8? Pulldownlist: $200,000 $500,000 $2,000,000 $3,000,000 148 Whatistheamount ofthecontract assettoberecognised at31December 20X9? $ 149 Bridgenorth Comeasures performance obligations completed byreference topercentage ofcompletion. Identify whichTWOofthefollowing wouldbeanacceptable method ofmeasuring the performance obligations completed? Workinvoiced todateasa percentage oftotalcontract price Cashreceived todateasa percentage oftotalcontract price Costsincurred asa percentage oftotalexpected costs Timespentasa percentage oftotalexpected contract time G H 150 Ifat31December 20X8Bridgenorth Cohadcompleted only10%ofthecontract forcosts of$400,000andfeltthatitwastooearlytomeasure theoutcome oftheperformance obligation butitdidexpecttobeabletorecover thecostsincurred todate.What amount, ifany,couldBridgenorth Cohaverecognised asrevenue? $ (10marks) Apex Co case 18 mins Thefollowing scenario relatestoquestions 151–155. ApexCoisa publicly listedsupermarket chain.During thecurrent yearitstarted thebuilding ofa newstore.Thedirectors areawarethatinaccordance withIAS23Borrowing Costscertain borrowing costshavetobecapitalised. Details relating toconstruction ofApexCo'snewstore: ApexCoissued a $10million unsecured loanwitha coupon (nominal) interest rateof6%on 1April20X8.Theloanisredeemable ata premium whichmeans theloanhasaneffective finance costof7.5%perannum. Theloanwasspecifically issued tofinance thebuilding ofthenewstore whichmeets thedefinition ofa qualifying assetinIAS23.Construction ofthestorecommenced on1May20X8anditwascompleted andreadyforuseon28February 20X9,butdidnotopen fortrading until1April20X9. 52 Financial Reporting (FR) Page 75 of 405 G q 151 ApexCo'snewstoremeets thedefinition ofa qualifying assetunder IAS23. Whichofthefollowing isthecorrect description ofa qualifying assetunder IAS23? Anassetthatisreadyforuseorsalewhenpurchased Anassetthattakesa substantial period oftimetogetreadyforitsintended useor sale Anassetthatisintended foruserather thansale Anassetthathasbeenfinanced usinga specific loan Q U E T IO N S S 152 ApexCoissued theloanstockon1April20X8.Threeevents ortransactions mustbe takingplaceforcapitalisation ofborrowing coststocommence inaccordance withIAS 23.Whichofthefollowing isNOToneofthese? Expenditure ontheassetisbeingincurred Borrowing costsarebeingincurred Physical construction oftheassetisnearing completion Necessary activities areinprogress toprepare theassetforuseorsale 153 Whatisthetotalofthefinance costswhichcanbecapitalised inrespect ofApexCo's newstore? $ 154 Rather thantakeouta loanspecifically forthenewstoreApexCocouldhavefunded the storefromexisting borrowings whichare: (i) 10%bankloan$50million (ii) 8%bankloan $30million H Inthiscaseitwouldhaveapplied a 'capitalisation rate'totheexpenditure ontheasset. Whatwouldthatratehavebeen? 10% 8.75% 9% 9.25% 155 IfApexCohadbeenabletotemporarily investtheproceeds oftheloanfrom1Aprilto 1Maywhenconstruction began,howwouldtheproceeds beaccounted for? Deducted fromfinance costs Deducted fromthecostoftheasset Recognised asinvestment income inthestatement ofprofitorloss Deducted fromadministrative expenses inthestatement ofprofitorloss (10marks) Questions53 Page 76 of 405 Powered By Ù G q Bertrand Co case 18 mins Information relevant toquestions 156–160 Bertrand Coissued $10million convertible loannoteson1October 20X0thatcarrya nominal interest (coupon) rateof5%perannum. Theyareredeemable on30September 20X3atparfor cashorcanbeexchanged forequityshares inBertrand Coonthebasisof20shares foreach $100ofloan.A similar loannote,without theconversion option, would haverequired Bertrand Co topayaninterest rateof8%. Thepresent valueof$1receivable attheendofeachyear,basedondiscount ratesof5%and8%, canbetakenas: 5% 8% Endofyear 1 0.95 0.93 2 0.91 0.86 3 0.86 0.79 cumulative 2.72 2.58 156 Howshould theconvertible loannotesbeaccounted for? Asdebt Asdebtandequity Asequity Asdebtuntilconversion, thenasequity 157 Whatistheamount thatwillberecognised asfinance costsfortheyearended 30September 20X1? $ 158 Whatistheamount thatshould beshown under liabilities at30September 20X1? $9,425,000 $9,925,000 $9,690,000 Nil 159 IfBertrand Cohadincurred transaction costsinissuing theseloannotes,howwould thesehavebeenaccounted for? Added totheproceeds oftheloannotes Deducted fromtheproceeds oftheloannotes Amortised overthelifeoftheloannotes Charged tofinance costs 54 Financial Reporting (FR) Page 77 of 405 H G q 160 Bertrand Coalsopurchased a debtinstrument whichwillmature infiveyears'time. Bertrand Cointends toholdthedebtinstrument tomaturity tocollect interest payments. Complete thefollowing statement usingtheoptions below. Thisdebtinstrument willbemeasured asa financial at inthefinancial statements ofBertrand Co. asset amortised cost liability fairvalue Q U E T IO N S S fairvaluethrough profitorloss (10marks) Fino Co case 18 mins Information relevant toquestions 161–165 On1April20X7,FinoCoentered intoanagreement togaintherighttouseplantfromthe manufacturer fora period ofthreeyears.Theagreement meets thedefinition ofa leasein accordance withIFRS16Leases. Aninitial payment of$100,000 wasmadeon1April20X7andthepresent valueofthefuture leasepayments atthatdateis$173,500. Payments inrespect oftheleasearemadeinadvance andare$100,000 perannum, commencing on1April20X8.Therateofinterest implicit inthe leaseis10%.Theleasedoesnottransfer ownership oftheplanttoFinoCobytheendofthelease termandthereisnopurchase option available. H 161 Overwhatperiod should FinoCodepreciate a right-of-use asset,according toIFRS16 Leases? Fromthecommencement oftheleasetotheendoftheleaseterm Fromthecommencement oftheleasetotheendoftheuseful lifeoftheplant Fromthecommencement oftheleasetothelonger oftheendoftheleasetermand theendoftheuseful lifeoftheplant Fromthecommencement oftheleasetotheshorter oftheendoftheleasetermand theendoftheuseful lifeoftheplant 162 Inaddition totheinformation givenabove,FinoCoincurred initial directcostsof$20,000 tosetuptheleaseandreceived leaseincentives fromthemanufacturer totalling $7,000. Whatistheinitialcostoftheright-of-use assetasat1April20X7? $293,500 $186,500 $313,000 $286,500 Questions55 Page 78 of 405 Powered By Ù G q 163 Theoperations director hasquestioned whytheleasepayments cannot besimply charged toprofitorloss. InwhichTWOofthefollowing situations wouldcharging leasepayments toprofitorloss bethecorrect accounting treatment, assuming FinoCotakesadvantage ofanyoptional recognition exemptions available under IFRS16Leases? Selectyouranswers fromthe draganddropoptions provided. Correctaccounting treatment Ownership istransferred attheendofthe leaseterm Theleaseisforlessthan12months Theleased assethasa lowunderlying l Theleased assethasbeenspecially adapted fortheuseofthelessee 164 Selecting youranswer fromtheoptions provided, whatisthecarrying amount ofthe leaseliability at31March20X8? Pulldownlist: $190,850 $173,500 $200,000 $90,850 H 165 On1October 20X7,FinoCoentered intoa different leaseagreement onanother pieceof equipment. Theleaserunsfortenmonths andpayments of$1,000permonth arepayable inarrears. Asanincentive toenterintothelease,Finoreceived thefirstmonth rentfree. Finowishes totakeadvantage oftheoptional recognition exemptions under IFRS16. Whatamount should berecognised aspayments under short-term leasesintheyear ended31March20X8? $5,000 $6,000 $4,500 $5,400 (10marks) 56 Financial Reporting (FR) Page 79 of 405 G q Jeffers Co case (Mar/Jun 2019) 18 mins Thefollowing scenariorelatestoquestions 166–170. JeffersCoprepares financial statements fortheyearended 31December 20X8.Thefinancial statements areexpected tobeauthorised forissueon15March20X9. Thefollowing threeevents haveoccurred inJanuary20X9: (1) Health andsafetyfine Ahealth andsafetyinvestigation ofanincident whichoccurred in20X8wasconcluded in January20X9,resulting ina $1.5m fineforJeffersCo.Aprovision for$1mhadbeen recognised inJeffersCo'sfinancial statements fortheyearended 31December 20X8. (2) Customer ceasedtrading (3) Q U E T IO N S S Notice wasreceived on10January20X9thata customer owing$1.2m at31December 20X8hadceasedtrading. Itisunlikely thatthedebtwillberecovered infull. Acquisition ofa competitor Theacquisition ofa competitor wasfinalised on10January20X9,beingthedateJeffers Coobtained control overthecompetitor. Negotiations inrespect oftheacquisition commenced inMay20X8. Inaddition tothis,thereisanoutstanding courtcaseat31December 20X8relating tofaultygoods supplied byJeffersCo.Legaladvicestatesthatthereisa smallchancethattheywillhavetopay out$6m,butthemostlikelyoutcome isbelieved tobea payoutof$5m.Either way,JeffersCowill havetopaylegalfeesof$0·2m.Allpayments areexpected tobemadeon31December 20X9. JeffersCohasa costofcapitalof10%(discount factor0.909). JeffersCobelieves thefaultlieswiththesupplier, andispursuing acounter-claim. Legaladvice states thatitispossible, butnotlikely, thatthisactionwillsucceed. 166 Which,ifany,ofthefollowing statements regarding IAS10Events aftertheReporting Periodis/arecorrect? (1) (2) H 'Events afterthereporting period' aredeemed tobeallevents fromthedatethe financial statements areauthorised forissueupuntilthedateoftheannual meeting withtheshareholders Non-adjusting events donotneedtobereflected inanypartofanentity's financial statements orannual report 1only 2 only Both1and2 Neither 1nor2 167 Selectwhether eachofthefollowing events, whichoccurred inJanuary20X9,wouldbe classified asadjusting ornon-adjusting events inaccordance withIAS10,byselecting the relevant answer option. Health andsafetyfine Adjusting event Non-adjusting event Customer ceasedtrading Adjusting event Non-adjusting event Acquisition ofa competitor Adjusting event Non-adjusting event Questions57 Page 80 of 405 Powered By Ù G q 168 Selecting youranswer fromthepulldownlistprovided, whatamount should berecorded asa provision inrespect oftheoutstanding courtcaseagainstJeffersCoasat31 December 20X8(tothenearest hundred thousand)? Pulldownlist: $5.6m $5.5m $4.7m $4.5m 169 At31December 20X8,whichofthefollowing represents thecorrect accounting treatment ofthecounter-claim madebyJeffersCoagainstthesupplier? Nothing isrecognised ordisclosed inthefinancial statements Disclose asa contingent asset Recognise a receivable fromthesupplier Netthepossible counter-claim proceeds fromthesupplier against theprovision for legalclaim 170 InFebruary 20X9,a major firebroke outinJeffersCo'sproperty andwarehouse. JeffersCo hasnoinsurance, andnowthemanagement ofthecompany believes itisunable to continue trading. Howshould thisbereflected inJeffersCo'sfinancial statements fortheyearended 31December 20X8? Noadjustment should bemadetothefigures inthefinancial statements, however, thiseventmustbedisclosed inthenotes Thefinancial statements cannolonger beprepared ona goingconcern basis Nodisclosure is required in thefinancial statements; however, thiseventmustbe reflected in thefinancial statements fortheyearended 31December 20X9 Thefinancial statements should continue tobeprepared usingthegoingconcern basis,withanimpairment lossrecognised against thenon-current assets (10marks) 58 Financial Reporting (FR) Page 81 of 405 H G q Julian Co case 18 mins Information relevant toquestions 171–175 Thecarrying amount ofJulianCo'sproperty, plantandequipment at31December 20X3was $310,000 andthetaxwritten downvaluewas$230,000. Thefollowing datarelates totheyearended 31December 20X4: (i) Attheendoftheyearthecarrying amount ofproperty, plantandequipment was $460,000andthetaxwritten downvaluewas$270,000.During theyearsomeitems were revalued upwards by$90,000.Noitems hadpreviously required revaluation. Inthetax jurisdiction inwhichJulianCooperates revaluations ofassetsdonotaffectthetaxbaseof anassetortaxable profit. Gainsduetorevaluations aretaxable onsale. (ii) JulianCobegandevelopment ofa newproduct during theyearandcapitalised $60,000in accordance withIAS38Intangible Assets. Theexpenditure wasdeducted fortaxpurposes asitwasincurred. Noneoftheexpenditure hadbeenamortised bytheyearend. Thecorporate income taxrateis30%.Thecurrent taxchargewascalculated fortheyearas $45,000. Q U E T IO N S S 171 JulianCo'saccountant isconfused bytheterm'taxbase'.Whatismeant by'taxbase'? Theamount oftaxpayable ina future period Thetaxregime under whichanentityisassessed fortax Theamount attributed toanassetorliability fortaxpurposes Theamount oftaxdeductible ina future period 172 Usingthedraganddropoptions below,showthetaxable temporary difference tobe accounted forat31December 20X4inrelation toproperty, plantandequipment and development expenditure. Property, plantandequipment H Development expenditure Nil $60,000 $190,000 $270,000 173 Whatisthecarrying amount oftherevaluation surplus at31December 20X4? $63,000 $90,000 $30,000 $27,000 Questions59 Page 82 of 405 Powered By Ù q 174 Selectingyouranswer fromthe optionsbelow,what amount willbe shownas tax payable in the statement of financialpositionof Julian Co at 31December20X4? Pulldownlist: $45,000 $72,000 $63,000 $75,000 175 Deferredtax assets and liabilitiesarisefromtaxableand deductibletemporarydifferences. Whichof the followingis NOTa circumstancegivingriseto a temporarydifference? Depreciationaccelerated fortax purposes Developmentcosts amortisedinprofitor lossbut tax was deductibleinfullwhen incurred Accruedexpenseswhichhave already been deducted fortax purposes Revenueincludedinaccountingprofitwheninvoicedbut onlyliablefortax whenthe cash is received (10marks) G H 60 FinancialReporting(FR) Page 83 of 405 G q PARTBACCOUNTING FORTRANSACTIONS INFINANCIAL STATEMENTS(III) Thefinalsection ofPartBcovers reporting financial performance including thecalculation of earnings pershare.Reporting financial performance testsknowledge onchanging accounting policies orestimates inthefinancial statements (asperIAS8 Accounting Policies, Changes in Accounting Estimates andErrors) aswellastheaccounting treatment offoreign exchange movements. Calculating earnings pershareisa typicalOTQstylequestion intheexam. Section A questions Questions 176-187: Reporting financial performance (Chapter 17) Questions 188-195: Earnings pershare(Chapter 18) Section B questions ontheseareasarecovered inquestions 196-200 Section Q U E T IO N S S A Reporting financial performance 176 Whichofthefollowing wouldbetreated under IAS8 Accounting Policies, Changes in Accounting Estimates andErrors asa changeofaccounting policy? Achangeinvaluation ofinventory froma weighted average toa FIFObasis Achangeofdepreciation method fromstraight linetoreducing balance Adoption oftherevaluation model fornon-current assetspreviously heldatcost Capitalisation ofborrowing costswhichhavearisen forthefirsttime (2 marks) 177 Foranassettobeclassified as'heldforsale'under IFRS5 Non-current AssetsHeldfor SaleandDiscontinued Operations itssalemustbe'highlyprobable'. Whichofthe following isNOTa requirement ifthesaleistoberegarded ashighlyprobable? Management mustbecommitted toa plantoselltheasset Abuyermusthavebeenlocated fortheasset Theassetmustbemarketed ata reasonable price Thesaleshould beexpected totakeplacewithin oneyearfromthedateof classification (2 marks) H 178 Complete thestatement usingtheoptions provided. Anassetclassified as'heldforsale'should bemeasured atthelower of and Carrying amount lesscostsofdisposal Fairvaluelesscostsofdisposal Carrying amount Valueinuse (2 marks) Questions61 Page 84 of 405 Powered By Ù G q 179 Whichofthefollowing wouldbea changeinaccounting policyinaccordance withIAS8 Accounting Policies, Changes inAccounting Estimates andErrors? Adjusting thefinancial statements ofa subsidiary priortoconsolidation asits accounting policies differfromthoseofitsparent Achangeinreporting depreciation charges ascostofsalesrather thanas administrative expenses Depreciation charged onreducing balance method rather thanstraight line Reducing thevalueofinventory fromcosttonetrealisable valueduetoa valid adjusting eventafterthereporting period (2 marks) 180 Whichofthefollowing itemsisa changeofaccounting policyunder IAS8 Accounting Policies, Changes inAccounting Estimates andErrors? Classifying commission earned asrevenue inthestatement ofprofitorloss,having previously classified itasotheroperating income Switching topurchasing plantusingleases froma previous policyofpurchasing plantforcash Changing thevalueofa subsidiary's inventory inlinewiththegrouppolicyfor inventory valuation whenpreparing theconsolidated financial statements Revising theremaining useful lifeofa depreciable asset (2 marks) 181 Asat30September 20X3DuneCo'sproperty initsstatement offinancial position was: Property atcost(useful life15years) $45million Accumulated depreciation $6million On1April20X4,DuneCodecided toselltheproperty. Theproperty isbeingmarketed bya property agentata priceof$42million, which wasconsidered a reasonably achievable price atthatdate.Theexpected coststosellhavebeenagreed at$1million. Recent market transactions suggest thatactualselling prices achieved forthistypeofproperty inthe current market conditions are10%lessthanthepriceatwhich theyaremarketed. At30September 20X4theproperty hasnotbeensold. Atwhatamount should theproperty bereported inDuneCo'sstatement offinancial position asat30September 20X4? $36million $37.5million $36.8million $42million (2 marks) 62 Financial Reporting (FR) Page 85 of 405 H G q 182 Steeplechase Cosolda machine toa Greekcompany whichitagreed toinvoice in€.The salewasmadeon1October 20X6for€250,000.€125,000 wasreceived on1November 20X6andthebalance isdueon1January20X7. Theexchange ratemoved asfollows: 1October 20X6– €0.91to$1 1November 20X6– €0.95to$1 31December 20X6– €0.85to$1 Atwhatamount willthereceivable beshown inthefinancial statements at 31December 20X6? $ (tothenearest $) Q U E T IO N S S (2 marks) 183 IAS21TheEffectsofChanges inForeign Exchange Ratessetsouthowentities thatcarry outtransactions ina foreign currency should measure theresults ofthesetransactions at theyearend. Usingthepulldownlistoptions provided, selectwhichexchange rateshould nonmonetary itemscarried athistorical costbemeasured? Pulldownlist: Closingrate Average rate Rateatdateoftransaction Rateatbeginning oftheyear (2 marks) 184 Miston Cobuysgoodspricedat€50,000froma Dutchcompany on1November 20X8.The invoice isdueforsettlement intwoequalinstalments on1December 20X8and1January20X9. Theexchange ratemoved asfollows: 1November 20X8– €1.63to$1 1December 20X8– €1.61 to$1 31December 20X8– €1.64to$1 Whatwillbethenetexchange gainorlosstobereported inthefinancial statements of Miston Coat31December 20X8? $ gain/(loss) (tonearest $) H (2 marks) 185 Coppola Cohasa factorywitha carrying amount of$1.8million asat30November 20X6. Management haveagreed thesaleofthefactorytoFrancis Co,whichisduetocomplete on14January20X7.Thesalescontract wasagreedandthedecision tosellthefactory announced on1December 20X6.Relevant information relating tothefactory,whichis correct bothat1December 20X6and31December 20X6isasfollows: Fairvalue$2.4million Valueinuse$2.2million Coststosell$0.3million Depreciation forthefactoryinDecember 20X6iscalculated tobe$0.2million. Whatisthecarrying amount ofthefactoryforinclusion inthefinancial statements of CoppolaCoasat31December 20X6? $1.6million $1.8million $1.9million $2.1million (2 marks) Questions63 Page 86 of 405 Powered By Ù G q 186 According toIAS8 Accounting Policies, Changes inAccounting Estimates andErrors, whichisthecorrect accounting treatment tobeadopted bya company reporting under IFRSStandards? Changes inaccounting estimates anderrors should bothbeaccounted for retrospectively Changes inaccounting estimates anderrors should bothbeaccounted for prospectively Changes inaccounting estimates should beaccounted forretrospectively anderrors accounted forprospectively Changes inaccounting estimates should beaccounted forprospectively anderrors accounted forretrospectively (2 marks) 187 During 20X7,Greetex Codiscovered that$2.1million ofinventory recognised inthe financial statements at31December 20X6hadinfactbeensoldbefore theyearend.The following extracts fromthefinancial statements for20X6(asreported) and20X7(draft) areavailable. 20X6 20X7 (draft) $'000 $'000 Revenue 80,000 75,000 Costofsales (64,600) (62,000) Grossprofit 15,400 13,000 Thecostofsalesfor20X7includes the$2.1million errorinopening inventory. Whatwouldbetherevised costofsalesfigures forGreetex Coasat31December 20X6 and20X7? Usingtheoptions below,clickanddragthecorrect response forthecostofsalesfigures tobeincluded inthefinancial statements asat31December 20X7. 31Dec20X6 31Dec20X7 $ $ Costofsales 62,500 59,900 64,600 62,000 66,700 64,100 (2 marks) 64 Financial Reporting (FR) Page 87 of 405 H G q Earnings per share 188 Barwell Cohad10million ordinary shares inissuethroughout theyearended 30June 20X3.On1July20X2,ithadissued $2million of6%convertible loanstock,each$5ofloan stockconvertible into4 ordinary shares on1July20X6attheoption oftheholder. Barwell Cohadprofitfortheyearended 30June20X3of$1,850,000. Itpaystaxonprofits at30%. Whatwasdiluted earnings persharefortheyear? $0.167 $0.185 $0.161 $0.17 (2 marks) Q U E T IO N S S 189 At30September 20X2thetrialbalance ofCavernCoincludes thefollowing balances: $'000 Equityshares of20ceach 50,000 Sharepremium 15,000 CavernCohasaccounted fora fullysubscribed rightsissueofequityshares madeon 1April20X2ofonenewshareforeveryfourinissueat42centseach.Thiswastheonly shareissuemadeduring theyear. Usingthedraganddropoptions below,showthebalances onthesharecapitalandshare premium accounts at30September 20X1. Sharecapital Sharepremium $'000 $'000 H 4,000 11,250 37,500 40,000 (2 marks) 190 AquaCohascorrectly calculated itsbasicearnings pershare(EPS)forthecurrent year. WhichTWOofthefollowing itemsneedtobeadditionally considered whencalculating thediluted EPSofAquaCofortheyear? A1for5 rightsissueofequityshares during theyearat$1.20whenthemarket price oftheequityshares was$2.00 Theissueduring theyearofa convertible (toequityshares) loannote Thegranting during theyearofdirectors' shareoptions exercisable inthreeyears' time Equityshares issued during theyearasthepurchase consideration forthe acquisition ofa newsubsidiary company (2 marks) Questions65 Page 88 of 405 Powered By Ù G q 191 Manycommentators believe thatthetrendofearnings pershare(EPS)isa morereliable indicator ofunderlying performance thanthetrendofnetprofitfortheyear. Whichofthefollowing statements supports thisview? Netprofitcanbemanipulated bythechoiceofaccounting policies butEPScannot bemanipulated inthisway EPStakesintoaccount theadditional resources madeavailable toearnprofitwhen newshares areissued forcash,whereas netprofitdoesnot Thedisclosure ofa diluted EPSfigureisa forecast ofthefuture trendofprofit Thecomparative EPSisrestated where a changeofaccounting policyaffectsthe (2 marks) previous year'sprofits 192 At1January20X8Artichoke Cohad5 million $1equityshares inissue.On1June20X8,it madea 1for5 rightsissueata priceof$1.50.Themarket priceoftheshares onthelast dayofquotation withrightswas$1.80. Totalearnings fortheyearended 31December 20X8was$7.6million. Whatwastheearnings persharefortheyear? $1.35 $1.36 $1.27 $1.06 (2 marks) 193 Theweighted average number ofordinary shares thatFogartyCohasinissuefortheyear to31December 20X7is5,000,000. On1January,FogartyCoissued 500,000shareoptions topurchase one$1ordinary share at$2.80pershare.These options areexercisable between 1January20X9and 31December 20Y0.Theaverage market valueofeach$1ordinary shareofFogartyCo during theyearended 31December 20X7is$3.50. Whatistheweighted average number ofshares tobeusedinthecalculation ofdiluted earnings persharefortheyearended31December 20X7? ○ 4.9million ○ 5.1million ○ ○ 5.4million 5.5million 194 Plumstead Cohad4 million equityshares inissuethroughout theyearended 31March20X7. On30September 20X7itmadea 1for4 bonus issue.Profitfortheyearended 31March20X8 was$3.6million, outofwhichanequitydividend of20cpersharewaspaid.Thefinancial statements fortheyearended 31March20X7showed earnings pershare(EPS)of$0.70. WhatistheEPSfortheyearended31March20X8andtherestated EPSfortheyear ended31March20X7? 20X8$ (2 marks) 20X7$ 66 Financial Reporting (FR) Page 89 of 405 H q 195 Bollingbrook Co has earningsof $313,000and 100,000ordinary$1shares inissueduring 20X5.Thecompanyalso has inissue$100,00010%convertibleloanstockwhichis convertibleinone years' timeat a rate of 3 ordinaryshares forevery$10of stock.Thetax rate is 30%. What is the dilutedearningsper share? $2.41 $2.46 $2.48 $3.13 Q U E T IO N S S (2 marks) G H Questions 67 Page 90 of 405 Powered By Ù G q Section B Tunshill Co (Dec 2010 amended) case 18 mins Informationrelevantto questions196–200 Thedirectorsof TunshillCo are disappointedby the draft profitforthe year ended 30 September 20X3.Thecompany'sassistant accountant has suggestedtwoareas whereshe believesthe reportedprofitmay be improved: (i) Amajoritemof plant that cost $20 millionto purchase and installon 1October20X0is beingdepreciatedon a straight-linebasis overa five-yearperiod(assumingno residual value).Theplant is wearingwelland at the beginningof the currentyear (1October20X2) the productionmanager believedthat the plant was likelyto last eightyears intotal (ie fromthe date of its purchase).Theassistant accountant has calculatedthat, based on an eight-yearlife(and no residualvalue)the accumulateddepreciationof the plant at 30 September20X3wouldbe $7.5million($20million/ 8 years 3).Inthe financial statements forthe year ended 30 September20X2,the accumulateddepreciationwas $8 million($20million/ 5 years 2).Therefore,by adoptingan eight-yearlife,TunshillCo can avoida depreciationcharge inthe currentyear and instead credit$0.5 million($8million– $7.5million)to profitor lossinthe currentyear to improvethe reportedprofit. (ii) Mostof TunshillCo's competitorsvaluetheirinventoryusingthe average cost (AVCO) basis, whereasTunshillCo uses the firstinfirstout (FIFO)basis. Thevalueof TunshillCo's inventoryat 30 September20X3on the FIFObasis, is $20 million,howeveron the AVCO basis it wouldbe valuedat $18million.Byadoptingthe same method(AVCO)as its competitors,the assistant accountant says the companywouldimproveits profitforthe year ended 30 September20X3by $2 million.TunshillCo's inventoryat 30 September 20X2was reportedas $15million,howeveron the AVCObasis it wouldhave been reported as $13.4million. 196 What is the nature of the change beingproposedby the assistant accountant in (i)and howshouldit be applied? Change of accountingpolicy:Retrospectiveapplication Change of accountingpolicy:Prospectiveapplication Change of accountingestimate:Retrospectiveapplication Change of accountingestimate:Prospectiveapplication 197 Adjustingfor the change of usefullife,what willbe the carryingamount of the plant at 30 September20X3? $ 198 Whichof the followingwouldbe treated as a change of accountingpolicy? TunshillCo has receivedits firstgovernmentgrant and is applyingthe deferred incomemethod TunshillCo has changed the rate of depreciationused forits officeequipmentfrom 25%to 20%straightlinebasis TunshillCo has reclassifieddevelopmentcosts fromotheroperatingexpensesto cost of sales TunshillCo has increasedits irrecoverabledebt allowancefrom10%to 12% 68 FinancialReporting(FR) Page 91 of 405 H q 199 What willbe the effect of the change in (ii)on profitsfor the year ended 30 September 20X3? Increasedby $400,000 Reducedby $400,000 Increasedby $1,600,000 Reducedby $1,600,000 Q U E T IO N S S 200 Usingthe drag and drop optionsbelow,select the correct account to showthe accountingentry for the change in inventoryvaluefor the year ended 30 September 20X3? Account Debit Cost of sales Credit Inventory Revenue (10marks) G H Questions 69 Page 92 of 405 Powered By Ù G q PARTC: ANALYSING ANDINTERPRETING THEFINANCIAL STATEMENTS OFSINGLEENTITIES ANDGROUPS Analysing andinterpreting financial statements isaboutmorethansimply calculating ratios. Itis moreimportant thatyouunderstand whattheratiotellsyouaboutthecompany orgroupand howdifferent transactions andaccounting policies canimpact ratios. Thequestions inthissection willenable youtopractice yourapplication skillsaswellasbeing abletounderstand themechanics behind accounting. Learnyourproformas andapplyanswers toratioquestions toanswer thespecific scenario. Understanding thelimitations ofusingthese analytical tools. SectionAquestions Questions 201-206: Interpretation offinancial statements (Chapter 19) Questions 207-214: Limitations offinancial statements andinterpretation techniques (Chapter 20) Questions 215-221: Specialised, not-for-profit andpublicsector entities (Chapter 22) SectionBquestions onthesetopicsareinQuestions 222-226 SectionC questions arethelonger, written questions worth 20marks. Where theExamining Team's feedback isavailable (thequestion coming froma former exam), thisfeedback isgiven, together withtoptipsandeasymarks. Question 227Woodbank Co Question 228Hassle Co Question 229Funject Co Question 230Harbin Co Question 231Quartile Co Question 232Mowair Co Question 233Perkins Co Question 234PirloCo Question 235Kostner Co Section A Interpretation of accounting ratios and trends 201 Charlton Cohasanaverage operating profitmargin of23%ofwhichdepreciation ofplant andmachinery accounts for33%oftheoperating costs,aswellasincluding 78%ofthe salaries costwithin costofsales.Ithasanaverage assetturnover of0.8,whichissimilar to theaverages fortheindustry. Theentityismostlikelytobe: Anarchitectural practice Asupermarket Anestateagent Amanufacturer (2 marks) 70 Financial Reporting (FR) Page 93 of 405 H G q 202 Usingthe pulldownlistprovided,select the correct optionto completethe following statement. Reducingthe willincreasethe lengthof a company'soperatingcycle? Pulldownlist: receivablescollectionperiod inventoryholdingperiod payables payment period timetaken to producegoods Q U E T IO N S S (2 marks) 203 Inthe year to 31December20X9WestonCo pays an interimequitydividendof 3.4c per share and declaresa finalequitydividendof 11.1c.Ithas 5 million$1shares inissueand the exdivshare priceis $3.50. What is the dividendyield? 4% 24% 3.2% 4.1% (2 marks) 204 Analysisof the financialstatements of CapricornCo at 31December20X8yieldsthe followinginformation: Grossprofitmargin 30% Currentratio 2.14 ROCE 16.3% Assetturnover 4.19 Inventoryturnover 13.9 What is the profitmargin? 3.9% 7.6% 16.1% 7.1% (2 marks) H 205 Camargue Co is a listedcompanywithfourmillion50c ordinaryshares inissue.The followingextract is fromits financialstatements forthe year ended 30 September20X4. STATEMENT OFPROFIT ORLOSS $'000 Profitbeforetax 900 Incometax expense (100) Profitforthe year 800 At30 September20X4the marketpriceof Camargue Co's shares was $1.50.What was the P/Eratio on that date? (2 marks) Questions 71 Page 94 of 405 Powered By Ù q 206 Extractsfromthe financialstatements of PerseusCo are as follows: STATEMENT OFPROFIT ORLOSS STATEMENT OFFINANCIAL POSITION $'000 $'000 Operatingprofit 230 Ordinaryshares 2,000 Financecosts (15) Revaluationsurplus 300 Profitbeforetax 215 Retainedearnings 1,200 Incometax (15) 3,500 Profitforthe year 200 10%loannotes 1,000 Currentliabilities 100 Totalequityand liabilities 4,600 What is the return on capital employed? (2 marks) Limitations of financial statements and interpretation techniques 207 Cyan Co carriesits propertyat revaluedamount.Propertyvalueshave fallenduringthe currentperiodand an impairmentlosshas been recognisedon the property, howeverits carryingamountis stillhigherthan its depreciatedhistoricalcost. Completethe statement usingthe pulldownlistbelow,showingthe effect of the impairmenton the return on capital employed(ROCE)and gearing ratios of Cyan Co. the ROCEof Cyan Co, and Theeffectof thisimpairmentwill its gearingratio. G H Pulldown list: Decrease Increase (2 marks) 208 MagentaLtdhas a current ratio of 1.5,a quickratio of 0.4 and a positivecash balance. If it purchases inventoryon credit, what is the effect on these ratios? 72 Currentratio Decrease Decrease Increase Increase Quickratio Decrease Increase Decrease Increase FinancialReporting(FR) Page 95 of 405 (2 marks) G q 209 Fritwel Cohasanassetturnover of2.0andanoperating profitmargin of10%.Itis launching a newproduct whichisexpected togenerate additional salesof$1.6million and additional profitof$120,000. Itwillrequire additional assetsof$500,000. Assuming therearenootherchanges tocurrent operations, howwillthenewproduct affecttheseratios? Selecttheimpactontheratiosbelowusingthedraganddropoptions Operating profit margin ROCE Q U E T IO N S S Decrease Increase Nochange (2 marks) 210 Whichofthefollowing isa possible reason whya company's inventory holding period increases fromoneyeartothenext? Anincrease indemand foritsproducts Areduction inselling prices Obsolete inventory lines Seasonal fluctuations inorders H (2 marks) 211 Useofhistorical costaccounting means assetvalues canbereliably verified butithasa number ofshortcomings whichneedtobeconsidered whenanalysing financial statements. Whichoftheseisa possible resultoftheuseofhistorical costaccounting during a period ofinflation? Overstatement ofnon-current assetvalues Overstatement ofprofits Understatement ofinterest costs Understatement ofROCE (2 marks) Questions73 Page 96 of 405 Powered By Ù q 212 Creative accounting measures areoftenaimed atreducing gearing. Identify whether thefollowing measures willincrease, reduceorhavenoeffecton gearing. Renegotiating a loantosecure a lower interest rate Applying theoptions recognition exemption to a leasecontract under IFRS16Leases Repaying a loanjustbefore theyearendand takingitoutagainatthebeginning ofthe nextyear 'Selling' anassetunder a saleandleaseback agreement Increase Reduce Noeffect Increase Reduce Noeffect Increase Reduce Noeffect Increase Reduce Noeffect (2 marks) 213 Ifa company wished tomaintain thecarrying amount inthefinancial statements ofits non-current assets,whichofthefollowing woulditbeunlikely todo? Enterintoa saleandshort-term leaseback, theterms ofwhichmeetthe requirements tousetheoptional recognition exemption under IFRS16Leases. Account forasset-based government grantsusingthedeferral method Revalue itsproperties Changethedepreciation method fornewassetacquisitions from25%reducing balance totenyearsstraight line (2 marks) G H 214 Trentusestheformula: (tradereceivables atyearend/revenue fortheyear) 365to calculate howlongonaverage (indays)itscustomers taketopay. Whichofthefollowing wouldNOTaffectthecorrectness oftheabovecalculation ofthe average number ofdaysa customer takestopay? Trentexperiences considerable seasonal trading Trentmakes a number ofcashsalesthrough retailoutlets Reported revenue doesnotinclude a 15%salestaxwhereas thereceivables do include thetax Trentfactors withrecourse thereceivable ofitslargest customer (2 marks) 74 Financial Reporting (FR) Page 97 of 405 G q Specialised, not-for-profit and public sector entities 215 Whichof the followingare unlikelyto be stakeholdersin a charity? Taxpayers Financialsupporters Shareholders Government Q U E T IO N S S (2 marks) 216 TheInternationalPublicSectorAccountingStandards Boardregulatespublicsectorentities and is developinga set of accountingstandards whichcloselymirrorIFRSStandards. Whichof these is the mainconcept whichneeds to be introducedinto publicsector accounting? Materiality Accruals Relevance Faithfulrepresentation (2 marks) 217 Publicsector entitieshave performancemeasureslaid downby government,based on Key PerformanceIndicators(KPIs).WhichFOURof the followingare likelyto be financialKPIs for a localcouncil? Rentreceiptsoutstanding Interestcover Dividendcover Financialactuals against budget Returnon capital employed (2 marks) H 218 WhichTWOof the ratios are NOTrelevantfor Yellow,a charity whichoperates fromhigh street stores? Operatingprofitmargin Inventoryholdingperiod Currentratio Earningsper share (2 marks) 219 Whichof the followingis the mainaspect in whichpublicsector bodiesdifferfrom charities? Importanceof budgeting Fundedby government Performancemeasuredby keyperformanceindicators Norequirementto earn a returnon assets (2 marks) Questions 75 Page 98 of 405 Powered By Ù q 220 Althoughthe objectivesand purposesof not-for-profitentitiesare differentfromthose of commercialentities,the accountingrequirementsof not-for-profitentitiesare moving closerto those entitiesto whichIFRSstandards apply. Whichof the followingIFRSrequirementswouldNOTbe relevantto a not-for-profit entity? Preparationof a statement of cash flows Requirementto capitalisea leased asset Disclosureof dividendsper share Disclosureof non-adjustingeventsafter the reportingdate (2 marks) 221 WhichTWOof the followingstatements about a not-for-profitentity are valid? Thereis no requirementto calculatean earningsper share figureas it is not likelyto have shareholderswhoneed to assess its earningsperformance Therevaluationof its property, plant and equipmentis not relevantas it is not a commercialentity Itprioritisesnon-financialKPIsoverfinancialtargets Itsfinancialstatements willnot be closelyscrutinisedas it does not have any (2 marks) investors G H 76 FinancialReporting(FR) Page 99 of 405 G q Section Sandbag B plc case 18 mins Thefollowing scenariorelatestoquestions 222–226. Sandbag plcisa listedmanufacturing company. Itssummarised statement offinancial position is givenbelow. STATEMENT OFFINANCIAL POSITION ASAT31DECEMBER 20X4 $m Non-current assets 610 Inventories Tradereceivables Current assetinvestments Cashandcashequivalents Q U E T IO N S S 96 29 5 3 133 743 Equityandliabilities $1ordinary shares Retained earnings 400 190 590 50 103 743 Non-current liabilities – loans Tradeandotherpayables 222 WhatisSandbag plc'scurrent ratioat31December 20X4? 0.37 1.29 0.87 1.26 H (2 marks) 223 Thefinance director ofSandbag plcisworried aboutitscurrent ratio.Heisconsidering a number ofactions thathehopes willimprove Sandbag plc'scurrent ratio. Whichofthefollowing wouldincrease Sandbag plc'scurrent ratio? Offera settlement discount tocustomers Makea bonus issueofordinary shares Makea rightsissueofordinary shares Sellcurrent assetinvestments atthecarrying amount (2 marks) 224 WhatisSandbag plc'sacidtest(quick)ratioat31December 20X4?(Enteryouranswer to twodecimal places) (2 marks) Questions77 Page 100 of 405 Powered By Ù q 225 Thefinancedirectorof Sandbag plcknowsthat the acid test ratio is below1.Heis planning twochanges: Proposal1:Offeringa 2%earlysettlementdiscountto creditcustomers Proposal2: Delayingpayment to alltrade payables by one extra month Usingthe optionsbelow,match the effect the proposalswouldhave on the acid test ratio (tokenscan used morethan once). Proposal1 Proposal2 Increaseratio Decreaseratio (2 marks) 226 Sandbag plc is a manufacturingcompany. Whichof the followingratios wouldbest assess the efficiencyof Sandbag plc? Price/earningsratio Gearingratio Non-currentasset turnover Currentratio (2 marks) (10marks) G 78 FinancialReporting(FR) Page 101 of 405 H q Section 227 C Woodbank Co (Jun 2014 amended) 36 mins Shown below arethefinancial statements ofWoodbank Coforitsmostrecent twoyears: STATEMENTS OFPROFIT ORLOSSFORTHEYEARENDED 31MARCH: 20X4 20X3 $'000 $'000 Revenue 150,000 110,000 Costofsales 117,000 (85,800) Grossprofit 33,000 24,200 Distribution costs (6,000) (5,000) Administrative expenses (9,000) (9,200) Finance costs– loannoteinterest (1,750) (500) Profitbefore tax 16,250 9,500 Income taxexpense (5,750) (3,000) Profitfortheyear 10,500 6,500 Q U E T IO N S S STATEMENTS OFFINANCIAL POSITION ASAT31MARCH ASSETS Non-current assets Property, plantandequipment Goodwill G Current assets Inventories Tradereceivables Cashandcashequivalents Totalassets EQUITY ANDLIABILITIES Equity Equityshares of$1each Retained earnings Non-current liabilities 10%loannotes Current liabilities Tradepayables Current taxpayable 20X4 $'000 20X3 $'000 118,000 30,000 148,000 85,000 – 85,000 15,500 11,000 500 27,000 175,000 12,000 8,000 5,000 25,000 110,000 80,000 15,000 95,000 80,000 10,000 90,000 55,000 5,000 21,000 4,000 25,000 175,000 13,000 2,000 15,000 110,000 H Totalequityandliabilities Thefollowing information isavailable: (i) On1January20X4,Woodbank Coacquired a controlling interest inShawCofor $50million. Itpaidfortheacquisition through theissueofadditional 10%loannotesandby usingsomeofitscashreserves. ShawCowasanunincorporated entityanditsresults (for threemonths from1January20X4to31March20X4)andnetassets(including goodwill notsubject toanyimpairment) areincluded inWoodbank Co'sfinancial statements forthe yearended 31March20X4.There werenootherpurchases orsalesofnon-current assets during theyearended 31March20X4. Questions79 Page 102 of 405 Powered By Ù q (ii) Extractsof the results(forthree months)of the previouslyseparate businessof ShawCo, whichare includedinWoodbankCo's statement of profitor lossforthe year ended 31March20X4,are: $'000 Revenue 30,000 Cost of sales (21,000) Grossprofit 9,000 Distributioncosts (2,000) Administrative expenses (2,000) Required Usingthe preformattedtable providedbelow: (a) Calculatethe equivalentratiosforWoodbankCo forthe year ended 31March20X4. (5 marks) (b) Calculate, as far as the informationpermits,the equivalentratiosforWoodbankCo for the year ended 31March20X4excludingthe effectsof the purchase of ShawCo. (3 marks) (c) Assessthe comparativefinancialperformanceand positionof WoodbankCo forthe year ended 31March20X4.Youranswershouldreferto the effectsof the purchase of ShawCo. (12marks) (20 marks) Pre-formattedtable Ratio Woodbank Co 20X3 Woodbank Co 20X4 Working G Returnon capital employed 10.5% Grossprofit margin 22% Profitbefore interestand tax margin 9.1% Current ratio 1.7:1 Gearing (debt/(debt +equity)) 5.3% 80 FinancialReporting(FR) Page 103 of 405 Working Woodbank Co 20X4 excluding Shaw H G q 228 Hassle Co Hassle Coisa largepubliccompany thatwould liketoacquire (100%of)a suitable private company. Ithasobtained thefollowing draftfinancial statements fortwocompanies, Astral Co andBreakout Co.Theyoperate inthesameindustry, whichisclothing manufacturing within the fashion sector. Bothcompanies compete intheyounger, highturnover, discount fashion markets. STATEMENTS OFPROFIT ORLOSSFORTHEYEARENDED 30SEPTEMBER 20X8 Astral Co Breakout Co $'000 $'000 Revenue 12,000 20,500 Costofsales (10,500) 18,000) Grossprofit 1,500 2,500 Operating expenses (240) (500) Finance costs – loan (210) 300) – overdraft – (10) – lease – (290) Profitbefore tax 1,050 ,400 Income taxexpense (150) (400) Profitfortheyear 900 1,000 Note.Dividends werepaidduring theyear 250 STATEMENTS OFFINANCIAL POSITION ASAT30SEPTEMBER 20X8 Astral Co $'000 Assets Non-current assets Freehold factory(Note1) 4,400 Owned plant(Note2) 5,000 Leased plant(Note2) – 9,400 Current assets Inventory 2,000 Tradereceivables 2,400 Bank 600 5,000 Totalassets 14,400 Equityandliabilities Equityshares of$1each Revaluation surplus Retained earnings Non-current liabilities Leaseliabilities (Note3) 7%loannotes 10%loannotes Deferred tax Government grants Q U E T IO N S S 700 Breakout Co $'000 H – 2,200 5,300 7,500 3,600 3,700 – 7,300 14,800 2,000 900 2,600 3,500 5,500 2,000 – 800 800 2,800 – 3,000 – 600 1,200 4,800 3,200 – 3,000 100 – 6,300 Questions81 Page 104 of 405 Powered By Ù G q Astral Co $'000 Current liabilities Bankoverdraft Tradepayables Government grants Leaseliabilities (Note3) Taxation – 3,100 400 – 600 4,100 14,400 Totalequityandliabilities Breakout Co $'000 1,200 3,800 – 500 200 5,700 14,800 Notes 1 Bothcompanies operate fromsimilar premises. 2 Additional details ofthetwocompanies' plantare: Astral Co $'000 Owned plant– cost 8,000 Right-of-use asset– Leased plant– original fairvalue – There werenodisposals ofplantduring theyearbyeither company. 3 4 Theinterest rateimplicit within Breakout Co'sleasesis7.5%perannum. Forthepurpose of calculating ROCEandgearing, allleaseliabilities aretreated aslong-term interest bearing borrowings. Thefollowing ratioshavebeencalculated forAstral Coandcanbetakentobecorrect: Return onyearendcapitalemployed (ROCE) (capital employed takenasshareholders' fundspluslong-term interestbearing borrowings – seeNote3 above) Pre-tax return onequity(ROE) Netasset(totalassetslesscurrent liabilities) turnover Grossprofitmargin Operating profitmargin Current ratio Closinginventory holding period Tradereceivables' collection period Tradepayables' payment period (usingcostofsales) Gearing (seeNote3 above) Interest cover Dividend cover Required (a) (b) Breakout Co $'000 10,000 7,500 14.8% 19.1% 1.2times 12.5% 10.5% 1.2:1 70days 73days 108days 35.3% 6 times 3.6times Calculate forBreakout Cotheratiosequivalent toallthosegivenforAstral Coabove. (8 marks) Assess therelative performance andfinancial position ofAstral CoandBreakout Coforthe yearended 30September 20X8toinform thedirectors ofHassle Cointheiracquisition (12marks) decision. (20marks) 82 Financial Reporting (FR) Page 105 of 405 H G q 229 Funject Co (Mar/Jun 2017) 36 mins Funject Cohasidentified Aspect Coasa possible acquisition within thesameindustry. Aspect Co iscurrently owned bytheGamilton Groupandthefollowing areextracts fromthefinancial statements ofAspect Co: EXTRACT FROMTHESTATEMENT OFPROFITORLOSSFORTHEYEARENDED 31DECEMBER 20X4 $'000 Revenue 54,200 Costofsales 21,500 Grossprofit 32,700 Operating expenses 11,700 Operating profit 21,000 STATEMENT OFFINANCIAL POSITION ASAT31DECEMBER 20X4 $'000 $'000 Assets Non-current assets 24,400 Current assets Inventories 4,900 Receivables 5,700 Cashandcashequivalents 2,300 12,900 Totalassets 37,300 Equityandliabilities Equity Equityshares 1,000 Retained earnings 8,000 9,000 Liabilities Non-current liabilities Loan 6,700 Current liabilities Tradepayables 5,400 Current taxpayable 6,200 11,600 Totalequityandliabilities 37,300 Q U E T IO N S S H Additional information: (i) On1April20X4,AspectCo decided tofocusonitscorebusiness andsodisposed ofa non-core division. Thedisposal generated a lossof$1.5m which isincluded within operating expenses. Thefollowing extracts showtheresults ofthenon-core division fortheperiod priortodisposal whichwereincluded inAspectCo'sresults for20X4: $'000 Revenue 2,100 Costofsales (1,200) Grossprofit 900 Operating expenses (700) Operating profit 200 (ii) Atpresent Aspect Copaysa management chargeof1%ofrevenue totheGamilton Group whichisincluded inoperating expenses. Funject Coimposes a management chargeof10% ofgrossprofitonallofitssubsidiaries. (iii) Aspect Co'sadministration offices arecurrently located within a building owned bythe Gamilton Group.IfAspect Cowereacquired, thecompany would needtoseekalternative premises. Aspect Copaidrentof$46,000in20X4.Commercial rentsforequivalent office spacewould cost$120,000. Questions83 Page 106 of 405 Powered By Ù q Required (a) Redraft Aspect Co'sstatement ofprofitorlossfor20X4toadjustforthedisposal ofthe non-core division innote(i)andthemanagement andrentcharges whichwould be imposed pernotes(ii)and(iii)ifAspect Cowasacquired byFunject Co. (4 marks) (b) Using thepreformatted tableprovided below, calculate theequivalent 20X4ratios forAspect Cobasedontherestated financial information calculated inpart(a). Note:Youshould assume thatanyincrease ordecrease inprofitasa result ofyouradjustments in part(a)willalsoincrease ordecrease cash. (6 marks) Pre-formatted table Industry KPIs 20X4 Grossprofitmargin 45% Operating profitmargin 28% Receivables collection period (c) G 230 Working Aspect Co 20X4 41days Current ratio 1.6:1 Acidtest(quick) ratio 1.4:1 Gearing (debt/equity) 240% Usingtheratioscalculated inpart(b),comment onAspectCo's20X4performance and financial position compared totheindustry average KPIsprovided innote(iv). (10marks) (20marks) Harbin Co 36 mins Shown below aretherecently issued (summarised) financial statements ofHarbin Co,a listed company, fortheyearended 30September 20X7,together withcomparatives for20X6and extracts fromthechiefexecutive's report thataccompanied theirissue. STATEMENT OFPROFIT ORLOSS 20X7 $'000 250,000 (200,000) 50,000 (26,000) (8,000) 16,000 (4,000) 12,000 Revenue Costofsales Grossprofit Operating expenses Finance costs Profitbefore tax Income taxexpense (at25%) Profitfortheyear 84 Financial Reporting (FR) Page 107 of 405 20X6 $'000 180,000 (150,000) 30,000 (22,000) (–) 8,000 (2,000) 6,000 H G q STATEMENT OFFINANCIAL POSITION Non-current assets Property, plantandequipment Goodwill Current assets Inventories Tradereceivables Cashandcashequivalents Totalassets Equityandliabilities Equityshares of$1each Retained earnings Non-current liabilities 8%loannotes Current liabilities Bankoverdraft Tradepayables Current taxpayable 20X7 $'000 20X6 $'000 210,000 10,000 220,000 90,000 – 90,000 25,000 13,000 – 38,000 258,000 15,000 8,000 14,000 37,000 127,000 100,000 14,000 114,000 100,000 12,000 112,000 100,000 17,000 23,000 4,000 44,000 258,000 Totalequityandliabilities Q U E T IO N S S – – 13,000 2,000 15,000 127,000 H Extracts fromthechiefexecutive's report: 'Highlights ofHarbin Co'sperformance fortheyearended 30September 20X7: Anincrease insalesrevenue of39% Grossprofitmargin upfrom16.7% to20% Adoubling oftheprofitfortheperiod Inresponse totheimproved position, theboardpaida dividend of10centspersharein September 20X7anincrease of25%ontheprevious year.' Youhavealsobeenprovided withthefollowing further information. On1October 20X6,Harbin Copurchased thewhole ofthenetassetsofFatima Co(previously a privately owned entity) for$100million, financed bytheissueof$100,000 8%loannotes. The contribution ofthepurchase toHarbin Co'sresults fortheyearended 30September 20X7was: $'000 Revenue 70,000 Costofsales (40,000) Grossprofit 30,000 Operating expenses (8,000) Profitbefore tax 22,000 There werenodisposals ofnon-current assetsduring theyear. Questions85 Page 108 of 405 Powered By Ù G q Thefollowingratioshave been calculatedforHarbinCo forthe year ended 30 September. 20X6 Returnon capital employed 7.1% Netasset (equalto capital employed)turnover 1.6 Netprofit(beforetax)margin 4.4% Currentratio 2.5:1 Closinginventoryholdingperiod(indays) 37 Tradereceivables'collectionperiod(indays) 16 Tradepayables' payment period(based on cost of sales)(indays) 32 Gearing(debt overdebt plusequity) Nil Required (a) Usingthe preformattedtableprovidedbelow,calculateequivalentratiosforHarbinCo for (8 marks) 20X7. Pre-formatted table 20X6 Returnon capital employed 7.1% Netasset turnover 1.6 Netprofitmargin 4.4% Currentratio 2.5 Closinginventoryholdingperiod 37days Tradereceivables'collectionperiod 16days Tradepayables' payment period 32 days Gearing Nil (b) Working 20X7 H Assessthe financialperformanceand positionof HarbinCo forthe year ended 30 September20X7comparedto the previousyear. Youranswershouldreferto the informationinthe chiefexecutive'sreportand the impactof the purchase of the net assets of Fatima. (12marks) (20 marks) 86 FinancialReporting(FR) Page 109 of 405 G q 231 Quartile Co (Dec 2012 amended) 36 mins Quartile Cosellsjewellery through stores inretailshopping centres throughout thecountry. Over thelasttwoyearsithasexperienced declining profitability andiswondering ifthisisrelated to thesector asa whole. Ithasrecently subscribed toanagencythatproduces average ratios acrossmanybusinesses. Below aretheratiosthathavebeenprovided bytheagencyforQuartile Co'sbusiness sector basedona yearendof30June20X2. Thefinancial statements ofQuartile Cofortheyearended 30September 20X2are: STATEMENT OFPROFIT ORLOSS $'000 $'000 Revenue 56,000 Opening inventory 8,300 Purchases 43,900 Closinginventory (10,200) Costofsales (42,000) Grossprofit 14,000 Operating costs (9,800) Finance costs (800) Profitbefore tax 3,400 Income taxexpense (1,000) Profitfortheyear 2,400 Q U E T IO N S S STATEMENT OFFINANCIAL POSITION $'000 ASSETS Non-current assets Property andshopfittings Development expenditure 25,600 5,000 30,600 Current assets Inventories Cashandcashequivalents H 10,200 1,000 11,200 41,800 Totalassets EQUITY ANDLIABILITIES Equity Equityshares of$1each Revaluation surplus Retained earnings 15,000 3,000 8,600 26,600 Non-current liabilities 10%loannotes Current liabilities Tradepayables Current taxpayable 8,000 5,400 1,800 7,200 41,800 Totalequityandliabilities Notes. 1 Thedirectors ofQuartile Coregularly hold'allstockmustgo'salestoincrease salesand makespacetobringnewinventory intothestores. These salesareverypopular with customers andgenerate strong sales. 2 Quartile revalued itsretailstores forthefirsttimeon30September 20X2whichresulted in therevaluation surplus shown. Questions87 Page 110 of 405 Powered By Ù q 3 The10%loannoteswereissued in20X1andareduetoberepaid in20X4.A dividend of $1.5million waspaidinthecurrent year. 4 Thedevelopment expenditure relates toaninvestment ina process tomanufacture artificial precious gemsforfuture salebyQuartile Cointheretailjewellery market. Required (a) Usingthepreformatted tablebelow, calculate theequivalent ratiosforQuartile Cofor (8 marks) 20X2. Pre-formatted table Sector average Return onyear-end capitalemployed (ROCE) 1.4times Grossprofitmargin 35% Operating profitmargin 12% 1.25:1 Average inventory turnover 3 times Tradepayables' payment period 64days Gearing (b) G 232 Quartile Co 16.8% Netassetturnover Current ratio Working 38% Assess thefinancial andoperating performance ofQuartile Coincomparison toitssector averages. (12marks) (20marks) Mowair Co (Sept/Dec 17) 36 mins Mowair Coisaninternational airline which fliestodestinations allovertheworld. Mowair Co experienced strong initial growth butinrecent periods thecompany hasbeencriticised forunderinvesting initsnon-current assets. Extracts fromMowair Co'sfinancial statements areprovided below. Statements offinancial position asat30June: 20X7 20X6 $'000 $'000 Assets Non-current assets Property, plantandequipment 317,000 174,000 Intangible assets(noteii) 20,000 16,000 337,000 190,000 Current assets Inventories 580 490 Tradeandotherreceivables 6,100 6,300 Cashandcashequivalents 9,300 22,100 Totalcurrent assets 15,980 28,890 Totalassets 352,980 218,890 Equityandliabilities Equity Equityshares 3,000 3,000 Retained earnings 44,100 41,800 Revaluation surplus 145,000 Nil Totalequity 192,100 44,800 88 Financial Reporting (FR) Page 111 of 405 H G q Liabilities Non-currentliabilities 6%loannotes Currentliabilities Tradeand otherpayables 6%loannotes Totalcurrentliabilities Totalequityand liabilities 20X7 $'000 20X6 $'000 130,960 150,400 10,480 19,440 29,920 352,980 4,250 19,440 23,690 218,890 Q U E T IO N S S OtherEXTRACTS fromMowairCo's financialstatements forthe years ended 30 June: 20X7 $'000 154,000 12,300 (9,200) 18,480 20X6 $'000 159,000 18,600 10,200) 24,310 Revenue Profitfromoperations Financecosts Cash generated fromoperations Thefollowinginformationis also relevant: (i) MowairCo had exactly the same flightschedulein 20X7as in 20X6,withthe overall number of flightsand destinationsbeingthe same inboth years. (ii) InApril20X7,MowairCo had to renegotiateits licenceswithfivemajorairports,whichled to an increaseinthe pricesMowairCo had to pay for the rightto operate flightsthere. Thelicenceswithten moremajorairportsare due to expireinDecember20X7,and Mowair Co is currentlyinnegotiationwiththese airports. Required (a) Usingthe preformattedtable providedbelow,calculatethe requiredratiosforMowairCo forthe years ended 30 June 20X6and 20X7: Pre-formatted table 20X7 Working 20X6 H Working Operatingprofit margin Returnon capital employed Netasset turnover Currentratio Interestcover Gearing (b) Note.Forcalculationpurposes,allloannotes shouldbe treated as debt. (6 marks) Commenton the performanceand positionof MowairCo for the year ended 30 June 20X7. Note.Youranswershouldhighlightany issueswhichMowairCo shouldbe consideringin the near future. (14marks) (20 marks) Questions 89 Page 112 of 405 Powered By Ù G q 233 Perkins Co (Mar/Jun 18) 36 mins Belowareextracts fromthestatements ofprofitorlossforthePerkins groupandPerkins Co fortheyearsending 31December 20X7and20X6respectively. 20X7 20X6 (Consolidated) (Perkins Coindividual) $'000 $'000 Revenue 46,220 35,714 Costofsales (23,980) (19,714) Grossprofit 22,240 16,000 Operating expenses (3,300) (10,000) Profitfromoperations 18,940 6,000 Finance costs (960) (1,700) Profitbefore tax 17,980 4,300 Thefollowing information isrelevant: On1September 20X7,Perkins Co soldallofitssharesinSwanson Co, itsonlysubsidiary, for $28.64million. Atthisdate,Swanson Cohadnetassetsof$26.1million. Perkins Cooriginally acquired 80%ofSwanson Cofor$19.2million, whenSwanson Cohadnetassetsof$19.8million. Perkins Cousesthefairvaluemethod forvaluing thenon-controlling interest, whichwas measured at $4.9million at thedateofacquisition. Goodwill inSwanson Co hasnotbeen impaired sinceacquisition. Inordertocompare Perkin Co'sresults fortheyearsended 20X6and20X7,theresults of Swanson Coneedtobeeliminated fromtheaboveconsolidated statements ofprofitorlossfor 20X7.Although Swanson Cowascorrectly accounted forinthegroupfinancial statements for theyearended 31December 20X7,a gainondisposal ofSwanson Coof$9.44million iscurrently included inoperating expenses. Thisreflects thegainwhichshould havebeenshown inPerkins Co'sindividual financial statements. Intheyearended 31December 20X7,Swanson Cohadthefollowing results: $m Revenue 13.50 Costofsales 6.60 Operating expenses 2.51 Finance costs 1.20 During theperiod from1January20X7to1September 20X7,Perkins Co sold$1million of goodstoSwanson Co ata margin of30%.Swanson Cohadsoldallofthesegoodsontothird parties by1September 20X7. Swanson Copreviously usedspaceinPerkins Co'sproperties, whichPerkins Codidnotcharge Swanson Cofor.Sincethedisposal ofSwanson Co,Perkins Cohasrented thatspacetoanew tenant, recording therental income inoperating expenses. Thefollowing ratioshavebeencorrectly calculated basedontheabovefinancial statements: 20X7 20X6 (Consolidated) (Perkins Coindividual) Grossprofitmargin 48.1% 44.8% Operating margin 41% 16.8% Interest cover 19.7times 3.5times Required (a) Calculate thegainondisposal whichshould havebeenshown intheconsolidated statement ofprofitorlossforthePerkins groupfortheyearended 31December 20X7. (5 marks) 90 Financial Reporting (FR) Page 113 of 405 H G q (b) (c) (d) 234 Remove theresults ofSwanson Coandthegainondisposal ofthesubsidiary toprepare a revised statement ofprofitorlossfortheyearended 31December 20X7forPerkins Co only. (4 marks) Calculate theequivalent ratiostothosegivenforPerkins Cofor20X7basedontherevised figures inpart(b)ofyouranswer. (2 marks) Usingtheratioscalculated inpart(c)andthoseprovided inthequestion, comment onthe performance ofPerkins Cofortheyearsended 31December 20X6and20X7. (9 marks) (20marks) Pirlo Co (Mar/Jun 2019) Q U E T IO N S S 36 mins Theconsolidated statements ofprofitorlossforthePirlogroupfortheyearsended 31December 20X9and20X8areshown below. 20X9 20X8 $'000 $'000 Revenue 213,480 216,820 Costofsales (115,620) (119,510) Grossprofit 97,860 97,310 Operating expenses (72,360) (68,140) Profitfromoperations 25,500 29,170 Finance costs (17,800) (16,200) Investment income 2,200 2,450 Profitbefore tax 9,900 15,420 Shareofprofitofassociate 4,620 3,160 Taxexpense (2,730) (3,940) Profitfortheyear 11,790 14,640 Attributable to: Shareholders ofPirloCo Non-controlling interest 8,930 2,860 H 12,810 1,830 Thefollowing information isrelevant: (i) On31December 20X9,thePirlogroupdisposed ofitsentire 80%holding inSambaCo,a software development company, for$300m.TheSambaCoresults havebeenfully consolidated intotheconsolidated financial statements above.SambaCodoesnot represent a discontinued operation. (ii) Theproceeds fromthedisposal ofSambaCohavebeencredited toasuspense account and nogain/loss hasbeenrecorded inthefinancial statements above. (iii) PirloCooriginally acquired theshares inSambaCofor$210m. Atthisdate,goodwill was calculated at$70m.Goodwill hasnotbeenimpaired sinceacquisition, andexternal advisers estimate thatthegoodwill arising inSambaCohasa valueof$110m at 31December 20X9. (iv) On31December 20X9,SambaCohadnetassetswitha carrying amount of$260m.In addition tothis,SambaCo'sbrandnamewasvalued at$50matacquisition inthe consolidated financial statements. Thisisnotreflected inSambaCo’sindividual financial statements, andthevalueisassessed tobethesameat31December 20X9. (v) SambaCoistheonlysubsidiary inwhichthePirlogroupowned lessthan100%ofthe equity. ThePirlogroupusesthefairvaluemethod tovaluethenon-controlling interest. At31December 20X9,thenon-controlling interest inSambaCoisdeemed tobe$66m. Questions91 Page 114 of 405 Powered By Ù G q (vi) UntilDecember20X8,PirloCo rented space inits propertyto a thirdparty. This arrangementended and, on 1January 20X9,Samba Co's administrativedepartment movedintoPirloCo’sproperty.PirloCo charged Samba Co a reduced rent. Samba Co's propertieswere sold in April20X9at a profit of $2m whichis includedinadministrative expenses. (vii) On 31December20X9,the employmentof the two foundingdirectorsof Samba Co was transferred to PirloCo. Fromthe date of disposal,PirloCo willgo intodirectcompetition withSamba Co. Aspart of thismove,the directorsdid not take theirannual bonusof $1m each fromSamba Co. Instead,they receiveda similar'joiningfee' fromPirloCo, whichwas paid to themon 31December20X9.Theseindividualshaveexcellentrelationshipswiththe largest customersof Samba Co, and are centralto PirloCo’sfutureplans. (viii) Samba Co's revenueremainedconsistentat $26minboth 20X9and 20X8and Samba Co has highlevelsof debt. Keyratiosfromthe Samba Co financialstatements are shown below: 20X9 81% 66% 1.2times Grossprofitmargin Operatingprofitmargin Interestcover Required (a) (b) (c) Calculatethe gain/losson the disposalof Samba Co whichwillbe recordedin: Theindividualfinancialstatements of PirloCo; and Theconsolidatedfinancialstatements of the Pirlogroup. 20X8 80% 41% 1.1times 5 marks) Calculateratiosequivalentto thoseprovidedinnote (viii)forthe Pirlogroupforthe years ended 31December20X9and 20X8.Noadjustmentis requiredforthe gain/losson disposalfrom(a). (3 marks) Commenton the performanceand interestcoverof the Pirlogroupforthe years ended 31December20X9and 20X8.Youranswershouldcommenton: Theoverallperformanceof the Pirlogroup; How,once accounted for, the disposalof Samba Co willimpacton youranalysis; and Theimplicationsof the disposalof Samba Co forthe futureresultsof the Pirlogroup. (12marks) 20 marks) 235 Kostner Co 36 mins Cash flowstatement forKostnerCo forthe year ended 31December20X8 $'000 Cash flowsfromoperatingactivities Profitbeforetaxation Adjustmentsfor: Depreciation Profiton disposalof PPE Interestexpense 350 (Increase)decrease ininventories (Increase)decrease intrade &otherreceivables Increase(decrease)inprovisions Increase(decrease)intrade payables 92 FinancialReporting(FR) Page 115 of 405 600 (3,000) 270 (1,810) (838) (722) 50 710 $'000 H G q $'000 (2,610) (300) (472) $'000 Cashusedinoperations Interest paid Income taxespaid Netcashfromoperating activities (3,382) Cashflowsfrominvesting activities Interest received 40 Proceeds fromdisposal ofproperty 9,900 Purchase ofproperty, plantandequipment (800) Netcashfrominvesting activities 9,140 Cashflowsfromfinancing activities Proceeds fromlongtermborrowings 1,100 Proceeds fromissueofsharecapital 1,500 Payments under leases (2,440) Netcashfromfinancing activities 160 Netincrease incashandcashequivalents 5,918 Cashandcashequivalents atbeginning ofperiod (2,500) Cashandcashequivalents atendofperiod 3,418 Extract ofthestatement ofprofitorlossfortheyearended 31December 20X8 31December 20X8 31December 20X7 $'000 $'000 3,206 3,107 Revenue (807) (745) Costofsales 2,399 2,362 Grossprofit (379) (350) Administration costs (1,470) (920) Otheroperating expenses 550 1,092 Operating profit (270) (20) Interest paid 40 39 Interest received 320 1,111 Profitbefore taxation Kostner Corunsa smallnumber ofgymandleisure facilities inthesouthwestofEngland. Thefollowing information isalsoprovided regarding thecompany: Inventories heldbythegymsaremainly consumables suchastowels, drinks andsnacks whichareallavailable forpurchase bytheclients. During December, Kostner purchased a newrangeofhighprotein recovery drinks, ProBizz. MartyGrosman, thePurchases Manager, helped Kostner obtain a 'greatmargin' onthedrinks bybuyinginbulk.Revenue fromconsumables hasremained relatively staticyearonyear. Gymmembers payanannual subscription bymonthly directdebit.Newmembers must paya non-refundable joining feewhichisrecognised immediately inthefinancial statements. Otherrevenue comes fromKostner licensing outitsbrandofbespoke fitness classes, the 'TotemPower', basedona corestrength workout usingpoles.Thelicence iscapitalised and reviewed forimpairment onanannual basis. During September, itwasdecided torentoutsomeoftheunused studio spacefor freelance gyminstructors tousetoputonspecialist groupclasses suchasPumpStrength, Hi-Intensity Workout, PilaYoga andFreeDance.Thishasproved verypopular, withthe freelancers beinginvoiced inarrears. Thisamount wasoutstanding atyearendasthe creditcontroller hadbeenonlongtermsickleave. Q U E T IO N S S H Questions93 Page 116 of 405 Powered By Ù q Therewas an inauguralfitnessfestivalto attract clientsto the gyms in the newyear whichwas held at the SouthKimblegym in December,incomeof $325,000 fromthis event is currentlyoutstanding fromthe organisers.Thisdebt is expected to be recovered in full. Thereis a provisioninthe accounts fora legalclaimmade against Kostnerfroma client whoinjuredherselfon a faultypieceof equipment.Theprovisioninthe accounts recognisesthat the claimis likelyto succeedand is closeto settlementat the year end. Breakdownof the revenue 20X8 20X7 $000 $000 Fitnessfestival 325 TotemPower 280 260 Rentalof rooms 300 Membership&sundries 2,301 2,847 Totalrevenue 3,206 3,107 Required (a) Interpretthe profitabilityand cash flowof KostnerCo usingthe informationprovided. Highlightany areas of concernforthe managementteam supportingyouranswerwith relevantevidence. (15marks) (b) Comparethe usefulnessof informationfromthe cash flowwiththat obtainedfromthe statement of profitor lossextract. (5 marks) (20 marks) G H 94 FinancialReporting(FR) Page 117 of 405 G q PARTD: PREPARATION OFFINANCIAL STATEMENTS Although questions onthispartofthesyllabus maybeaskedinanysection oftheexam, Section C oftheexamwillinclude a question onthepreparation offinancial statements forsingle entities orgroups. Theaccounts preparation question willalsoinclude otherpartsofthesyllabus, forexample, thecalculation ofgoodwill ortherevaluation ofnon-current assets. SectionAquestions Questions 236-248:Consolidated statement offinancial position (Chapter 8) Questions 249-258:Consolidated statement ofprofitorlossandothercomprehensive income (Chapter 9) Questions 259-265:Accounting forassociates (Chapter 10) Questions 266-270:Presentation ofpublished financial statements (Chapter 16) Questions 271-275: Statement ofcashflows(Chapter 21) SectionBquestions onthesetopicsareinquestions 276-305 SectionC questions onthesetopicsareinquestions 306-325 Section Q U E T IO N S S A Consolidated statement of financial position 236 WitchCoacquired 70%ofthe200,000equityshares ofWizard, itsonlysubsidiary, on 1April20X8whentheretained earnings ofWizard Cowere$450,000.Thecarrying amounts ofWizard Co'snetassetsatthedateofacquisition wereequaltotheirfairvalues. WitchComeasures non-controlling interest atfairvalue,basedonshareprice.Themarket valueofWizard Coshares atthedateofacquisition was$1.75. At31March20X9theretained earnings ofWizardCowere$750,000.Atwhatamount should thenon-controlling interest appearintheconsolidated statement offinancial position ofWitchCoat31March20X9? H (2 marks) $ 237 CloudCoobtained a 60%holding inthe100,000$1shares ofMistCoon1January20X8. CloudCopaid$250,000cashimmediately withanadditional $400,000payable on 1January20X9andoneshareinCloudCoforeachtwoshares acquired. CloudCohasa costofcapitalof8%andthemarket valueofitsshares on1January20X8was$2.30. Whatwasthetotalconsideration paidforCloudCo'sshareofMistCo? $689,370 $719,000 $758,370 $788,000 (2 marks) 238 On1June20X1,Premier Coacquired 80%oftheequitysharecapitalofSandford Co.At thedateofacquisition thefairvalues ofSandford Co'snetassetswereequaltotheir carrying amounts withtheexception ofitsproperty. Thishada fairvalueof$1.2million BELOWitscarrying amount. Theproperty hada remaining useful lifeofeightyears. Whateffectwillanyadjustment required inrespect oftheproperty haveongroup retained earnings at30September 20X1? $ Increase/decrease (2 marks) Questions95 Page 118 of 405 Powered By Ù q 239 On1August 20X7,Patronic Copurchased 18million ofthe24million $1equityshares of Sardonic Co.Theacquisition wasthrough a shareexchange oftwoshares inPatronic Co foreverythreeshares inSardonic Co.Themarket priceofa shareinPatronic Coat 1August 20X7was$5.75.Patronic Cowillalsopayincashon31July20X9(twoyears afteracquisition) $2.42peracquired shareofSardonic Co.Patronic Co'scostofcapital is10%perannum. Whatistheamount oftheconsideration attributable toPatronic Cofortheacquisition of Sardonic Co? $105million $139.5 million $108.2million $103.8million (2 marks) 240 On1April20X0,PicantCoacquired 75%ofSander Co'sequityshares bymeans ofa share exchange andanadditional amount payable on1April20X1thatwascontingent uponthe post-acquisition performance ofSander Co.Atthedateofacquisition PicantCoassessed thefairvalueofthiscontingent consideration at$4.2million butby31March20X1itwas clearthattheamount tobepaidwould beonly$2.7million. Usingthedraganddropoptions below,demonstrate howPicantCowouldaccount for this$1.5million adjustment initsfinancial statements asat31March20X1? Account G Debit Current liabilities Credit Goodwill Retained earnings (2 marks) 241 CrashCoacquired 70%ofBangCo's100,000$1ordinary shares for$800,000whenthe retained earnings ofBangCowere$570,000. BangCoalsohasaninternally developed customer listwhichhasbeenindependently valued at$90,000.Thenon-controlling interest inBangCowasjudged tohavea fairvalue of$220,000atthedateofacquisition. Whatwasthegoodwill arisingonacquisition? $130,000 $450,000 $380,000 $350,000 (2 marks) 96 Financial Reporting (FR) Page 119 of 405 H G q 242 PhantomCo acquired70%of the $100,000equityshare capital of GhostCo, its only subsidiary,for$200,000 on 1January 20X9whenthe retainedearningsof GhostCo were $156,000. At31December20X9retainedearningsare as follows. $ PhantomCo 275,000 GhostCo 177,000 PhantomCo considersthat goodwillon acquisitionis impairedby 50%.Non-controlling interestis measuredat fairvalue,estimatedat $82,800. Usingthe pulldownlist provided,select what are group retained earnings at 31December20X9? Q U E T IO N S S Pulldownlist: $262,900 $280,320 $289,700 $585,700 (2 marks) 243 TazerCo, a parent company, acquiredLowdownCo, an unincorporatedentity, for $2.8million.Afairvalueexerciseperformedon LowdownCo's net assets at the date of purchase showed: $'000 Property,plant and equipment 3,000 Identifiableintangibleasset 500 Inventories 300 Tradereceivableslesspayables 200 4,000 H Howshouldthe purchase of Lowdownbe reflectedin TazerCo's consolidatedstatement of financialposition? Recordthe net assets at the carryingamountsshownaboveand creditprofitor loss with$1.2million Recordthe net assets at the carryingamountsshownaboveand creditTazerCo's consolidatedgoodwillwith$1.2million Derecognisethe identifiableintangibleasset, recordthe remainingnet assets at the carryingamountsshownaboveand creditprofitor losswith$700,000 Recordthe purchase as a financialasset investmentat $2.8 million (2 marks) Questions 97 Page 120 of 405 Powered By Ù q 244 On 1January 20X5,Pratt Co acquired80%of the equityshares of SamCo. Pratt Co valuesnon-controllinginterestsat fairvalueand, at the date of acquisition,goodwillwas valuedat $20,000. AtDecember20X5,the goodwillwas fullyimpaired. Inreviewingthe fairvalueof SamCo's net assets at acquisition,Pratt Co concludedthat property, plant and equipment,witha remaininglifeof fiveyears, had a fairvalueof $5,000 inexcessof its carryingamount. SamCo has not incorporatedany of these adjustmentsintoits individualfinancial statements. What is the total charged to group retained earningsat 31December20X5as a resultof these consolidationadjustments? $16,800 $21,000 $17,000 $20,800 (2 marks) 245 Platt Co has owned60%of the issuedequityshare capital of SerpiCo formany years. At 31October20X7,the individualstatements of financialpositionincludedthe following: Platt Co SerpiCo $ $ Currentassets 700,000 500,000 Currentliabilities 300,000 200,000 Neitherhad a bank overdraftat 31October20X7. Duringthe year ended 31October20X7,Platt Co made $100,000sales on creditto SerpiCo. SerpiCo had one-quarterof these goodsininventoryat 31October20X7. Platt Co makesa 20%grossprofitmarginon allsales. On 31October20X7,SerpiCo sent a chequefor$50,000 to pay allof the outstanding balance due to Platt Co. Platt Co did not receivethischeque until2 November20X7. G Platt Co's policyforin-transititemsis to adjust fortheminthe parent company. Inrespect of current assets and current liabilities,what amountswillbe reported in Platt Co's consolidatedstatement of financialpositionat 31October20X7? Currentassets $1.197millionand currentliabilities$0.5 million Currentassets $1.145millionand currentliabilities$0.45 million 98 Currentassets $1.195millionand currentliabilities$0.45 million Currentassets $1.195millionand currentliabilities$0.5 million FinancialReporting(FR) Page 121 of 405 (2 marks) H G q 246 BoatCoacquired 60%ofAnchor Coon1January20X4.Atthedateofacquisition, the carrying amount ofAnchor Co'snetassetswerethesameastheirfairvalues, withthe exception ofanitemofmachinery whichhada carrying amount of$90,000,a fairvalue of$160,000 anda remaining useful lifeoffiveyears.Non-controlling interests arevalued atfairvalue. Whatisthejournal entryrequired toreflectthisfairvalueadjustment intheconsolidated statement offinancial position ofBoatCoasat31December 20X6? $ $ Debit Retained earnings 25,200 Debit Non-controlling interest 16,800 Debit Property, plantandequipment 28,000 Credit Goodwill 70,000 Debit Debit Debit Credit Retained earnings Non-controlling interest Property, plantandequipment Goodwill 8,400 5,600 56,000 Debit Debit Debit Credit Retained earnings Non-controlling interest Property, plantandequipment Goodwill 57,600 38,400 64,000 Debit Retained earnings Debit Property, plantandequipment Credit Goodwill 42,000 28,000 Q U E T IO N S S 70,000 160,000 70,000 (2 marks) H 247 On1July20X5,PullCoacquired 80%oftheequityofSatCo.Atthedateofacquisition, goodwill wascalculated as$10,000andthenon-controlling interest wasmeasured atfair value.Inconducting thefairvalueexercise onSatCo'snetassetsatacquisition, PullCo concluded thatproperty, plantandequipment witha remaining lifeoftenyearshada fair valueof$300,000inexcess ofitscarrying amount. SatCohadnotincorporated thisfair valueadjustment intoitsindividual financial statements. Atthereporting dateof31December 20X5,thegoodwill wasfullyimpaired. Fortheyear ended 31December 20X5,SatCoreported a profitfortheyearof$200,000. WhatisthePullGroupprofitfortheyearended31December 20X5thatisattributable to non-controlling interests? $16,000 $12,000 $35,000 $15,000 (2 marks) 248 ZebraCoacquired 75%ofthe2 million issued $1ordinary shares ofPenguin Coon1 January20X2for$3,700,000 whenPenguin Co'sretained earnings were$1,770,000. ZebraCohasnoothersubsidiaries. ZebraCoelected tomeasure non-controlling interests inPenguin Coattheirfairvalueof $1,140,000 attheacquisition date. Animpairment review performed on31December 20X3indicated thatgoodwill onthe acquisition ofPenguin Cohadbeenimpaired by$100,000. Noimpairment wasrecognised intheyearended 31December 20X2. Questions99 Page 122 of 405 Powered By Ù G q WhichTHREEof the followingstatements are true in respect of the non-controlling interest to be includedin the consolidatedstatement of financialpositionof the Zebra group for the year ended 31December20X3? Non-controllinginterestwouldbe higherifthe proportionatemethodwas used Itwillbe includedat its fairvalueon acquisitionplusshare of post-acquisition earningsof PenguinCo. Itwillbe includedas a separate componentof equity. 25%of the impairmentinthe goodwillarisingon acquisitionwillbe debitedto it. Itwillbe includedinthe non-currentliabilitiesof the Zebragroup. (2 marks) Consolidated comprehensive statement income of profit or loss and other 249 PaprikaCo purchased 75%of the equity share capital of Salt Co on 30 April20X4. Non-controllinginterestsare measured at fair value. Thecost of sales of both companiesforthe year ended 30 April20X6are as follows: Paprika Salt $ $ Cost of sales 60,000 100,000 Thefollowinginformationis provided: (1) SaltCo had machineryincludedinits net assets at acquisitionwitha carrying amountof $120,000but a fairvalueof $200,000. Themachineryhad a remaining usefullifeof eightyears at the date of acquisition.Alldepreciationis charged to cost of sales. (2) Duringthe year, SaltCo soldsomegoodsto PaprikaCo for$32,000 at a margin of 25%.Threequarters of these goodsremainedininventoryat year end. What is the cost of sales in PaprikaCo's consolidatedstatement of profitor lossfor the year ended 30 April20X6? $144,000 $132,000 $176,000 $140,000 (2 marks) 250 HillusionCo acquired80%of SkeptikCo on 1July 20X2.Inthe post-acquisitionperiod HillusionCo soldgoodsto SkeptikCo at a priceof $12million.Thesegoodshad cost HillusionCo $9 million.Duringthe year to 31March20X3SkeptikCo had sold$10million (at cost to SkeptikCo)of these goodsfor$15million. Howwillthis affect group cost of sales in the consolidatedstatement of profitor lossof HillusionCo for the year ended 31March20X3? Increaseby $11.5million Increaseby $9.6million Decreaseby $11.5million Decreaseby $9.6million (2 marks) 100 FinancialReporting(FR) Page 123 of 405 H q 251 On1July20X7,Spider Coacquired 60%oftheequitysharecapitalofFlyCoandonthat datemadea $10million loantoFlyCoata rateof8%perannum. Whatwillbetheeffectongroupretained earnings attheyear-end dateof31December 20X7whenthisintragroup transaction iscancelled? Groupretained earnings willincrease by$400,000 Groupretained earnings willbereduced by$240,000 Groupretained earnings willbereduced by$160,000 There willbenoeffectongroupretained earnings (2 marks) Q U E T IO N S S 252 WileyCoacquired 80%ofCoyoteCoon1January20X8.Atthedateofacquisition Coyote Cohada building whichhada fairvalue$22million anda carrying amount of$20million. Theremaining useful lifeofthebuilding was20years. CoyoteCo'sprofitfortheyearto30June20X8was$1.6million whichaccrued evenly throughout theyear. WileyComeasures non-controlling interest atfairvalue.At30June20X8itestimated that goodwill inCoyoteCowasimpaired by$500,000. Whatisthetotalcomprehensive income attributable tothenon-controlling interest at 30June20X8? $40,000 $50,000 $187,500 $150,000 (2 marks) G H 253 BasilCoacquired 60%ofParsley Coon1March20X9.InSeptember 20X9BasilCosold $46,000worth ofgoodstoParsley Co.BasilCoapplies a 30%mark-up toallitssales.25% ofthesegoodswerestillheldininventory byParsley Coattheendoftheyear. Anextract fromthedraftstatements ofprofitorlossofBasilCoandParsley Coat 31December 20X9is: BasilCo Parsley Co $ $ Revenue 955,000 421,500 Costofsales (407,300) (214,600) Grossprofit 547,700 206,900 Allrevenue andcostsariseevenly throughout theyear. Whatwillbeshown asgrossprofitintheconsolidated statement ofprofitorlossof BasilCofortheyearended31December 20X9? 2 marks) $ Questions101 Page 124 of 405 Powered By Ù G q 254 PremierCo acquired80%of SanfordCo on 1June 20X1.SalesfromSanfordCo to Premier Co throughoutthe year ended 30 September20X1wereconsistently$1millionper month. SanfordCo made a mark-upon cost of 25%on these sales.At30 September20X1Premier Co was holding$2 millioninventorythat had been suppliedby SanfordCo inthe postacquisitionperiod. Byhowmuchwillthe unrealisedprofitdecrease the profitattributable to the noncontrollinginterest for the year ended 30 September20X1? (2 marks) $ 255 BrighamCo has owned70%of DorsetCo formany years. Italso holdsa $5 million8%loan note fromDorsetCo. One of DorsetCo's non-currentassets has sufferedan impairmentof $50,000 duringthe year. Thereis a balance inthe revaluationsurplusof DorsetCo of $30,000 inrespect of thisasset. Theimpairmentlosshas not yet been recorded. Theentityfinancialstatements of DorsetCo showa profitforthe year of $1.3million. What is the amount attributable to the non-controllinginterests in the consolidated statement of profitor loss? (2 marks) $ 256 On 1January 20X3,WestbridgeCo acquiredallof BrookfieldCo's 100,000$1shares for $300,000. Thegoodwillacquiredinthe businesscombinationwas $40,000, of which50% had been writtenoffas impairedby 31December20X5.On 31December20X5Westbridge Co soldallof BrookfieldCo's shares for$450,000 whenBrookfieldCo had retained earningsof $185,000. Usingthe pulldownlistprovided,select whichis the correct answer for the profiton disposalthat shouldbe includedin the consolidatedfinancialstatements of WestbridgeCo? Pulldownlist $145,000 $165,000 $245,000 $330,000 (2 marks) 257 On 1January 20X3,WestbridgeCo acquiredallof BrookfieldCo's 100,000$1shares for $300,000. Thegoodwillacquiredinthe businesscombinationwas $40,000, of which50% had been writtenoffas impairedby 31December20X5.On 31December20X5Westbridge Co soldallof Brookfield'sshares for$450,000 whenBrookfieldhad retainedearningsof $185,000. What is the profiton disposalthat shouldbe includedin the individualentity financial statements of WestbridgeCo? (2 marks) $ 102 FinancialReporting(FR) Page 125 of 405 H G q 258 Alderminster Coacquired a 70%holding inBidford Coon1January20X4for$600,000.At thatdatethefairvalueofthenetassetsofBidford Cowas$700,000.Alderminster Co measures non-controlling interest atitsshareofnetassets. On31December 20X6Alderminster Cosoldallitsshares inBidford Cofor$950,000.At thatdatethefairvalueofBidford Co'snetassetswas$850,000.Goodwill wasnot impaired. Whatwastheprofitorlossondisposal toberecognised intheconsolidated financial statements ofAlderminster Co? Q U E T IO N S S profit/loss Pulldownlist: $135,000 $200,000 $245,000 $355,000 Accounting (2 marks) for associates 259 On1October 20X8,Pacemaker Coacquired 30million ofVardine Co's100million shares in exchange for75million ofitsownshares. ThefairvalueofPacemaker Co'sshares atthe dateofthisshareexchange was$1.60each. Vardine Co'sprofitissubject toseasonal variation. Itsprofitfortheyearended 31March20X9was$100million. $20million ofthisprofitwasmadefrom1April20X8to 30September 20X8. Pacemaker Cohasonesubsidiary andnootherinvestments apartfromVardine Co. Whatamount willbeshown as'investment inassociate' intheconsolidated statement of financial position ofPacemaker Coasat31March20X9? $144million $150million $78million $126million (2 marks) H 260 Howshould anassociate beaccounted forintheconsolidated statement ofprofitorloss? Theassociate's income andexpenses areaddedtothoseofthegroupona lineby linebasis Thegroupshareoftheassociate's income andexpenses isaddedtothegroup figures ona linebylinebasis Thegroupshareoftheassociate's profitfortheyearisrecorded asa one-line entry Onlydividends received fromtheassociate arerecorded inthegroupstatement of profitorloss (2 marks) Questions103 Page 126 of 405 Powered By Ù G q 261 JarvisCo owns30%of McLintockCo. Duringthe year to 31December20X4McLintockCo sold$2 millionof goodsto JarvisCo, of which40%werestillheldininventoryby Jarvisat the year end. McLintockCo appliesa mark-upof 25%on allgoodssold. What effect wouldthe abovetransactionshave on groupinventoryat 31December20X4? Debitgroupinventory$48,000 Debitgroupinventory$160,000 Creditgroupinventory$48,000 Noeffect on groupinventory (2 marks) 262 UlyssesCo owns25%of Grant Co, whichit purchasedon 1May20X8for$5 million.At that date Grant Co had retained earnings of $7.4million.Atthe year-end date of 31October 20X8Grant Co had retained earnings of $8.5 millionafter paying out a dividendof $1million.On 30 September20X8,UlyssesCo sold$600,000 of goods to Grant Co, on whichit made 30%profit.Grant Co had not resoldthesegoodsby 31October. Atwhat amount willUlyssesCo record its investmentin Grant Co in its consolidated statement of financialpositionat 31October20X8? $5,000,000 $5,275,000 $5,230,000 $4,855,000 (2 marks) 263 On 1February20X3,PinotCo acquired30%of the equityshares of NoirCo, its only associate, for$10millionincash. Theprofitforthe year of NoirCo forthe year to 30 September20X3was $6 million.Profitsaccrued evenlythroughoutthe year. NoirCo made a dividendpayment of $1millionon 1September20X3.At30 September20X3 PinotCo decidedthat an impairmentlossof $700,000 shouldbe recognisedon its investmentinNoirCo. What amount willbe shownas 'investmentinassociate' in the statement of financial positionof PinotCo as at 30 September20X3? (2 marks) $ 264 Anassociate is an entityinwhichan investorhas significantinfluenceoverthe investee. WhichTWOof the followingindicatethe presence of significantinfluence? Theinvestorowns330,000 of the 1,500,000equityvotingshares of the investee Theinvestorhas representationon the board of directorsof the investee Theinvestorisable to insistthat allofthe salesofthe investeeare made to a subsidiaryofthe investor Theinvestorcontrolsthe votesof a majorityof the board members (2 marks) 265 RubyCo owns30%of EmeraldCo and exercisessignificantinfluenceoverit. EmeraldCo soldgoodsto RubyCo for$160,000.EmeraldCo appliesa one-thirdmark-upon cost. RubyCo stillhad 25%of these goodsininventoryat the year end. What amount shouldbe deducted fromconsolidatedretained earningsin respect of this transaction? (2 marks) $ 104 FinancialReporting(FR) Page 127 of 405 H G q Presentation of published financial statements 266 Whichofthefollowing wouldnotNECESSARILY leadtoa liability beingclassified asa current liability? Theliability isexpected tobesettled inthecourse oftheentity's normal operating cycle Theliability hasarisen during thecurrent accounting period Theliability isheldprimarily forthepurpose oftrading Theliability isduetobesettled within 12months aftertheendofthe reporting period (2 marks) Q U E T IO N S S 267 Whichofthefollowing wouldbeshown inthe'othercomprehensive income' section ofthe statement ofprofitorlossandothercomprehensive income? Anincrease invaluation onaninvestment property Profitonsaleofaninvestment Receipt ofa government grant Arevaluation surplus ofa factorybuilding (2 marks) 268 Usingthepulldownlistprovided whichofthefollowing areNOTitemsrequired byIAS1 Presentation ofFinancial Statements tobeshown onthefaceofthestatement of financial position? H Pulldownlist: Inventories Provisions Government grants Intangible assets (2 marks) 269 HowdoesIAS1Presentation ofFinancial Statements definethe'operating cycle'ofan entity? Thetimebetween acquisition ofassetsforprocessing anddelivery of finished goodstocustomers Thetimebetween delivery offinished goodsandreceipt ofcashfrom customers Thetimebetween acquisition ofassetsforprocessing andpayment ofcash tosuppliers Thetimebetween acquisition ofassetsforprocessing andreceipt ofcash fromcustomers 2 marks) 270 Whereareequitydividends paidpresented inthefinancial statements? Asa deduction fromretained earnings inthestatement ofchanges inequity Asa liability inthestatement offinancial position Asanexpense inprofitorloss Asa lossin'other comprehensive income' (2 marks) Questions105 Page 128 of 405 Powered By Ù G q Statement of cash flows 271 Extracts fromthestatements offinancial position ofNedburg Coareasfollows: Statements offinancial position asat30September: 20X2 20X1 Equity $m $m Ordinary shares of$0.50each 750 500 Sharepremium 350 100 Retained earnings 1,980 1,740 On1October 20X1,a bonus issueofonenewshareforeverytenheldwasmade,financed fromsharepremium. Thiswasfollowed bya further issueforcash. Thestatement ofprofitorlossofNedburg Coshows a profitfortheyearof$480,000. Usingthepulldownlistavailable, whatamount willappearunder 'cashflowsfrom financing activities' inthestatement ofcashflowsofNedburg Cofortheyearended 30September 20X2inrespect ofshareissues? Pulldownlist: $500million $660million $160million $210million (2 marks) 272 Thestatement offinancial position ofPintoCoat31March20X7showed property, plant andequipment witha carrying amount of$1,860,000. At31March20X8ithadincreased to$2,880,000. During theyearto31March20X8,plantwitha carrying amount of$240,000wassoldata lossof$90,000,depreciation of$280,000wascharged and$100,000 wasaddedtothe revaluation surplus inrespect ofproperty, plantandequipment. Whatamount should appearunder 'investing activities' inthestatement ofcashflowsof PintoCofortheyearended31March20X8ascashpaidtoacquire property, plantand equipment? $1,640,000 $1,440,000 $1,260,000 $1,350,000 (2 marks) 106 Financial Reporting (FR) Page 129 of 405 H G q 273 Thefollowing information isavailable fortheproperty, plantandequipment ofFryCoasat 30September: 20X4 20X3 $'000 $'000 Carrying amounts 23,400 14,400 Thefollowing items wererecorded during theyearended 30September 20X4: (i) Depreciation chargeof$2.5million (ii) Anitemofplantwitha carrying amount of$3million wassoldfor$1.8million (iii) Aproperty wasrevalued upwards by$2million (iv) Environmental provisions of$4million relating toproperty, plantandequipment werecapitalised during theyear Whatamount wouldbeshown inFryCo'sstatement ofcashflowsforpurchase of property, plantandequipment fortheyearended30September 20X4? $8.5million $12.5million $7.3million $10.5million Q U E T IO N S S (2 marks) 274 Thecarrying amount ofproperty, plantandequipment was$410million at31March20X1 and$680million at31March20X2.During theyear,property witha carrying amount of $210million wasrevalued to$290million. Thedepreciation chargefortheyearwas $115 million. There werenodisposals. Whatamount willappearonthestatement ofcashflowsfortheyearended31March 20X2inrespect ofpurchases ofproperty, plantandequipment? H (2 marks) $ 275 Extracts fromDeltoid Co'sstatements offinancial position areasfollows: STATEMENT OFFINANCIAL POSITION ASAT31MARCH 20X1 20X0 $'000 $'000 Non-current assets Property, plantandequipment Right-of-use asset 6,500 2,500 Non-current liabilities Leaseliability 4,800 2,000 Current liabilities Leaseliability 1,700 800 Right-of-use assetsareinitially measured equaltotheinitial amount oftheleaseliability, otherthantocorrectly account fordirectcostsof$50,000whichwereincurred onthe arrangement ofnewleasecontracts. During theyearto31March20X1depreciation charged onright-of-use assetswas$1,800,000. Whatamount willbeshown inthestatement ofcashflowsofDeltoid Cofortheyear ended31March20X1inrespect ofpayments madeunder leases? (2 marks) $ Questions107 Page 130 of 405 Powered By Ù G q Section Root B Co and Branch Co case 18 mins Information relevant toquestions 276–280. On1April20X7,RootCoacquired 116million ofBranch Co's145million ordinary shares foran immediate cashpayment of$210million andissued atparone10%$100loannoteforevery200 shares acquired. Atthedateofacquisition Branch Coowned a recently builtproperty thatwascarried atits depreciated construction costof$62million. Thefairvalueofthisproperty atthedateof acquisition was$82million andithadanestimated remaining useful lifeof20years. Branch Coalsohadaninternally developed brandwhichwasvalued attheacquisition dateat $25million witha remaining lifeof10years. Theinventory ofBranch Coat31March20X9includes goodssupplied byRootCofora saleprice of$56million. Rootaddsa mark-up of40%oncosttoallsales. 276 Whatisthetotalamount oftheconsideration transferred byRootCotoacquire the investment inBranch Co?(Giveyouranswer inmillions). $ (2 marks) million 277 Whatwillbetheamount oftheadjustment togroupretained earnings at31March20X9 inrespect ofthemovement onthefairvalueadjustments? $7million $3.5million $5.6million $2.8million (2 marks) 278 Whatistheamount oftheunrealised profit arising fromintragroup trading? (Giveyour answer inmillions). $ (2 marks) million 279 Usingthedraganddropoptions available, showhowshould theunrealised profitbe posted? Account Debit Costofsales Inventories Credit Non-controlling interest Non-current assets (2 marks) 108 Financial Reporting (FR) Page 131 of 405 H G q 280 Branch Cohasrecently lostsomelargecontracts andthedirectors ofRootCoare wondering ifBranch Cocanbeexcluded fromconsolidation nextyear. Whichofthefollowing situations wouldallowa subsidiary tobeexcluded from consolidation? Theactivities ofthesubsidiary aresignificantly different totheactivities oftherest ofthegroup Control ofthesubsidiary hasbeenlost Control ofthesubsidiary isonlyintended tobetemporary Thesubsidiary operates under long-term restrictions whichprevent itfrom (2 marks) transferring fundstotheparent Q U E T IO N S S (10marks) Port Co and Alfred Co case 18 mins Information relevant toquestions 280–284 On1November 20X4,PortCopurchased 75%oftheequityofAlfred Cofor$650,000.The consideration was35,000$1equityshares inPortCowitha fairvalueof$650,000. Noted below areextracts fromthedraftstatements ofprofitorlossforPortCoanditssubsidiary Alfred Cofortheyearending 31December 20X4alongwiththedraftstatements offinancial position asat31December 20X4. Theprofits ofAlfred Cohavebeenearned evenly throughout theyear. DRAFTSTATEMENTS OFPROFIT ORLOSSFORTHEYEARENDING 31DECEMBER 20X4(extract) PortCo Alfred Co $'000 $'000 Grossprofit 364 240 Profitfortheyear 330 96 H DRAFTSTATEMENTS OFFINANCIAL POSITION ASAT31DECEMBER 20X4(extracts) Port Alfred Equity $'000 $'000 $1Equityshares 200 100 Sharepremium 500 85 Retained earnings 2,900 331 Revaluation surplus 30 – 3,630 516 PortCohasnotaccounted fortheissueofitsownshares orfortheacquisition oftheinvestment inAlfred Co. 281 Usingthedraganddropoptions below,showthebalances onthesharecapitalandshare premium accounts at31December 20X4. Sharecapital Sharepremium $ $ 585,000 335,000 1,115,000 235,000 Questions109 Page 132 of 405 Powered By Ù q 282 WhatarethenetassetsofAlfredCoatacquisition? $ 283 Theaccountant ofPortCoisfinalising theconsolidated financial statements. Which TWOofthefollowing statements aretrueregarding consolidated financial statements? Thenon-controlling interest shareofprofitispartoftheconsolidated statement of profitorloss Goodwill onacquisition should beamortised overa period notexceeding 20years Ifa subsidiary isacquired during theyear,itsresults areapportioned overtheyear ofacquisition Onlythegroupshareofthesubsidiary's non-current assetsisshown inthe statement offinancial position 284 Whatistheamount ofgroupgrossprofitfortheyearended31December 20X4? $ 285 Whatisgroupretained earnings at31December 20X4? G $2,912,000 $2,916,000 $2,972,000 $2,996,000 H (10marks) Polestar Co case 18 mins Thefollowing scenario relatestoquestions 285–289. On1April20X3,Polestar Coacquired 75%ofthe12million 50centequityshares ofSouthstar Co. Polestar Comadeanimmediate cashpayment of$1.50pershare.Thestatements ofprofitorloss fortheyearended 30September 20X3showrevenue forPolestar CoandSouthstar Coas $110million and$66million respectively. Revenue accrued evenly overtheyear. Additional information: (i) Atthedateofacquisition, thefairvalues ofSouthstar Co'sassetswereequaltotheir carrying amounts withtheexception ofright-of-use property heldunder a lease agreement. Thishada fairvalueof$2million aboveitscarrying amount anda remaining leasetermoftenyearsatthatdate.Alldepreciation isincluded incostofsales. (ii) Contingent consideration wasestimated tobe$1.8million at1April20X3,butby 30September 20X3duetocontinuing losses, itsvaluewasestimated atonly$1.5million. Thecontingent consideration hasnotbeenrecorded byPolestar Coandthedirectors expect theacquisition tobea bargain purchase. (iii) Polestar soldmaterials attheircostof$4million toSouthstar CoinJune20X3.Southstar Coprocessed allofthesematerials atanadditional costof$1.4million andsoldthemback toPolestar CoinAugust 20X3for$9million. At30September 20X3Polestar Cohad $1.5million ofthesegoodsstillininventory. There werenootherintragroup sales. 110 Financial Reporting (FR) Page 133 of 405 q (iv) Polestar Co'spolicyistovaluethenon-controlling interest atfairvalueatthedateof acquisition. Southstar Co'ssharepriceof$1.20pershareatthatdatecanbedeemed tobe representative ofthefairvalueoftheshares heldbythenon-controlling interest. The retained earnings ofSouthstar attheacquisition datewere$14.3million. 286 WhatwasthefairvalueofSouthstar Co'snetassetsattheacquisition date?Submit your answer toonedecimal place. $ million Q U E T IO N S S 287 Whatisconsolidated revenue fortheyearended30September 20X3? $130million $143million $163million $156million 288 Duetolower thanexpected profits oftheacquired company, Southstar Co,theestimated valueofthecontingent consideration hasfallenfrom$1.8million to$1.5million. Usingthedraganddropoptions below,showhowthisbeaccounted forinPolestar Co. Account G Debit Goodwill Credit Liability H Profitorloss 289 Whatistheamount oftheadjustment toprofitattributable tothenon-controlling interest inrespect ofunrealised profit? $ 290 Polestar Comeasures thenon-controlling interest inSouthstar Coatfairvalue.Whichof thefollowing applies whennon-controlling interest ismeasured atfairvalue? Thenon-controlling interest willbeallocated itsshareofanynegative goodwill Thenon-controlling interest willbeallocated thewhole ofthepre-acquisition profits Thenon-controlling interest willbeallocated itsshareofanygoodwill impairment Ifthesubsidiary's sharepricefalls,thenon-controlling interest willbeadjusted (10marks) Questions111 Page 134 of 405 Powered By Ù q Plateau Co case 18 mins Thefollowinginformationrelates to questions 290–294 On 1October20X6,Plateau Co acquiredthe followingnon-currentinvestments: Threemillionequityshares inSavannahCo by an exchangeof one share inPlateau Co for everytwoshares inSavannahCo plus$1.25per acquiredSavannahCo share incash. The marketpriceof each Plateau Co share at the date of acquisitionwas $6 and the market priceof each SavannahCo share at the date of acquisitionwas $3.25. 30%of the equityshares of AxleCo at a cost of $7.50per share incash. Onlythe cash considerationof the aboveinvestmentshas been recordedby Plateau Co. Extractsfromthe summariseddraft statementsoffinancialpositionofthe threecompaniesat 30 September20X7are: Plateau Co SavannahCo AxleCo $'000 $'000 $'000 Equityshares of $1each 10,000 4,000 4,000 Retainedearnings – at 30 September20X6 16,000 6,000 11,000 – foryear ended 30 September20X7 9,250 2,900 5,000 35,250 12,900 20,000 Thefollowinginformationis relevant: (i) G (ii) Atthe date of acquisitionSavannahCo had fiveyears remainingof an agreementto supplygoodsto one of its majorcustomers.Theagreementhas been consistentlyrenewed whenit expires.Thedirectorsof Plateau Co estimatethat the valueof thiscustomer-based contract has a fairvalueof $1millionand an indefinitelifeand has not sufferedany impairment. Duringthe year ended 30 September20X7SavannahCo soldgoodsto Plateau Co for $2.7million.SavannahCo had markedup these goodsby 50%on cost. Plateau Co had a thirdof the goodsstillinits inventoryat 30 September20X7.Therewereno intragroup payables/receivablesat 30 September20X7. (iii) Itis the grouppolicyto valuenon-controllinginterestat acquisitionat full(orfair)value. Forthispurposethe share priceof SavannahCo at the acquisitiondate shouldbe used. 291 What is the total of the considerationpaid by Plateau Co for SavannahCo? $3,750,000 $9,750,000 $12,750,000 $21,750,000 292 Howshouldthe customercontract in note (i)be accounted for? Shouldnot be recognisedas itemis internallygenerated Groupshare of 75%shouldbe recognisedand not amortised Shouldbe recognisedat $1millionand not amortised Shouldbe recognisedat $1millionand amortisedoverfiveyears 112 FinancialReporting(FR) Page 135 of 405 H q 293 Whatamount willbeshown asnon-controlling interest intheconsolidated statement of financial position at30September 20X7? $3,900,000 $3,250,000 $3,225,000 $3,975,000 Q U E T IO N S S 294 Whatamount willbeshown intheconsolidated statement offinancial position at30 September 20X7inrespect oftheinvestment inAxleCo? $ 295 Plateau Coisnegotiating a contract tosupplygoodstoAxleCointhecoming year (ended 30September 20X8)at20%profit. Howwilltheunrealised profitonthesaleofthesegoodsbeadjusted intheconsolidated financial statements fortheyearended30September 20X8?Selectyouranswers from thedraganddropoptions provided. Account Debit Groupinventory Credit Investment inassociate G H Shareofprofitof associate (10marks) Pinto Co case 18 mins Thefollowing scenario relatestoquestions 295–299. PintoCoisa publicly listedcompany. Thefollowing financial statements ofPintoCoare available: STATEMENT OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORYEARENDED 31MARCH 20X8(extract) $'000 Profitbefore tax 440 Income taxexpense 160) Profitfortheyear 280 Othercomprehensive income Gainsonproperty revaluation 00 Totalcomprehensive income 380 Questions113 Page 136 of 405 Powered By Ù G q STATEMENTS OFFINANCIAL POSITION (extracts)ASAT 31March20X8 $'000 $'000 Non-currentassets (note(i)) Property,plant and equipment 2,880 Investmentproperty 420 3,300 Non-currentliabilities Deferredtax 50 Currentliabilities Tradepayables Currenttax payable Totalequityand liabilities 1,610 150 50 1,760 5,000 31March20X7 $'000 $'000 1,860 400 2,260 30 1,270 – 430 1,270 3,660 Thefollowingsupportinginformationis available: (i) Anitemof plant witha carryingamountof $240,000 was soldat a lossof $90,000 during the year. Depreciationof $280,000 was charged (to cost of sales)forproperty, plant and equipmentinthe year ended 31March20X8. PintoCo uses the fairvaluemodelinIAS40 InvestmentProperty.Therewereno purchases or sales of investmentpropertyduringthe year. (ii) Adividendof 3 cents per share was paid on 1January 20X8.PintoCo has $1millionof 20 cent equityshares at 31March20X7and 31March20X8. (iii) $60,000 was includedinPinto'sprofitbeforetax forthe year ended 31March20X8in respect of incomeand gains on investmentproperty. Youare preparinga statement of cash flowsforPintoCo forthe year to 31March20X8. 296 What is the amount of tax that PintoCo eitherreceivedor paid duringthe year? $60,000 paid $60,000 received $10,000paid $10,000received 297 Pintohas spent $1,440,000on purchase of plant. What is the net cash used in investing activities? $ 298 What was the amount of the dividendpaid on 1January 20X8? $150,000 $300,000 $240,000 $120,000 114 FinancialReporting(FR) Page 137 of 405 H G q 299 UnderwhichTWOclassification(s)can dividendspaid be shownin the statement of cash flows? Investingactivities Financingactivities Operatingactivities Movementinpayables Q U E T IO N S S 300 Whichof the followingitemswillNOTbe adjusted against PintoCo's profitbefore tax in arrivingat net cash fromoperating activities? Theincreaseintrade payables Theproceedsfromsale of plant Theincreaseinthe warrantyprovision Theinvestmentincome (10marks) Woolf Co case 18 mins Thefollowingscenario relates to questions 300-304. Thefollowingextractsare fromthe draft financialstatements of WoolfCo forthe year ended 31December20X7: 31Dec20X6 31Dec20X7 $'000 $'000 Currentliabilities Governmentgrants 400 600 Leaseliabilities 800 900 Non-currentliabilities Governmentgrants Leaseliabilities 900 1,700 H 1,400 2,000 $000 Interestreceived 40 Profitbeforetaxation 50 Thefollowingsupportinginformationis available: (i) WoolfCo initiallymeasuredright-of-useassets acquiredunderlease contracts arranged duringthe year at $1,540,000.Theamountwas calculatedas the initialmeasurementof the lease liabilityadjustedto take account of directcosts incurredof $40,000. (ii) WoolfCo purchaseda factory duringthe year whichqualifiedthe companyto receive governmentgrants of $950,000, whichwas includedwithinliabilitieson receipt.Total depreciationrecognisedinprofitbeforetaxationwas $2,200,000. (iii) Thenet movementinworkingcapital balances resultedinan outflowof $100,000overthe courseof the year. Questions 115 Page 138 of 405 Powered By Ù G q 301 Usingthe pulldownlistprovided,select the correct amount paid in respect of lease liabilitiesfor the year ended 31December20X7 Pulldownlist: $400,000 $1,100,000 $1,140,000 $1,900,000 302 Insofaras the informationallows,what is the cash fromoperationsfigurefor inclusionin the statement of cash flowsfor WoolfCo at 31December20X7? Cash inflowof $1,860,000 Cash inflowof $2,110,000 Cash inflowof $2,360,000 Cash inflowof $3,060,000 303 Whichof the followingstatements providesa plausiblereason for the movementin the workingcapital balances of WoolfCo duringthe year? (i) (ii) Adecrease ininventoriesdue to a successfulyear end warehousesale Adecrease intrade receivablesdue to the recruitmentof an experiencedcredit controller (iii) Adecrease intrade payables due to WoolfCo seekingpromptpayment discounts instead of utilisingthe fullcreditperiodterms Option(i)only Option(ii)only Option(i)and (ii) Option(iii)only 304 Whichof the followingcash flowswouldNOTbe includedunder cash flowsfrom financingactivities? Cash proceedsfromissuingordinaryshare capital Cash proceedsfromrepaymentsof lease liabilities Cash proceedsfromthe sale of a factory Cash paymentsfromthe issueof debenturesby the company 116 FinancialReporting(FR) Page 139 of 405 H q 305 IAS20Government GrantsandDisclosure ofGovernment Assistance allows twochoices forthepresentation ofgovernment grantsrelating toassets. Whichofthefollowing accounting treatments wouldbevalidoptions forWoolfCoto adoptinrespect ofthegrantreceived forthefactoryunit? (i) Recognise theincome fromthegrantasdeferred income (ii) Deduct thegrantinarriving atthecarrying amount oftheassetacquired (iii) Present thewhole grantasa separate creditinthestatement ofprofitorlosswithin 'other income' Option (i)only Option (ii)only Options (i)and(ii) Option (iii) Q U E T IO N S S (10marks) G H Questions117 Page 140 of 405 Powered By Ù G q Section 306 C Pedantic Co (Dec 2008 amended) 36 mins On 1April20X8,PedanticCo acquired60%of the equityshare capital of SophisticCo ina share exchangeof twoshares inPedanticCo forthree shares inSophisticCo. Atthat date the retained earningsof SophisticCo were$5 million.Theissueof shares has not yet been recordedby PedanticCo. Atthe date of acquisitionshares inPedanticCo had a marketvalueof $6 each. Beloware the summariseddraft statements of financialpositionof both companies. STATEMENTS OFFINANCIAL POSITION ASAT30 SEPTEMBER 20X8 PedanticCo SophisticCo Assets $'000 $'000 Non-currentassets Property,plant and equipment 40,600 12,600 Currentassets 16,000 6,600 Totalassets 56,600 19,200 Equityand liabilities Equityshares of $1each Retainedearnings Non-currentliabilities 10%loannotes Currentliabilities Totalequityand liabilities 10,000 35,400 45,400 4,000 6,500 0,500 3,000 8,200 56,600 4,000 4,700 9,200 Thefollowinginformationis relevant: (i) Atthe date of acquisition,the fairvaluesof Sophistic'sassets wereequal to theircarrying amountswiththe exceptionof an itemof plant, whichhad a fairvalueof $2 millionin excessof its carryingamount.Ithad a remaininglifeof fiveyears at that date (straight-line depreciationis used).SophisticCo has not adjustedthe carryingamountof its plant as a resultof the fairvalueexercise. (ii) SalesfromSophisticCo to PedanticCo inthe post-acquisitionperiodwere$8 million. SophisticCo applieda mark-upon cost of 40%on these sales.PedanticCo had sold $5.2 million(at cost to PedanticCo)of these goodsby 30 September20X8. (iii) SophisticCo's trade receivablesat 30 September20X8include$600,000 due from PedanticCo whichdid not agree withPedanticCo's correspondingtrade payable. This was due to cash intransit of $200,000 fromPedanticCo to SophisticCo. Bothcompanies have positivebank balances. (iv) PedanticCo has a policyof accountingforany non-controllinginterestat fullfairvalue. Thefairvalueof the non-controllinginterestinSophisticCo at the date of acquisitionwas estimatedto be $5.9million.Consolidatedgoodwillwas not impairedat 30 September 20X8. 118 FinancialReporting(FR) Page 141 of 405 H G q Required (a) Prepare theconsolidated statement offinancial position forPedantic Coasat 30September 20X8. (16marks) (b) Pedantic Cohasbeenapproached bya potential newcustomer, TrilbyCo,tosupplyit witha substantial quantity ofgoodsonthree-month creditterms. Pedantic Cois concerned attheriskthatsucha largeorderrepresents inthecurrent difficult economic climate, especially asPedantic Co'snormal creditterms areonlyonemonth's credit. To support itsapplication forcredit,TrilbyhassentPedantic Coa copyofTradhat Co'smost recent audited consolidated financial statements. TrilbyCoisa wholly owned subsidiary within theTradhat Cogroup.Tradhat Co'sconsolidated financial statements showa strong statement offinancial position including healthy liquidity ratios. Comment ontheimportance thatPedantic Coshould attachtoTradhat Co'sconsolidated financial statements whendeciding onwhether tograntcreditterms toTrilbyCo. (4 marks) (20marks) 307 Highveldt Co Q U E T IO N S S 36 mins Highveldt Co,a publiclistedcompany, acquired 75%ofSamson Co'sordinary shares on 1April20X4.Highveldt Copaidanimmediate $3.50pershareincashandagreedtopaya further amount of$108million on1April20X5.Highveldt Co'scostofcapitalis8%perannum. Highveldt Cohasonlyrecorded thecashconsideration of$3.50pershare. Thesummarised statements offinancial position ofthetwocompanies at31March20X5are shown below: Highveldt Co $m $m 420 – 300 720 133 853 Property, plantandequipment (note(i)) Development costs(note(iv)) Investments (note(ii)) Current assets Totalassets Equityandliabilities Ordinary shares of$1each Reserves: Sharepremium Revaluation surplus Retained earnings – 1April20X4 – yearto31March20X5 160 190 Non-current liabilities 10%intragroup loan(note(ii)) Current liabilities Totalequityandliabilities Samson Co $m $m 320 40 20 380 91 471 270 80 80 45 40 – 350 745 – 108 853 134 76 H 210 330 60 81 471 Questions119 Page 142 of 405 Powered By Ù G q Thefollowinginformationis relevant: (i) HighveldtCo has a policyof revaluingland and buildingsto fairvalue.Atthe date of acquisitionSamsonCo's land and buildingshad a fairvalue$20 millionhigherthan their carryingamountand at 31March20X5thishad increasedby a further$4 million(ignore any additionaldepreciation). (ii) IncludedinHighveldtCo's investmentsis a loanof $60 millionmade to SamsonCo at the date of acquisition.Interestis payable annuallyinarrears. SamsonCo paid the interest due forthe year on 31March20X5,but HighveldtCo did not receivethisuntilafter the year end. HighveldtCo has not accounted forthe accrued interestfromSamsonCo. (iii) SamsonCo had establisheda lineof productsunderthe brand name of Titanware.Acting on behalfof HighveldtCo, a firmof specialists,placed a valueof $40 millionon the brand name withan estimatedusefullifeof ten years as at 1April20X4.Thebrand is not included inSamsonCo's statement of financialposition. (iv) SamsonCo's developmentprojectwas completedon 30 September20X4at a cost of $50 million.$10millionof thishad been amortisedby 31March20X5.Developmentcosts capitalisedby SamsonCo at the date of acquisitionwere$18million.HighveldtCo's directorsare of the opinionthat SamsonCo's developmentcosts do not meet the criteriain IAS38 IntangibleAssetsforrecognitionas an asset. (v) SamsonCo soldgoodsto HighveldtCo duringthe year at a profitof $6 million;one-third of these goodswerestillinthe inventoryof HighveldtCo at 31March20X5. (vi) Animpairmenttest at 31March20X5on the consolidatedgoodwillconcludedthat it should be impairedby $20 million.Noother assets wereimpaired. (vii) Itis the grouppolicyto measurenon-controllinginterestfairvalue.Thefairvalueof the non-controllinginterestinSamsonCo at the acquisitiondate was $83 million. Required Calculatethe followingfiguresas they wouldappear inthe consolidatedstatement of financial positionof HighveldtCo at 31March20X5: (a) (b) (c) Goodwill Non-controllinginterest Thefollowingconsolidatedreserves: (8 marks) (4 marks) share premium,revaluationsurplusand retainedearnings. (8 marks) (20 marks) 308 Paradigm Co (Dec 2011 amended) 36 mins On 1October20X2,ParadigmCo acquired75%of Strata Co's equityshares by means of a share exchangeof twonewshares inParadigmCo foreveryfiveacquiredshares inStrata Co. In addition,ParadigmCo issuedto the shareholdersof Strata Co a $10010%loannote forevery 1,000shares it acquiredinStrata Co. ParadigmCo has not recordedany of the purchase consideration,althoughit does have other 10%loannotes already inissue. Themarketvalueof ParadigmCo's shares at 1October20X2was $2 each. Thesummarisedstatements of financialpositionof the twocompaniesat 31March20X3are: ParadigmCo $'000 ASSETS Non-currentassets Property,plant and equipment Financialasset: equityinvestments(note(i)) 47,400 7,500 54,900 120 FinancialReporting(FR) Page 143 of 405 Strata Co $'000 25,500 3,200 28,700 H G q Current assets Inventories (note(ii)) Tradereceivables (note(iii)) Bank Totalassets EQUITY ANDLIABILITIES Equity Equityshares of$1each Retained earnings/(losses) – at1April20X2 – foryearended 31March20X3 Non-current liabilities 10%loannotes Paradigm Co $'000 StrataCo $'000 17,400 14,800 5,100 92,200 8,400 9,000 – 46,100 40,000 19,200 7,400 66,600 20,000 (4,000) 8,000 24,000 8,000 Current liabilities Tradepayables (note(iii)) Bankoverdraft Totalequityandliabilities 17,600 – 92,200 Q U E T IO N S S – 3,000 9,100 46,100 Thefollowing information isrelevant: (i) Atthedateofacquisition, StrataCoproduced a draftstatement ofprofitorlosswhich showed ithadmadea netlossfortheyearof$2million atthatdate.Paradigm Co accepted thisfigureasthebasisforcalculating thepre-andpost-acquisition splitof StrataCo'sprofitfortheyearended 31March20X3. Alsoatthedateofacquisition, Paradigm Coconducted a fairvalueexercise onStrataCo's netassetswhichwereequaltotheircarrying amounts (including StrataCo'sfinancial assetequityinvestments) withtheexception ofanitemofplantwhichhada fairvalueof $3million below itscarrying amount. Theplanthada remaining estimated useful lifeof threeyearsat1October 20X2. H Paradigm Co'spolicyistovaluethenon-controlling interest atfairvalueatthedateof acquisition. Forthispurpose, a sharepriceforStrataCoof$1.20eachisrepresentative of thefairvalueoftheshares heldbythenon-controlling interest. (ii) Eachmonth sinceacquisition, Paradigm Co'ssalestoStrataCowereconsistently $4.6million. Paradigm Cohadmarked theseupby15%oncost.StrataCohadone month's supply($4.6million) ofthesegoodsininventory at31March20X3.Paradigm Co's normal mark-up (tothirdpartycustomers) is40%. (iii) StrataCo'scurrent account balance withParadigm Coat31March20X3was$2.8million, whichdidnotagreewithParadigm Co'sequivalent receivable duetoa payment of $900,000madebyStrataCoon28March20X3,whichwasnotreceived byParadigm Co until3 April20X3. (iv) Thefinancial assetequityinvestments ofParadigm CoandStrataCoarecarried attheir fairvalues asat1April20X2.Asat31March20X3,thesehadfairvalues of$7.1million and $3.9million respectively. (v) There werenoimpairment losses within thegroupduring theyearended 31March20X3. Required Prepare theconsolidated statement offinancial position forParadigm Coasat31March20X3. (20marks) Questions121 Page 144 of 405 Powered By Ù G q 309 Boo Co and Goose Co 36 mins BooCo acquired80%of GooseCo's equityshares for$300,000 on 1January 20X8.Atthe date of acquisitionGooseCo had retainedearningsof $190,000. On 31December20X8BooCo despatched goodswhichcost $80,000 to GooseCo, at an invoicedcost of $100,000.GooseCo receivedthe goodson 2 January 20X9and recordedthe transactionthen. Thetwocompanies'draft financialstatements as at 31December20X8are shownbelow. Thefairvalueof the non-controllinginterestinGooseCo at the date of acquisitionwas $60,000. STATEMENTS OFPROFIT ORLOSSANDOTHER COMPREHENSIVE INCOME FORTHEYEAR ENDED 31DECEMBER 20X8 BooCo GooseCo $'000 $'000 Revenue 5,000 1,000 Cost of sales 2,900 600 Grossprofit 2,100 400 Otherexpenses 1,700 320 Profitbeforetax 400 80 Incometax expense 130 30 Profitforthe year 270 50 Othercomprehensiveincome: Gain on revaluationof property 20 – Totalcomprehensiveincomeforthe year 290 50 STATEMENTS OFFINANCIAL POSITION AT31DECEMBER 20X8 Assets Non-currentassets Property,plant and equipment InvestmentinGooseCo Currentassets Inventories Tradereceivables Cash and cash equivalents Totalassets Equityand liabilities Equity Sharecapital Retainedearnings Revaluationsurplus Currentliabilities Tradepayables Tax Totalequityand liabilities $'000 $'000 1,940 300 2,240 200 – 200 500 650 170 1,320 3,560 120 40 35 195 395 2,000 500 20 2,520 100 240 – 340 910 130 1,040 3,560 30 25 55 395 Required Preparea draft consolidatedstatement of profitor lossand othercomprehensiveincomeand statement of financialposition.Itis the grouppolicyto valuethe non-controllinginterestat acquisitionat fairvalue. (20 marks) 122 FinancialReporting(FR) Page 145 of 405 H G q 310 Viagem Co (Dec 2012 amended) 36 mins On1January20X2,Viagem Coacquired 90%oftheequitysharecapitalofGrecaCoina share exchange inwhichViagem Coissued twonewshares foreverythreeshares itacquired inGreca Co.Additionally, on31December 20X2,Viagem Cowillpaytheshareholders ofGrecaCo$1.76 pershareacquired. Viagem Co'scostofcapitalis10%perannum. Atthedateofacquisition, shares inViagem CoandGrecaCohada market valueof$6.50and $2.50eachrespectively. STATEMENTS OFPROFIT ORLOSSFORTHEYEARENDED 30SEPTEMBER 20X2 Viagem Co GrecaCo $'000 $'000 Revenue 64,600 38,000 Costofsales (51,200) (26,000) Grossprofit 13,400 12,000 Distribution costs (1,600) (1,800) Administrative expenses (3,800) (2,400) Investment income 500 – Finance costs (420) – Profitbefore tax 8,080 7,800 Income taxexpense (2,800) (1,600) Profitfortheyear 5,280 6,200 Equityasat1October 20X1 Equityshares of$1each 30,000 10,000 Retained earnings 54,000 35,000 Thefollowing information isrelevant: (i) Atthedateofacquisition thefairvalues ofGrecaCo'sassetswereequaltotheircarrying amounts withtheexception oftwoitems: 1 Anitemofplanthada fairvalueof$1.8million aboveitscarrying amount. The remaining lifeoftheplantatthedateofacquisition wasthreeyears.Depreciation is charged tocostofsales. 2 GrecaCohada contingent liability whichViagem Coestimated tohavea fairvalue of$450,000.Thishasnotchanged asat30September 20X2. GrecaCohasnotincorporated thesefairvaluechanges intoitsfinancial statements. (ii) Viagem Co'spolicyistovaluethenon-controlling interest atfairvalueatthedateof acquisition. Forthispurpose, themarket valueofGrecaCo'sshares atthatdatecanbe deemed toberepresentative ofthefairvalueoftheshares heldbythenon-controlling interest. (iii) SalesfromViagem CotoGrecaCothroughout theyearended 30September 20X2had consistently been$800,000permonth. Viagem Comadea mark-up oncostof25%on thesesales.GrecaCohad$1.5million ofthesegoodsininventory asat30September 20X2. (iv) Viagem Co'sinvestment income isa dividend received fromitsinvestment ina 40%owned associate whichithasheldforseveral years.Theassociate's profitfortheyearended 30September 20X2was$2million. (v) Although GrecaCohasbeenprofitable sinceitsacquisition byViagem Co,themarket for GrecaCo'sproducts hasbeenbadlyhitinrecent months andViagem Cohascalculated thatthegoodwill hasbeenimpaired by$2million asat30September 20X2. Required (a) Calculate thegoodwill arising ontheacquisition ofGrecaCo. (6 marks) (b) Prepare theconsolidated statement ofprofitorlossforViagem Cofortheyearended (14marks) 30September 20X2. (20marks) Q U E T IO N S S H Questions123 Page 146 of 405 Powered By Ù G q 311 Prodigal Co (Jun 2011 amended) 36 mins On 1October20X0,ProdigalCo purchased75%of the equityshares inSentinelCo. The acquisitionwas througha share exchangeof twoshares inProdigalCo foreverythree shares in SentinelCo. Themarketvalueof ProdigalCo's shares at 1October20X0was $4 per share. The summarisedstatements of profitor lossand other comprehensiveincomeforthe twocompanies forthe year ended 31March20X1are: ProdigalCo SentinelCo $'000 $'000 Revenue 450,000 240,000 Cost of sales (260,000) (110,000) Grossprofit 190,000 130,000 Distributioncosts (23,600) (12,000) Administrative expenses (27,000) 23,000) Financecosts (1,500) (1,200) Profitbeforetax 137,900 93,800 Incometax expense (48,000) (27,800) Profitforthe year 89,900 66,000 Othercomprehensiveincome Gainon revaluationof land (note(i)) 2,500 1,000 Losson fairvalueof investmentinequityinstrument (700) (400) 1,800 600 Totalcomprehensiveincomeforthe year 91,700 66,600 Theequityof SentinelCo at 1April20X0was: $'000 Equityshares of $1each 160,000 Othercomponentsof equity(reinvestmentinequityinstrument) 2,200 Retainedearnings 125,000 Thefollowinginformationis relevant: (i) ProdigalCo's policyis to revaluethe group'sland to marketvalueat the end of each accountingperiod.Priorto its acquisition,SentinelCo's land had been valuedat historical cost. Duringthe post-acquisitionperiodSentinelCo's land had increasedinvalueoverits valueat the date of acquisitionby $1million.SentinelCo has recognisedthe revaluation withinits ownfinancialstatements. (ii) Immediatelyafter the acquisitionof SentinelCo on 1October20X0,ProdigalCo transferredan itemof plant witha carryingamountof $4 millionto SentinelCo at an agreed valueof $5 million.Atthisdate the plant had a remaininglifeof twoand a half years. ProdigalCo had includedthe profiton thistransferas a reductioninits depreciation costs. Alldepreciationis charged to cost of sales. (iii) Afterthe acquisitionSentinelCo soldgoodsto ProdigalCo for$40 million.Thesegoods had cost SentinelCo $30 million.$12millionof the goodssoldremainedinProdigalCo's closinginventory. (iv) ProdigalCo's policyis to valuethe non-controllinginterestof SentinelCo at the date of acquisitionat its fairvaluewhichthe directorsdeterminedto be $100million. (v) Thegoodwillof SentinelCo has not sufferedany impairment. (vi) Allitemsinthe abovestatements of profitor lossand othercomprehensiveincomeare deemedto accrue evenlyoverthe year unlessotherwiseindicated. Required (a) Calculatethe goodwillon acquisitionof SentinelCo. (4 marks) (b) Preparethe consolidatedstatement of profitor lossand othercomprehensiveincomeof (16marks) ProdigalCo forthe year ended 31March20X1. (20 marks) 124 FinancialReporting(FR) Page 147 of 405 H G q 312 Plastik Co (Dec 2014 amended) 36 mins On1January20X4,Plastik Coacquired 80%oftheequitysharecapitalofSubtrak Co.The consideration wassatisfied bya shareexchange oftwoshares inPlastik Coforeverythree acquired shares inSubtrak Co.Atthedateofacquisition, shares inPlastik CoandSubtrak Co hada market valueof$3and$2.50eachrespectively. Plastik Cowillalsopaycashconsideration of27.5centson1January20X5foreachacquired shareinSubtrak Co.Plastik Cohasa costof capitalof10%perannum. Noneoftheconsideration hasbeenrecorded byPlastik Co. Below arethesummarised draftfinancial statements ofbothcompanies. STATEMENTS OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORTHEYEARENDED 30SEPTEMBER 20X4 Plastik Co Subtrak Co $'000 $'000 Revenue 62,600 30,000 Costofsales 45,800) (24,000) Grossprofit 16,800 6,000 Distribution costs (2,000) (1,200) Administrative expenses (3,500) (1,800) Finance costs (200) – Profitbefore tax 11,100 3,000 Income taxexpense 3,100) (1,000) Profitfortheyear 8,000 2,000 Othercomprehensive income: Gainonrevaluation ofproperty 1,500 – Totalcomprehensive income 9,500 2,000 STATEMENTS OFFINANCIAL POSITION ASAT30SEPTEMBER 20X4 Plastik Co $'000 ASSETS Non-current assets Property, plantandequipment 18,700 Current assets Inventories (note(ii)) 4,300 Tradereceivables 5,700 Cashandcashequivalents – 10,000 Totalassets 28,700 EQUITY ANDLIABILITIES Equity Equityshares of$1each Revaluation surplus (note(i)) Retained earnings Non-current liabilities 10%loannotes(note(ii)) Current liabilities Tradepayables (note(iv)) Bank Current taxpayable Totalequityandliabilities Q U E T IO N S S H Subtrak Co $'000 13,900 1,200 2,500 300 4,000 17,900 10,000 2,000 6,300 18,300 9,000 – 3,500 12,500 2,500 1,000 3,400 1,700 2,800 7,900 28,700 3,600 – 800 4,400 17,900 Questions125 Page 148 of 405 Powered By Ù G q Thefollowinginformationis relevant: (i) Atthe date of acquisition,the fairvaluesof SubtrakCo's assets and liabilitieswereequal to theircarryingamountswiththe exceptionof SubtrakCo's propertywhichhad a fairvalue of $4 millionaboveits carryingamount.Forconsolidationpurposes,thisledto an increase indepreciationcharges (incost of sales)of $100,000inthe post-acquisitionperiodto 30 September20X4.SubtrakCo has not incorporatedthe fairvaluepropertyincreaseintoits entityfinancialstatements. Thepolicyofthe PlastikCo groupisto revalueallpropertiesto fairvalueat each year end. On 30 September20X4,the increaseinPlastikCo's propertyhas alreadybeen recorded, however,a furtherincreaseof$600,000inthe valueofSubtrakCo's propertysinceitsvalue at acquisitionand 30 September20X4has not been recorded. (ii) SalesfromPlastikCo to SubtrakCo throughoutthe year ended 30 September20X4had consistentlybeen $300,000 per month.PlastikCo made a mark-upon cost of 25%on all these sales.$600,000 (at cost to SubtrakCo)of SubtrakCo's inventoryat 30 September 20X4had been suppliedby PlastikCo inthe post-acquisitionperiod. (iii) PlastikCo's policyis to valuethe non-controllinginterestat fairvalueat the date of acquisition.ForthispurposeSubtrakCo's share priceat that date can be deemedto be representativeof the fairvalueof the shares heldby the non-controllinginterest. (iv) Dueto recent adversepublicityconcerningone of SubtrakCo's majorproductlines,the goodwillwhicharose on the acquisitionof SubtrakCo has been impairedby $500,000 as at 30 September20X4.Goodwillimpairmentshouldbe treated as an administrative expense. (v) Assume,exceptwhereindicatedotherwise,that allitemsof incomeand expenditureaccrue evenlythroughoutthe year. Required (a) Calculatethe goodwillarisingon the acquisitionof SubtrakCo on 1January 20X4. (4 marks) (b) Calculatethe followingamountsforpresentationinthe consolidatedstatement of financial position: (i) (ii) (c) Groupretainedearnings Non-controllinginterest (6 marks) Preparethe consolidatedstatement of profitor lossand other comprehensiveincomefor PlastikCo forthe year ended 30 September20X4. (10marks) (20 marks) 313 Laurel Co 36 mins LaurelCo acquired80%of the ordinaryshare capital of HardyCo for$160millionand 40%of the ordinaryshare capital of ComicCo for$70millionon 1January 20X7whenthe retainedearnings balances were$64 millioninHardyCo and $24 millioninComicCo. LaurelCo, ComicCo and HardyCo are publiclimitedcompanies. Thestatements of financialpositionof the three companiesat 31December20X9are set out below: Non-currentassets Property,plant and equipment Investments LaurelCo $m HardyCo $m 220 230 450 160 – 160 126 FinancialReporting(FR) Page 149 of 405 ComicCo $m 78 – 78 H q Currentassets Inventories Tradereceivables Cash at bank Equity Sharecapital – $1ordinaryshares Sharepremium Retainedearnings Currentliabilities Tradepayables LaurelCo $m HardyCo $m ComicCo $m 384 275 42 701 ,151 234 166 10 410 570 122 67 34 223 301 400 16 278 694 96 3 128 227 80 – 97 177 457 1,151 343 570 124 301 Q U E T IO N S S Youare also giventhe followinginformation: 1 2 3 G 4 On 30 November20X9,LaurelCo soldsomegoodsto HardyCo forcash for$32 million. Thesegoodshad originallycost $22 millionand nonehad been soldby the year end. On the same date LaurelCo also soldgoodsto ComicCo forcash for$22 million.Thesegoods originallycost $10millionand ComicCo had soldhalfby the year end. On 1January 20X7,HardyCo ownedsomeitemsof equipmentwitha carryingamountof $45 millionthat had a fairvalueof $57million.Theseassets wereoriginallypurchasedby HardyCo on 1January 20X5and are beingdepreciatedoversixyears. Grouppolicyis to measurenon-controllinginterestsat acquisitionat fairvalue.Thefair valueof the non-controllinginterestsinHardyCo on 1January 20X7was calculatedas $39million. Cumulativeimpairmentlosseson recognisedgoodwillamountedto $15millionat 31December20X9.Noimpairmentlosseshave been necessaryto date relatingto the investmentinthe associate. H Required Preparea consolidatedstatement of financialpositionforLaurelCo and its subsidiaryas at 31December20X9,incorporatingits associate inaccordance withIAS28 Investmentsin Associates. (20 marks) Questions 127 Page 150 of 405 Powered By Ù G q 314 Tyson Co 36 mins Below arethestatements ofprofitorlossandothercomprehensive income ofTysonCo,its subsidiary Douglas Coandassociate FrankCoat31December 20X8.TysonCo,Douglas Coand FrankCoarepubliclimited companies. Revenue Costofsales Grossprofit Otherexpenses Finance income Finance costs Profitbefore tax Income taxexpense PROFIT FORTHEYEAR Othercomprehensive income: Gainsonproperty revaluation, netoftax TOTALCOMPREHENSIVE INCOME FORTHEYEAR TysonCo Douglas Co $m $m 500 150 (270) (80) 230 70 (150) (20) 15 10 (20) – 75 60 (25) (15) 50 45 20 70 10 55 FrankCo $m 70 30) 40 15) – (10) 15 (5) 0 5 5 Youarealsogiventhefollowing information: 1 TysonCoacquired 80million shares inDouglas Cofor$188million threeyearsagowhen Douglas Cohada creditbalance onitsreserves of$40million. Douglas Cohas100million $1ordinary shares. 2 TysonCoacquired 40million shares inFrankCofor$60million twoyearsagowhenthat company hada creditbalance onitsreserves of$20million. FrankCohas100million $1 ordinary shares. 3 During theyearDouglas CosoldsomegoodstoTysonCofor$66million (cost$48million). Noneofthegoodshadbeensoldbytheyearend. 4 Grouppolicyistomeasure non-controlling interests atacquisition atfairvalue.Thefair valueofthenon-controlling interests inDouglas Coatacquisition was$40million. An impairment testcarried outattheyearendresulted in$15million oftherecognised goodwill relating toDouglas Cobeingwritten offandrecognition ofimpairment losses of $2.4million relating totheinvestment inFrankCo. Required Prepare theconsolidated statement ofprofitorlossandothercomprehensive income fortheyear (20marks) ended 31December 20X8forTysonCo,incorporating itsassociate. 315 Paladin Co (Dec 2011 amended) 36 mins On1October 20X0,Paladin Cosecured a majority equityshareholding inSaracen Coonthe following terms. Animmediate payment of$4pershareon1October 20X0;anda further amount deferred until 1October 20X1of$5.4million. Theimmediate payment hasbeenrecorded inPaladin Co'sfinancial statements, butthedeferred payment hasnotbeenrecorded. Paladin Co'scostofcapitalis8%perannum, givingthe deferred payment a current costat1October 20X0of$5million. On1February 20X1,Paladin Coalsoacquired 25%oftheequityshares ofAugusta Copaying $10million incash. 128 Financial Reporting (FR) Page 151 of 405 H G q Thesummarised statements offinancial position ofthethreecompanies at30September 20X1 are: Paladin Co Saracen Co Augusta Co Assets $'000 $'000 $'000 Non-current assets Property, plantandequipment 40,000 31,000 30,000 Intangible assets 7,500 Investments – Saracen Co(8million shares at$4each) 32,000 – Augusta Co 10,000 – – 89,500 31,000 30,000 Current assets Inventories 11,200 8,400 10,000 Tradereceivables 7,400 5,300 5,000 Cashandcashequivalents 3,400 – 2,000 Totalassets 111,500 44,700 47,000 Equityandliabilities Equity Equityshares of$1each Retained earnings – at1October 20X0 – foryearended 30September 20X1 Non-current liabilities Deferred tax Current liabilities Bank Tradepayables Totalequityandliabilities Paladin Co $'000 Saracen Co $'000 Augusta Co $'000 50,000 25,700 9,200 84,900 10,000 12,000 6,000 28,000 10,000 31,800 1,200 43,000 15,000 8,000 1,000 – 11,600 111,500 2,500 6,200 44,700 – 3,000 47,000 Q U E T IO N S S H Thefollowing information isrelevant: (i) Paladin Co'spolicyistovaluethenon-controlling interest atfairvalueatthedateof acquisition. Thedirectors ofPaladin Coconsidered thefairvalueofthenon-controlling interest inSaracen Cotobe$7million. (ii) Atthedateofacquisition, thefairvalues ofSaracen Co'sproperty, plantandequipment wasequaltoitscarrying amount withtheexception ofSaracen Co'splantwhichhada fair valueof$4million aboveitscarrying amount. Atthatdatetheplanthada remaining lifeof fouryears.Saracen Cousesstraight-line depreciation forplantassuming a nilresidual value. Alsoatthedateofacquisition, Paladin Covalued Saracen Co'scustomer relationships asa customer baseintangible assetatfairvalueof$3million. Saracen Cohasnotaccounted forthisasset.Trading relationships withSaracen Co'scustomers lastonaverage forsix years. (iii) At30September 20X1,Saracen Co'sinventory included goodsbought fromPaladin Co (atcosttoSaracen Co)of$2.6million. Paladin Cohadmarked upthesegoodsby30%on cost.Paladin Co'sagreed current account balance owedbySaracen Coat30September 20X1was$1.3million. (iv) Impairment testswerecarried outon30September 20X1whichconcluded that consolidated goodwill wasnotimpaired, but,duetodisappointing earnings, thevalueof theinvestment inAugusta Cowasimpaired by$2.5million. (v) Assume allprofits accrueevenly through theyear. Required Prepare theconsolidated statement offinancial position forPaladin Coasat30September 20X1. (20marks) Questions129 Page 152 of 405 Powered By Ù G q 316 Dargent Co (Mar/Jun 2017) 36 mins On1January20X6,Dargent Co acquired 75%ofLatreeCo'sequityshares bymeans ofa shareexchange oftwoshares inDargent Co foreverythreeLatreeCo shares acquired. Onthat date,further consideration wasalsoissued totheshareholders ofLatreeCo intheformof$100 8%loannotesforevery100sharesacquired inLatreeCo.Noneofthepurchase consideration, northeoutstanding interest ontheloannotesat31March20X6,hasyetbeenrecorded by Dargent Co.Atthedateofacquisition, thesharepriceofDargent CoandLatree Cois$3·20 and$1·80respectively. Thesummarised statements offinancial position ofthetwocompanies asat31March20X6are: Dargent Co Latree Co $'000 $'000 Assets Non-current assets Property, plantandequipment (note(i)) 75,200 31,500 Investment inAmery Coat1April20X5(note(iv)) 4,500 – 79,700 31,500 Current assets Inventory (note(iii)) 19,400 18,800 Tradereceivables (note(iii)) 14,700 12,500 Bank 1,200 600 35,300 31,900 Totalassets 115,000 63,400 Equityandliabilities Equity Equityshares of$1each Retained earnings – at1April20X5 – foryearended 31March20X6 Non-current liabilities 8%loannotes Current liabilities (note(iii)) Totalequityandliabilities 50,000 20,000 16,000 86,000 20,000 19,000 8,000 47,000 5,000 24,000 29,000 115,000 – 6,400 16,400 63,400 Thefollowing information isrelevant: (i) Atthedateofacquisition, thefairvaluesofLatreeCo'sassetswereequaltotheir carrying amounts. However, Latree Cooperates a minewhich requires tobe decommissioned infiveyears'time.Noprovision hasbeenmadeforthesedecommissioning costsbyLatree Co.Thepresent value(discounted at8%)ofthedecommissioning is estimated at$4million andwillbepaidfiveyearsfromthedateofacquisition (theendof themine's life). (ii) Dargent Co'spolicyistovaluethenon-controlling interest atfairvalueatthedateof acquisition. Latree Co'ssharepriceatthatdatecanbedeemed toberepresentative of thefairvalueoftheshares heldbythenon-controlling interest. (iii) Theinventory ofLatreeCoincludes goodsbought fromDargent Cofor$2.1million. Dargent Coapplies a consistent mark-up oncostof40%whenarriving atitsselling prices. On28March20X6,Dargent Co despatched goodstoLatreeCo witha selling priceof $700,000.Thesewerenotreceived by LatreeCo untilaftertheyearendandsohave notbeenincluded intheaboveinventory at31March20X6. 130 Financial Reporting (FR) Page 153 of 405 H G q At31March20X6,DargentCo's recordsshoweda receivabledue fromLatreeCo of $3million,this differedto the equivalentpayable in LatreeCo's recordsdue to the goods in transit. Theintra-groupreconciliationshouldbe achievedby assumingthat LatreeCo had receivedthe goods in transit beforethe year end. (iv) Theinvestmentin AmeryCo represents30%of its votingshare capital and DargentCo uses equityaccountingto account for this investment.AmeryCo's profitfor the year ended 31March20X6was $6 millionand AmeryCo paid total dividendsduringthe year ended 31March20X6of $2 million.Dargent Co has recordedits share of the dividend receivedfromAmeryCo in investmentincome(and cash). (v) Allprofitsand lossesaccrued evenlythroughoutthe year. (vi) Therewereno impairmentlosseswithinthe group for the year ended 31March20X6. Required Preparethe consolidatedstatement of financialpositionfor DargentCo as at 31March20X6. (20 marks) 317 Party Co (Sep/Dec 2017) Q U E T IO N S S 36 mins Thefollowingare the draft statements of financialpositionof PartyCo and StreamerCo as at 30 September20X5: Party Co StreamerCo $'000 $'000 ASSETS Non-currentassets Property,plant and equipment 392,000 84,000 Investments 120,000 – 512,000 84,000 Currentassets 94,700 44,650 Totalassets 606,700 128,650 EQUITY ANDLIABILITIES Equity Equityshares Retainedearnings Revaluationsurplus Non-currentliabilities Deferredconsideration Currentliabilities Totalequityand liabilities Thefollowinginformationis relevant: 190,000 210,000 41,400 441,400 60,000 36,500 4,000 100,500 28,000 137,300 606,700 – 28,150 28,650 (i) On 1October20X4,PartyCo acquired80%ofthe share capitalofStreamerCo.Atthisdate the retainedearningsof StreamerCo were$34 millionand the revaluationsurplusstood at $4 million.Party Co paid an initialcash amount of $92millionand agreed to pay the ownersof StreamerCo a further $28 millionon 1October 20X6.Theaccountant has recordedthe fullamountsof both elementsof the considerationin investments.Party Co has a cost of capital of 8%.Theappropriatediscountrate is 0.857. (ii) On 1October 20X4,the fair valuesof StreamerCo's net assets wereequal to their carrying amounts withthe exceptionof someinventorywhichhad cost $3 millionbut had a fairvalueof $3.6million.On 30 September20X5,10%of these goodsremainedinthe inventoriesof StreamerCo. H Questions 131 Page 154 of 405 Powered By Ù G q (iii) Duringthe year,PartyCosoldgoodstotalling$8 millionto StreamerCoat a grossprofit marginof25%.At30 September20X5,StreamerCo stillheld$1millionofthese goodsin inventory.PartyCo's normalmargin(tothirdparty customers)is 45%. (iv) ThePartygroupuses the fairvaluemethodto valuethe non-controllinginterest.At acquisitionthe non-controllinginterestwas valuedat $15million. Required (a) Preparethe consolidatedstatement of financialpositionof the Party groupas at 30 September20X5. (15marks) (b) Party Co has a strategy of buyingstrugglingbusinesses,reversingtheirdeclineand then sellingthemon at a profitwithina shortperiodof time.Party Co is hopingto do thiswith StreamerCo. Asan adviserto a prospectivepurchaserofStreamerCo,explainany concernsyouwould raiseabout makingan investmentdecisionbased on the informationavailableinthe Party Group'sconsolidatedfinancialstatements incomparisonto that availableinthe individual (5 marks) financialstatementsof StreamerCo. (20 marks) 318 Fresco Co (Jun 2012 amended) 36 mins Thefollowingtrialbalance relatesto FrescoCo at 31March20X2: $'000 Equityshares of 50 cents each (note(i)) Sharepremium(note(i)) Retainedearningsat 1April20X1 Right-of-useasset - freeholdproperty (12years)at cost (note (ii))) Plantand equipment– at cost (note(ii)) Accumulatedamortisationof leased propertyat 1April20X1 Accumulateddepreciationof plant and equipmentat 1April20X1 Inventoriesat 31March20X2 Tradereceivables(note(iii)) Cash and cash equivalents Deferredtax (note(iv)) Tradepayables Revenue Cost of sales Leasepayments(note(ii)) Distributioncosts Administrative expenses Bankinterest Currenttax (note(iv)) Suspenseaccount (note(i)) $'000 45,000 5,000 5,100 48,000 H 47,500 16,000 33,500 25,200 28,500 1,400 3,200 27,300 350,000 298,700 8,000 16,100 26,900 300 800 500,000 13,500 500,000 Thefollowingnotes are relevant: (i) Thesuspenseaccount representsthe correspondingcreditforcash receivedfora fully subscribedrightsissueof equityshares made on 1January 20X2.Thetermsof the share issuewereone newshare foreveryfiveheldat a priceof 75 cents each. Thepriceof the company'sequityshares immediatelybeforethe issuewas $1.20each. 132 FinancialReporting(FR) Page 155 of 405 G q (ii) Non-current assets: FrescoCodecided torevalue itsfreehold property on1April20X1.Thedirectors accepted thereport ofanindependent surveyor whovalued thefreehold property at$36million on thatdate.FrescoCohasnotyetrecorded therevaluation. Theremaining lifeofthe freehold property iseightyearsatthedateoftherevaluation. FrescoComakes anannual transfer toretained profits toreflect therealisation oftherevaluation surplus. InFresco Co'staxjurisdiction therevaluation doesnotgiverisetoa deferred taxliability. On1April20X1,Fresco Coacquired therighttouseanitemofplantunder anagreement that meets thedefinition ofa leaseunder IFRS16Leases. Therateofinterest implicit inthelease agreement is10%perannum. Theleasepayments inthetrialbalance represent aninitial deposit of$2million paidon1April20X1andthefirstannual rental of$6million paidon31 March 20X2.Theleaseagreement requires fourfurther annual payments of$6million on31 March eachyear,starting 31March 20X3.Thepresent valueofthefuture leasepayments on inception oftheleaseis$23million. Theuseful lifeoftheplantis6years. Plantandequipment (other thantheleased plant)isdepreciated at20%perannum using thereducing balance method. Nodepreciation/amortisation hasyetbeencharged onanynon-current assetfortheyear ended 31March20X2.Depreciation andamortisation arecharged tocostofsales. (iii) InMarch20X2,FrescoCo'sinternal auditdepartment discovered a fraudcommitted bythe company's creditcontroller whodidnotreturn froma foreign business trip.Theoutcome of thefraudisthat$4million ofthecompany's tradereceivables havebeenstolen bythe creditcontroller andarenotrecoverable. Ofthisamount, $1million relates totheyear ended 31March20X1andtheremainder tothecurrent year.FrescoCoisnotinsured against thisfraud. (iv) FrescoCo'sincome taxcalculation fortheyearended 31March20X2shows a taxrefund of$2.4million. Thebalance oncurrent taxinthetrialbalance represents theunder/over provision ofthetaxliability fortheyearended 31March20X1.At31March20X2,FrescoCo hadtaxable temporary differences of$12million (requiring a deferred taxliability). The income taxrateofFrescoCois25%. Required (a) Prepare thestatement ofprofitorlossandothercomprehensive income forFrescoCofor theyearended 31March20X2. (8 marks) (b) Prepare thestatement offinancial position ofFrescoCoasat31March20X2. (12marks) (20marks) 319 Dexon plc Q U E T IO N S S H 36 mins Below isthesummarised draftstatement offinancial position ofDexon plc,a publicly listed company, asat31March20X8. ASSETS Non-current assets Property atvaluation (land$20m;buildings $165m (note(i)) Plant(note(i)) Investments (note(ii)) Current assets Inventories Tradereceivables (note(iii)) Cashandcashequivalents Totalassets $'000 $'000 185,000 180,500 12,500 378,000 84,000 52,200 3,800 140,000 518,000 Questions133 Page 156 of 405 Powered By Ù G q EQUITY ANDLIABILITIES Equity Ordinary shares of$1each Sharepremium Revaluation surplus Retained earnings – At1April20X7 – Fortheyearended 31March20X8 Non-current liabilities Deferred tax– at1April20X7(note(iv)) Current liabilities Totalequityandliabilities Thefollowing information isrelevant: (i) $'000 12,300 96,700 $'000 250,000 40,000 18,000 109,000 417,000 9,200 81,800 518,000 Thenon-current assetshavenotbeendepreciated fortheyearended 31March20X8. Dexon plchasa policyofrevaluing itslandandbuildings attheendofeachaccounting year.Thevalues intheabovestatement offinancial position areasat1April20X7whenthe buildings hada remaining lifeof15years.Aqualified surveyor hasvalued thelandand buildings at31March20X8at$180million. Plantisdepreciated at20%onthereducing balance basis. (ii) Theinvestment isa fundwhose valuechanges directly inproportion toa specified market index. Theinvestment ismeasure atfinancial assetsatfairvaluethrough profitandlossare held.At1April20X7therelevant indexwas1,200andat31March20X8itwas1,296. (iii) InlateMarch20X8,thedirectors ofDexon plcdiscovered a material fraudperpetrated by thecompany's creditcontroller thathadbeencontinuing forsometime.Investigations revealed thata totalof$4million ofthetradereceivables asshown inthestatement of financial position at31March20X8hadinfactbeenpaidandthemoney hadbeenstolen bythecreditcontroller. Ananalysis revealed that$1.5million hadbeenstolen intheyearto 31March20X7withtherestbeingstolen inthecurrent year.Dexon plcisnotinsured for thislossanditcannot berecovered fromthecreditcontroller, norisitdeductible fortax purposes. (iv) During theyear,thecompany's taxable temporary differences increased by$10million of which$6million related totherevaluation oftheproperty. Thedeferred taxrelating tothe remainder oftheincrease inthetemporary differences should betakentoprofitorloss.The applicable income taxrateis20%. (v) Theabovefigures donotinclude theestimated provision forincome taxontheprofitforthe yearended 31March20X8.Afterallowing foranyadjustments required initems (i)to(iii), thedirectors haveestimated theprovision at$11.4 million (thisisinaddition tothedeferred taxeffects ofitem(iv)). (vi) Dividends totalling $15.5million werepaidduring theyear. Required Taking intoaccount anyadjustments required byitems (i)to(vi)above: (a) (b) Prepare a statement showing therecalculation ofDexon plc'sprofitfortheyearended 31March20X8. (8 marks) Redraft thestatement offinancial position ofDexon plcasat31March20X8. (12marks) Notes tothefinancial statements arenotrequired. (20marks) 134 Financial Reporting (FR) Page 157 of 405 H G q 320 Xtol Co (Jun 2014 amended) 36 mins Thefollowing trialbalance relates toXtolCoat31March20X4: Revenue Costofsales Distribution costs Administrative expenses Loannoteinterest anddividends paid(notes(iv) and(v)) Bankinterest Freehold property atcost Plantandequipment atcost(note(ii)) Accumulated amortisation/depreciation at1April20X3: Right-of-use asset Plantandequipment Inventories at31March20X4 Tradereceivables Tradepayables Bank Equityshares of25centseach(note(iii)) Sharepremium Retained earnings at1April20X3 5%convertible loannote(note(iv)) Current tax(note(vi)) Deferred tax(note(vi)) $'000 290,600 33,500 36,800 13,380 900 100,000 155,500 61,000 63,000 3,200 757,880 $'000 490,000 Q U E T IO N S S 25,000 43,500 32,200 5,500 56,000 25,000 26,080 50,000 4,600 757,880 Thefollowing notesarerelevant: (i) Revenue includes anamount of$20million forcashsalesmadethrough XtolCo'sretail outlets during theyearonbehalfofFrancais. XtolCo,actingasagent,isentitled toa commission of10%oftheselling priceofthesegoods.By31March20X4,XtolCohad remitted toFrancais $15million (ofthe$20million sales)andrecorded thisamount incost ofsales. (ii) Plantandequipment isdepreciated at12½% perannum onthereducing balance basis.All amortisation anddepreciation ofnon-current assetsischarged tocostofsales.Freehold property isdepreciated over20years. (iii) On1August 20X3,XtolComadea fullysubscribed rightsissueofequitysharecapital basedontwonewshares at60centseachforeveryfiveshares held.Theissuehasbeen fullyrecorded inthetrialbalance figures. (iv) On1April20X3,XtolCoissued a 5%$50million convertible loannoteatpar.Interest is payable annually inarrears on31Marcheachyear.Theloannoteisredeemable atparor convertible intoequityshares attheoption oftheloannoteholders on31March20X6.The interest onanequivalent loannotewithout theconversion rightswould be8%perannum. Thepresent values of$1receivable attheendofeachyear,basedondiscount ratesof5%and 8%,are: 5% 8% Endofyear 1 0.95 0.93 2 0.91 0.86 3 0.86 0.79 (v) Anequitydividend of4 centspersharewaspaidon30May20X3and,aftertherights issue,a further dividend of2 centspersharewaspaidon30November 20X3. (vi) Thebalance oncurrent taxrepresents theunder/over provision ofthetaxliability forthe yearended 31March20X3.A provision of$28million isrequired forcurrent taxfortheyear ended 31March20X4andatthisdatethedeferred taxliability wasassessed at $8.3million. H Questions135 Page 158 of 405 Powered By Ù G q Required (a) Prepare thestatement ofprofitorlossforXtolCofortheyearended 31March20X4. (8 marks) (b) Prepare thestatement offinancial position forXtolCofortheyearended 31March20X4. (12marks) (20marks) 321 Atlas Co 36 mins Thefollowing trialbalance relates toAtlasCoat31March 20X3. Equityshares of50centseach Sharepremium Retained earnings at1April20X2 Landandbuildings – atcost(land$10million) (note(i)) Plantandequipment – atcost(note(i)) Accumulated depreciation at1April20X2:– buildings – plantandequipment Inventories at31March20X3 Tradereceivables Bank Deferred tax(note(ii)) Tradepayables Revenue Costofsales Distribution costs Administrative expenses Dividends paid Bankinterest Current tax(note(ii)) $'000 60,000 94,500 43,700 42,200 411,500 21,500 30,900 20,000 700 725,000 $'000 50,000 20,000 11,200 20,000 24,500 6,800 6,200 35,100 550,000 H 1,200 725,000 Thefollowing notesarerelevant: (i) Non-current assets: On1April20X2,thedirectors ofAtlasCodecided thatthefinancial statements would show animproved position ifthelandandbuildings wererevalued tomarket value.Atthatdate, anindependent valuer valued thelandat$12million andthebuildings at$35million and thesevaluations wereaccepted bythedirectors. Theremaining lifeofthebuildings atthat datewas14years.AtlasCodoesnotmakea transfer toretained earnings forexcess depreciation. Ignore deferred taxontherevaluation surplus. Plantandequipment isdepreciated at20%perannum usingthereducing balance method andtimeapportioned asappropriate. Alldepreciation ischarged tocostofsales,butnone hasyetbeencharged onanynon-current assetfortheyearended 31March20X3. (ii) AtlasCoestimates thatanincome taxprovision of$27.2million isrequired fortheyear ended 31March20X3andatthatdatetheliability todeferred taxis$9.4million. The movement ondeferred taxshould betakentoprofitorloss.Thebalance oncurrent taxin thetrialbalance represents theunder/over provision ofthetaxliability fortheyearended 31March20X2. Required (a) Prepare thestatement ofprofitorlossandothercomprehensive income forAtlasCo fortheyearended 31March20X3. (8 marks) (b) Prepare thestatement offinancial position ofAtlasCoasat31March20X3. (10marks) (c) Calculate basicearnings persharefortheyearended 31March20X3. (2 marks) 20 marks) 136 Financial Reporting (FR) Page 159 of 405 G q 322 Moby Co (Dec 2013 amended) 36 mins Thefollowingtrialbalance relatesto MobyCo as at 30 September20X3. $'000 $'000 Revenue 227,800 Cost of sales 64,500 Distributioncosts 13,500 Administrative expenses 6,500 Bankinterest 900 Dividend 2,000 Leaserentalpaid on 30 September20X3(note(ii)) 9,200 Land($12million)and building($48million)at cost (note(ii)) 60,000 Ownedplant and equipmentat cost (note(ii)) 65,700 Right-of-useasset – leased plant at initialcarryingamount 35,000 (note(ii)) Accumulateddepreciationat 1October20X2: Building 10,000 Ownedplant and equipment 17,700 Leasedplant 7,000 Inventoriesat 30 September20X3 26,600 Tradereceivables 38,500 Balanceon contract (note(i)) 4,000 Bank 5,300 Insuranceprovision(note(iii)) 150 Deferredtax (note(iv)) 8,000 Leaseliabilityat 1October20X2(note(ii)) 29,300 Tradepayables 21,300 Currenttax (note(iv)) 1,050 Equityshares of 20 cents each 45,800 Sharepremium 3,200 Loannote (note(v)) 40,000 Retainedearningsat 1October20X2 – 19,800 436,400 436,400 Thefollowingnotes are relevant: (i) Thebalance on the long-termcontract is made up of the followingitems. Cost incurredto date $8 million Valueof invoicesissued(workcertified) $10million Thecontract commencedon 1October20X2and is fora fixedpriceof $25 million. Performanceobligationsare satisfiedovertime.MobyCo'spolicyisto recognise satisfactionof performanceobligationson such contracts based on a stage of completion givenby the workcertifiedas a percentage of the contract price. Mobyhas invoicedwork to the valueof $4 millioninthe year and has not yet receivedany paymentsfromthe customer. (ii) Non-currentassets: MobyCo decidedto revalueits land and buildingsforthe firsttimeon 1October20X2.A qualifiedvaluerdeterminedthe relevantrevaluedamountsto be $16millionforthe land and $38.4millionforthe building.Thebuilding'sremaininglifeat the date of the revaluationwas 16years. Thisrevaluationhas not yet been reflectedinthe trialbalance figures.MobyCo does not makea transferfromthe revaluationsurplusto retained earningsinrespect of the realisationof the revaluationsurplus.Deferredtax is applicable to the revaluationsurplusat 25%. Theright-of-useasset relatesto leased plant was acquiredon 1October20X1undera five-yearagreementwhichmeetsthe definitionof a lease underIFRS16Leases.The carryingamountof the leased plant inthe trialbalance is equal to the presentvalueof the futurelease paymentsat the lease inceptiondate. Therentalsare $9.2millionper annum payable on 30 Septembereach year. Therate of interestimplicitinthe lease is 10%per annum.Theusefullifeof the leased plant was 7 years. Q U E T IO N S S H Questions 137 Page 160 of 405 Powered By Ù q Ownedplant and equipmentisdepreciatedat 12.5%per annumusingthe reducing balance method. Nodepreciationhas yet been charged on any non-currentasset forthe year ended 30 September20X3.Alldepreciationischarged to cost of sales. (iii) On 1October20X2,MobyCo receiveda renewalquote of $400,000 fromthe company's propertyinsurer.Thedirectorsweresurprisedat howmuchit had increasedand believedit wouldbe lessexpensiveforthe companyto 'self-insure'.Accordingly,they charged $400,000 to administrativeexpensesand creditedthe same amountto the insurance provision.Duringthe year, the companyincurred$250,000 of expensesrelatingto previouslyinsuredpropertydamage whichit has debitedto the provision. (iv) Aprovisionforincometax forthe year ended 30 September20X3of $3.4millionis required.Thebalance on currenttax representsthe under/overprovisionof the tax liability forthe year ended 30 September20X2.At30 September20X3the tax base of MobyCo's net assets was $24 millionlessthan theircarryingamounts.Thisdoes not includethe effect of the revaluationinnote 2 above.Theincometax rate of MobyCo is 25%. (v) The$40 millionloannote was issuedat par on 1October20X2.Nointerestwillbe paid on the loan;howeverit willbe redeemedon 30 September20X5for$53,240,000,whichgives an effectivefinancecost of 10%per annum. (vi) Ashare issuewas made on 31December20X2of 4 millionshares for$1per share. Itwas correctlyaccounted for. Required (a) Preparethe statement of profitor lossand other comprehensiveincomeforMobyCo forthe year ended 30 September20X3. (13marks) (b) Preparethe statement of changes inequityforMobyCo forthe year ended 30 September20X3. (7 marks) (20 marks) G H 138 FinancialReporting(FR) Page 161 of 405 G q 323 Vernon Co Thefollowing extract isfromthetrialbalance ofVernon Coat31December 20X8: $'000 $'000 Costofsales 46,410 Finance costs 4,050 Investment income (note(iii)) 1,520 Operating expenses (note(iii)) 20,640 Revenue (notes (i)and(ii)) 75,350 Tax(notevi)) 130 Thefollowing notesarerelevant: (i) Vernon Comadealargesaleofgoodson1July20X8,which wasalsothedateofdelivery. Under theterms oftheagreement, Vernon Cowillreceive payment of$8mon30June 20X9.Currently, Vernon Cohasrecorded $4minrevenue andtradereceivables. The directors intend torecord theremaining $4mrevenue intheyearended 31December 20X9. Thecostsofthissalehavebeenaccounted forcorrectly inthefinancial statements forthe yearended 31December 20X8.Vernon Cohasa costofcapitalof8%atwhichan appropriate discount factorwould be0.9259. (ii) Q U E T IO N S S Vernon Coalsosoldgoodstoanoverseas customer on1December 20X8for12mKromits (Kr).Theyagreed a 60-daypayment term.Noentries haveyetbeenmadetorecord this sale,although thegoodswerecorrectly removed frominventory andexpensed incostof sales.Theamount remains unpaid at31December 20X8. Relevant exchange ratesare: 1December 20X8:6·4Kr/$ 31December 20X8:6·0Kr/$ (iii) Vernon Coacquired $9m5%bondsatparvalueon1January20X8.Theinterest is receivable on31December eachyear.Vernon Co incurred $0·4mbroker feeswhen acquiring thebonds,whichhasbeenexpensed tooperating expenses. These bondsare repayable ata premium sohaveaneffective rateof8%.Vernon Cohasrecorded the interest received on31December 20X8ininvestment income. (iv) During theyear,Vernon Corevalued itsheadofficeforthefirsttime,resulting inan increase invalueof$12m at31December 20X8.Deferred taxisapplicable tothisgainat 25%. (v) Vernon Covalues itsinvestment properties usingthefairvaluemodel. Theinvestment properties increased invalueby$4mat31December 20X8. H (vi) Thetaxfigureinthetrialbalancerepresents theunder/over provision fromtheprevious year.Thecurrent taxliability fortheyearended 31December 20X8isestimated tobe $3·2m. (vii) At1January20X8,Vernon Cohad30million $1equityshares inissue.On1April20X8, Vernon Coissued anadditional 5 million $1equityshares atfullmarket value.On1July 20X8,Vernon Coperformed a 2 for5 rightsissue,at$2·40pershare.Themarket valueofa Vernon Coshareat1July20X8was$3·10pershare. Required (a) Produce a statement ofprofitorlossandothercomprehensive income forVernon Co fortheyearended 31December 20X8. (15marks) (b) Calculate theearnings pershareforVernon Cofortheyearended 31December 20X8. (5 marks) (20marks) Questions139 Page 162 of 405 Powered By Ù G q 324 Dickson Co 36 mins Beloware the statements of financialpositionof DicksonCo as at 31March20X8and 31March 20X7,togetherwiththe statement of profitor lossand othercomprehensiveincomeforthe year ended 31March20X8. 20X8 20X7 $'000 $'000 Non-currentassets Property,plant and equipment 799 657 Right-of-useasset 126 80 Developmentexpenditure 290 160 1,215 897 Currentassets Inventories 360 227 Tradereceivables 274 324 Investments 143 46 Cash and cash equivalents 29 117 806 714 Totalassets 2,021 1,611 Equity Sharecapital – $1ordinaryshares Sharepremium Revaluationsurplus Retainedearnings Non-currentliabilities 6%debentures Leaseliabilities Deferredtax Currentliabilities Tradepayables Leaseliabilities Currenttax Debentureinterest Bankoverdraft Totalequityand liabilities $'000 500 350 160 229 1,239 $'000 400 100 60 255 815 150 100 48 298 100 80 45 225 274 17 56 5 132 484 2,021 352 12 153 – 54 571 1,611 STATEMENT OFPROFIT ORLOSSANDOTHER COMPREHENSIVE INCOME Revenue Cost of sales Grossprofit Otherexpenses Financecosts Profitbeforetax Incometax expense Profitforthe year Othercomprehensiveincome: Gain on revaluationof property, plant and equipment Totalcomprehensiveincomeforthe year 140 FinancialReporting(FR) Page 163 of 405 $'000 1,476 (962) 514 (157) (15) 342 (162) 180 100 280 H G q Notes 1 During 20X8,amortisation of$60,000wascharged ondevelopment projects. 2 3 4 5 During 20X8,items ofproperty, plantandequipment witha carrying amount of$103,000 weresoldfor$110,000. Profitonsaleoftheseitems wasnetted offagainst 'other expenses'. Depreciation charged intheyearonproperty, plantandequipment totalled $47,000. Dickson Coacquired a newright-of-use assetwhichwasinitially measured equaltothe initial amount oftheleaseliability of$56,000.Depreciation onright-of-use assetshas beencorrectly calculated as$10,000fortheyear.Leasepayments aremadeinarrears on thelastdayofeachaccounting period. During theyearDickson Comadea 1for8 bonus issue,capitalising itsretained earnings, followed bya rightsissue. Thecurrent assetinvestments aregovernment bondsandmanagement hasdecided to classify themascashequivalents. Thenewdebentures wereissued on1April20X7.Finance costincludes debenture interest andleasefinance charges only. Q U E T IO N S S 6 Dickson Cohasa netcashgenerated fromoperating activities of$40,000. Required (a) Prepare anextract fromthestatement ofcashflowsforDickson Coshowing thenetcash generated byorusedfrombothinvesting activities andfinancing activities. (10marks) (b) Explain totheboardofdirectors ofDickson Cowhatinformation isincluded inthe statement ofcashflowsthatcannot beobtained fromreviewing theotherprimary financial (3 marks) statements. (c) Discuss Dickson Co'sperformance fortheyearwithreference totheprofitfortheyearand theextract fromthestatement ofcashflowsprepared in(a) (7marks) (20marks) H Questions141 Page 164 of 405 Powered By Ù q 325 Haverford Co (Mar/Jun 2018) 36 mins Below isthetrialbalance forHaverford Coat31December 20X7: Property – carrying amount 1January20X7(note(iv)) Ordinary shares $1at1January20X7(note(iii)) Othercomponents ofequity(Sharepremium) at 1January20X7(note(iii)) Revaluation surplus at1January20X7(note(iv)) Retained earnings at1January20X7 Draftprofitfortheyearended 31December 20X7 4%Convertible loannotes(note(i)) Dividends paid Cashreceived fromcontract customer (note(ii)) Costincurred oncontract todate(note(ii)) Inventories (note(v)) Trade receivables Cash Current liabilities $'000 18,000 3,620 1,900 4,310 5,510 10,320 43,660 $'000 20,000 3,000 800 6,270 2,250 8,000 1,400 1,940 43,660 Thefollowing notesarerelevant: (i) On1January20X7,Haverford Co issued80,000$1004%convertible loannotes.The loannotescanbeconverted toequityshareson31December 20X9orredeemed at par onthesamedate.Anequivalent loanwithout theconversion rightswouldhaverequired interest of 6%.Interest is payableannually inarrears on31December eachyear.The annual payment hasbeenincluded infinance costsfortheyear.Thepresent valueof$1 receivable attheendofeachyear,basedondiscount ratesof4%and6%,are: G Endofyear1 Endofyear2 Endofyear3 (ii) 4% 0.962 0.925 0.889 6% 0.943 0.890 0.840 During theyear,Haverford Coentered intoacontract toconstruct anassetforacustomer. Control oftheassettransfers tothecustomer asitiscompleted andHaverford Codoesnot haveanalternative usefortheasset.Haverford Comeasures satisfaction ofperformance obligations overtimebywayofreference tocertified workcompleted. Thecontract hada totalpriceof$14million. Thecoststodateof$1.9million areincluded intheabovetrial balance. Coststocomplete thecontract areestimated at$7.1million. At31December 20X7,thecontract iswasindependently certified asbe40%complete. To date,Haverford Cohasinvoiced $1.4million tothecustomer andthisisshown intheabove trialbalance. (iii) Haverford Comadea 1for5 bonus issueon31December 20X7,whichhasnotyetbeen recorded intheabovetrialbalance. Haverford Cointends toutilise thesharepremium as faraspossible inrecording thebonus issue. (iv) Haverford Co'sproperty hadpreviously beenrevalued upwards, leadingtothe balanceontherevaluation surplusat 1January20X7.Theproperty hada remaining lifeof25yearsat 1January20X7. (v) At31December 20X7,theproperty wasvalued at$16million. Noentries haveyetbeenmadetoaccount forthecurrent year'sdepreciation chargeor theproperty valuation at31December 20X7.Haverford Co doesnotmakeanannual transfer fromtherevaluation surplus inrespect ofexcess depreciation. Ithasbeendiscovered thatinventory totalling $0.39million hadbeenomitted fromthe finalinventory countintheabovetrialbalance 142 Financial Reporting (FR) Page 165 of 405 H q Required (a) Calculate theadjusted profitforHaverford Cofortheyearended 31December 20X7 (6 marks) (b) Prepare thestatement ofchanges inequityforHaverford Cofortheyearended 31December 20X7 (6 marks) (c) Prepare thestatement offinancial position forHaverford Coasat31December 20X7 (8 marks) (20marks) Q U E T IO N S S G H Questions143 Page 166 of 405 Powered By Ù q G H 144 FinancialReporting(FR) Page 167 of 405 q Answers G H Page 168 of 405 Powered By Ù q G H 146 Financial Reporting (FR) Page 169 of 405 q Section A Conceptual framework 1 C Apresent economic resource controlled byanentityasa result ofpastevents. An economic resource isa rightthathasthepotential toproduce economic benefits (Conceptual Framework, para.4.3-4.4). 2 C 3 4 5 B A C Thisisa liability. Thelicence payment couldbeavoided byceasing manufacture. Thefallinvalueoftheinvestment isa losschargeable toprofitorloss. Planned expenditure doesnotconstitute anobligation. Theamount thatcouldbeobtained fromselling theasset,lessanycostsofdisposal. Theunderlying assumption isgoingconcern. Consistency 6 Consistency isanimportant partofthequalitative characteristic ofcomparability, butitisnotthesamething.Comparability offinancial statements isaidedbythe consistency ofpolicies andmethods used,either between companies within the sameindustry orwithin thesamecompany, between different years. Thecorrect answers are: Toassistpreparers todevelop consistent accounting policies whennoIFRSStandard applies toa particular event. Toassistindetermining thetreatment ofitems notcovered byanexisting IFRSStandard. G 7 8 Itisnottobeauthoritative where a specific IFRSStandard conflicts withtheConceptual Framework astheConceptual Framework willbeoverridden ifthereisa specific IFRS Standard. Whenever thereisa conflict between anIFRSStandard andtheConceptual Framework, theIFRSStandard takesprecedence. Norisittoissuerulesregarding the accounting treatment ofelements inthefinancial statements, astheConceptual Framework isa principles-based format, nota prescriptive, rules-based approach. C Asecret formula forthemanufacture ofa best-selling sauce.Therecipe iskept secure atthecompany premises andknown onlybythecompany directors. Areceivable froma customer whichhasbeensold(factored) toa finance company. Thefinance company hasfullrecourse tothecompany foranylosses. B A N S W E R H S Thereceivable hasbeenfactored withrecourse soshould continue toberecognised asanasset.Thecompany selling thereceivable stillretains control overthatdebt, notthefactoring company. Neither 1nor2 TheConceptual Framework statesthatpermitting alternative accounting treatments forthesameeconomic phenomenon diminishes comparability (para.2.29) anditalso statesthatcomparability doesnotequaluniformity (para.2.27). Answers147 Page 170 of 405 Powered By Ù q Regulatory 9 10 framework A Publicationof an ExposureDraft AnExposureDraftwillbe publishedfollowingthe reviewof DiscussionPaper comments. Thecorrectanswersare: Itwouldbe easierforinvestorsto comparethe financialstatements of companieswith those of foreigncompetitors. Cross-borderlistingwouldbe facilitated. AdoptingIFRSStandards improvesthe comparabilityof the financialstatements.Many territoriesnowhave eitheradopted or requirelistedcompaniesto adopt IFRSStandards, thismeans a moreconsistentapproach across the globallistingexchanges,intheory, meaningthat the companywillnot have to reportinlocalGAAPremovingone barrierto listingabroad ifthey are already adoptingIFRSStandards. Accountantsand auditorsmay have less defenceincase of litigationas they willnot be able to demonstratethat they followedsomepreciserule,but willinstead have to defend theirapplicationof judgement. One potentialdownsideof adoptingIFRSStandards is that they are standardisedand cannot be amendedeasilyto reflectlocalindustries.One way a countrycan do thisis by convergingtheirlocalnationalaccountingstandards withIFRSStandards, albeitwiththe abilityto makeamendmentsto reflectlocalindustries. 11 G 12 Arules-basedsystemwilltend to giveriseto a largernumberof IFRSStandards than a principles-basedsystem. Aprinciples-basedsystemrequiresthe exerciseof morejudgementinapplicationthan a rules-basedsystem. B Inthe earlystages of the project,the IASBwillconsultwiththe Advisory Committeeand IFRSAdvisoryCouncilto seekout the keyissues. 13 C 14 C TheAdvisoryCommitteeand IFRSAdvisoryCouncilwillreviewand decideupon the keyissuespriorto issuinga DiscussionPaper whichwillseekout publiccomments. AnExposureDraftwillpulltogetherthe keyresponsesfollowingthe publiccomments and seekout additionalclarificationpriorto any IFRSStandard beingissued. Itavoidsthe overstatementof profitwhichcan ariseduringperiodsof inflation Historicalcost accountingdoes not avoidthe overstatementof profitwhicharises duringperiodsof inflation,whichis whyalternativemodelshave been proposed. Reduceddividendsto shareholders Theotheroptionsare alllikelyconsequencesof overstatementof profits. Inthe case of C, what tends to happen whenprofitsare overstatedis that too much cash ispaid out individendsto shareholders,depletingfundsneeded forinvestment. 15 B $320,000 Historicalcost; $384,000currentcost Cost/valuation Depreciation((500,00090%)/5) 2 Depreciation((600,00090%)/5) 2 Carryingamount 16 A Historicalcost $'000 500 (180) 320 Currentcost $'000 600 (216) 384 Currentcost accounting Theconceptof 'physicalcapital maintenance'is appliedincurrentcost accounting. 148 FinancialReporting(FR) Page 171 of 405 H q 17 A Itassistsa user to assess the futureprospectsof the business Theothersare benefitsof historicalcost accounting. 18 B Presentvalueof futurecash flows,lesscosts of disposal Costs incurredat the timeof acquisitionis historicalcost. Open marketvalueof the asset is fairvalue.Open marketvaluelessthe presentvalueof the futurecash outflowsis not a measurementunderthe ConceptualFramework. A N S W E R G H S Answers 149 Page 172 of 405 Powered By Ù q Section B Lisbon Co case 19 C 20 A 21 C 22 C 23 D TheConceptualFrameworkrequiresinformationto be presentedina mannerthat is clear and understandable,but withoutomittingcomplexissues. Faithfulrepresentation.Thesubstance of the transactionis that a sale and leasebackhas taken place and the transactionshouldbe accounted foras such rather than a sale beingrecognised. Relevance.Thehistoricalcost of the propertieswillbe lessrelevantthan their currentvalue. Thefinancialstatements shouldbe prepared on a differentbasis. Thebasis of valuationof assets willbe affected. Thisis a change of accountingpolicyso the informationwillbe amended retrospectively.Assuch, the priorperiodfinancialstatements shouldbe restated. G H 150 FinancialReporting(FR) Page 173 of 405 q Section Tangible 24 A non-current B Land Materials Labour Architects fees Surveyors fees Siteoverheads Testing firealarms 25 assets A $'000 1,200 2,400 3,000 25 15 300 10 6,950 Answer option A includes everything uptosurveyor’s fees,butomits thesite overheads andtesting firealarmcosts. Answer option C includes allcostsincluding administrative overheads andbusiness rateswhichareincorrect. Answer option D wrongly includes theadministrative overheads. Weighted average capitalisation rate= (9%15/ 39)+(11% 24/ 39)=3.5%+6.8%=10.3% Borrowing costs= + $6m10.3%9/12 $2m10.3%5/12 G $ 463,500 85,833 549,333 Answer option B usesthe9%interest rateinstead ofcalculating theweight average costofborrowing Answer option C doesnotpro-rate for9months and5 months respectively A N S W E R H S Answer options Dusesa simple average of10%instead oftheweighted average 26 A Borrowing costsMarch– December ($2.4m8%10/ 12) Lessinvestment income ($1m6%4/12) 27 B $ 160,000 (20,000) 140,000 Transfers should onlybemadewhenthereisa changeinuseoftheproperty. (IAS 40,para57) Transfers fromaninvestment property toanIAS16property mustbemadeatthe fairvalueoftheinvestment property atthedateofthetransfer. (IAS40,para60) Anentityshould treatanydifference atthetransfer datefroma capitalised property (treated under IAS16)whentransferred toaninvestment property asa revaluation under IAS16.(IAS40,para61) Answers151 Page 174 of 405 Powered By Ù q 28 Thegain or lossarisingfroma change inthe fairvalueof an investmentpropertyshouldbe recognisedinprofitor lossnot the revaluationsurplus. Followinginitialrecognition,investment propertycan be heldat eithercost or fairvalue True Ifan investmentpropertyisheldat fairvalue, thismustbe appliedto allofthe entity's investmentproperty True Aninvestmentpropertyisinitiallymeasuredat cost, includingtransactioncosts True Again or lossarisingfroma change inthe fair valueof an investmentpropertyshouldbe recognisedinthe revaluationsurplus 29 D False $2,200,000 Weightedcapitalisationrate = (10%140/ 340)+(8%200 / 340)=4.1%+4.7%=8.8% $50 million8.8%6/ 12=$2.2million AnsweroptionAassumesthe cheaper 8%borrowingrate 30 AnsweroptionBassumesa simpleaverage of 9% AnsweroptionC does not pro-rate for6 months $37,250 Machine((500,000– 20,000) / 109/12) Safetyguard ((25,000/5)3 / 12) G 31 $'000 36,000 1,250 37,250 $4,765 Themachinehas beenownedfor2 years3 months,sothe remainingusefullifeat 31March20X9 was12years9 months. Priorto revaluationitwasbeingdepreciatedat $4,000pa (60,000/ 15),sothe chargeforthe firstthreemonthsof20X9was$1,000. Themachinewillnowbe depreciatedoverthe remaining12years9 months=153months.Sothe chargeforthe remaining9 monthsof20X9is$3,765((64,000/ 153)9). 32 Sototaldepreciationforthe yearended31.12.X9 is(1,000+3,765)=$4,765 $203,000 Priorto 30 June20X8,the buildingwasclassifiedas property,plantand equipmentand was accountedforunderIAS16.Whenthe buildingwasleased,therewasa changeinusageand it wastransferredto an investmentproperty,and soisaccountedforunderIAS40. IAS40 requiresthat assetsmustbe transferredacrossat the fairvalueofthe date oftransfer ($950,000inthe question).Thecreditwillgo to the revaluationsurplus. $ Cost 1.1.X0 900,000 Depreciationto 30.6.X8(900,000 8.5 / 50) (153,000) Carryingamount30.6.X8 747,000 Revaluationsurplus 203,000 Fairvalue30.6.X8 950,000 Theincreaseof($1,200,000– $950,000)=$250,000arisingbetween30.6.X8and 31.12.X8 will be creditedto profitorlossinaccordancewithIAS40. 152 FinancialReporting(FR) Page 175 of 405 H q Intangible 33 D 34 C non-current assets Inorderforcapitalisation tobeallowed itisnotnecessary fordevelopment tobe completed, patents toberegistered orsalescontracts signed. However, an intangible assetcanonlyberecognised ifitscostcanbereliably measured. Research costs Expensed development Jan–Mar (8003) Depreciation oncapitalised amount b/f(20m20%) $ 1,400,000 2,400,000 4,000,000 7,800,000 Answer option A includes depreciation onthedevelopment costscapitalised inthe current year.Notethatnodepreciation ischarged onthenewproject asitisstillin development. Answer option B includes depreciation onthedevelopment costscapitalised inthe current yearanddoesnotwriteofftheresearch costs. Answer option D doesnotinclude thedepreciation costs. 35 Acustomer listbuiltupoverthelasttenyearsof trading updated forthecustomer's current preferences G 36 neligible Specialised tooling fora newproduct developed by thebusiness Eligible Aworking version ofa newmachine thatusesnew technology usedfortesting oftheprototype apparatus Thetitleheading, fontanddesign ofthefrontpageof a major broadsheet newspaper Eligible A N S W E R neligible H S PerIAS38,development costsallowable forcapitalisation include 'thedesign, construction and operation ofapilotplantthatisnotofascaleeconomically feasible forcommercial production' (theworking version ofthenewmachine) and'thedesign oftools, jigs,moulds anddiesinvolving newtechnology' (specialised tooling) (IAS38,para.57-62). Mastheads (theheading across a newspaper) andcustomer listscannot berecognised asthevalue issubjective (nomoney has beenpaidinexchange fortheitem) andcannot bemeasured reliably (IAS38,para.48-50). $12,500 $'000 Recoverable amount – fairvalue lesscostsofdisposal 15,000 Lessdepreciation 1.4.X9 – 30.9.X9 (15m / 36/12) ( 2,500) 12,500 37 Carrying amount ofintangible assetat 30September 20X5 $152,000 Amount charged toprofit/loss for period ending 30September 20X5 $88,000 Answers153 Page 176 of 405 Powered By Ù q Working 1Jan 20X5 Projectstarts 1Mar20X5 Projectis technicallyfeasible Cost are expensedas in researchphase 30 Jun 20X5 Productionstarts Cost are capitalisedas project is technicallyfeasible 30 Sept 20X5 Yearend Depreciation commenceswhen availableforuse 30 Jun Capitalisedas an intangibleasset from1March– 30 June20X5$40,0004 =$160,000 Amortisation ofasset from1June20X5$160,000/5years3/12=$8,000 Carryingamountofthe asset at 30 September20X5=$160,000– $8,000=$152,000 ExpensesforJanuaryand February20X4=2 $40,000=$80,000 Amortisation expenseforthe period$8,000 Expensestakento the statementofprofitorloss=$80,000+$8,000=$88,000 G H 154 FinancialReporting(FR) Page 177 of 405 q Impairment 38 C of assets $594(tothenearest ‘000) $'000 260 (90) (40) 130 Totalimpairment (1,010 – 750) Goodwill Damaged plant Balance toallocate Theremaining $130,000 willbeallocated prorataasfollows: Building Plant $'000 $'000 700 160 Impairment (106) (24) 594 39 Therecoverable amount ofanassetofanassetisthehigher of Fairvaluelesscostsofdisposal Valueinuse and under IAS36 Impairment ofAssets. 40 $7,687 Fairvaluelesscostsofdisposal (78,000– 2,500) $75,500 Value inuse: 30,0001/ 1.08=27,778 30,0001/ 1.08=25,720 2 30,0001/ 1.08=23,815 3 $77,313 Recoverable amount is$77,313 andcarrying amount is$85,000,soimpairment is $7,687. G 41 Anunusually significant fallinthemarket valueofoneormoreassets Anincrease inthemarket interest ratesusedtocalculate valueinuseoftheassets Theotheroptions areinternal indicators ofimpairment. 42 $350,000 43 A Fairvaluelesscostsofdisposal (2.7m– 50,000) Valueinuse $ 2,650,000 2,600,000 Recoverable amount istherefore: Impairment loss(β) Carrying amount 2,650,000 350,000 3,000,000 A N S W E R H S $8million Goodwill Patent Property Plantandequipment Current assets $m 3 5 10 15 2 35 $m (3) (3) (2) (3) – (11) $m – 2 8 12 2 24 Thegoodwill iswritten off,thepatent iswritten downandtheremaining $5m impairment isallocated proratatotheproperty andtheplantandequipment. Answer option B doesnotallocate anyoftheimpairment losstotheproperty. Answers155 Page 178 of 405 Powered By Ù q AnsweroptionC allocatesthe remaining$5mimpairmentequallyto propertyand plant and equipment 44 A 45 A AnsweroptionDallocatesallof the remainingimpairmentagainst property. $17,785 $ Carryingamount(100,0005/10) 50,000 Fairvaluelesscosts to sell 30,000 Valueinuse (8,5003.79) 32,215 Recoverableamountis $32,215and impairmentloss=50,000 – 32,215=$17,785 AnsweroptionBtakes the recoverableamountto be the lowerof the valueinuse and the fairvaluelesscosts to sell. AnsweroptionC takes the recoverableamountto be the lowerof the valueinuse and the fairvaluelesscosts to selland uses thisas the amountof the impairment. AnsweroptionDassumesthe recoverableamountto be the amountof impairment. $154,545 Netassets priorto impairment $ Property,plant and equipment Goodwill Productpatent Netcurrentassets G Impairment $ 200,000 50,000 20,000 30,000 300,000 mpairednet assets $ (45,455) (50,000) (4,545) – (100,000) 54,545 – 15,455 30,000 200,000 Goodwillis writtenoffinfulland the balance of the lossis pro-rated betweenPPE and the patent. 46 Advancesinthe technologicalenvironmentinwhichan asset is employedhas an adverseimpacton its futureuse Indicatorof impairment Anincreaseininterestrates whichincreasesthe discount rate an entityuses Indicatorof impairment Thecarryingamountof an entity'snet assets is lowerthan the entity'snumberof shares inissuemultipliedby its share price Indicatorof impairment Theestimatednet realisablevalueof inventoryhas been reduceddue to firedamage althoughthisvalueis greater than its carryingamount Notan indicatorof impairment Theestimatednet realisablevalueofinventorythat has beenreduceddueto firedamagebut the valueisgreaterthan itscarryingamountisNOTan indicatorofimpairment.Ifthe NRVof inventoryisgreaterthan itscarryingamount,thennoimpairmenthas arisen. 156 FinancialReporting(FR) Page 179 of 405 H q Section Plethora 47 B plc case $314,000 Buildingtransferredto investmentproperty Originalcost Depreciation1.1.X0to 1.7.X9((600/ 50) 9.5) Carryingamountat 1.7.X9 Revaluationsurplus Fairvalue $'000 600 (114) 486 314 800 48 A 49 Recoverableamount Ifthe asset has beenimpaired,itmusthavebeenwrittendownto itsrecoverableamount.Thisis the higheroffairvaluelesscostsofdisposaland valueinuse. Thereversalof impairmentlosseson revaluedassets shouldbe recognisedinother comprehensiveincome 50 Creditedto profitor loss Theincreaseinvalueinthiscase of $190,000(740,000– 550,000) willbe creditedto profitor lossinaccordance withIAS40. Animpairmentlosscan onlybe reversedifthere is a change inthe estimatesused to determinethe recoverableamountof the impairedassets Impairmentlossesinrespect of goodwillcannot be subsequentlyreversed.WhilstIAS36 does not apply to inventories,it does not scope out othercurrentassets. G 51 D A N S W E R $85,000 Impairmentlosseson assets, otherthan goodwill,can be reversedup to the maximumof what the asset wouldhave been carriedat had no impairment occurred. Carrying Carrying Carrying amountat amountat Impairment amountat 31December 31December lossat 31December 20X9had no 20X8before 31December 20X8AFTER impairment Asset impairment 20X8 impairment occurred $’000 $’000 $’000 $’000 Building 900 100 800 875 Plantand equipment 300 20 280 290 Goodwill 40 40 Nil 40 Total S Reversal of imp. Loss $’000 75 10 Nil 85 Linetti Co case 52 Thecorrectansweris $18.4m.Thisis calculatedas $10m+$0.5m+$1m+$6.6mless unusedmaterialsof $0.5mplusborrowingcosts of $0.8m. AnsweroptionBdoes not includethe borrowingcosts whichcan be capitalised. AnsweroptionC includesthe $0.5 millionof unusedmaterials. A H AnsweroptionDincludesthe unusedmaterialsbut does not includethe borrowing costs. Answers 157 Page 180 of 405 Powered By Ù q 53 B 54 C 55 D Insurancepremiumsare expensedas they formpart of the normalcosts of usingthe head office.Marketingcosts are specificallydisallowedby IAS16.Themaintenance costs of the computersare expensedas they are normalcosts of operatingthe computers. Theextensionis part of the originalbuilding,and thereforethe buildingmustbe revaluedas one asset. Theimpairmentlossforthe CGUis $2.2m($11.8m– $9.6m).Theimpairmentlossis initiallyallocatedto the goodwillbalance of $1.4m.Theunallocatedimpairmentloss is$0.8m.Thisis allocatedto the brand and PPEbased on theircarryingamounts: Allocationof impairment $m $m Brand 2 (0.2) PPE 6 (0.6) Total 8 (0.8) Thevalueof the brand is therefore$1.8m(2m– 0.2m). 56 C Elite 57 Bothof the actionsare requiredon an annual basis (IAS36 para 9 and 10). Leisure A Co case $279m Shipsfabric Cabinsetc Propulsion Cost$m Dep'nperiod Dep'nto date 300 8/25 (96) 150 8/12 (100) 100 30/40 hrs (75) G Carrying amount 204 50 25 279 H 58 $14m(140m5,000/50,000) 59 60 $45m(Repainting$20m+Losson disposal$25m) D Capitalisethe cost whenincurredand amortiseoverfiveyears IAS16paragraph 13-14refersspecificallyto whenassets may requiresubstantial inspectionsand/or overhaulson a periodicbasis' Wheneach majorinspectionis performed,its cost is recognisedinthe carryingamount of the itemof property, plant and equipmentas a replacement'(IAS16,para. 13) $290,000 (250+40) At55%losingthe case is 'probable'so mustbe providedfor. 61 Dexterity Co case 62 Patent forthe newdrug Capitalise Licenceforthe newvaccine Capitalise Specialisttrainingcoursesundertakenby Dexteritystaff TemerityCo's patent on the existingdrug currently licencedforuse Expense Capitalise Thepatentforthe newdrugand the licenceforthe newvaccinewillgenerateprobablefuture economicbenefitsas theyhavebeenapprovedforclinicaluse.Thereisan existenceofa market,managementhaveascertainedreliablythe costsand that the companycan sellor controlthe assets. 158 FinancialReporting(FR) Page 181 of 405 G q Temerity Co'sexisting patent foradrugalready inuseshould becapitalised asitmeets the criteria under IAS38ofaninternally generated intangible asset. Specialist training courses, although theywillbenefit thebusiness (thus meeting thecriteria of anexpense from which benefits areexpected toflow)theycannot becapitalised asthe company doesnotcontrol thestaff(theycanleave thecompany) sofailing thecontrol element ofthedefinition ofanintangible asset. IAS38states thattraining costsmust beexpensed as employees donotrepresent aresource controlled bytheentity andtherefore cannot recognise thetraining costsasanintangible asset(IAS38,para.15). 63 Required ifDexterity Coadopts therevaluation model Theentire classofintangible assetsmust berevalued atthesametime Validactivemarket fortheasset Oninitial recognition, theoriginal costoftheitemmust beused,itcannot beusedfrom initial recognition, regardless ofwhether there isanactive market ornot.Therevaluation model may beused,provided thecriteria havebeenmet,atalaterdate. Although prepaid marketing costsmaybecapitalised, training costsmaynotbecapitalised as partoftheintangible assetunder IAS38. 64 C Thedesign ofpossible neworimproved product orprocess alternatives Thisactivity isstillattheresearch stage 65 B $9,375,000 ($10m – (($10m/8) 6/12)) A N S W E R 66 B Itshould becapitalised andreviewed forimpairment everyyear. S H IAS36Impairment ofAssets (para.10) requires thatgoodwill betested forimpairment onanannual basis,regardless ofwhether thereisanyindication ofimpairment. Advent Co case 67 $256m A Land Building $m 85 171 256 18019/20 Answer option B ignores theeffectofdepreciation inthecurrent year 68 D Answer option C doesnotapplytherevaluation inthecurrent year Answer option D depreciates thebuilding overthe25yearsuseful lifeatthedateof theprevious valuation. $35m $m Existing plant 15020% 30 Newplant 5020%6/12m 5 35 Answers159 Page 182 of 405 Powered By Ù G q 69 Theeffective dateofrevaluation Required Professional qualifications ofthevaluer 70 71 Notrequired Thebasisusedtorevalue theassets Required Thecarrying amount ofassetsifnorevaluation had takenplace Required There isnorequirement todisclose theprofessional qualifications ofthevaluer. $140m $m Balance 1.10.X8 270 Depreciation to30.9.X9 (30) 240 Impairment loss(β) (140) Recoverable amount 100 Therecoverable amount ofanassetofanassetisthehigher of Fairvaluelesscostsofdisposal and Valueinuse Asstated inIAS36Impairment ofAssets, para.22. Theother options arenotinlinewiththe accounting standard. Systria 72 Co case $40,000 Goodwill Patent Landandbuildings Plantandmachinery Netcurrent assets H Original $'000 50 10 100 50 10 Impairment $'000 (50) (10) (20) Remaining 30 (10) prorata – (90) 73 There areadverse changes totheusetowhichtheassetisput. Theoperating performance oftheassethasdeclined. Depreciation isirrelevant andtheotheroptions areanexternal indicator ofimpairment. 74 $1.5million Recoverable amount is$6million, leaving animpairment lossof$4million. $2.5million willbeallocated tothedestroyed assetsandtheremaining $1.5million written offagainst goodwill. $3million – $1.5million =$1.5million. 160 Financial Reporting (FR) Page 183 of 405 q 75 Debit Accumulated depreciation $20,000 Property atcost $30,000 Revaluation surplus 76 Credit $50,000 Thedepreciation iswritten offandthebalance addedtothecostoftheproperty. C $3,250 Depreciation todateof$20,000means theproperty has40yearsofuseful lifeleft attherevaluation date.Depreciation willbe$130,000/40. A N S W E R G H S Answers161 Page 184 of 405 Powered By Ù q Section A Revenue 77 Thecorrectansweris a contract asset of $180,000 $ 980,000 (800,000) 180,000 Revenuerecognised$2,800,000 35% Lessamountsinvoicedto date Contract asset Contract asset Contract liability 78 A $180,000 $240,000 The$120,000relatingto the purchase of ITequipmentcan be recognisedas income immediatelyas the termsof that portionof the grant have already been satisfied. Theremaining$600,000 shouldbe initiallydeferredand then releasedto incomeon a monthlybasis as the conditionof the grant, beingto providetraining,are satisfied. Thereceiptdate of the governmentgrant is not relevant,the termsof the grant are beingcompliedwithfrom1April20X5and thereforegrant incomecan be recognised fromthat date. At31October20X5,the remainingtermattached to the training grant is 17months,of which12monthsare currentand 5 monthsare non-current. Thenon-currentliabilityis thereforemeasuredas $600,000 ×5/24 months= $125,000 AnsweroptionBis based on the fullamountof the grant of $720,000 AnsweroptionC is the fullamountof the liability AnsweroptionDis the currentportiononly G 79 B Contract revenuerecognised Costs to date Depreciationof specialistplant Profitrecognisedat 31March20X3 $'000 22,000 (12,000) (3,000) 7,000 AnsweroptionAincorrectlycalculatesa proportionof the total profiton the contract. 80 A AnsweroptionC incorrectlyreflectstotal expectedprofit AnsweroptionDassumesthat no profitor losscan be recognisedto date. $9,600 Revenuerecognised($120,00050%(W)) Amountsinvoiced Contract asset $ 60,000 (50,400) 9,600 Working Costs to date Costs to complete Percentagecompletion 48,000 48,000 50% 162 FinancialReporting(FR) Page 185 of 405 H q AnsweroptionBis the profitthat can be recognisedrather than the contract asset (50%($120,000– $96,000)). 81 C AnsweroptionC is the trade receivablesbalance ($50,400– $40,000). AnsweroptionDis the total amountinvoiced. $300,000 $ Grant received1.1.X5 1,500,000 Recognisedyear to 31.12.X5 (1,500,00020%) (300,000) Balance31.12.X5 1,200,000 82 Debit Otherincome Credit 80,000 Deferredincome 80,000 Depreciationexpense 155,000 Accumulateddepreciation 155,000 Workings Grant is 50%of the asset, so the asset cost is $400,000 2 =$800,000 Thedepreciationis $800,000 – $25,000/5 years =$155,000 Thegrant is recognisedas deferredincomeon the SOFPand releasedto the profitor lossin the same manneras the depreciation(over5 years, therefore$400,000/5 years = $80,000) G A N S W E R H S 83 Value($) Revenue Currentliability nil 90,000 Tradereceivables nil Nosalehas takenplaceas controlofthe goodshas notbeentransferred(sorevenuewillbe nil), but CambridgeComustshowthat itisholding$90,000whichbelongsto CircusCo. 84 C Salesof $150,000on 30 September20X4.Theamountinvoicedto and receivedfrom the customerwas $180,000,whichincluded$30,000 forongoingservicingworkto be done by ReproCo overthe nexttwoyears. Theamountto recogniseinrevenueis $150,000as the servicingamountof $30,000 has not yet been earned. Thiswouldbe recognisedas deferredincome. Answers 163 Page 186 of 405 Powered By Ù G q 85 B $160,000 Contract asset: Revenue recognised todate($5m38%) Lessamounts invoiced 86 87 88 Answer option A isincorrect asitrefers totradereceivables rather thancontract asset. Answer option C isincorrect asitisthetotalprofitforthecontract. Answer option D isincorrect asitistheprofitthatcanberecognised at30 September 20X4. Manufacturer canrequire dealer toreturn theinventory Manufacturer bearsobsolescence risk These bothindicate thatthemanufacturer retains ownership oftheinventory. Theother options would indicate thattherisksandrewards havebeentransferred tothedealer. $400,000 Anassetisdefined as‘a present economic resource controlled bytheentityasa result of pastevents’ (Conceptual Framework). Thestafftraining doesnotmeetthedefinition ofan assetbecause theemployer doesnotcontrol itsemployees; theemployer cannot control whether ornotanemployee chooses toleaveemployment. Ifanemployee leaves, the employer willnotreceive thefullbenefit ofthestafftraining. Ifthestafftraining isnotan asset,then$500,000should becharged infulltoprofitorlossintheyearinwhichitis incurred andcannot bespread acrosstwoyears.Asthesecond instalment ofthe government grantisvirtually certain thenthefull$100,000 canbeoffsetagainst the $500,000stafftraining costs. $24,920,000 $'000 Revenue perdraftprofitorloss 27,000 Service andsupport costs(8002 130%) (2,080) 24,920 Introduction 89 90 91 92 $'000 1,900 (1,740) 160 to groups D C There isnobasisonwhicha subsidiary maybeexcluded fromconsolidation. Credited toprofitorloss IFRS3 requires a bargain purchase tobecredited toprofitorlossasitisan economic gain.Iftheconsideration ishigher thanthenetassetsbeingpurchased, thatwould constitute goodwill (nottakingthedebittotheprofitandloss).Bytaking thebargain purchase totheprofitandlossimmediately, IFRS3 aimstorestrict any excess beingcarried forwards. C Existence ofsignificant influence. Theotheroptions indicate control overa subsidiary assetoutbyIAS27 Consolidated andSeparate Financial Statements. Asubsidiary witha different reporting datemayprepare additional statements uptothe groupreporting dateforconsolidation purposes. Where a subsidiary's financial statements aredrawn uptoa different reporting datefrom thoseoftheparent, adjustments should bemadeforsignificant transactions orevents occurring between thetworeporting dates. Theallowable gapbetween reporting datesisthreemonths, notfive.IAS27allows subsidiaries tohavenon-coterminous yearends,provided several criteria aremet, including stating reasons whythefinancial yearendisdifferent totheparent. 164 Financial Reporting (FR) Page 187 of 405 H q 93 Thecharacteristicsof the asset Relevant Thepricepaid to acquirethe asset 94 95 Theprincipalor mostadvantageous marketfor the asset Relevant Thehighestand best use of the asset Relevant Thepricepaidto acquirethe asset isthe historicalcostofthe asset.Fairvaluelooksat the futurebenefitswhichare expectedto flowfromthe asset,as opposedto whatwaspaidinthe past. IFRS13willtake intoaccount assumptionsthat marketparticipantsmay use when establishinga fairvalueforthe asset. D Inaccordance withIFRS10,paragraph 7 IFRS10makesno referenceto a holdingof morethan 50%of the equityshares of an investeecompany. D Gamma Co is located ina countrywherea militarycoup has taken place and Petre Co has lostcontrolof the investmentforthe foreseeablefuture. Consolidationis not appropriateinthiscase as the parent has lostcontrol. Financial 96 Notrelevant B instruments $1,524,000 Interestyears 1–3(30m8%2.49) Repaymentyear 3 (30m0.75) Debtcomponent Equityoption(β) G $'000 5,976 22,500 28,476 1,524 30,000 A N S W E R H S AnsweroptionAis the presentvalueof the futureinterestpayments. AnsweroptionC is the debt component AnsweroptionDis the total amountraisedon the issue 97 D $21,495,000 Proceeds(20m– 0.5m) Interest10% Interestpaid (20m5%) Balance30 March20X1 Interest10% Interestpaid (20m5%) $'000 19,500 1,950 (1,000) 20,450 2,045 (1,000) 21,495 98 Fairvalue withchanges going through profitor loss FairvaluethroughOCIwouldbe correctifan electionhad been made to recognise changes invaluethroughothercomprehensiveincome.Amortisedcost is used fordebt instruments,not equityinstruments. Answers 165 Page 188 of 405 Powered By Ù G q 99 A $514,560 $ 500,000 40,000 (33,000) 507,000 40,560 (33,000) 514,560 1January20X1 Interest 8% Interest received (550,0006%) 31December 20X1 Interest 8% Interest received 31December 20X2 100 B Intangible assets These donotgiverisetoa present righttoreceive cashorotherfinancial assets. The otheroptions arefinancial instruments. 101 $1,000,000 $'000 13,500 $12,500 1,296/ 1,200 Carrying amount (12,500) Gain 1,000 102 $240,000 $ 40,000shares @ $6 240,000 Transaction costsareaddedtotheinitial costbutomitted fromsubsequent measurement. Lease 103 C Accounting $1,283 ($1,283,366 rounded) H PVoffuture leasepayments Interest at6%(6%$1,871,100) Balance oftheleaseliability at31Dec20X6 Current Non-current $ 1,871,100 112,266 1,983,366 700,000 ,283,366 ,983,366 Answer option A isthecurrent portion oftheleaseliability Answer option B doesnotaccount forinterest intheyear Answer option D istheopening balance 104 Thelessee obtains substantially allofthe economic benefits fromuseoftheasset Indicates a lease Ownership intheassetistransferred at theendoftheleaseterm Indicates a lease Thecontract relates toanidentified asset Indicates a lease Ifitsuitsthemtodoso,thelessor can substitute anidentical asset Doesnotindicate a lease Thelessee doesnothaverightofuseofanidentified assetasthelessor hassubstitution rights. 166 Financial Reporting (FR) Page 189 of 405 G q 105 D $6,390,900 $ Finance charge Initial liability (PVoffuture cashflows) 15,462,000 Interest 8%($15.462m 8%) 1,236,960 ,236,960 Payment (6,000,000) Totalleaseliability at31.3.X8 10,698,960 Depreciation ischarged basedontheshorter oftheleaseterm(three years)andthe useful life(fiveyears)asthereisnooption topurchase theassettheendofthelease period. Initial measurement ofright-of-use asset 15,462,000 Depreciation charge15,462,000/3 (5,154,000) Carrying amount 10,308,000 Chargetotheprofitandlossis$5,154,000 +$1,236,960 =$6,390,900 Answer option A onlycharges thefinance cost Answer option B hasdepreciation charged overfiveyears(instead ofoverthelease term) Answer option C isjustthepayment made 106 C 107 B Leaseliability + otherdirectcosts+amounts paidbefore oroncommencement ofthe lease– incentives received $4,098,050 $ Present valueofthefuture leasepayments at1October 20X3 22,745,000 Interest at10% 2,274,500 Lesspayment inarrears 6,000,000) Leaseliability asat30Sept20X4 19,019,500 Extend thecalculation toworkouttheleaseliability attheend ofthenextperiod: B/fwd Interest at10% Payment inarrears Leaseliability at30Sept20X5 Calculation ofcurrentliability (19,019,500 – 14,921,450) Answer option A isonlytheinterest chargeforthenextperiod 9,019,500 1,901,950 6,000,000) 14,921,450 A N S W E R H S 4,098,050 Answer option C isjustthecashpayment tobemade,nottheliability Answer option D istheinterest chargeforthefirstperiod only. 108 Thelessee hastherighttosubstantially alltheeconomic benefits fromuseoftheasset. Theagreement concerns anidentified assetwhichcannot besubstituted. Theleasetermdoesnothavetobeforsubstantially alloftheestimated useful lifeofthe asset.Ifthelessor hastherighttodirecttheuseoftheasset,thelessee doesnothaveright ofuse,soitisnota leasewithin thescopeofIFRS16. 109 $866,325 $ Cost1July20X4($4,657,500 +$37,500) 4,695,000 Depreciation to30June20X5($4,695,000/8) 586,875 Leaseliability at1July20X46%interest =$4,657,500 6%=279,450 TotalchargetotheSOPL(279,450 + 586,875) =$866,325 110 D Recognise proportion relating torightofusetransferred. Answers167 Page 190 of 405 Powered By Ù q 111 $112,000 $ 40,000 68,000 4,000 112,000 Leaseinterest(250,00016%) Plantdepreciation((250,000+90,000) / 5) Short-termlease (18,0002/9) Totalcharge to profitor loss 112 $20,283 $ 240,200 28,824 (100,000) 169,024 20,283 Initiallease liability Interest12% Payment Balance31.12.X6 Interestto 31.12.X7 at 12% 113 B Onlythe gain inrespect of the rightstransferredto the financialinstitutioncan be recognisedinprofitor loss. $ Totalgain (20,000,000 – 18,000,000) 2,000,000 7,092,000 20,000,000 709,200 Gain on rightstransferred(2,000,000 – 709,200) 1,290,800 Gain on rightsretained 2,000,000 114 $13,588 G Depreciationforthe year Financecost forthe year Totalcharge forthe year 100,650/10 100,6508% $ 10,065 8,052 18,702 H Apportionforthe yearas acquiredpart waythroughthe accountingperiod 1April– 31December= 9 monthsso9/12$18,702=$13,588 Provisions and events after the reporting period 115 $100,000 Lossof the case is not 'probable',so no provisionis made, but the legalcosts willhave to be paid so shouldbe providedfor. 116 A Provision$2 millionand $2 millioncapitalisedas part of cost of mine $2 millionshouldbe providedforand capitalisedas part of the cost of the mine.It willthen be depreciatedoverthe usefullife. 168 FinancialReporting(FR) Page 191 of 405 G q 117 Aston Cohasa company policyofcleaning upany environmental contamination caused byitsoperations, even though itisnotlegallyobliged todoso Provision required Brum Cohasa fixedpricecontract tosupplywidgets to Erdington Co.Brum Cohascalculated thatitwillcostmoreto manufacture thewidgets thanbudgeted, whichismorethan therevenue agreed fromErdington Co Provision required Coleshill Coisclosing downa division. Theboardhas prepared detailed closure planswhichhavenotyetbeen communicated tocustomers andemployees No provision required Dudley Cohasacquired a machine whichrequires a major overhaul everythreeyears.Thecostofthefirstoverhaul is reliably estimated at$120,000 No provision required Aston Cowillcreate a provision forthepresent value oftheenvironmental clearupcost– they haveaprobable outflow ofcosts(thedecommissioning costs) andthere isapresent obligation (astheyhaveapolicy ofcleaning up,itisaconstructive obligation asopposed toalegal obligation). Brum Cohasdiscovered thatthecostofsupply exceeds theexpected revenue from the contract. Thisisanexample ofanonerous contract. Aprovision should berecognised thatisthe unavoidable costsofmeeting thecontract withErdington Co(thelower ofthecostoffulfilling thecontract orpenalties from thefailure tofulfilthecontract). These costsarenotstated inthe question, butthatwould bethebasisforthecalculation oftheprovision. Coleshill Cohasnotcommunicated theplansofficially sothedecision could stillbereversed. Although noprovision isrequired inthefinancial statements, itwould bedisclosed inanoteto theaccounts ifmaterial asitmight affectthegoingconcern ofthecompany. Dudley Cohasacquired amachine which requires thestafftoberetrained onitssafe operation. Thestafftraining willhappen inthenextfinancial period. Provisions asaresult ofthe training ofstaffareforbidden byIAS37asthecompany doesnothavecontrol overthestaff (theycanleave atanytime). 118 D $2.21m Provision at1July20X8=($3m0.713)=$2,139,000 A N S W E R H S Interest to31Dec20X8=7%$2.139m 6/12=$74,865 Provision at31Dec20X8=$2,139,000 +$74,865=$2,213,865 rounded to$2.21m Answer option A istheinitial carrying amount at1July20X8. Answer option B isbasedonunwinding thediscount for12months instead of 6 months. Answer option C istheundiscounted amount. 119 Provisions should bemadeforbothconstructive andlegal obligations True Discounting maybeusedwhenestimating theamount ofa provision True Arestructuring provision mustinclude theestimated costsof retraining orrelocating continuing staff Arestructuring provision mayonlybemadewhena company hasa detailed planfortherestructuring andhas communicated tointerested parties a firmintention tocarry itout False True Answers169 Page 192 of 405 Powered By Ù G q 120 Thecorrect answer is:DebitProvision $100,000, DebitProfitorloss$20,000;CreditCash $120,000 Theprovision isa liability andtherefore a creditbalance. Onsettlement, theprovision must bereversed witha debit.Anexpense of$100,000 waspreviously recognised in20X4when theoriginal provision wascreated, sotherefore onlytheextra$20,000paidneedstobe recognised asanexpense inprofitorlossin20X5.Cashisanassetandtherefore a debit balance. Itisreduced bytheamount paidwitha creditentry. 121 $24,532,000 $'000 Restoration ofseabed (10,000250) 2,500 Dismantling ofequipment (30m0.68) 20,400 Unwinding ofdiscount (20,4008%) 1,632 24,532 122 $0.6million $m 0.3 0.3 0.6 123 Thediscovery ofa fraudwhichoccurred during theyear $2million 15% $6million 5% Thedetermination ofthesaleproceeds ofanitemofplantsoldbefore theyearend These bothprovide evidence ofconditions thatexisted attheendofthereporting period. The other options refer toconditions which arose afterthereporting period andaretherefore nonadjusting events according toIAS10Events After theReporting Period. 124 Thecorrect answers are: Thomas Co,a customer ofColeridge Co,whichowesthecompany $200,000hasgone intoinsolvency on3 April20X5 Inventory heldinstockat31Marchwhichcost$200,000wassoldon21April20X5for $150,000 Bothoftheseevents giveadditional information aboutthevalueofassetswhichwere included inthefinancial statements ofColeridge at31March20X5.Theinventory is required tobeheldatthelower ofcostornetrealisable value,andthereceivable requires tobereduced by$200,000astheamount willnotberecovered. Thefactoryaccident occurred aftertheyearend,soisnotanadjusting event. ThesaleoftheWordsworth division, although itwasdecided priortotheyearend,wasnot a commitment attheyearend.However, itmayberequired todisclose thesetwoevents if theyarematerial. Inventories and biological assets 125 $95,100 Product A 1,00040 B 2,50015 C 80022 126 C $ 40,000 37,500 17,600 95,100 Theitemisbecoming obsolete 170 Financial Reporting (FR) Page 193 of 405 H G q 127 D 128 B 129 A Astheitembecomes obsolete wecanexpect itsmarket pricetofall– andeventually fallbelow cost.Theotheroptions would allmaintain orimprove thenetrealisable valueoftheitem. Fairvaluelessestimated coststosell IAS41Agriculture requires biological assetstobemeasured oninitial recognition at fairvaluelessestimated coststosell. Harvest Harvest isanintervention, nota biological process. Growth, procreation and degeneration arenatural biological processes. Included inprofitorlossfortheyear Againorlossona biological assetisincluded inprofitorlossfortheyear. 130 Production overheads should beincluded incoston thebasisofa company's actuallevelofactivity in theperiod Incorrect Inarriving atthenetrealisable valueofinventories, settlement discounts mustbededucted fromthe expected selling price Incorrect Inarriving atthecostofinventories, FIFO,LIFOand weighted average costformulas areacceptable Incorrect Itispermitted tovaluefinished goodsinventories at materials pluslabour costonly,without adding production overheads Incorrect Production overheads areallocated onthebasisofa company's normal levelofactivity. Settlement discounts arenotdeducted toarrive atNRV.TheLIFOformula isnotallowed under IAS2 Inventories. Valuation offinished goodsshould include production overheads. 131 A IAS10Events AftertheReporting Period Thismayberelevant asagricultural produce isperishable andifpriceshavetobe reduced aftertheyearend,thiswillaffecttheyearendvaluation. 132 $39.3million $m Perinventory count 36.0 Received afteryearend (2.7) Soldafteryearend(7.8m/ 1.3) 6.0 39.3 A N S W E R H S 133 $55,080 NRV– (12,000(5.485%))= $55,080 Theinventory atyearendshould beheldatthelower ofcostandnetrealisable value ($5.40– ($5.40*15%) =$4.59perunit,giving12,000$4.59=$55,080. Asinformation hascometolightaftertheyearendbutbefore theapproval ofthefinancial statements andtheinventory washeldattheyearend,thevalueshould berestated toits netrealisable valuelessselling costs. Answers171 Page 194 of 405 Powered By Ù G q Accounting 134 C 135 C for taxation $16.8million Chargeforyear Underprovision Adjust deferred tax(W) Profitorlosscharge $'000 16,200 2,100 (1,500) 16,800 Working Provision needed (13m30%) Provision b/f Reduce provision 3,900 (5,400) (1,500) $1.2million Prioryearunderprovision Current provision Movement ofdeferred tax(8.4– 5.6) Deferred taxonrevaluation surplus Income taxexpense 136 D $'000 700 4,500 (2,800) (1,200) 1,200 $345,000 $'000 850 50 250 1,150 345 B/f Yearto31.12.X8 (500– 450) Revaluation surplus 30% 137 $130million $m 300 270 (440) 130 B/f(140+160) Chargeforyear C/f (310+130) Taxpaid 138 $19million $'000 19,400 (800) 400 19,000 Current charge Over-provision Deferred tax(W) Working Required provision Lessrevaluation 6,750 (3,750) 3,000 (2,600) 400 Balance b/f Chargetoincome tax 172 Financial Reporting (FR) Page 195 of 405 H G q 139 B $5,100charge Asthetaxbaseislessthanthecarrying amount foraccounting purposes (more tax benefit hasbeentaken), thena provision isrequired Carrying amount (accounting) $'000 Costofasset 40,000 Depreciation charge(40,000– 5,000)/5years (7,000) Carrying amount at31August 20X2 33,000 Taxbase Costofasset LessY1taxdepreciation at60%40,0000.6 Difference $33,000– $16,000 Taxprovision 0.3$17,000 40,000 (24,000) 16,000 17,000 5,100 140 Asset/liability Liability Amount($) 120,000 Asthetaxbaseislessthantheaccounting carrying amount (more taxbenefit hasbeen taken), thendeferred taxliability isrequired: Carrying amount $'000 Costofasset 1,000 Residual value (200) Depreciable value 800 Depreciation charge800/8years (100) Carrying amount at31December 20X5(1,000– 100) 900 Taxbase Costofasset 1,000 LessY1taxallowance at50% (500) 500 Difference $900,000– $500,000 400 Taxliability 30%$400,000 120 A N S W E R H S Answers173 Page 196 of 405 Powered By Ù G q Section B Derringdo 141 C 142 D Co case $22,000 Operatingexpenses Depreciationcharge (800,000 85%10%6/12) Releaseof grant (240,00010%6/12) $204,000 Deferredincome Grant received($800,00030%) Releaseforthisyear ($240,00010%6/12) Totalbalance at year end $ 240,000 (12,000) 228,000 Presentation Currentliability($240,00010%) Non-currentliability(balance) 143 $439 Year1 Laptop(W) Broadband(562(W)/2) Working Laptop Broadband(30 122) 144 B 145 B $ 34,000 (12,000) 22,000 24,000 204,000 228,000 $ 158 281 439 H 200 720 920 22% 78% 100% 158 562 720 Recognisingrevenuewhena performanceobligationis satisfied. DerringdoCo is not exposedto creditriskforthe amountdue fromthe customer Theotheroptionswouldallsuggest that DerringdoCo was the principal. Bridgenorth Co case 146 $200,000 $ 2,500,000 (2,300,000) 200,000 147 $500,000 Workinvoicedlesscash received($2,000,000– $1,500,000) Revenue50%5,000,000 = Expenses= 148 $1,000,000 $ 4,000,000 3,000,000 Revenuerecognised(80%5,000,000) Amountsinvoicedto date Contract asset 1,000,000 174 FinancialReporting(FR) Page 197 of 405 G q 149 Costsincurred asa percentage oftotalexpected costs Workinvoiced todateasa percentage ofthetotalcontract price These arevalidmeasures oftheinputs expended tosatisfytheperformance obligation. 150 $400,000 Bridgenorth Cocanrecognise revenue totheextent ofcostsincurred todate(IFRS15, para.45). Apex Co case 151 B 152 C 153 A 154 D Anassetthattakesa substantial period oftimetogetreadyforitsintended useor sale(IAS23,para.5) Physical construction oftheassetisnearing completion IAS23hasnorequirements inrespect ofthestageofcompletion oftheasset $625,000(($10m 7.5%) 10/12) 9.25% % 6.25 3.00 9.25 10%50/80 8%30/80 155 C Bertrand 156 B 157 C Recognised asinvestment income inthestatement ofprofitorloss Theinvestment proceeds wereearned before construction began,soarenot deducted fromtheborrowing costswhicharebeingcapitalised. Co case A N S W E R H S Asdebtandequity $735,000 $'000 1,290 7,900 9,190 Interest payable ($10m 5%2.58*) Capitalrepayable ($10m 0.79) Debtelement 735 Finance costsforyear=9,1908% 158 A $9,425,000 159 B 1October 20X0 Finance charge 8% Interest paid(10,000 5%) Balance 30September 20X1 Deducted fromtheproceeds oftheloannotes. $'000 9,190 735 (500) 9,425 Theeffective interest rateisthenapplied tothenetamount. 160 Asa financial asset at amortised cost Answers175 Page 198 of 405 Powered By Ù q Fino Co case 161 D 162 D Fromthe commencementof the lease to the shorterof the end of the lease termand the end of the usefullifeof the plant $286,500 $ Presentvalueof futurelease payments 173,500 Paymentsmade on the commencementof the lease 100,000 Initialdirectcosts 20,000 Less:Leaseincentives (7,000) Initialcost of the rightof use asset 286,500 163 Correctaccountingtreatment Ownershipis transferredat the end of the lease term Thelease is forlessthan 12months Theleased asset has a lowunderlying value Theleased asset has been specially adapted forthe use of the lessee G H Wherethe agreementisforlessthan 12monthsorthe underlyingasset isoflowvalue,lease paymentscan be chargeddirectlyto profitorloss,inaccordancewiththe optionalrecognition exemptionsavailableinIFRS16. 164 $190,850 Presentvalueof futurecash flowsat 1.4.X7 Interestaccrued 1.4.X7– 31.3.X8($173,50010%) Leaseliabilityas at 31.3.X8 $ 73,500 17,350 90,850 $173,500does not factor inthe interestcharge, $200,000 isthe futureinstalment payments.$90,850takes the correctcalculationof the interestbut then deducts the payment whichis not due untilthe followingday (1April20X8). ((9,000/10)6) =$5,400 165 D 176 FinancialReporting(FR) Page 199 of 405 G q Jeffers Co case 166 D Neitherthe reorganisationnor the staff training Thereorganisationcannot be providedforbecause it has onlygone as far as a feasibilitystudy. Staff trainingisnot a validprovisionas IAS37paragraph 81specificallyforbidscosts relatingto retrainingor relocatingstaff to be providedforinrestrictingprovisions. 167 Thecorrectanswersare: Thehealth and safety fineand the customerceasingtradingare both adjustingevents Thehealth safety fineresultedfroman accidentwhichhad occurredby the financialyear end. Thecustomer'sreceivablewas inexistencehad the financialyear end, and the notice stating that the debt was unlikelyto be recoverablewas receivedafter the year end, but priorto the financialstatements beingapproved.Thereforeit is an adjustingevent. Althoughit was likelythat the competitorwouldbe acquiredby Jeffers Co, there was no certaintyuntilthe controlwas achievedafter the year end. Thecontrolwas not inexistence at the year end. Healthand safety fine Adjustingevent Customerceased trading Adjustingevent Acquisitionof a competitor Non-adjustingevent 168 Thecorrectansweris:$4.7million $5.2 milliondiscountedat 0.909 =$4.7million 169 A Nothingis recognisedor disclosedinthe financialstatements A N S W E R 170 B S Julian Thefinancialstatements can no longerbe prepared on a goingconcernbasis H Co case 171 C Theamountattributed to an asset or liabilityfortax purposes 172 Property,plant and equipment Developmentexpenditure $190,000 $60,000 PPE($460,000– $270,000).Developmentexpenditureis inlinewithIAS38 and is per the question. 173 A Therevaluationsurplusis carriednet of deferredtax. $ Revaluation 90,000 Deferredtax (90,000 30%) (27,000) Carryingamountof revaluationsurplus 63,000 174 $45,000. Thetax charge forthe year. 175 C Accruedexpenseswhichhave already been deducted fortax purposes. Theywillnot giveriseto a temporarydifference. Answers 177 Page 200 of 405 Powered By Ù G q Section A Reporting 176 A 177 B financial performance Achangeinvaluation ofinventory froma weighted average toa FIFObasis. Achangeofdepreciation method istreated asa changeofaccounting estimate. Adoption oftherevaluation method isdealtwithunder IAS16.Application ofa new accounting policy(suchascapitalisation ofborrowing costs)fortransactions that didnotpreviously occurisnota changeinaccounting policyaccording toIAS8. Abuyermusthavebeenlocated fortheasset. Itisnotnecessary fora buyertohavebeenlocated fortheasset,onlythatthesaleis 'highlyprobable' anda buyerisbeingactively sought byorganisation (IFRS5, para.8). 178 Lower of Carrying amount and Fairvaluelesscostsofdisposal Astheassetsaretobesold,valueinuseisnotrelevant andrecoverable amount willbefair valuelesscostsofdisposal. 179 B Achangeinreporting depreciation charges ascostofsalesrather thanas administrative expenses. Thisisa changeinpresentation whichwillaffectcalculation ofgrossprofitandwillberetrospectively adjusted whenpresenting comparatives. A andDaresimply adjustments madeduring preparation ofthefinancial statements, C isa changeofaccounting estimate. 180 A 181 C Classifying commission earned asrevenue inthestatement ofprofitorloss,having previously classified itasotheroperating income. Thisisa changeinpresentation so qualifies asa changeinaccounting policy. $36.8million Selling price90%minus selling costs. 182 $147,059 €125,000/0.85 183 Rateatthedateoftransaction 184 $98loss Date 1/11 1/12 31/12 185 B Rate 1.63 1.61 1.64 $ 30,675 (15,528) 15,244 € 50,000 (25,000) 25,000 Gain/(loss) (191) 93 (98) $1.8million Thefactoryisa heldforsaleassetfrom1December 20X6andistherefore measured atthelower ofitscarrying amount anditsfairvaluelesscoststosell(IFRS5,para.15). Thefairvaluelesscoststosell($2.4million – $0.3million =$2.1million) isgreater thanthecarrying amount of$1.8million andtherefore noimpairment isrecognised oninitial recognition oftheheldforsaleasseton1December 20X6.Asthe information isthesameat31December 20X6,nosubsequent adjustment isrequired. $1.6million isthecarrying amount lessdepreciation of$0.2million, however, once thefactoryisclassified asheldforsale,depreciation isnolonger charged and therefore thedepreciation forDecember doesnotrequire tobeaccounted for. $1.9million isthevalueinuselesscostsofdisposal, butthisisnota valid measurement oftheassetunder IFRS5. 178 Financial Reporting (FR) Page 201 of 405 H G q 186 D Changes inaccounting estimates should beaccounted forprospectively anderrors accounted forretrospectively. Changes inaccounting estimates donotaffectprevious periods andaretherefore notcorrections oferrors. IAS8 doesgiveexamples onwhatconstitutes changes in accounting policyandwhatisdefined asanestimate. Achangeinthebasisof measuring anasset,forexample, suchasinventory beingmeasured ona FIFObasis instead oftheweighted average cost,willbea changeinaccounting policy,nota changeinestimate. 187 Costofsales 31Dec20X6 $ 66,700 Working Costofsales Asstatedinquestion Inventory adjustment 20X6 $'000 64,600 2,100 66,700 31Dec20X7 $ 59,900 20X7 $'000 62,000 (2,100) 59,900 The$2.1million wasincluded inclosing inventory at31December 20X6inerror. Ifthe closing inventory decreases toremove theeffectoftheerror, thecostofsaleswillincrease bythesameamount. Theopening inventory at1January20X7alsoincluded the$2.1million inerror. Adecrease inopening inventory toremove theeffectoftheerrorwilldecrease costofsalesbythe sameamount. Earnings 188 A per share A N S W E R H S $0.167 Earnings ondilution: Basic Addbackinterest (2,0006%70%) Shares ondilution: Existing Conversion (2m4/5) $'000 1,850 84 1,934 '000 10,000 1,600 11,600 BasicEPS=1,850/ 10,000=$0.185 Diluted EPS=1,934/ 11,600 = $0.167 Answers179 Page 202 of 405 Powered By Ù q 189 Sharecapital $'000 Sharepremium $'000 $40,000 $4,000 Balance30 SeptemberX2(250mshares) Rightsissue: Sharecapital (50m20c) Sharepremium(50m22c) Balance30 SeptemberX1(200mshares) Sharecapital $'000 50,000 Sharepremium $'000 15,000 (10,000) – 40,000 (11,000) 4,000 190 Thecorrectanswersare: Theissueduringthe year of a convertible(to equityshares)loannote Thegrantingduringthe year of directors'share optionsexercisableinthree years' time Theconvertibleloannote and the share optionsshouldbe taken intoaccount when calculatingdilutedEPS. 191 B EPStakes intoaccount the additionalresourcesmade availableto earn profitwhen newshares are issuedforcash, whereasnet profitdoes not. 192 A $1.35 TERP 5 1.8= 11.5= G 9.0 1.5 10.5/ 6 =$1.75 Shares 5,0005/121.8/ 1.75 6,0007/12 193 C H $'000 2,143 3,500 5,643 EPS=7,600 / 5,643=$1.35 Thecorrectansweris:5.1million Calculatethe shares that are treated as beingissuedfornilconsideration: No.of shares underoption No.of shares that wouldhave been issuedat the average 500,000 $2.80 marketprice 3.50 No.of shares treated as issuedfornilconsideration Sharesused inEPScalculation=5,000,000 +100,000=5.1m 180 FinancialReporting(FR) Page 203 of 405 500,000 (400,000) 100,000 G q 194 EPS20X8:$0.72 EPS20X7:$0.56 Workings 1 Calculation oftheeffectofthebonus issueontheweighted average ofshares 1/4/X7 30/09/X7 Bonus issue(1for4) 2 Number of Time Bonus Weighted shares apportionedfraction average 4,000,000 6/12 5/4 2,500,000 1,000,000 5,000,000 2,500,000 5,000,000 Calculation ofEPSfortheyearended 31March20X8 $0.72/ $0.56 Shares $'000 4,000 1,000 5,000 B/f1April20X7 Bonus issue(1for4) C/f 31March20X8 EPS20X8=3.6/ 5 =$0.72 3 195 B Calculation ofthe(restated) EPSfortheyearended 31March20X7 Restated EPS20X7=$0.704,000/ 5,000=$0.56(aftertakingintoaccount the effectofthebonus issueofshares inSeptember 20X7) $2.46 Workings Additional shares resulting fromconversion $100,000/$10 3 shares = 30,000 shares Totaldilutive number ofshares 100,000+30,000=130,000 Revised earnings $313,000 + (10%$100,000 70%)= $320,000 Diluted earnings pershare $320,000/130,000 =$2.46 Option Aignores theinterest saving afterconversion ($313,000/130,000 =$2.41). Option C ignores thetaxeffect ontheinterest saving afterconversion ($323,000/130,000 =$2.48). Option Dignores theincrease inshares andcalculates thebasicearnings pershare ($313,000/100,000 =$3.13) A N S W E R H S Answers181 Page 204 of 405 Powered By Ù q Section B Tunshill Co (Dec10) 196 D case Changeofaccounting estimate: Prospective application Thisisa changeofaccounting estimate sodoesnotneedtoberetrospectively applied. 197 $10,000,000 $m Original cost1October 20X0 20 Twoyearsdepreciation ((20/5) 2) (8) Carrying amount at1October 20X2 12 Depreciation to30September 20X3(12/6) (2) Carrying amount at30September 20X3 10 198 C Tunshill Cohasreclassified development costsfromotheroperating expenses tocost ofsales. Thisisa changeinpresentation soitisa changeofaccounting policy. 199 B Reduced by$400,000 Yearto30September 20X2 B/f1October 20X2 Yearto30September 20X3 At30September 20X3 G FIFO $m 15 AVCO $m 13.4 20 18 Current yearprofit $m (1.6) 1.6 ( 2.0) (0.4) Theneteffectat30September 20X3ofthisproposal willbetoreduce current year profits by$400,000. 200 Debit Costofsales Credit Inventory Thecreditentryreduces inventory. 182 Financial Reporting (FR) Page 205 of 405 H G q Part C Section A Interpretation 201 D of accounting ratios and trends Amanufacturer Thelowasset turnoversuggestsa capital-intensiveindustry.Thehighpercentage of depreciationsupports this theory that the businesshas a large amount of non-currentassets. Thisrulesout the estate agency or architecturalpractice. Supermarketscan also be capital-intensivebut tend to operate on lowprofit margins,and the cost ofsalespersonnelcostswouldbe includedwithinadministrative and sales costs, rather than the cost of manufacturingthe productitself,as ina manufacturingindustry. 202 Reducingthe payables payment periodwillincreasethe lengthof a company'soperating cycle. Thiswillreduceworkingcapital and means that it willtake longerto buildup working capital needed forproduction.Theotheroptionswillallspeed up the operatingcycle. 203 D 4.1% Working:(Dividends(3.4+11.1)/ Shareprice)100=14.5/ 350 100=4.1% 204 A 3.9% Profitmarginis a componentof ROCE:Profitmargin×Assetturnover=ROCE Working:16.3%/ 4.19=3.9% A N S W E R 205 7.5 Working:EPS=800 / 4,000 =$0.20. P/Eratio =150/ 20 =7.5 206 5.1% $'000 Profitbeforeinterestand tax 230 Capital employed(3,500+1,000) 4,500 =5.1% Limitations techniques of financial statements and H S interpretation 207 Theeffect of thisimpairmentwillincrease the ROCEratio of Cyan Co, and increase its gearingratio. Capital employed(assets)woulddecrease, increasingROCE.Theimpairmentlosswill reduceequity(revaluationsurplus)and so increasegearing. 208 A Thevalueof the inventorywillbe added to both currentassets and currentliabilities. Itwilladd proportionatelymoreto liabilitiesand so reducethe currentratio.The effect on the quickratio willbe evengreater as inventoryis excludedfromassets. 209 Operatingprofitmargin ROCE Decrease Increase Thenewproductwillhave an operatingprofitof 120/ 1,600=7.5%,so willreducethe currentmargin.Itwillhave a ROCEof 120/ 500 =24%,higherthan the current20%. Answers 183 Page 206 of 405 Powered By Ù q 210 C 211 B Obsolete inventory lines Obsolete goodscanleadtoa build-up ofunsold inventory, thereby increasing the holding period. Areduction inselling priceoranincrease indemand couldincrease salesleading toa fallintheholding period. Seasonal fluctuations willchangethe holding period throughout theyear,butshould notaffecttheyearonyearpicture. Overstatement ofprofits Theuseofhistorical costaccounting during a period ofinflation canleadto overstatement ofprofits. Non-current assetscarried athistorical costmaybe presented ata valuewellbelow theirfairvalue,leading tounderstated depreciation andconsequently overstated profits. Thiscanbecompounded bytheuseofFIFO,if inventory isheldatanoriginal costwhichissignificantly below replacement cost. Thechargetocostofsaleswillbeunderstated andprofitoverstated. Theuseofhistorical costaccounting willleadtounderstatement rather than overstatement ofnon-current assetvalues andwillnotaffectinterest costs.Itislikely toleadtooverstatement rather thanunderstatement ofROCE. 212 Renegotiating a loantosecure a lower interest rate Noeffect Applying theoptions recognition exemption toa lease contract under IFRS16Leases Reduce Repaying a loanjustbefore theyearendandtakingitout againatthebeginning ofthenextyear. Reduce 'Selling' anassetunder a saleandleaseback agreement Reduce 213 A G Enterintoa saleandshort-term leaseback, theterms ofwhichmeettherequirements tousetheoptional recognition exemption under IFRS16Leases. Thiswould beanunlikely transaction asitwould remove theassetfromthe statement offinancial position. Thedeferral method ofaccounting forgovernment grantsleaves thecarrying amount oftheassetintact,rather thandeducting theamount ofthegrantfromthe assetamount. Revaluing assetsistheobvious wayofincreasing thecarrying amount ofassets. Under thereducing balance method, moredepreciation ischarged intheearlier yearsofthelifeofanasset,soa changeto10%straight linewould reduce the depreciation chargeforthefirstfewyears.Ofcourse, thiseffectisonlytemporary asthechargewillcatchupaftera fewyears. 214 D Trentfactors withrecourse thereceivable ofitslargest customer Areceivable factored withrecourse willstillbeincluded intradereceivables atthe yearend.Seasonal trading willcreateparticular distortion ifthebusiest period isjust before theyearend.Cashsaleswillneedtoberemoved fromthecalculation andan adjustment willhavetobemadeforsalestax. Specialised, 215 C not-for-profit and public sector entities Shareholders Charities donotusually haveshareholders, inthecommercial senseoftheterm. 216 B Accruals Publicsector accounting needstomovefromcash-based accounting toapplication oftheaccruals concept. 184 Financial Reporting (FR) Page 207 of 405 H G q 217 Rentreceipts outstanding, interest paid,interest cover,financial actuals against budget Alocalcouncil would notpaydividends andwould beunlikely tomeasure ROCE,which dealswithreturn toinvestors. 218 Thecorrect answers are: Operating profitmargin andearnings pershare Charities donotoperate witha viewtoearning a profitanddonothaveshareholders. Inventory holding period isrelevant toa charityasthecharity willgenerate fundsbasedon theinventory itsells.Thecurrent ratiowillalsoberelevant astoremain viable, thecharity mustbeabletopayanyliabilities astheyfalldue. 219 B Funded bygovernment Publicsector bodies havea major advantage notgenerally enjoyed bycharities – government funding. 220 C Disclosure ofdividends pershare Not-for-profit entities donothavesharecapitalsodividends pershareisnot relevant. Theotherrequirements couldberelevant toa not-for-profit entity. 221 Thecorrect answers are: There isnorequirement tocalculate anearnings persharefigureasitisnotlikelytohave shareholders whoneedtoassess itsearnings performance. Itisprioritising non-financial KPIsoverfinancial targets. Theobjectives ofa not-for-profit entitydonotinclude making a profitsoitwould not calculate earnings pershareorreport toshareholders. However, itislikelytohaveto account tothetrustees oftheBoardofthecharity orentityusingnon-financial KPIs.For example, a hospital mayaccount formortality rates,ora children’s charity showthe numbers ofchildren assisted during theperiod. A N S W E R H S Answers185 Page 208 of 405 Powered By Ù G q Section Sandbag 222 B 223 C B plc case 1.29 Current ratio=current assets/current liabilities =133/103 =1.29 Makea rightsissueofordinary shares Thiswould increase bothcashandsharecapital,increasing current assetswithout incurring anyadditional liabilities. Offering a settlement discount tocustomers would makecashreceived lower than receivables whichwould decrease thecurrent ratio. Making a bonus issueofshares would generate nocashatallandwould notaffect thecurrent ratio. Selling current assetinvestments would simply replace onecurrent assetwith another, atthesameamount. 224 0.36 Acidtestratio=(current assets– inventories)/current liabilities =(133– 96)/103 = 0.36 225 Proposal 1 Proposal 2 Decrease ratio Increase ratio Proposal 1willcausetheacidtestratiotofallbecause, although receivables willconvert intocashmorequickly, theamount ofcashreceived willbelessthantheamount ofthe receivables. Current assetswillfallwithout anychangeincurrent liabilities, sotheacidtest ratiowillfall. Proposal 2 willcausetheacidtestratiotorise,bydelaying thereduction incashthat would occurbypayingsuppliers. Sincetheacidtestratioislessthan1,anything that prevents anequalfallincurrent assetsandcurrent liabilities willboosttheratio. 226 C Non-current assetturnover Amanufacturing company willhavehighnon-current assets(factory, plantand machinery), sothisratiowillmeasure howefficiently itisusingitsnon-current assets togenerate revenue. TheP/Eratioisa measure ofmarket confidence inthefuture oftheentity. Gearing relates tolong-term solvency andthecurrent ratiorelates toliquidity. 186 Financial Reporting (FR) Page 209 of 405 H G q Section 227 C Woodbank Co (Jun 2014 amended) Textreference. Chapter 19. Toptips.Thequestion makes itveryclearwhere youranalysis should beheading – theeffectof thepurchase ofShawCo– soconcentrate onthisandreview theinformation fromthisangle. Easymarks. Theratioswereeasymarks anda thorough reading ofthequestion would have givenyousomeobvious points tomake. Examining Team's comments. Manycandidates paidtoolittleattention totheincremental effect oftheacquisition ofShawCoandfewcommented onthefactthatprofitorlossonlyincluded the results ofShawCoforthreemonths. Thisleda lotofcandidates toconclude thattheacquisition wasnotadvantageous, whichisnottheconclusion borne outbytakingintoaccount the expected profits ofShawover12months. Marking scheme Marks 1markpervalidpoint(including 8 forratios) 20 (a)and(b) Ratio Woodbank Co 20X3 Woodbank Co 20X4 Working Working Woodbank Co 20X4 excluding Shaw Return on capital employed 10.5% (16,250+1,750) / (95,000+55,000) 12% (18,000– 5,000)/(150,000 – 50,000) 13% Gross profit margin 22% 33,000/150,000 22% (33,000– 9,000)/(150,000 – 30,000) 20% (18,000– 5,000)/(150,000 – 30,000) 10.8%12% Profit before interest andtax margin 9.1% (16,250 + 1,750) /150,000 Current ratio 1.7:1 27,000/25,000 Gearing (debt/(debt +equity)) 5.3% 55,000/ (55,000+ 95,000) 1.08:1 N/A 36.7% N/A A N S W E R H S N/A N/A Answers187 Page 210 of 405 Powered By Ù G q (c) Analysis ofperformance andposition Theacquisition ofShawCohasmaterially affected theresults ofWoodbank Cofortheyear ended 31March 20X4.Inorder tomakea meaningful comparison oftheperformance of Woodbank Coduring theyearto31March 20X4withitsperformance during theyearto 31March 20X3,itisnecessary toisolate theeffects oftheacquisition andconsider how Woodbank Co'sperformance would havelooked without ShawCo. Profitability ShawCohascontributed positively toprofitability withboththegrossprofit margin and profit before interest andtaxmargin bothbeinghigher aftertheacquisition. However the $50million ofloannotes which financed theacquisition haveincreased capital employed andsoexerted a downward pullonROCE.WithShawCo,ROCEis12%.Without ShawCoit would havebeen13%.Thisislikelytobeduetoonlythree months profits ofShawCobeing included inPBIT.If12months' profits wereused,wecouldexpect thereturn tobe correspondingly higher. Woodbank Co'sindividual grossprofithasdeclined by2%since20X3.Whilerevenue has risenby9%,costofsaleshasincreased by11%. However, Woodbank Cohasdonewellat keeping downexpenses anditsPBITmargin without ShawCo(10.8%) would havebeenup on20X3(9.1%). Itisimportant toremember thatShawCowasonlyowned forthefinal threemonths ofthefinancial year,notmuchtimefortheadditional assetstoshowa return. Itislikelythattheacquisition willenhance profitability toa greater extent overthe next12months. Liquidity Thecurrent ratioofWoodbank Cohasfallenfrom1.7:1 to1.08:1. Thisisa steepdrop.We canseeimmediately thatcashreserves havedeclined by$4.5million, whichislikelytobe duetousingcashreserves topartlyfundtheacquisition ofShawCo.Tradepayables have increased by$8million. Thissuggests thatWoodbank Coishaving trouble payingits suppliers ontimeorthatShawhada largeamount oftradepayables whichhavenowbeen consolidated within thegroup.Theretained earnings balance shows thatWoodbank Co paida dividend of$5.5million during 20X4.Thiswasperhaps unwise whenworking capital wasneeded tofinance expansion andpaytheadditional loaninterest. Hadthedividend notbeenpaidthecurrent ratiofor20X4would be1.3:1 – stilla fallfrom20X3,butless alarming. Gearing Gearing hasrisenfrom5.3%to36.7%,attributable toanadditional $50million loannotes issued tofinance theacquisition ofShawCo.Theinterest payments eachyearwillbe $5.5million whichisthesameastheamount ofthedividend paidin20X4.Shareholders mayexpect toreceive lessinfuture yearsastheservicing ofthedebtwilltakepriority, but hadtheacquisition beenfunded bya shareissuetheirreturns would havebeendiluted. Gearing of36.7%isstillwithin acceptable limits andfuture goodreturns fromthe acquisition willbuildupretained earnings andkeepgearing incheck. Conclusion Woodbank Co'sperformance would havebeenbroadly comparable totheprevious year hadnoacquisition takenplace.Theacquisition ofShawCohashada detrimental effecton liquidity andgearing for20X4butappears fromthreemonths results tohavethecapacity tosignificantly increase profits forWoodbank Co.Itseems likelythatovera longer period thiswillalsoimprove liquidity andgearing, givinganoverall positive result forshareholders. 188 Financial Reporting (FR) Page 211 of 405 H q 228 Hassle Co Textreferences.Chapters 19and 20. Toptips. Clearlylayingout the calculations,especiallyforthe ratioswas vitalinthisquestion. Youshouldensureyou showyourworkingsor underlyingformulaforallratiocalculations performed.Rememberto state whetheran adjustmentmakesan increaseor decrease inprofit (showdecreases inbrackets).Calculatingthe ratiosinthe correctway gained easy marks,but additionalmarksweregivenforadding commentsrelevantto the situation. Easymarks.Calculationof ratios,rememberto showyourworkings(as the revisedfigureswere used, it was imperativeto showthe workingsor zeromarksweregiven).Amarkwas givenfor stating a conclusion,whichthe markersencouraged. (a) ROCE Pre-taxROE Netasset turnover Grossprofitmargin Operatingprofitmargin Currentratio Closinginventory holdingperiod Tradereceivables collectionperiod Tradepayables payment period Gearing Interestcover Dividendcover G (b) (2,500– 500 – 10)/(2,800+3,200 +3,000 +500)% (1,400/2,800)% 20,500/(14,800– 5,700) (2,500/20,500)% (2,000/20,500)% 7,300/5,700 =20.9% =50% =2.3 times =12.2% =9.8% =1.3: 1 (3,600/18,000)365 =73days (3,700/20,500)365 =66 days (3,800/18,000)365 (3,200+500 +3,000)/9,500% 2,000/600 1,000/700 =77days =71% =3.3 times =1.4times Assessmentof relativepositionand performanceof AstralCo and BreakoutCo Profitability Atfirstsightit appears that HassleCo wouldsee a muchgreater returnon its investmentif it acquiredBreakoutCo rather than AstralCo. Acloseranalysisof the figuressuggeststhat thismay not be the case. BreakoutCo has a ROCEover40%higherthan AstralCo's and a ROEmorethan double AstralCo's ROE.However,the differenceis due moreto the lowerlevelof equityin BreakoutCo than to the superiorityof its profit.BreakoutCo's equity($2.8m)is onlyhalf that of AstralCo ($5.5m).Thisreducesthe denominatorforROCEand doublesthe ROE.In addition,onlyAstralCo has revaluedits assets (evidencedby the existenceof the revaluationsurplus).Increasesinasset valuehave a negativeimpacton ROCEbut do not contributeto earnings,hence the ROCEmeasuremay appear worseforAstralCo. Acloser lookat the profitsof both companiesshowsthat the operatingprofitmarginof AstralCo is 10.5%and that of BreakoutCo is 9.75%. Thenet asset turnoverof BreakoutCo (2.3times)suggeststhat it is runningthe more efficientoperation.BreakoutCo has certainlyachieveda muchgreater turnoverthan AstralCo and witha lowerlevelof net assets, thoughagain, thiscouldbe due to the revaluationof AstralCo's assets. Theproblemis that, on a muchhigherlevelof turnover,its net profitis not muchhigherthan AstralCo's. A N S W E R H S Furtheranalysisof net assets showsthat AstralCo ownsits factory, whileBreakoutCo's factory mustbe rented, partly accountingforthe higherlevelof operatingexpenses.Astral Co's factory is carriedat currentvalue,as shownby the propertyrevaluationsurplus, whichincreasesthe negativeimpacton AstralCo's ROCE. Answers 189 Page 212 of 405 Powered By Ù q Gearing Breakout Cohasdouble thegearing ofAstral Co,duetoitsleaseobligations. At7.5% Breakout Coispayinglessontheleasethanonitsloannotes, butthisstillamounts toa doubling ofitsinterest payments. Itsinterest coveris3.4times compared to6 times for Astral Co,making itslevelofriskhigher. Ina badyearBreakout Cocouldhavetrouble servicing itsdebtsandhavenothing lefttopaytoshareholders. However, thefactthat Breakout Cohaschosen tooperate witha higher levelofgearing rather thanraisefunds froma shareissuealsoincreases thepotential return toshareholders. Liquidity Astral CoandBreakout Cohavebroadly similar current ratios, butshowing a slightly higher levelofriskinthecaseofBreakout Co.Breakout Coisalsorunning anoverdraft whileAstral Cohas$1.2m inthebank.Astral Coispursuing itsreceivables slightly less aggressively thanBreakout Co,buttakingsignificantly longer topayitssuppliers. Asthis doesnotappear tobeduetoshortage ofcash,itmustbeduetoAstral Cobeingableto negotiate morefavourable terms thanBreakout Co. Summary Breakout Cohasa higher turnover thanAstral Coanda policyofpayingoutmostofits earnings toshareholders. Thismakes itanattractive proposition froma shareholder viewpoint. However, ifitsturnover weretofall,therewould belittlelefttodistribute. Thisis theriskandreturn ofa highlygeared company. Breakout Coisalready running an overdraft andsohasnocashtoinvest inanymoreplantandequipment. Inthelightofthis, itsdividend policyisnotparticularly wise.Astral Cohasa lower turnover anda muchmore conservative dividend policybutmaybea better long-term investment. Hassle Co's decision willprobably depend uponitsattitude toriskandtherelative purchase pricesof Astral CoandBreakout Co. 229 Funject Co G H Textreferences. Chapters 19and20 Toptips.Clearlylayingoutthecalculations, especially fortheratioswasvitalinthisquestion. Youshould ensure youshowyourworkings orunderlying formula forallratiocalculations performed. Remember tostatewhether anadjustment makes anincrease ordecrease inprofit (showdecreases inbrackets). Calculating theratiosinthecorrect waygainedeasymarks, but additional marks weregivenforaddingcomments relevant tothesituation. Easymarks. Calculation ofratios, remember tousethepreformatted response areaprovided and showyourworkings (astherevised figures wereused,itwasimperative toshowtheworkings or zeromarks weregiven).Amarkwasgivenforstating a conclusion, whichthemarkers encouraged. Examining Team's comments. Mostanswers confined themselves togivinga textbook based explanation ofwhattheratiotoldusersandwhether thecompany's ratiowashigher orlower thantheindustry average. Someanswers wentontosuggest whether thecompany ratioswere better orworse thantheindustry averages, butveryfewprovided anyfurther analysis. Better answers referred tothediffering performance ofthedivision disposed ofanditsimpact onthe company's results. 190 Financial Reporting (FR) Page 213 of 405 q Marking scheme Marks (a) (b) (c) (a) Adjustment torevenue andcostofsales Disposal ofnon-core division Management charge(remove old,addnew) Rentexpense (remove current, addcommercial) 1 1 1 1 Calculation ofratios Profitability comments Liquidity comments Gearing comments Conclusion 5 3 1 1 10 20 Restated financial information Statement ofprofitorloss 20X4 $'000 52,100 (20,300) 31,800 (12,212) 19,588 Revenue (54,200– 2,100(note1)) Costofsales(21,500– 1,200(note1) Grossprofit Operating expenses (W1) Profitbefore tax G 4 6 H S W1Restatement ofoperating expenses Asperquestion Less:expenses relating tonon-core division lossondisposal ofnon-core division Gamilton Groupmanagement charge(54,2001%) Add:Funject management charge(31,800 10%) Less:rentcharged byGamilton Group Add:commercial rent (b) A N S W E R 1,700 (700) 1,500) (542) 3,180 (46) 120 2,212 Profithasdecreased from$21,000,000 to$19,588,000 andtheresulting journal entrywill be($'000s): DebitRetained earnings (21,000– 19,588) CreditCash Ratiocalculations $1,412 $1,412 IndustryKPIs 20X4 Working Grossprofitmargin 45% 31,800/52,000 100 61% Operating profitmargin 28% 19,588/52,100 100 38% 41days (5,700/52,100) 365 40 (12,900– 1,412)/11,600 1:1 Receivables collection period Current ratio 1.6:1 Aspect Co 20X4 Answers191 Page 214 of 405 Powered By Ù G q Industry KPIs 20X4 (c) Working Aspect Co 20X4 Acidtest (quick)ratio 1.4:1 (12,900– 4,900 – 1,412)/(11,600) 0.57:1 Gearing(debt/equity) 240% 16,700/ (9,000 – 1,412) 220% Commentaryon performance Profitability Thediscontinuedoperationhad a grossprofit%(GP%)of 43%(900/2,100100)and an operatingprofit%(OP%)of 10%(200/2,100100).Beforeadjustingforthe disposal, AspectCo has a GP%of 60%.Afteran adjustmenthas been made to reflectthe disposal, AspectCo's GP%is 61%whichis higherthan the industryaverage of 45%.Thus,it would appear that the disposalof the non-coredivisionhas had a positiveimpacton the GP%of AspectCo. Sucha positivecomparisonof the GP%to the industryaverage wouldsuggest that AspectCo has negotiateda verygood deal withits suppliersforthe cost of goodsin comparisonto its competitors;the GP%is 16%(61– 45)higherthan the industryaverage. However,whenconsideringthe OP%,the financialstatements have been adjustedto reflect: (i) the disposalof the discontinuedoperation; (ii) a newmanagementcharge whichwouldbe imposedby FunjectCo; and (iii) commercialrent charges. Theseadjustmentsresultinan OP%of 38%.So,althoughthe OP%is still10%(38– 28) higherthan the industryaverage, it wouldappear that someof the advantage of having such a good deal withits suppliersis lostwhenoperatingcosts are incurred.TheOP%does not outperformthe industryaverage to the same extentthat GP%did.Althoughthe managementcharge willbe eliminatedas an intra-grouptransactionon consolidation,it willstillhave an impactinthe individualfinancialstatements of AspectCo. However,there is no indicationof what thischarge is forand whetheror not it representsa marketvalue forthese costs. Therent of $120,000is deemedto be a fairmarketvaluewhichwould indicatethat the previousrent charge of $46,000 was artificiallylow.IfFunjectCo acquiresAspectCo, it may wishto capitaliseon the relationshipwhichAspectCo has with its supplierof goodsbut it mightalso need to investigatethe compositionof operating costs otherthan those describedaboveto see ifany of these can be avoided/reduced. Liquidity AspectCo's receivablescollectionperiodappears to be comparablewiththe KPIsprovided (40 days incomparisonto 41days). Termsof trade of 30 days are quitereasonable (thoughthisusuallydepends on the type of business)and so there are no causes for concernhere. Giventhat AspectCo's receivablescollectionperiodiscomparableto the industryaverage, the differenceinthe currentratio(1·1:1 incomparisonto 1·6:1)can onlybe explainedby eitherlowercurrentassets other than receivables(forexample,cash) or highercurrent liabilities.AsAspectCo's cash balance does not appear to be low($2·3m),thissuggests that its liabilitiesmightbe higherthan average. PerhapsAspectCo's favourable relationshipwithits suppliersalso extendsto longerthan average creditterms.AsAspect Co's acid (quick)ratio (0·57:1)is muchlessthan the industryaverage (1·4:1), thiswouldalso suggest that AspectCo is holdinga higherthan average levelof inventory.Thismay raisea concernabout AspectCo's abilityto sellits inventory.Thereis also a currenttax billto consider.Indeed,ifAspectCo wereasked to settleits currentliabilitiesfrommerelyits receivablesand bank, it wouldbe unableto do so. PerhapsFunjectCo may wishto further investigatethe proceduresassociated withthe purchase and holdingof AspectCo's inventorypriorto a takeover.Asa parent company, FunjectCo shouldbe able to influence these proceduresand have morecontroloverthe levelsof inventoryheld. 192 FinancialReporting(FR) Page 215 of 405 H G q Gearing AspectCo appears to be highlygeared but perhaps thisis not a huge cause forconcern because it appears to be a highlygeared industry(220%comparedto 240%).Itmay be that the proceedsfromthe sale of the non-coredivisioncan be/wereused to pay down loans.Asthe gearingforthe industryis higherthan that of AspectCo, it may be that AspectCo couldstillincreaseborrowingsinfuture.Ifso, AspectCo may need to increase workingcapital efficiencyand reducecosts inorderto generate enoughcash to service higherborrowings. Conclusion Overall,Aspect'sstatement of financialpositiongiveslittlecause forconcern;the profitabilitymarginsappear to be healthyalthoughfurtherinvestigationsof operating costs and workingcapital efficiencymay be required.Moreinformationalso needs to be obtainedabout the nature of the businessand perhaps the financialstatements of several years (as opposedto one)mightalso be beneficial. 230 Harbin Co Textreferences.Chapters 19and 20. Toptips. Youhave been givenmostof the ratiosinthisquestion.Youcan probablysee that additionalratiosare relevanthere, to illustratethe effectof the purchase of FatimaCo. The examiningteam frequentlypointsout that to comparetworatiosand say somethingwentup or downis not analysis.Youmustlookbehindthe numbersand makerelevantsuggestions,specific to the scenario,regardingwhythishas happened. Easymarks.Youweretoldthat the purchase of FatimaCo was significant,so you mustallowfor thisinlookingat the ratiosand computeadditionalratiosas needed. Ifyou did this,the ratios gave you plentyto analyse. ExaminingTeam'scomments.Unfortunately,the performanceassessmentinthisquestionwas quitepoor. Somecandidates did not evenpointout obviousissuesarisingfromthe purchase of FatimaCo. A N S W E R H S Markingscheme Marks Ratios Considerationof chiefexecutive'sreport Impactof purchase Remainingissues– ½ markper validpoint (a) 8 3 6 3 20 Ratiosfor 20X7 20X6 Working 20X7 11.2% Returnon capital employed 7.1% (16,000+8,000)/ (114,000+100,000) Netasset turnover 1.6 250,000 / (114,000+100,000) 1.17 Netprofitmargin 4.4% (16,000+8,000) / 250,000 9.6% Currentratio 2.5:1 38,000 / 44,000 0.86:1 Answers 193 Page 216 of 405 Powered By Ù G q 20X6 (b) Working 20X7 Closinginventory holding period 37days 25,000/ 200,000365 46days Tradereceivables' collection period 16days 13,000/250,000 365 9days Tradepayables' payment period 32days 23,000/ 200,000365 42days Gearing Nil 46.7% 100,000/ (114,000 +100,000) Itisimportant tolookatthe20X7ratioswhichhavebeenaffected bytheacquisition and seewhattheywould havebeenwithout theaddition ofFatima Co'sresults. Theadditional ratiosareattheendofthisreport. Profitability Itisimmediately apparent thatwithout thepurchase ofFatima Cothechiefexecutive's report would havelooked verydifferent. Theincrease insalesrevenue of39%would have disappeared. Thesalesrevenue ofHarbin Coisstatic.Theincrease ingrossprofitmargin from16.7% to20%would havebeena fallto11.1%. Theprofitfortheperiod would nothave doubled. Itwould havegonefroman$8million profitbefore taxin20X6toa $2million profitbefore taxin20X7,assuming thattheloannoteinterest would nothavearisen. This would havegivenanROCEof2.05%for20X7rather thanthe11.2% whenFatima Cois included. IfwebreakROCEdownintonetprofit% andassetturnover, wecanseethat Fatima Co'sresults haveincreased thenetprofit% byalmost ninetimes, whilehaving an adverse effectontheassetturnover duetothe$100million funding through loannotes. There issomedistortion inthe20X7figures arising frominterest charges whicharenot deducted incalculating ROCEbuthavebeendeducted inarriving atnetprofit. Liquidity Whileithasgreatlyenhanced Harbin Co'sprofitability, thepurchase ofFatima Cohas donelittleforliquidity, anaspectnottouched onintheextract fromthechiefexecutive's report. Harbin Coborrowed $100million topayforFatima Co,sothepurchase wasnot funded fromworking capital.However, ithaspaid$8million loannoteinterest, increased itsinventory holding by$10million, invested inadditional property, plantandequipment andpaida $10million dividend. Inthiswayithas,despite theincreased profit, converted a positive cashbalance of$14million toanoverdraft of$17million. Theratiosshowthisvery clearly. Harbin Co'scurrent ratiohasdeclined from2.5:1to0.86:1anditsquickratio(not shown above) hasdeclined from1.47:1 to0.30:1,castingsomedoubtuponwhether itwillbe abletocontinue tomeetitscommitments astheyfalldue. Theincrease intheinventory holding period isworrying, asitsuggests thatHarbin Comay haveinventory whichisslowmoving, andtheincrease inthepayables period bytendays suggests problems payingsuppliers. Harbin Cohasa $4million taxbilloutstanding. Ifthis isnotpaidontimeitwillincurinterest, whichwillfurther weaken thecashposition. Gearing Thecostofacquiring Fatima Coisdirectly reflected inthegearing ratio,whichhasgone fromnilin20X6to46.7%in20X7,withtheissueoftheloannotes. Thiswillreduce profits available fordistribution toshareholders inthefuture andifHarbin Co'scashposition does notimprove itmaybeforcedtoseekfurther loans.Inthelightofthis,theincrease of25% inthedividend ishardtojustify. Conclusion Itisclearthattheacquisition ofFatima Cohashada positive impact ontheprofitability of Harbin Co'sfortheyearended 30September 20X7buthasincreased thegearing ofthe company astheacquisition wasfinanced bydebt.There hasbeenlittleimpact onliquidity. 194 Financial Reporting (FR) Page 217 of 405 H q Appendix – ratiosadjusted forpurchase ofFatimaCo WithFatima Without Fatima Co Co 20X7 20X7 11.2% 2.05% Return oncapitalemployed 24,000*– 22,000/ 114,000 – (22,000– 5.500**) (profit before interest andtaxovertotalassetsless current liabilities) Netasset(equaltocapitalemployed) turnover 1.17 250,000– 70,000/ 114,000 – (22,000– 5,500) 1.85 Netprofitmargin 9.6% 24,000– 22,000/ 250,000– 70,000 1.1% *Without theacquisition ofFatima Cothefinance costsof$8,000would notbeincurred. **$5,500=25%tax 231 Quartile Co (Dec 2012 amended) Textreferences. Chapters 19and20. Toptips.A bitofplanning isuseful fora question likethisandthecategories ofprofitability, liquidity andgearing giveyoua structure around whichtobaseyouranalysis. Notethatthisisa retailbusiness, sothiswillaffecttheratios. Easymarks. Analysis oftheratiosisstraightforward andsomeuseful points onthelimitations on usefulness ofa sector average comparison couldhaveearned fourmarks. Marking scheme Marks G (a) Ratios (b) 1markpervalidcomment Totalforquestion 8 12 20 A N S W E R H S (a) Sectoraverage Working Quartile Co 16.8% (3,400+800)/ (26,600 12.1% +8,000) 1.4times 56,000(26,600+8,000) 1.6times 35% 14,000/ 56,000 25% 12% (14,000– 9,800)/ 7.5% 56,000 Current ratio 1.25:1 11,200/7,200 1.55:1 Average inventory turnover 3 times 42,000/ 10,200 4.1times 64days 5,400/42,000 365 Tradepayables' payment period 47days Gearing 38% 8,000/ (26,600+8,000) 33% Analysis offinancial andoperating performance ofQuartile Cocompared tosector average Profitability Quartile Cohasa ROCEsignificantly lowerat12.1% thanthesector average of16.8%. This ismainly duetothelower thanaverage grossprofitmargin andconsequent lowoperating profitmargin. Theoperating expenses areactually lower (17.5%) asa percentage of revenue thanthesector average of23%(35%– 12%)sotheproblem liesbetween revenue andcostofsales.Thisisconsistent withthefactthedirectors regularly hold'allstockmust go'sales,wheninventory willbesoldata discount toitsnormal retailpricestoencourage Return onyear-end capital employed (ROCE) Netassetturnover Grossprofitmargin Operating profitmargin (b) Answers195 Page 218 of 405 Powered By Ù q salestobemade.Theinventory turnover isquitebrisk(4.5times compared toa sector average of3 times) butQuartile Co'smark-up of33.3%((25/ 75)100)issignificantly below thesector average of54%((35/ 65)100).Quartile Coismaintaining turnover by keeping pricesdown. Theothercomponent ofROCE,netassetturnover, isslightly higher thanthesector average. Thisisduetothebuoyant turnover, astheratiowillhavebeendepressed bythe property revaluation andthecapitalisation ofthedevelopment expenditure, whichhave increased theassetbase.Itistobehoped thatthedevelopment expenditure willgenerate theexpected revenue. Ifithadbeennecessary toexpense itfortheyearended 30September 20X2Quartile Cowould havereported a lossbefore taxof$1.6million. Liquidity Quartile Cohasa current ratioof1.55:1 compared tothesector average of1.25:1. Both appear low,butsatisfactory fortheretail sector asthecashcycleisfairlyrapid.Inventory canbeturned intoimmediate cashandthisisparticularly trueforQuartile Cowithitshigh inventory turnover level.Ithasnotradereceivables which isconsistent withexpectations for a retail company. Thelower thanaverage payables days(45compared to64)andthe absence ofanoverdraft suggest thatQuartile Coisnotsuffering liquidity problems. Gearing Quartile Co'sdebttoequityratiois30%,wellbelow thesector average of38%andthe interest rateontheloannotesisbelow theROCEof12.1%, meaning thattheborrowings areearning a goodreturn forthebusiness. Theloannotesneedtoberepaid intwoyears' andthecompany doesnotcurrently havesufficient cashreserves torepaytheloan.The company paida largedividend of$1.5m intheyearanditwould beadvisable nottomake suchlargepayments inthefuture inordertofundtheloanrepayments. Theinterest cover of5.25times (4,200/ 800)issatisfactory. Quartile Coisnothaving anyproblems servicing itsloanandisunlikely togivelenders anyparticular concern. Conclusion There arenogoingconcern worries forQuartile Cobutitdoeshaveanissuewithlow profitability. Itappears tobepositioned atthebottom endofthejewellery market selling highvolume cheapitems rather thanmorevaluable piecesonwhichtherewould be significantly higher profitmargins. Thismayormaynotbethemostadvantageous strategy ina period ofrecession. G 232 Mowair Co (Sept/Dec 2017) Textreferences. Chapters 19and20. Toptips.Following calculation oftheratios, itisimportant toconsider thenarrative behind the scenario notjustthefinancial information provided. Thisquestion givessuitable headings aspart Basksforcommentary onthe'performance' and'position' ofthebusiness. Asthisisa discussion question, itisexpected thatthecandidate cansupplya suitable conclusion, evenifonlya short paragraph orcouple ofsentences asthisshows anunderstanding ofthewhole question andthat thecandidate canpulltheiranswer together. Easymarks. Ensure workings (orunderlying formula) areshown forthecalculation oftheratios (which isgenerally performed wellbycandidates). Marks areawarded notjustfortheratioanswers, butalsofortheworkings behind them. Examining Team's comments. TheExamining Teamarelooking formeaningful useofthe scenario, notjuststating thatratioshaveimproved/worsened, thereneedstoberelevant suggested reasons whythesechanges mayhaveoccurred. Calculation ofratioswasperformed well,however, candidates arenotusingalltheinformation provided inthequestion when answering theanalysis question inpartB. 196 Financial Reporting (FR) Page 219 of 405 H q Marking scheme Marks (a) Ratiocalculations 6 (b) Performance Position Future issues ofconcern Conclusion 6 4 3 1 6 14 20 (a) 20X7 Workings 20X6 Workings Operating profitmargin 8.0% 12,300/154,000 11.7% 18,600/159,000 Return oncapital employed 3.6% 12,300/(192,100 + 130,960 + 19,440) 8.7% 18,600/(44,800 + 150,400+ 19,440) Netassetturnover 0.45times 154,000/(192,100 + 0.74times 159,000/(44,800 + 150,400 +19,440) 130,960 + 19,440) Current ratio 0.53:1 Interest cover 1.3times 12,300/9,200 15,980/29,920 Gearing (Debt/Equity) 78.3% G (b) 1.22:1 28,890/23,690 1.8times 18,600/10,200 (130,960 + 379.1% 19,440)/192,100 (150,400 + 19,440)/44,800 Performance Mowair Co'srevenue hasdeclined intheyear.AsMowair Cohashadexactly thesame number offlights intheyear,thedecline mustbeduetoeither lowernumbers of passengers orfromMowair Co reducing thepriceoncertain flights. Tosubstantiate this,it would behelpful toseethenumber ofpassengers whohaveflown onMowair Coflights during theyear. Inaddition tothedecline inrevenue, there hasbeena decline intheoperating profit margin intheyear.Asthenumber offlights operated byMowair Cohasremained thesame,itwould appear thata number ofthecostsincurred byMowair Coonoperating theairline willbe relatively fixedandmaynothavechanged significantly during theyear.Ithasbeennoted thatthere hasbeenanincrease incostoflicences charged byairports during theyear,which would againcausetheoperating profit margin tofallasamortisation would behigher. This onlyoccurred inApril20X7,sothefullimpact willnotactually befeltuntilnextyear. Inaddition tothis,itimportant tonotethattherearenumerous contracts upforrenewal inthenextyear.Thiscouldleadtohigher pricesforusingtheairports, andmayevenresult inMowair Cobeingunable tousethoseairports infuture. Ifthiswasthecase,itmayhave asignificant impact ontherevenue forthebusiness, asthesearedescribed asmajor airports, which willhavethehigher levels ofdemand. Return oncapitalemployed hasdeclined significantly intheyear.There aretwomajor reasons forthis.First,therehasbeena decline intheprofitfromoperations, asdiscussed above.Inaddition tothis,Mowair Cohasrevalued itsnon-current assetsintheyear.This means thatthere isa largerevaluation surplus in20X7which wasnotpresent in20X6.This willhavetheeffectofreducing thereturn oncapitalemployed duetotherebeinga much largertotalbalance inequity. Ifthereturn oncapitalemployed iscalculated without this, itwould be6·2%,whichstillrepresents a decline inperformance. A N S W E R H S Answers197 Page 220 of 405 Powered By Ù q Looking atthenetassetturnover, thishasdeclined dramatically from0·74timesto0·45 times. Thiswillagainbeaffected bytherevaluation surplus, making thetwoyears incomparable. Ifthisisremoved fromthecalculation, thenetassetturnover increases to 0·78times. Thisisa slightincrease inperformance. Thisincrease hasnotcomefrom increased revenue, asitcanbeseenthatrevenue hasfallenby$5million. Rather, this increase hascomefromthedecrease incapitalemployed. Thisarisesfromthereduction in theloannotes, whichappear tohavea significant amount repaid annually. Position Thevalueofnon-current assetshasrisensharply intheyear,by$147million. Alarge proportion ofthatwillbeduetotherevaluation whichhastakenplace,leading toan increase of$145million. Thissuggests thatMowair Cohasacquired somenewassetsin theyear,butitisunclear whattheseare.Theymaybereplacement components on aircraft, asitisunlikely tobesignificant enough tobeanactualnewaircraft itself. Thelevelofdebtinthebusiness isa concern, asthismakes upa significant portion ofthe entity's financing, andappears toincura largeannual repayment. Thereduction inthe current ratiocanbeattributed tothelargedecrease incash,whichislikelytobedueto thedebtrepayments made. Itisworth noting thatMowair Co isalmost completely funded bydebt,witha relatively smallamount heldinsharecapital.Therefore, thereisanopportunity fora newinvestor to consider putting moremoney intothebusiness intheformofshares andthecompany thenrepaying someoftheloansheldbyMowair Co.AsMowair Coiscurrently repaying $19million a yearontheloans,itmaybemoresensible torepaytheseifpossible, freeing upa lotmorecashforgrowing thebusiness ortobereturned annually intheformof dividends, alsosaving$9million a yearininterest. Issues toconsider inthefuture Therearea number ofthingstoconsider regarding thefuture performance ofMowair Co. Thefirstoftheseisthetenmajor licences whicharedueforrenegotiation withairports. If thepriceisraised onthese, thenthiswillleadtoreduced profits beingmadebyMowair Co infuture periods. Thedebtappears tobebeingrepaid inannual instalments of$19million, meaning that Mowair Coneeds togenerate sufficient cashtorepaythateachyear,before returning any profit totheowner. Inaddition tothis,the$9million interest means thatthebusiness appears currently unable toreturn anycashtoinvestors. Finally, Mowair Co'sbusiness model isheavily dependent onlarge,expensive itemsofnoncurrent assets. Ithasbeennotedthattherehasbeencriticism ofunder-investment in these,sothiscouldleadtolargepotential outlays inthenearfuture toreplace assets. Conclusion Mowair Cohasnotshown a weakened performance inthecurrent year,butappears tobea profitable business atitscore.Themajor issuewiththebusiness isthelevelofdebt,whichis resulting in$19million annual repayments and$9million annual interest. Anynewinvestor whowasabletoreduce theseamounts aspartofanyfuture purchase, would putthe business ina muchstronger cashposition. G 233 Perkins Co (Mar/Jun 2018) Textreferences. Chapters 19and20. Toptips.Startwiththecalculations intheordertheyarepresented intherequirement. Ensure thatthetimeapportionment iscorrectly calculated forthenumber ofmonths thatthesubsidiary isowned. Usetheheadings giveninthequestion whenstructuring thenarrative answer, and consider whatthecalculated ratiosrepresent (forexample, liquidity) andsowhatthoseratios haveinformed theuserofthefinancial statements. Easymarks. Ensure workings (orunderlying formula) areshown forthecalculation oftheratios (which isgenerally performed wellbycandidates). Marks areawarded notjustfortheratio answers, butalsofortheworkings behind them. 198 Financial Reporting (FR) Page 221 of 405 H q Examining Team's comments. Onceagain,theExamining Teamhaveindicated thatnarrative analysis isbriefornotrelevant tothescenario, forexample, omitting thedisposal ofthe subsidiary. Thelossondisposal isgenerally performed well,butbecareful toensure timeapportionment oftheresults onthesubsidiary whencompleting thestatement ofprofitorloss. Marking scheme Marks (a) Proceeds Goodwill Netassets NCI 0.5 2.5 0.5 1.5 (b) Revenue andCOS Othercosts 2 2 (c) Ratios (d) Grossprofitmargin Operating profitmargin Interest cover Conclusion (a) 2 5 1 1 5 4 2 9 20 Gainondisposal inPerkins groupconsolidated statement ofprofitorloss $’000 28,640 (4,300) (26,100) 6,160 4,400 G Proceeds Less:Goodwill (w1) Less:Netassetsatdisposal Add:NCIatdisposal (w2) A N S W E R H S Workings 1 Goodwill Consideration NCIatacquisition Less:Netassetsatacquisition 2 $’000 19,200 4,900 (19,800) 4,300 NCIatdisposal $’000 4,900 (1,260) 6,160 NCIatacquisition 20%(26,100– 19,800) Answers199 Page 222 of 405 Powered By Ù G q (b) (c) (d) Adjusted P/Lextracts: $’000 Revenue (46,220– 9,000(S8/12)+ 1,000(intra-group)) 38,220 Costofsales(23,980– 4,400(S8/12))[seenote] (19,580) Grossprofit 18,640 Operating expenses (3,300– 1,673(S8/12)+ 9,440profitondisposal) (11,067) Profitfromoperations 7,573 Finance costs(960– 800(S8/12)) (160) Note:Originally, theintra-group saleresulted in$1million turnover and$0.7million costsof sales.These amounts wererecorded intheindividual financial statements ofPerkins Co. Onconsolidation, the$1million turnover waseliminated – thisneedstobeaddedback. Thecorresponding $1million COSconsolidation adjustment istechnically madetoSwanson Co'sfinancial statements andsocanbeignored here. RatiosofPerkins Co,eliminating impact ofSwanson Coandthedisposal during theyear 20X7 Working 20X7 20X6 recalculated (seeP/Labove) original Grossprofitmargin 48.8% 18,640/38,220 48.1% 44.8% Operating margin 19.8% 7,573/38,220 41% 16.8% Interest cover 47.3times 7,573/160 19.7times 3.5times Analysis ofPerkins Co Grossprofitmargin Inlooking atthegrossmargin ofPerkins Co,theunderlying margin madebyPerkins Cois higher thanin20X6. Aftertheremoval ofSwanson Co'sresults, thiscontinues toincrease, despite Swanson Co having a grossmargin ofover50%.Itispossible thatSwanson Co'sgrossprofit margin was artificially inflated byobtaining cheapsupplies fromPerkins Co. Perkins Comakes a margin of48.8%,butonlysoldgoodstoSwanson at30%. Operating margin Theoperating margin appears tohaveincreased significantly ontheprioryear.Itmustbe noted thatthiscontains theprofit ondisposal ofSwanson Co,whichincreases this significantly. Removing theimpact oftheSwanson Codisposal stillshows thatthemargin isimproved on theprioryear,butitismuchmoreinline. Swanson Co'soperating margin is32.6%,significantly higher thanthemargin earned by Perkins Co,againsuggesting thata profitable business hasbeensold.Thisislikelytobe duetothefactthatSwanson CowasabletousePerkins Co'sfacilities withnocharge, meaning itsoperating expenses wereunderstated compared tothemarket prices. Itislikelythattherentalincome earned fromthenewtenant hashelped toimprove the operating margin, andthisshould increase further oncethetenant hasbeeninfora full year. Interest cover Initially, theinterest coverhasshown goodimprovement in20X7compared to20X6,as therehasbeena significant increase inprofits. Evenwiththeprofitondisposal stripped out,theinterest coverwould stillbeveryhealthy. Following theremoval ofSwanson Co,theinterest coverisimproved further. Thismaybe because thedisposal ofSwanson Cohasallowed Perkins Cotorepaydebtandreduce the interest expense incurred. 200 Financial Reporting (FR) Page 223 of 405 H q Conclusion Swanson Co seems tohavebeena profitable company, whichraisesquestions overthe disposal. However, someoftheseprofits mayhavebeenderived fromfavourable terms with Perkins Co,suchascheapsupplies andfreerental. Itisworth noting thatPerkins Conow hasrental income intheyear.Thisshould growinfuture periods, asthisislikelytobeafull year'sincome infuture periods. 234 Pirlo Co Marking scheme Marks (a) Disposal 5 (b) Ratios 3 (c) Revenue/margins Otherandconclusion (a) 6 6 Gain/loss ondisposal (i) Individual financial statements ofPirloCo G (ii) Salesproceeds Costofinvestment Gainondisposal Consolidated financial statements ofthePirlogroup Salesproceeds Less:goodwill Less:netassets($260m+$50mFV) Add:NCI Lossondisposal (b) $’000 300,000 (210,000) 90,000 A N S W E R H S $’000 300,000 (70,000) (310,000) 66,000 (14,000) Keyratios 20X9 20X8 45.8% 44.9% (97,860/213,480) 100% (97,310/216,820) 100% Operating margin 11.9% 13.5% (25,500/213,480) 100% (29,170/216,820) 100% Interest cover 1.43 1.8 (25,500/17,800) (29,170/16,200) Comment ontheperformance Therevenue forthegroupfortheyearhasactually declined intheyear.Thescenario statesthattheSambaCorevenue hasremained thesameinbothyears,sothisdecrease appears torepresent a decline fromtheremaining companies inthegroup. Whilsttherehasbeenanoverall decline inrevenue, thegrossprofitmargin has improved in20X9(44.9%increased to45.8%).SambaCohasa significantly higher gross profit margin (81%) inrelation totherestofthegroup,suggesting thattherestofthePirlo groupoperates ata lower grossprofitmargin. Grossprofitmargin (c) 12 30 Answers201 Page 224 of 405 Powered By Ù q Theoperating profit margin ofthegrouphasdeteriorated in20X9(13.5% hasdecreased to 11.9%). Thisisinitially surprising duetothesignificant increase intheoperating profit margin ofSambaCo(41%hasincreased to66%).However, theincrease inSambaCo's operating profitmargin maynotrepresent a trueincrease inperformance inSambaCo duetothefollowing: SambaCohasrecorded a $2mprofitondisposal ofitsproperties, whichwillinflate itsprofitfromoperations in20X9. Inaddition tothis,SambaCohasbeencharged a lower rateofrentbyPirloCo,which mayalsohavetheimpact ofmaking theprofitfromoperations in20X9higher than theprevious period iftherentislower thanthedepreciation SambaCowould have recorded. Thisconcern isfurther enhanced when theshareoftheprofit oftheassociate isconsidered. Thishascontributed $4·6mtotheprofitfortheyear,whichisnearly40%oftheoverall profitofthegroup. Thecombination ofthesefactors raisesconcerns overtheprofitability ofPirloCoandany othersubsidiaries inthegroup,asitappears tobelossmaking. Someoftheselosses will havebeenmadethrough thelossofrental income through thenewarrangement. Thejoining feepaidtoSambaCo'sprevious directors isa one-off costpaidbyPirloCo. Consequently, itisincluded intheconsolidated statement ofprofit orlossfortheyear ended 31December 20X9.Asimilar amount waspaidbySambaCointheformofan annual bonus intheyearended 20X8.Therefore, 20X8and20X9arecomparable butthe joining feerepresents a costsavingforPirloCoinfuture years. Thedecline ininterest coverappears tobedriven byboththedecrease inprofitfrom operations andanincrease infinance costs.AsSambaCohasa largeamount ofdebt,and muchlower interest coverthanthegroup,thisshould increase infuture periods. Thedisposal ofSambaCoappears tobesurprising, giventhatitgenerates thehigh margins compared totherestofthegroup.Thelossondisposal ofSambaCoshould be brought intotheconsolidated statement ofprofitorloss.Thiswould reduce profitfrom operations bya further $14m andwould reduce theoperating profitmargin further to 5·4%. ThesaleofSambaCoata lossisverysurprising giventhatitappears tocontribute good results andhasa history ofstrong performance. Whilst selling SambaCoata lossmaybe a strange move, PirloComaybelieve thattherealvalueoftheSambaCobusiness has beensecured byemploying thetwofounding directors. Conclusion Thedisposal ofSambaCodoesnotappear tobea goodmove, asthePirlogroupseems to belosingitsmostprofitable element. ThePirloCodirectors seemtohavemadea risky decision tomoveintothesoftware development industry asa competitor ofSambaCo. G 235 Kostner Co (Note.Morepoints havebeenmadetocoverthetypeofanswers whichmaybegiven,notallare required tomakethemaximum scoreof15marks. Marking allocation is5 marks onprofitability and5 marks onliquidity witha further 5 marks commenting onoverall performance, interactions andrecommendations formanagement withanysuitable conclusions). (a) Performance Profitability Although revenue hasincreased yearonyear,management should review the individual revenue streams toassesswhether thereareanyareasofconcern. Membership andsundries haveseenthelargest decrease yearonyearinrevenue, and astheinformation hasstated thatrevenue fromconsumables hasremained static,the fallmustbeattributed tomembership subcriptions. Asthisisthecoreofthebusiness, management needtoassesswhytheincome isdropping sodrastically. Froma strategic point,theremaybeanissuewiththequality ofthefreelance trainers who arerenting thestudio rooms, anditisrecommended thatthemembers whoare cancelling theirsubcriptions beaskedfortheirreasoning toascertain theissues. 202 Financial Reporting (FR) Page 225 of 405 H G q Membership revenue mayalsobeaffected astherevenue isnotsplitbetween the non-refundable joining feeandtheregular subscriptions. There maybea decrease inattracted newmembers hencethereduction inrevenue. Thenewsports drink,ProBizz wasbought ata heavily discounted ratebybuyingin bulkpriortotheyearend.Provided thatKostner canselltheproduct anditis attractive tothemembers, thismayprovetobea profitable decision. Kostner haveincreased theircashusinganissueofsharecapital$1,500,000 and increasing theirgearing further bytakingouta further loanof$1,100,000. Although thiswillhavehelped theliquidity ofthecompany, therewillbeadditional costs(and therefore reduced profitability) ininterest charges. Theprovision intheaccounts inrespect ofthelegalclaimagainst Kostner willhave affected theprofitability ofthecompany interms ofthelegalcostsandany compensation whichmaybeduetobepaidout.Management should review their safetyguidelines andensure thatsuchaccidents areunlikely tobethecauseof negligence onthepartofKostner. Management should alsoinvestigate whether the manufacturer oftheequipment wasnegligent andwhether a claimmaybemade regarding thefault. Theoperating profitofthebusiness hassignificantly decreased from35%in20X7to 17%in20X8,withthebiggest increase inoperating costs(60%increase yearon year).Theinformation provided doesnotsplitdownthecosts,butasthecostof personal trainers islikelytobedeemed a costofsales,andothersalaries in administration costs,itisexpected thatrental costsmaybeanissuehere.They havesoldproperty andarelikelytobeleasing gymsandproperties, whichmaygo somewaytoexplaining theincrease inrental costs.Aservice industry suchasgyms, willhavethebulkoftheircostsinpremises andstaff.Othercosts,whichmayfall intothiscategory include insurances, utilities andlegalandprofessional costs.The impact ofthelegalclaimmaybegreater thanjusttheprovision of$50,000inthe financial statements, butprofitability maybeaffected bya subsequent increase in insurance andlegalcostsasa result. Management should review theoperating costs andensure thatthecostsarerelevant totheincome streams. Liquidity Netincrease incashovertheyearof$5,918,000 isexplained by: – Cashoutflow fromoperating activities of$3,382,000 – Cashinflow frominvesting activities of$9,140,000 – Cashinflow fromfinancing activities of$160,000 Accounts receivable balance hasincreased by$722,000yearonyear,thiscanbe partlyexplained bytwonewrevenue streams forthebusiness, bothofwhichare paidforinarrears bytheconsumers (theFitness Festival receivable of$325,000and the$300,000fromthestudio hire).Theremaining increase of$97,000($722,000 – $325,000– $300,000)relates totheonlyremaining revenue invoiced withcredit terms, thatoftheTotemPow licence. Theabsence ofthecreditcontroller hasclearly hadanimpact ontherecoverability ofthesedebts,andmanagement should address a temporary replacement tocoverthecollection ofdebtsinherabsence. Bypurchasing theProBizz drinks ina highvolume, andsoclosetotheyear-end, means thatcashistiedupintheinventory andcannot beusedtopaysuppliers (which hasseenanincrease atyearend). Itlooksliketheyaretakingoutlongtermfinance tofundtheshort-term operations ofthebusiness. Normally long-term finance would betakenouttofundlongterm purchases ofproperty, plantandequipment buttherehasbeenminimal purchase in theyear(perthecashflow).Therefore, thisseems a bitofa strange strategy andit islikelythatthefinancing arrangement hasbeenputinplacetofunddaytoday operational costsrather thaninvesting infuture business. A N S W E R H S Answers203 Page 226 of 405 Powered By Ù G q (b) Overall pointstomake Thetradereceivables, inventories andcashbalances areallincreased yearonyear, butthismaybea timing issueduetowhensuppliers maybepaid.Itmayalsobea deliberate decision madebymanagement toshowa strong assetbaseatyearend. Although thecashposition atyearendispositive, andshows a significant increase fromanoverdraft toa positive balance, theoperating cashflowshould becompared withtheoperating profit. Comparing theoperating profitof$550,000tothenet operating cashoutflow of$3,382,000 highlights a significant issuewhereby the organisation cannot seemtocoveritsdaytodaycosts.Thefurther thatthe operating cashflowisfromtheoperating profit, thegreater thepotential issue. Thereasons forKostner having anoverall cashinflow areoneswhicharetrickyto repeat onanongoing basis,namely theissueofsharecapital($1,500,000), the increase inthe10%loan($1,100,000) andthesaleofa significant non-current asset withproceeds of$9,900,000. Management needtoaddress theissueofa negative operating cashflowposition asa matter ofurgency rather thanrelying onincreasing theirgearing (byincreasing loans) andissuing newsharecapital tofundtheshortfall. Theissueofshares maybecontentious withtheshareholders astheirprevious holdings mayhavebecome diluted, andtogether withthefallinprofits (andlackof dividends paidduring theyear)maypotentially causeinvestors toselltheirholdings, making thebusiness anattractive onefora takeover bya competitor. Giventheissues statedabove,theremaybea significant issueregarding thegoing concern ofKostner andmanagement should takeurgent actiontoaddress this. Liquidity andprofitability cansometimes beatoddswitheachother. Forexample, profitability isincreased bybuyingtheProBizz drinkinbulk,however, thecashto purchase thiswillbetiedupforlonger (itcannot beusedforotherpurposes within thebusiness untilthedrinks aresold). Theprofitandlossstatement mayshownosignificant issues regarding thegoing concern ofa company, however, a cashflowstatement canshowinmoredetail where thecashhasbeenspent.Anorganisation should haveanoperating cash inflow ofa similar sizetotheoperating profitinordertoprovethatthebusiness can coveritsdaytodayexpenses simply byoperating ina normal manner. Kostner has seena netcashinflow, butthisismainly because ofnon-trading conditions (share issue,loanincrease, saleofa significant asset). Delaysinpayingsuppliers mayresult inlosingoutonsettlement discounts, therefore impacting profitability. Cashflowscanalsohighlight where thecashiscoming from,soifthetrade payables areincreasing yearonyear,witha operating cashoutflow, itisa possible signthatthebusiness iswithholding payments inordertofundotherareasofits business (payroll, taxesetc). (Total:20marks) 204 Financial Reporting (FR) Page 227 of 405 H q Section A Consolidated statement of financial position 236 $195,000 Fairvalueatacquisition (200,00030%$1.75) Shareofpost-acquisition retained earnings ((750– 450)30%) 237 A $ 105,000 90,000 195,000 $689,370 Consideration transferred: Cash Deferred consideration (400,000/1.08) Shares (30,000$2.30) $ 250,000 370,370 69,000 689,370 238 Increase $40,000 ($1.2million/8 4/12) 80%=$40,000 Theadjustment willreduce depreciation overthenexteightyears,soitwillincrease retained earnings. 239 $105million $'000 69,000 36,000 105,000 Shares (18m2/3$5.75) Deferred consideration (18m$2.421/1.1 2) G 240 A N S W E R H S Debit Current liabilities Credit Retained earnings Thisadjustment reduces (debits) theliability andthecreditistoretained earnings. Theremeasurement relates tothepost-acquisition period, sogoodwill isnotaffected. 241 D Consideration transferred Fairvalueofnon-controlling interest Fairvalueofnetassets: Shares Retained earnings $ 100,000 570,000 $ 800,000 220,000 1,020,000 (670,000) 350,000 Answers205 Page 228 of 405 Powered By Ù q 242 C $ Consideration NCI Netassets: Shares Retainedearnings Goodwill 100,000 156,000 PhantomCo GhostCo: (177– 156)70% Goodwillimpairment(26,800/2)70% Groupretainedearnings $ 200,000 82,800 256,000 26,800 275,000 4,700 (9,380) 280,320 243 A Thiscombinationresultsina bargain purchase of $1.2millionwhichshouldbe creditedto profitor loss. 244 A $16,800 Theadditionaldepreciationcharged as a resultof the fairvalue adjustmentis$5,000/5 =$1,000 Impairmentof goodwill Restrictwriteoffto the groupshare only(PrattCo owns80%of Sam Co) Therefore,80%$21,000 245 D 1,000 20,000 21,000 16,800 Currentassets $1.195millionand currentliabilities$0.5 million $ 1,200,000 G Currentassets (700,000+500,000) Currentassets Less:Unrealisedprofiton inventory($100,000¼)20% Cash intransit Noeffect as asset inthe subsidiaryis exchangedforasset inthe parent. 246 A $ (5,000) 1,195,000 Currentliabilities(300,000 +200,000) 500,000 Theincreasedue to the use of fairvalueis $70,000 ($160,000-$90,000)which shouldbe adjustedby a creditto goodwillinits entirety. Debit Credit Property,plant and equipment Goodwill $ 70,000 $ 70,000 Anadditionaldepreciationcharge is requiredfor3 years (31Dec20X4,20X5and 20X6),therefore $70,000/5 years 3 years =$42,000. Thereforeproperty, plant and equipmentis increasedby $28,000 ($70,000-42,000). Asthe non-controllinginterestis valuedat fairvalue,the adjustmentforthe depreciationneeds to be splitbetweenthe groupearnings($42,00060%= $25,200)and the NCI($42,00040%=$16,800).AsBoatCo has acquired60%of AnchorCo, the NCIshare of thisadjustmentto earningsis 40%of the additional depreciationcharge. 206 FinancialReporting(FR) Page 229 of 405 H G q $ 25,200 16,800 Debit Retained earnings Debit NCI Credit Property, plantandequipment $ 42,000 Therefore, tosummarise Debit Debit Debit Credit 247 D $ 25,200 16,800 28,000 Retained earnings NCI Property, plantandequipment Goodwill $ 70,000 $15,000 $ 100,000 (10,000) (15,000) 75,000 15,000 Subsidiary profits ($200,0006/12) Writeoffgoodwill (perquestion, thisisfullyimpaired) Additional depreciation ($300,000/10 6/12) NCIat20% Remember toapportion theprofits ofthesubsidiary asacquired partwaythrough theaccounting period. Depreciation tobecalculated onthefairvalueoftheassetbelonging toSatCo. Timeapportioned forthesixmonths ofinvestment byPullCoinSatCo. 248 Thecorrect answers are: Itwillbeincluded atitsfairvalueonacquisition plusshareofpost-acquisition earnings ofPenguin Co. Itwillbeincluded asa separate component ofequity. 25%oftheimpairment inthegoodwill arising onacquisition willbedebited toit. Iftheproportionate method wasused,non-controlling interest onacquisition would have beenlower at$692,500(25%($1,000,000 + $1,770,000)). Non-controlling interest is included intheequityoftheZebragroup,notnon-current liabilities. Consolidated comprehensive 249 A statement of profit or loss and A N S W E R H S other income $144,000 $ Consolidated costofsales: Paprika Salt Additional depreciation foryear(200,000– 120,000)/8 Unrealised profitininventory (32,00025%)= $8,0003/4 Less:Intragroup salessoldbySaltCotoPaprika Co 60,000 100,000 10,000 6,000 (32,000) 144,000 $132,000 option deducts theunrealised profitinstead ofaddingiton. $176,000 omits tocanceltheintragroup salesof$32,000. $140,000 calculates theunrealised profitassuming ¾ ofgoodsaresoldtothird parties, instead of¾ goodsremaining ininventory atyearend. Answers207 Page 230 of 405 Powered By Ù G q 250 C Decrease Increase ($2m25%(profit margin)) Netdecrease 251 C $m 12.0 0.5 11.5 Groupretained earnings willdecrease by$160,000 Lossofinvestment income (Spider) (10m8%6/12) Savingofinterest payable (Fly)groupshare(40060%) Therefore thenetimpact istoreduce retained earnings by$160,000 252 B Profitto30June20X8(1.6m 6/12) Additional depreciation onFVA((2m/20) 6/12) Goodwill impairment NCIshare20% $'000 (400) 240 $ 800,000 (50,000) (500,000) 250,000 50,000 253 $717,463 $ 547,700 172,417 (2,654) 717,463 BasilCo Parsley Co(206,90010/12) PURP((46,00030/130) 25%) 254 $80,000 $2m25/12520%=$80,000 255 $264,000 H $'000 1,300 (400) (20)* 880 264 Profitfortheyear Intragroup interest (5m8%) Impairment (50,000– 30,000) 30% *Therevaluation surplus iseliminated firstandtheremainder charged toprofitorloss. 256 $145,000 $ $ Salesproceeds 450,000 Sharecapital 100,000 Retained earnings 185,000 Goodwill 20,000 (305,000) 145,000 257 $150,000 (450,000– 300,000) 258 $245,000profit Disposal proceeds Goodwill ondisposal (600,000– (700,00070%)) Shareofnetassetsatdisposal (850,00070%) 208 Financial Reporting (FR) Page 231 of 405 $ 950,000 (110,000) (595,000) 245,000 q Accounting for associates 259 A Cost(75m$1.60) Shareofpost-acquisition retained earnings (100– 20)30% 260 C 261 D $m 120 24 44 Thegroup's shareoftheassociate's profitfortheyearisrecorded asa one-line entry.Linebylinetreatment would becorrect fora subsidiary, notanassociate. The dividends received fromtheassociate areallthatisrecorded intheindividual entity financial statements oftheparent, butintheconsolidated financial statements this isreplaced bythegroupshareofprofitfortheyear. Noeffectongroupinventory. Thetransaction willbeposted as: Debit Credit Shareofprofitofassociate Investment inassociate 262 $5,230,000 Costofinvestment Shareofpost-acquisition profit(8,500– 7,400) 25% PURP(60030%25%) $'000 5,000 275 (45) 5,230 263 $10,200,000 G Costofinvestment Shareofpost-acquisition profit(6,0008/12)– 1,000) 30% Impairment $'000 10,000 900 (700) 10,200 A N S W E R H S 264 Thecorrect answers are: Theinvestor owns330,000ofthe1,500,000 equityvoting shares oftheinvestee. Theinvestor hasrepresentation ontheboardofdirectors oftheinvestee. Thepresence ofsignificant influence isindicated bya shareholding of20%ormoreor representation ontheboard.Regarding thethirdoption, material transactions would need tobebetween theinvestor itselfandtheinvestee. Thefinaloption denotes control, not significant influence. ($160,000/4) 25%30%=$3,000 265 $3,000 Presentation of published financial statements 266 B Thefactthata liability hasarisen during thecurrent accounting period doesnot makeita current liability. Theotheroptions would allleadtoclassification asa current liability. 267 D Therevaluation surplus onthefactorywillbepresented under 'other comprehensive income'. Increases inthevaluation ofinvestment properties andprofitondisposal of aninvestment gothrough profitorloss.Thetreatment ofa government grant depends onthepurpose ofthegrant,butultimately itisincluded inprofitorloss. Inventories, provisions andintangible assetsareshown separately. There isnosuch requirement forgovernment grants. 268 C Answers209 Page 232 of 405 Powered By Ù q 269 D Thetimebetween acquisition ofassetsforprocessing andreceipt ofcashfrom customers. 270 A Equitydividends arepresented inthestatement ofchanges inequity. Statement 271 C of cash flows Issueofshares Sharecapitalandpremium b/f(500+100) Bonus issue(500/0.501/10) Cashreceived (β) Sharecapitalandpremium c/f(750+350) $m 600 100 400 1,100 Dividends paid Retained earnings b/f Profitfortheyear Dividend paid(β) Retained earnings c/f 1,740 480 (240) 1,980 Cashinflow fromfinancing activities (400– 240) 272 B $'000 1,860 100 (240) (280) 1,440 1,440 2,880 Balance b/f Revaluation Disposal Depreciation G Additions (β) Balance c/f 273 A $'000 14,400 (2,500) (3,000) 2,000 4,000 14,900 8,500 23,400 Carrying amount 20X3 Depreciation Saleofplant Revaluation Environmental provision Purchases (β) 274 160 $305million B/f Depreciation Revaluation Purchases (β) C/f $m 410 (115) 80 305 680 210 Financial Reporting (FR) Page 233 of 405 H q 275 $2,100,000 B/f(2,000+800) Additions (6,500– 2,500- 50*+1,800) Payments made(β) C/f (4,800+1,700) *Thedirectcostsof$50,000incurred onarranging newleasecontracts would beincluded intheinitial measurement oftheright-of-use asset butwould NOTbeincluded aspartoftheleaseliability. Anadjustment istherefore needed toremove theeffectofthedirectcostswhen calculating theleasepayments made. $'000 2,800 5,750 (2,050) 6,500 A N S W E R G H S Answers211 Page 234 of 405 Powered By Ù G q Section Root B Co and Branch Co case 276 $268million $m 210 58 268 Cash Shares (116m 100/200) 277 $5.6million Property Brand Acquisition Movement (2years) $m $m 20 (2) 25 (5) (7) $7million 80%=$5.6million 278 $16million $56m40/140 279 Thecorrect answer is: DRCostofsales/CR Inventories Theunrealised profitisaddedtocostofsalesandremoved frominventories. 280 Thecorrect answer is: Control ofthesubsidiary hasbeenlost. Exclusion fromconsolidation isonlyallowed whencontrol hasbeenlost. Port Co and Alfred H Co case 281 Thecorrect answer is: Sharecapital$235,000/Share premium $1,115,000 Issueofshares Sharecapital Sharepremium Fairvalueofproceeds Draft $'000 200 500 282 $500,000 $'000 Netassetsatdateofacquisition Sharecapital Sharepremium Retained earnings 331– (962/12) 100 85 315 500 212 Financial Reporting (FR) Page 235 of 405 Newissue $'000 35 615 650 Revised $'000 235 1,115 q 283 Thecorrect answers are: Thenon-controlling interest shareofprofitispartoftheconsolidated statement ofprofitor loss. Ifa subsidiary isacquired during theyear,itsresults areapportioned overtheyearof acquisition. Thestatement offinancial position shows allnon-current assets. Goodwill isnotamortised, itissubject toanannual impairment review. 284 $404,000 PortCo$364,000andAlfred Co($240,0002/12)= $404,000 285 $2,912,000 Portretained earnings Alfred post-acquisition (96,0002/12) ShareofAlfred Co:(1675%) Polestar Port $'000 2,900 Alfred $'000 12 2,912 16 Co case 286 $22.3million $'000 6,000 14,300 2,000 22,300 Sharecapital Retained earnings at30.9.X3 Fairvalueadjustment onproperty G A N S W E R 287 $130million (110m +(66m6/12)– 13mintragroup) 288 H S Account Goodwill Debit Liability Credit Profitorloss IFRS3 Business Combinations statesthatchanges tothecontingent consideration should result ina remeasurement tofairvaluewithanygainorlosstakentotheprofitorloss.The effectwould adjustthegoodwill figureiftherearosenewinformation regarding theposition atacquisition date.However, ifthecontingent consideration, beingcashinthisinstance whichisdependent ona certain levelofprofitbeingachieved, thentheadjustment ismade tothestatement ofprofitorloss.(IFRS3,para.58) 289 $150,000 Unrealised profit= 9m– 5.4m=3.6m Stillininventory =3.6m1.5/9=600,00025%=150,000 Answers213 Page 236 of 405 Powered By Ù G q 290 Thecorrect answer is: Thenon-controlling interest willbeallocated itsshareofanygoodwill impairment. Theotheroptions areincorrect. Plateau 291 C 292 C Co case $12,750,000 ((3m/2$6)+(3m$1.25)) Thecontract isestimated tohaveanindefinite life. 293 A NCIatacquisition (1mshares @ $3.25) NCIshareofpost-acquisition retained earnings ((W)2,60025%) Working Retained earnings perdraft Lessunrealised profit($2.7m 50/1501/3) 294 B $'000 3,250 650 3,900 $'000 2,900 (300) 2,600 $10,500,000 Cost(4m30%$7.50) Shareofpost-acquisition retained earnings (5,00030%) $'000 9,000 1,500 10,500 295 AxleCoisnota member ofthegroup,sogroupinventory isunaffected. Account H Groupinventory Credit Investment inassociate Debit Pinto Shareofprofitof Co case 296 $10,000received $ B/fcurrent (asset) B/fdeferred tax Chargefortheyear Received (balance) C/f (current +deferred) – 30,000 160,000 10,000 200,000 297 $1,250,000 $'000 150 (1,440) 40 1,250 Proceeds from saleofplant(240– 90) Purchase ofplant(W) Investment property income (60– 20) 214 Financial Reporting (FR) Page 237 of 405 G q Working B/f Revaluation gain Disposal Depreciation Purchases (β) $'000 1,860 100 (240) (280) 1,440 2,880 298 $150,000 1,0005 $0.03 299 Thecorrect answer is: Operating activities andfinancing activities Dividends paidcanbepresented under operating activities orfinancing activities. 300 Thecorrect answer is: Theproceeds fromsaleofplant Itistheprofitondisposal oftheplantthatwillbeadjusted against profitbefore tax,notthe proceeds ofdisposal. Woolf Co case 301 Thecorrect answer is$1,100,000 Bfwd(1,700+800) Right-of-use assetacquired (1,540– 40) Cashmovement (balancing figure) Cfwd(2,000+900) $’000 2,500 1,500 (1,100) 2,900 A N S W E R H S Option $400,000isthemovement between thetwoyearsignoring theeffectofthenew lease.Option $1,500,000 istheactualleaseamount rather thanthecashmovement. Option $1,900,000 usesthecorrect figures, butsubtracts thenewleaseduring theyear whichmakes thecashmovement now$1,900,000. 302 A Cashinflow of$1,860,000 $’000 Profitbefore taxation 50 Adjustments for Depreciation (perthequestion) 2,200 Interest received (perthequestion) (40) Release ofgrant(working) (250) Working capitalmovement (perthequestion) (100) Cashinflow fromoperations 1,860 Government grantworking Bfwd(400+900) Grantreceived intheyear Cashmovement (balancing figure) Cfwd(600+1,400) $000 1,300 950 (250) 2,000 Option B of$2,110,000 ignores thecashmovement ofthegrant($250,000). Option C addsonthecashmovement ofthegrantinstead ofsubtracting it.Option D of $3,060,000addsonthevalueofthegovernment grantreceived ($950,000) instead ofrecognising thenetmovement ingrants. Answers215 Page 238 of 405 Powered By Ù q 303 D 304 C 305 C Option(iii)only Bothof options(i)and (ii)willdecrease the balances of workingcapital assets (trade receivablesand inventory).Thiswillresultina workingcapital inflowinboth cases. Onlyoption(iii)willresultinan overallworkingcapital outflow. Thiswouldbe includedwithinthe movementsof cash frominvestingactivities. Investingactivitiesrepresentspaymentsmade to investinassets used by the companyto generate profitsand the proceedsfromthe sale of those assets, such as paymentsto acquirenon-currentassets, paymentsto acquireshares inother companiesand the proceedsfromthe sale of non-currentassets. Options(i)and (ii) Recognisethe incomefromthe grant as deferredincome;or Deductthe grant inarrivingat the carryingamountof the asset acquired Presentingthe wholegrant as a separate iteminthe statement of profitor lossis acceptable forgrants receivedrelatingto incomeforwhichthe expenditurehas already been incurred,but not forassets as the grant incomeshouldbe recognised overthe usefullifeof the asset purchased. G H 216 FinancialReporting(FR) Page 239 of 405 q Section 306 C Pedantic Co (Dec 2008 amended) Textreferences. Chapters 8 and9. Toptips.Thefirstpointtonotehereisthatthesubsidiary wasacquired mid-year. Remember this whenitcomes toworking outthedepreciation onthefairvalueadjustment. Thisquestion hadlots todobutnorealproblems. Intheexam,youshould setupyourproforma, transfer thenumbers astheyareprovided inthequestion, thenstartworking through theadjustments. Transfer your adjustments totheproforma whenyouhavecompleted eachworking. Easymarks. There werelotsofeasymarks here.There werelotsofmarks available inthe statement offinancial position evenifyoudidnotgetthegoodwill quiteright.Correctly calculating thefigures fromtheshareexchange would havegainedyoumarks ongoodwill, share capitalandsharepremium. Marking scheme Marks (a) G (b) (a) Statement offinancial position: Property, plantandequipment Goodwill Current assets Equityshares Sharepremium Retained earnings Non-controlling interest 10%loannotes Current liabilities 1markpervalidpointtomaximum 2 5 1½ 1 1 2 2 ½ 1 A N S W E R 16 4 20 H S PEDANTIC CO – CONSOLIDATED STATEMENT OFFINANCIAL POSITION AT30SEPTEMBER 20X8 $'000 Non-current assets Property, plantandequipment (40,600+12,600+1,800(W6)) 55,000 Goodwill (W2) 4,500 59,500 Current assets(16,000+6,600– 800– 600+200)(orsee(W9)) 21,400 Totalassets 80,900 Equityattributable toowners oftheparent Sharecapital(10,000+1,600(W5)) 11,600 Sharepremium (W5) 8,000 Retained earnings (W3) 35,700 55,300 Non-controlling interests (W4) 6,100 61,400 Non-current liabilities 10%loannotes(3,000+4,000) 7,000 Current liabilities (8,200+4,700– 400(W9)) 12,500 80,900 Answers217 Page 240 of 405 Powered By Ù q (b) Pedantic Cocannot takeassurance fromtheTradhat groupfinancial statements that TrilbyCowould beabletomeetitsliability inrespect ofthegoods.Thegroupfinancial statements willhaveaggregated theassetsandliabilities ofallthegroupcompanies andit willnotbepossible tousethemtocalculate liquidity ratiosforanyonecompany. Thisisimportant, because Pedantic Co'scontract would notbewiththeTradhat group,it would bewithTrilbyCo.IfTrilbyCodefaulted onitsobligations, theTradhat groupwould beunder nolegalobligation tostepin,sothatthefactthatthegrouphasa strong financial position isnotreallyrelevant. Itwould onlybecome relevant ifTradhat groupwere willing tooffera parent company guarantee. Intheabsence ofa parent company guarantee, Pedantic Comustbaseitsdecision onthe financial position ofTrilbyCoasshown initsindividual company financial statements. It should alsoobtain references fromothersuppliers ofTrilbyCo,specifically thosewho supplyitwithlargeorders on90daycreditterms. Workings 1 Groupstructure Pedantic Co 1.4.X8 60% Mid-year acquisition, sixmonths before yearend 2 Sophistic Co Goodwill Consideration transferred (W5) Fairvalueofnon-controlling interests Less:Fairvalueofnetassetsatacquisition: Sharecapital Retained earnings Fairvalueadjustment (W6) $'000 4,000 5,000 2,000 G 3 Goodwill Retained earnings Pedantic Co $'000 35,400 Perquestion Movement onFVadjustment (W6) PUP(W7) Pre-acquisition Groupshare(50060%) 4 300 35,700 Non-controlling interests (11,000) 4,500 Sophistic Co $'000 6,500 (200) (800) (5,000) 500 $'000 5,900 NCIatacquisition NCIshareofpost-acquisition retained earnings ((W3)500 40%) 5 $'000 9,600 5,900 200 6,100 Shareexchange Consideration transferred (4,00060%×2/3=1,600$6) SharecapitalofPedantic Co(1,600$1) Sharepremium ofPedantic Co(1,600$5) 218 Financial Reporting (FR) Page 241 of 405 Debit $'000 9,600 Credit $'000 1,600 8,000 H G q 6 Fairvalueadjustments $'000 Acq'n 1.4.X8 2,000 Plant(*$2m/5 6/12) 7 Intragroup trading Eliminate unrealised profit Costofsales/retained earnings ((8,000– 5,200)40/140) Inventories (SOFP) 8 $'000 Mov't 6/12 200)* $'000 Yearend 30.9.X8 1,800 $'000 $'000 800 Current assets(supplementary working) $'000 16,000 6,600 (800) (600) 200 21,400 Pedantic Co Sophistic Co Unrealised profitininventory (W7) Intercompany receivables (perquestion) Cashintransit (W9) 9 Cashintransit Debit Receivables Payables Cash 307 Highveldt 800 400 200 Credit 600 Co Textreference. Chapter 9. Toptips.Makesurethatyoureadtherequirement carefully before doinganything. Youarenot askedtoprepare a statement offinancial position; justthegoodwill andreserves. Thismakes the question easier tomanage effectively asyouarejustdoingtheworkings without having totieit alltogether ina setoffinancial statements. A N S W E R H S There arequitea fewcomplications toconsider. Foreachcalculation gothrough eachofthesix additional piecesofinformation andmakeappropriate adjustments whenrelevant. Examining Team's comments. Thisquestion wasunusual inaskingforextracts fromthe statement offinancial position. Manycandidates wereconfused bythisandwasted time preparing a fullstatement offinancial position. Othercommon errors were:fairvalue adjustments; consolidated reserves; revaluation andsharepremium reserves; andthecostofthe investment. Marking scheme Marks (a) Goodwill – Consideration transferred – Non-controlling interest – Sharecapitalandpremium – Retained earnings – Fairvalueadjustments – Goodwill impairment Maximum 2 1 1 1 2 1 8 Answers219 Page 242 of 405 Powered By Ù q (b) (c) Marks Non-controllinginterest – Sharecapital and premium – Retainedearnings – Fairvalueadjustment Maximum Consolidatedreserves – Sharepremium – Revaluationsurplus Retainedearnings – Post-acquisitionprofit – Interestreceivable – Financecost – Goodwillimpairment Maximum 1 2 1 4 1 2 2 1 1 1 Maximumforquestion (a) GoodwillinSamsonCo Considerationtransferred 80m shares 75%$3.50 Deferredconsideration:$108m1/1.08 Non-controllinginterest Fairvalueof net assets at acquisition: Carryingamountof net assets at 1.4.20X4: Ordinaryshares Sharepremium Retainedearnings Fairvalueadjustments(W) G Impairmentcharge giveninquestion Carryingamountat 31March20X5 Working Fairvalueadjustment: Revaluationof land Recognitionof fairvalueof brands Derecognitionof capitaliseddevelopmentexpenditure (b) Non-controllinginterestinSamsonCo's net assets NCIat acquisition(perquestion) NCIshare of post-acquisitionretainedearnings((iii)48 25%) NCIshare of post-acquisitionrevaluationsurplus((iii)4 25%) NCIshare of goodwillimpairment($20m25%) $m 8 20 $m 210 100 310 83 80 40 134 42 H (296) 97 (20) 77 $m 20 40 (18) 42 $m 83 12 1 (5) 91 (c) Consolidatedreserves Sharepremium Theshare premiumof a group,likethe share capital, is the share premiumof the parent only($80m) 220 FinancialReporting(FR) Page 243 of 405 G q Revaluation surplus Parent's ownrevaluation surplus GroupshareofSamson Co'spost-acquisition revaluation; $4m75% Retained earnings attributable toowners oftheparent Perquestion Accrued interest fromSamson Co($60m10%) Unwinding ofdiscount ondeferred consideration Amortisation ofbrand($40m/10 years) Writeoffdevelopment expenditure asincurred ($50m– $18m) Writebackamortisation ofdevelopment expenditure Unrealised profit Groupshare(75%) Impairment ofgoodwill inSamson Co– groupshare(2075%) 308 Paradigm $m 45 3 Highveldt Samson $m $m 350 76 6 – (8) – – (4) – (32) – 10 – (2) 348 48 36 (15) 369 Co Textreference. Chapter 9. Toptips.Therearetwoimportant issuesinthisquestion – StrataCo showed a pre-acquisition lossandhada negative fairvalueadjustment. Thequestion wasotherwise straightforward. Easymarks.Fivemarksareallocated forthegoodwill calculation andplentyof marksare available forstandard consolidation issues. Examining Team'scomments. Thequestion included a fairvalueadjustment forplantwhichwas belowitscarryingamount – whichmanycandidates treatedas a surplus. Mostcandidates correctly calculated andaccounted forthevalueoftheshareexchange andtheNCIbutthere weresomeerrorsincalculating thenumber of loannotesissued.Somecandidates incorrectly calculated post-acquisition profitas$6million. A N S W E R H S Marking scheme Marks Statement offinancial position Property, plantandequipment Goodwill Equityinvestments Inventories Tradereceivables Cashandcashequivalents Equityshares Sharepremium Retained earnings Non-controlling interest 10%loannotes Tradepayables Bankoverdraft 1½ 5 1 1 1½ 1 1½ ½ 3 1½ 1 1 ½ 20 Answers221 Page 244 of 405 Powered By Ù G q CONSOLIDATED STATEMENT OFFINANCIAL POSITION ASAT31MARCH 20X3 $'000 ASSETS Non-currentassets Property,plant and equipment(47,400+25,500 – 2,500 (W6)) Goodwill(W1) Financialasset: equityinvestments(7,100+3,900) Currentassets Inventories(17,400+8,400 – 600 (W2)) Tradereceivables(14,800+9,000 – 900 (W3)– 2,800 interco) Cash and cash equivalents(5,100+900 (W3)) 51,300 141,200 EQUITY ANDLIABILITIES Equityattributableto ownersof ParadigmCo Sharecapital (40,000 +6,000 (W1)) Sharepremium(W1) Retainedearnings(W4) 46,000 6,000 34,000 86,000 8,800 94,800 Non-controllinginterest(W5) Non-currentliabilities 10%loannotes (8,000 +1,500(W1)) 9,500 Currentliabilities Tradepayables (17,600+13,000– 2,800 intercompany) Overdraft 27,800 9,100 Workings 1 Goodwill $'000 Considerationtransferred: Shares(20m2/5 75%$2) Loannotes (15m100/1,000) Netassets at acquisition; Sharecapital Retainedearnings((4,000)+(2,000)) Fairvalueadjustment(W5) 20,000 (6,000) (3,000) (11,000) 8,500 Goodwill FinancialReporting(FR) $'000 12,000 1,500 13,500 6,000 19,500 Non-controllinginterest(5m$1.2) 222 H 36,900 141,200 Totalequityand liabilities PURP Intercompanysales ininventory$4.6m PURP=$4.6m15/115=$600,000 70,400 8,500 11,000 89,900 25,200 20,100 6,000 Totalassets 2 $'000 Page 245 of 405 G q 3 Intercompany cashintransit 4 DebitCash CreditReceivables Retained earnings Perdraft Addbackpre-acquisition loss $'000 900 $'000 Paradigm $'000 26,600 Strata $'000 4,000 6,000 10,000 PURP(W2) Gain(loss)onequityinvestments* Movement onfairvalueadjustment (W6) GroupshareofStrataCo– 75%11,200 Groupretained earnings (600) (400) 8,400 34,000 900 700 500 11,200 *Lossonequityinvestments inParadigm Co:(7,500– 7,100) 5 Non-controlling interest Fairvalueatacquisition (W1) Shareofpost-acquisition retained earnings (11,200 (W4)25%) 6 PPEcarrying amount $'000 6,000 2,800 8,800 $'000 3,000 (500) 2,500 FVAonplant(W1) Depreciation (3,000/3yrs6/12) Carrying amount A N S W E R H S Answers223 Page 246 of 405 Powered By Ù G q 309 Boo Co and Goose Co BOOGROUP– CONSOLIDATED STATEMENT OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORTHEYEARENDED 31DECEMBER 20X8 $'000 5,900 (3,420) 2,480 (2,020) 460 (160) 300 Revenue (5,000+1,000– 100(W5)) Costofsales(2,900+600– 100+20(W5)) Grossprofit Otherexpenses (1,700+320) Profitbefore tax Tax(130+30) Profitfortheyear Othercomprehensive income Gainonproperty revaluation Totalcomprehensive income fortheyear Profitattributable to Owners oftheparent Non-controlling interest (20%50) 20 320 290 10 300 Totalcomprehensive income attributable to Owners oftheparent (ß) Non-controlling interest 310 10 320 CONSOLIDATED STATEMENT OFFINANCIAL POSITION ASAT31DECEMBER 20X8 $'000 Assets Non-current assets(1,940+200) Goodwill (W2) Current assets Inventories (500+120+80) 700 Tradereceivables (650– 100(W5)+40) 590 Cashandcashequivalents (170+35) 205 Totalassets Equityandliabilities Equityattributable toowners oftheparent Sharecapital Retained earnings (W3) Revaluation surplus $'000 2,140 70 1,495 3,705 2,000 520 20 2,540 70 2,610 Non-controlling interest (W4) Totalequity Current liabilities Tradepayables (910+30) Tax(130+25) 940 155 Totalequityandliabilities 224 Financial Reporting (FR) Page 247 of 405 1,095 3,705 H q Workings 1 Groupstructure BooCo 80% 2 GooseCo Goodwill $'000 Consideration transferred Fairvalueofnon-controlling interest Fairvalueofnetassets: Sharecapital Retained earnings Goodwill 3 100 190 Retained earnings BooCo $'000 500 (20) 480 Perquestion Unrealised profit(W5) Lesspre-acquisition Goose:80%50 Grouptotal G 4 40 520 Non-controlling interest NCIatacquisition NCIshareofpost-acquisition retained earnings (5020%) 5 Intragroup issues Step1:RecordGooseCo'spurchase DebitCostofsales CreditPayables DebitClosinginventory (SFP) CreditCostofsales $100,000 $100,000 These transactions canbesimplified to: DebitInventory CreditPayables Step2: Cancelunrealised profit DebitCOS(andretained earnings) inBoo CreditInventory (SFP) Step3: Cancelintragroup transaction DebitRevenue CreditCostofsales Step4: Cancelintragroup balances DebitPayables CreditReceivables $100,000 $20,000 $100,000 $100,000 $'000 300 60 360 (290) 70 GooseCo $'000 240 (190) 50 $'000 60 10 70 A N S W E R H S $100,000 $100,000 $100,000 $20,000 $100,000 $100,000 Answers225 Page 248 of 405 Powered By Ù G q 310 Viagem Co (Dec 2012 amended) Textreference. Chapter 9. Toptips.Thegoodwill impairment mustbededucted fromtheconsolidated profitorloss.The subsidiary hasbeenowned forninemonths sorevenue andexpenses mustbeapportioned. You havenotbeentoldthattheparent hasaccounted fortheunwinding ofthediscount onthe deferred consideration, soyoushould assume that(asisnormal forthisexam) youhavetomake thisadjustment. Easymarks. There wereplentyofmarks available hereforstandard workings. Marking scheme Marks Goodwill Consolidated statement ofprofitorloss: Revenue Costofsales Distribution costs Administrative expenses Shareofprofitofassociate Finance costs Income tax Profitforyear– attributable toparent – attributable toNCI (a) 6 2 2 1 2 1½ 2 1 ½ 2 Consolidated goodwill atacquisition Consideration transferred: Shares (9m2/3$6.50) Deferred consideration ((9m$1.76)/1.1) $'000 Goodwill 226 Financial Reporting (FR) Page 249 of 405 $'000 39,000 14,400 53,400 2,500 55,900 Non-controlling interest ((10m $2.50) 10%) Fairvalueofnetassets: Sharecapital Retained earnings: b/f threemonths to1Jan 20X2(6,2003/12) FVAonplant Contingent liability 14 20 10,000 35,000 1,550 1,800 (450) (47,900) 8,000 H G q (b) CONSOLIDATED STATEMENT OFPROFIT ORLOSSFORTHEYEARENDED 30SEPTEMBER 20X2 $'000 85,900 (64,250) 21,650 (2,950) Revenue (64,600+(38,0009/12)– 7,200(W2)) Costofsales(51,200+ (26,0009/12)– 7,200+300(W2)+450(W3)) Grossprofit Distribution costs(1,600+(1,800 9/12)) Administrative expenses (3,800+(2,4009/12)+ 2,000(goodwill impairment)) Finance costs(W4) Shareofprofitofassociate (2,00040%) Profitbefore tax Income taxexpense (2,800+(1,6009/12)) Profitfortheyear (7,600) (1,500) 800 10,400 (4,000) 6,400 Profitattributable to Owners oftheparent (ß) Non-controlling interest (W5) 6,180 220 6,400 Workings 1 Groupstructure Viagem Co 1Jan 20X2 90% Mid-year acquisition, ninemonths before yearend 2 GrecaCo Intragroup trading $'000 Intragroup trading (8009months) DebitRevenue CreditCostofsales PURP (1,500 25/125) DebitCostofsales Credit Group inventory (SFP) 3 7,200 300 Fairvalueadjustment $'000 A N S W E R H S 7,200 300 Acquisition Movement Yearend $'000 $'000 $'000 1,800 (450)* 1,350 Plant *(1,800/3) 9/12 4 Finance costs Viagem Coperstatement ofprofitorloss Unwinding ofdiscount ondeferred consideration: ((14,400 10%) 9/12) 5 Non-controlling interest Profitfortheyear(6,2009/12) Depreciation onfairvalueadjustment (W3) Goodwill impairment Non-controlling share10% $'000 420 1,080 1,500 $'000 4,650 (450) (2,000) 2,200 220 Answers227 Page 250 of 405 Powered By Ù q 311 Prodigal Co (Jun 2011 amended) Textreference. Chapter 9. Toptips.Sentinel Cowasacquired mid-year andtherefore pro-rating isrequired. Always pay closeattention todates. Easymarks. Revenue isrelatively straightforward fortwomarks andforalloftheexpense categories apartfromcostofsalesitwasonlynecessary totakeProdigal Co'sbalance plus6/12 Sentinel Co.Theothercomprehensive income wasalsoeasy. Examining Team's comments. There weremanygoodscores here.Twoproblem areaswere dealing withtheelimination ofintragroup salesandtheadditional depreciation ontheasset transfer. Somecandidates failedtocalculate NCIinthetotalcomprehensive income. Marking scheme Marks (a) (b) G (a) Goodwill onacquisition Consideration transferred FairvalueofNCI Fairvalueofnetassets Statement ofprofitorlossandothercomprehensive income Revenue Costofsales Distribution costsandadministrative expenses Finance costs Income taxexpense Non-controlling interest inprofitfortheyear Othercomprehensive income Non-controlling interest inothercomprehensive income Goodwill onacquisition ofSentinel Co Consideration (((160,000 75%) 2/3)$4) Fairvalueofnon-controlling interest Fairvalueofnetassets: Shares Otherequityreserve (2,200-(400 6/12)*) Retained earnings (125,000 + (66,6006/12)) Goodwill 2 ½ 1½ 2 4 2 1½ 1 1½ 2½ 1½ $'000 160,000 2,000 158,300 4 H 16 20 $'000 320,000 100,000 420,000 320,300) 99,700 *Note. Ofthe$400,000lossontheinvestment inequityinstruments, half(6/12)ispreacquisition andgoestothegoodwill calculation. Theremainder ispost-acquisition and goestotheconsolidated statement ofprofitorloss. 228 Financial Reporting (FR) Page 251 of 405 G q (b) CONSOLIDATED STATEMENT OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORTHEYEARENDED 31MARCH 20X1 $'000 530,000 Revenue (450,00+(240,0006/12)– (W4)40,000) Costofsales(260,000+(110,000 6/12)+ (W3)800– (W4)40,000+3,000) (278,800) Grossprofit 251,200 Distribution costs(23,600+(12,0006/12)) (29,600) Administrative expenses (27,000+(23,0006/12)) 38,500) (2,100) Finance costs(1,500+(1,2006/12)) Profitbefore tax 81,000 Income taxexpense (48,000+(27,8006/12)) (61,900) Profitfortheyear 119,100 Othercomprehensive income: Gainonlandrevaluation (2,500+1,000)* 3,500 Investments inequityinstruments (700+(4006/12)) (900) Othercomprehensive income, netoftax 2,600 Totalcomprehensive income fortheyear 21,700 Profitattributable to: Owners oftheparent (bal) 111,550 Non-controlling interests (W2) 7,550 119,100 Totalcomprehensive income attributable to: Owners oftheparent (bal) 113,950 Non-controlling interests (W2) 7,750 121,700 *Allpost-acquisition A N S W E R Workings 1 Groupstructure andtimeline Prodigal Co H S Sentinel Co1.10.20X0 75% 1.4.20X0 1.10.20X031.3.20X1 Prodigal Co 2 > Sentinel Co×6/12 Non-controlling interests Perquestion (66,0006/12)((66,000– 400) 6/12+1,000)) Non-current assetPURP(W3)excess depreciation PUP(W4) Total comprehensive Profitforyear income $'000 $'000 33,000 200 (3,000) 30,200 25% 7,550 33,800 200 (3,000) 31,000 25% 7,750 Answers229 Page 252 of 405 Powered By Ù G q 3 4 Transfer ofplant 1.10.20X0 Profitontransfer (5,000– 4,000) Proportion depreciated (½/ 2½) Adjustment toplant Required adjustment: DebitCostofsales(andretained earnings) CreditPlant CreditNCI(20025%) Notethattheexcess depreciation iscredited tothesubsidiary. Thisisnetted offagainst theunrealised profitingroupcostof sales,but25%mustbecredited totheNCI. Intragroup trading Cancelintragroup sales/purchases: $'000 DebitGrouprevenue 40,000 CreditGroupcostofsales ((40,000– 30,000) 12,000/40,000) =3,000 DebitCostofsales(Sentinel Co)(NCI) 3,000 CreditGroupinventories 312 Plastik Co (Dec 2014 $'000 1,000 (200) 800 850 800 50 $'000 40,000 3,000 amended) Textreferences. Chapters 3,4 and14. Toptips.Thisisquitea time-pressured question soyouneedtoworkfast.Gettheproforma down forthestatement ofprofitorlossandthengomethodically through theworkings, showing your workings clearly. Easymarks. There aresomemarks available forfigures thatcanbeliftedstraight fromthe question andgood,clearworkings willhelpyoutofillinseveral gaps. Marking scheme Marks (a) (b) (c) Goodwill Groupretained earnings Non-controlling interest 4 2 Consolidated statement ofprofitorlossandothercomprehensive income Revenue Costofsales Distribution costs Administrative expenses (including goodwill impairment) Finance costs Income taxexpense Gainonrevaluation ofproperties Non-controlling interest– profitfortheyear – totalcomprehensive income 1½ 2½ ½ 1 1 ½ 1 1 1 Totalforquestion 230 Financial Reporting (FR) Page 253 of 405 4 6 10 20 H q (a) Goodwill Consideration transferred – 4.8mshares @ $3 Deferred consideration (7.2m$0.2751/1.1) $'000 FairvalueofNCI(1.8m shares @ $2.50) Fairvalueofnetassets: Shares Retained earnings (3,500– (2,0009/12)) Fairvalueadjustment – property 9,000 2,000 4,000 Goodwill atacquisition (b) (15,000) 5,700 Retained earnings Perquestion Lesspre-acquisition (1,500+(2,0003/12)) Goodwill impairment Unwinding ofdiscount ondeferred consideration (1,800(a)10%9/12) Depreciation onFVA PURP(600,00025/125) ShareofSubtrak Co(90080%) G Non-controlling interest NCIatacquisition (seegoodwill) Shareofpost-acquisition retained earnings (90020%) Shareofproperty revaluation gain(60020%) (c) $'000 14,400 1,800 16,200 4,500 20,700 Plastik $'000 6,300 (135) (120) 6,045 720 6,765 Subtrak $'000 3,500 (2,000) (500) (100) 900 $'000 4,500 180 120 4,800 A N S W E R H S CONSOLIDATED STATEMENT OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORTHEYEARENDED 30SEPTEMBER 20X4 $'000 Revenue (62,600+(30,0009/12)– 2,700(W2)) 82,400 Costofsales(45,800+(24,0009/12)– 2,580(W2)+100(b)) 61,320 Grossprofit 21,080 Distribution costs(2,000+(1,2009/12)) (2,900) Administrative expenses (3,500+(1,8009/12)+ 500(goodwill)) (5,350) Finance costs(200+135(seeretained earnings)) (335) Profitbefore tax 12,495 Income tax(3,100+(1,0009/12)) (3,850) 8,645 Othercomprehensive income Gainonrevaluation ofproperty (1,500+600) 2,100 Totalcomprehensive income 10,745 Answers231 Page 254 of 405 Powered By Ù G q $'000 Profitfortheyearattributable to: Owners oftheparent (β) Non-controlling interest (W1) 8,465 180 8,645 Totalcomprehensive income attributable to: Owners oftheparent (β) Non-controlling interest (W1) 10,445 300 10,745 Workings 1 Non-controlling interests Per(b)above Gainonproperty revaluation Profitforyear $'000 900 900 180 NCI20% 2 Totalcomprehensive income $'000 900 600 1,500 300 Intragroup trading (1) (2) Cancelintragroup sales/purchases DebitGrouprevenue (300,0009) CreditGroupcostofsales Eliminate unrealised profit DebitCostofsales(600,00025/125) CreditGroupinventories 232 Financial Reporting (FR) Page 255 of 405 $'000 2,700 120 $'000 2,700 120 H G q 313 Laurel Co STATEMENT OFFINANCIAL POSITION ASAT31DECEMBER 20X9 $m Non-current assets Property, plantandequipment (220+160+(W7)3) Goodwill (W2) Investment inassociate (W3) 383.0 9.0 96.8 488.8 Current assets Inventories (384+234– (W6)10) Tradereceivables (275+166) Cashandcashequivalents (42+10) 608.0 441.0 52.0 1,101.0 1,589.8 Equityattributable toowners oftheparent Sharecapital– $1ordinary shares Sharepremium Retained earnings (W4) 400.0 16.0 326.8 742.8 47.0 789.8 Non-controlling interests (W5) Current liabilities Tradepayables (457+343) 800.0 1,589.8 Workings 1 Groupstructure Laurel Co 80% 1.1.X7 A N S W E R H S 40% 1.1.X7 HardyCoComicCo(associate) $64m 2 $24mPre-acq'n ret'dearnings Goodwill Consideration transferred Non-controlling interests (atfairvalue) Fairvalueofnetassetsatacq'n: Sharecapital Sharepremium Retained earnings Fairvalueadjustment (W7) $m 96 3 64 12 Impairment losses $m 160 39 (175) 24 (15) 9 Answers233 Page 256 of 405 Powered By Ù q 3 Investment inassociate $m 70 29.2 (2.4) (0) 96.8 Costofassociate Shareofpost-acquisition retained reserves (W4) Unrealised profit(W6) Impairment losses 4 Consolidated retained earnings Laurel $m 278 (10) (2.4) Perquestion Less:PUPreHardyCo(W6) PUPreComicCo(W6) Fairvalueadjustment movement (W7) Lesspre-acquisition retained earnings Groupshareofpost-acquisition retained earnings: HardyCo(5580%) ComicCo(7340%) Lessgroupshareofimpairment losses (15×80%) 5 Hardy $m 128 Comic $m 97 (9) (64) 55 (24) 73 44 29.2 (12.0) 326.8 Non-controlling interests $m 39 Non-controlling interests atacquisition (W2) NCIshareofpost-acquisition retained earnings: HardyCo(5520%) LessNCIshareofimpairment losses (1520%) G 6 7 H 11 (3) 47 Unrealised profit Laurel Co'ssalestoHardyCo:$32m– $22m= $10m DRRetained earnings (Laurel Co) $10m CRGroupinventories $10m Laurel Co'ssalestoComicCo(associate) ($22m– $10m) ½40%share=$2.4m. DRRetained earnings (Laurel Co) CRInvestment inassociate Fairvalueadjustments $2.4m $2.4m At Atyear acquisition Movement end date $m $m $m +12 (9)* +3 PPE(57– 45) *Extra depreciation $12m ¾ Goodwill 234 Financial Reporting (FR) Page 257 of 405 Ret'd earnings PPE G q 314 Tyson Co STATEMENT OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORTHEYEARENDED 31DECEMBER 20X8 $m Revenue (500+150– 66) 584 Costofsales(270+80– 66+(W3)18) (302) Grossprofit 282 Otherexpenses (150+20+15) (185) Finance income (15+10) 25 Finance costs 20) 1.6 Shareofprofitofassociate ((1040%)– 2.4*) Profitbefore tax 03.6 Income taxexpense (25+15) (40) Profitfortheyear 63.6 Othercomprehensive income: Gainsonproperty revaluation, netoftax(20+10) 30 Shareofothercomprehensive income ofassociate (540%) 2 Othercomprehensive income fortheyear,netoftax 32.0 Totalcomprehensive income fortheyear 95.6 Profitattributable to: Owners oftheparent (63.6– 2.4) Non-controlling interests (W2) 61.2 2.4 63.6 Totalcomprehensive income attributable to: Owners oftheparent (95.6– 4.4) Non-controlling interests (W2) 91.2 4.4 95.6 A N S W E R H S *Impairment losses couldeither beincluded inexpenses ordeducted fromtheshareofprofitof associates figure. IAS28isnotprescriptive. Workings 1 Groupstructure TysonCo 80% 3 yrsago 40% 2 yrsago Douglas Co FrankCo(associate) $40m $20mPre-acq'n reserves 2 Non-controlling interests PFY $m 45 (18) (15) 12 2.4 PFY/TCIperquestion Unrealised profit(W3) Impairment loss NCIshare(20%) TCI $m 55 (18) (15) 22 4.4 Answers235 Page 258 of 405 Powered By Ù q 3 Unrealisedprofit $m 66 (48) 18 Sellingprice Cost PUP 315 Paladin Co (Dec 2011 amended) Textreferences.Chapters 4 and 8. Toptips. Thisis a pretty straightforwardconsolidatedstatement of financialposition.Set out the proformasand then workmethodicallythroughthe numbers.Thereare quitea fewadjustments to retainedearnings,so makesure yourretainedearningsworkingis veryclear. Easymarks.Thereare a lotof easy marksinthisquestion.Thecomplicationsare dealingwiththe deferredpayment and the unwindingof the discount,capitalisingand amortisingthe intangible asset and rememberingto deduct the intercompanybalance fromreceivablesand payables. Mostof the rest of it is quiteeasy, the PURPis onlyinthe parent and twomarksare availablefor investmentinassociate, whichis not a complicatedworking.Part (b)is easy marksforcorrectly assessingthe situation. ExaminingTeam'scomments.Theparts of thisquestionthat related to basic consolidation adjustmentswerewelldealt withby mostcandidates. Errorsoccurredinthe morecomplex aspects. Somecandidates failedto discountthe deferredconsiderationand somedid not treat the customerrelationshipas an intangibleasset. Othersdeducted the post-acquisitionadditional depreciationfromthe goodwill.Somestudents onlydeducted 25%of the impairmentlosson the investmentinassociate, whenthe lossappliedto the wholeof the investment.Acommonerror was to offsetthe subsidiary'soverdraftagainst the parent's bank balance. Nosuch rightof offset exists. G H Markingscheme Marks Consolidatedstatement of financialposition Property,plant and equipment Goodwill Otherintangibles Investmentinassociate Inventories Tradereceivables Cash and cash equivalents Equityshares Retainedearnings Non-controllinginterest Deferredtax Bankoverdraft Deferredconsideration Tradepayables 2 4 2 2 1 1 ½ ½ 4 2 ½ ½ 1 22 20 Maximum 236 FinancialReporting(FR) Page 259 of 405 G q CONSOLIDATED STATEMENT OFFINANCIAL POSITION ASAT30SEPTEMBER 20X1 ASSETS $'000 Non-current assets Property, plantandequipment (40,000+31,000+3,000(W6)) 74,000 Goodwill (W2) 15,000 Intangible assets(7,500+2,500(W6)) 10,000 Investment inassociate (W3) 7,700 106,700 Current assets Inventories (11,200 + 8,400– 600(W7)) 19,000 Tradereceivables (7,400+5,300– 1,300(W7)) 11,400 Cashandcashequivalents 3,400 33,800 Totalassets 140,500 EQUITY ANDLIABILITIES Equityattributable toowners ofPaladin Sharecapital 50,000 Retained earnings (W4) 35,200 85,200 Non-controlling interests (W5) 7,900 93,100 Non-current liabilities Deferred tax(15,000+8,000) 23,000 Current liabilities Overdraft 2,500 Tradepayables (11,600 + 6,200– 1,300(W7)) 16,500 Deferred consideration (5,000+400(W2)) 5,400 24,400 Totalequityandliabilities 140,500 Workings 1 Groupstructure A N S W E R H S Paladin Co 80% 1.10.X0 25% 1.2.X1 Saracen Co Augusta Co(associate) 2 Goodwill $'000 Consideration transferred: Cash Deferred consideration $'000 32,000 5,000 37,000 7,000 44,000 Non-controlling interest Fairvalueofnetassets: Sharecapital Retained earnings Fairvalueadjustment onplant Intangible asset 10,000 12,000 4,000 3,000 Goodwill (29,000) 15,000 Answers237 Page 260 of 405 Powered By Ù q 3 Investment inassociate Costofinvestment Shareofpost-acquisition retained earnings (800(W4)25%) Impairment 4 Retained earnings Perquestion – 1.10.20X0 – yearto30.9.20X1 PURP(W7) Depreciation onfairvalueadjustments (W6) Unwinding ofdiscount (5,400– 5,000(W2)) Lesspre-acquisition retained earnings to1.10.20X0 Lesspre-acquisition to1.2.X1 (1,2004/12) Saracen Co(4,50080%) Augusta Co(80025%) Impairment ofinvestment inassociate (W3) 5 Paladin Saracen Augusta Co Co Co $'000 $'000 $'000 25,700 12,000 31,800 9,200 6,000 1,200 18,000 33,000 (600) (1,500) (400) (12,000) (31,800) – (400) 4,500 800 3,600 200 (2,500) 35,200 Non-controlling interests NCIatacquisition (W2) Shareofpost-acquisition retained earnings (4,500(W4)20%) G 6 Fairvalueadjustments Plant Intangible asset(customer relationships) 7 Intragroup trading Unrealised profit: $'000 10,000 200 (2,500) 7,700 $'000 7,000 900 7,900 Year Acquisition Movement end $'000 $'000 $'000 4,000 1/4 (1,000) 3,000 3,000 1/6 (500) 2,500 7,000 (1,500) 5,500 $'000 $'000 DebitCostofsales/retained earnings (2,60030/130) 600 CreditInventories 600 Current account: DebitGrouptradepayables 1,300 CreditGrouptradereceivables ,300 attheyearend,sothisistheonlyoption whichwould require adjustment. Theothers have alltakenplaceaftertheyearend. 238 Financial Reporting (FR) Page 261 of 405 H G q 316 Dargent Co Textreferences. Chapters 7,8 and10. Toptips.Thisquestion required goodknowledge ofaccounting forgroups including correctly accounting forintragroup trading, dividends andaccounting fornewacquisitions (including goodwill). Easymarks. Calculating theplantandmachinery andgoodwill (including consideration) carried themostmarks inthisquestion. Layouttheconsolidation workings clearly,ensuring accurate timeapportionment ofearnings, goodsintransit, intra-group balances anddealing withthe investment intheassociate. Don'tforgettheeasymarks regarding theloanandtheinterest. Trickier points werethecalculation ofthefairvalueadjustment forthedecommissioning ofthe mine.Remember toonlytimeapportion SPLandnotSOFPbalances! Examining Team's comments. Mostcandidates prepared goodconsolidation workings, including thetime-apportioned retained earnings atthedateofacquisition, andfewmadeanyerrors with thecalculation ofthepurchase consideration oftheacquisition ofthesubsidiary. Theintra-group balances, goodsintransit andtheprinciples behind theinvestment intheassociate were generally dealtwithtoallowcandidates toearnhighormaximum marks. Marking scheme Marks Property, plantandequipment Goodwill: consideration Goodwill: fairvaluenetassets Investments inassociate Inventory Receivables Bank Equityshares andsharepremium Retained earnings: post-acquisition sub Retained earnings: other Non-controlling interests 8%loannotes Environmental provision Current liabilities 2 2½ 2 1 1½ 1 ½ 1 2 2 1½ ½ 1½ 1 20 A N S W E R H S Answers239 Page 262 of 405 Powered By Ù G q DARGENT CO – CONSOLIDATED STATEMENT OFFINANCIAL POSITION ASAT31MARCH 20X6 $'000 $'000 ASSETS Non-current assets Property, plantandequipment (75,200+31,500+4,000 remine– 200 110,500 depreciation) Goodwill (W1)) 11,000 Investment inassociate (4,500+1,200 (W3) 5,700 127,200 Current assets Inventories (19,400+18,800+700 GIT– 800URP(W2) 38,100 Tradereceivables (14,700 + 12,500– 3,000) 24,200 Cashandcashequivalents (1,200+600) 1,800 64,100 Totalassets 191,300 EQUITY ANDLIABILITIES Equityattributable toowners oftheparent Equityshares of$1each( 50,000+10,000(W1)) 60,000 Otherequityreserves (sharepremium) (W1) 22,000 Retained earnings (W3) 37,390 59,390 119,390 Non-controlling interest (W4) 9,430 Totalequity 128,820 Non-current liabilities 8%loannotes(5,000+15,000 consideration) 20,000 Accrued loaninterest (W3) 300 Environmental provision (4,000+80interest (W3)) 4,080 24,380 Current liabilities (24,000+16,400-(3,000-700 GIT)intra-group 38,100 W2)) Totalequityandliabilities 191,300 Workings (figures inbrackets arein$'000) 1 Goodwill inLatree Co Controlling interest Shareexchange (20,00075%2/3=10,000$3.20) 8%loannotes(20,00075%$1,000/1,000) Non-controlling interest (20,00025%$1.80) Equityshares Retained earnings at1April20X5 Earnings 1April20X5toacquisition (8,0009/12) Fairvalueadjustments – assetremine – Provision remine Goodwill arising onacquisition $'000 20,000 19,000 6,000 4,000 (4,000) $'000 32,000 15,000 9,000 56,000 (45,000) 11,000 Theshareexchange of$32million would berecorded assharecapitalof$10million (10,000$1)andsharepremium of$22million (10,000($3.20– $1.00)). 2 Applying thegrouppolicytotheenvironmental provision would meanadding$4million to thecarrying amount ofthemineandtheamount recorded asa provision atthedateof acquisition. Thishasnooverall effectongoodwill, butitdoesaffecttheconsolidated statement offinancial position andpost-acquisition profit. Inventory Theinventory ofLatree Coincludes unrealised profit(URP)of$600,000(2,10040/140). Similarly, thegoodsintransit saleof$700,000includes URPof$200,000(70040/140). 240 Financial Reporting (FR) Page 263 of 405 H G q 3 Consolidated retained earnings Dargent Co'sretained earnings Latree Co'spost-acquisition profit(1,72075%seebelow) Unrecorded shareofAmery's retained profit((6,000– 2,000)30%) Outstanding loaninterest at31March20X6(15,0008%3/12) URPininventory (W2) Theadjusted post-acquisition profits ofLatree Coare: Asreported andtimeapportioned (8,0003/12) Interest onenvironmental provision (4,0008%3/12) Additional depreciation re:mine(4,000/5years3/12) 4 2,000 (80) (200) 1,720 Non-controlling interest $'000 9,000 430 9,430 Fairvalueonacquisition (W1) Post-acquisition profit(1,72025%(W4) 317 Party Co (Sep/Dec $'000 36,000 1,290 1,200 (300) (800) 37,390 2017) Textreference. Chapter 8. Toptips.Thisquestion required goodknowledge ofaccounting forgroups including correctly accounting forintragroup trading (andunrealised profit), deferred consideration (anduseof discounting) andaccounting fordisposals ofa subsidiary (including treatment ofgoodwill), Armstrong &Miller isa newquestion intheWorkbook whichwillhelpcandidates topractice the treatment ofdeferred consideration. PartB,theanalysis ofthegroupshould ensure references tothescenario, takingfigures fromthefinancial statements andexplaining theusefulness of consolidated accounts. Easymarks. Itisimportant toshowyourworkings clearly,asmarks canbegainedbyshowing where youhaveobtained thenumbers inyourconsolidated statement offinancial position. Examining Team's comments. Candidates struggled withthedeferred consideration calculation, andmarkupandmargin continue tocauseconfusion. Thegoodwill calculation wasgenerally donewell,butensure practice ofhowtotreatfairvalueadjustments. PartBofthequestion neglected tomention therelated parties impact ofconsolidated financial statements (iethe intragroup trading beingremoved fromthecalculations), andmanycandidates failedtomention thepossible favourable trading conditions thatgroupcompanies benefit from. A N S W E R H S Marking scheme Marks (a) (b) Property plantandequipment Goodwill Current assets Sharecapital Retained earnings Revaluation surplus NCI Deferred consideration Current liabilities ½ 4 2½ ½ 3½ ½ 1½ 1½ ½ Limitations ofinterpretation usingconsolidated financial statements 5 15 5 20 Answers241 Page 264 of 405 Powered By Ù q (a) $'000 ASSETS Non-currentassets Property,plant and equipment Investments Goodwill Currentassets Totalassets EQUITY ANDLIABILITIES Equity Sharecapital Retainedearnings Revaluationsurplus Non-controllinginterest Totalequity Non-currentliabilities Deferredconsideration Currentliabilities Totalequityand liabilities (392,000+84,000) (120,000– 92,000 – 28,000) (W3) (94,700+44,650+60 FV– 250 URP) 476,000 0 32,396 508,396 139,160 647,556 190,000 209,398 41,400 440,798 15,392 456,190 (W5) (W4) (23,996+1,920) (137,300+28,150) 25,916 165,450 647,556 Workings 1 Groupstructure G 2 3 Party Co owns80%of StreamerCo. Party Co has ownedStreamerCo forone year Netassets Acquisition $'000 Sharecapital 60,000 Retainedearnings 34,000 Revaluationsurplus 4,000 Fairvalueadj inventory 600 98,600 Goodwill Non-controllinginterest NCIat acquisition NCI%of Streamerpost acquisition(1,96020%) 242 SOFPdate $'000 60,000 36,500 4,000 60 100,560 Postacq $'000 0 2,500 0 (540) 1,960 $'000 92,000 23,996 15,000 (98,600) 32,396 Cash Deferredcash (28m0.857) NCIat acquisition Less:Netassets at acquisition Goodwillat acquisition 4 H FinancialReporting(FR) Page 265 of 405 $'000 15,000 392 15,392 G q 5 Retained earnings PartyCo P's%ofStreamer postacquisition RE(1,96080%) Unwinding discount ondeferred consideration (23,9968%) Unrealised profit(1,00025%) (b) $'000 210,000 1,568 (1,920) (250) 209,398 Theconsolidated financial statements ofthePartyGroupareoflittlevaluewhen tryingto assess theperformance andfinancial position ofitssubsidiary, Streamer Co.Therefore the mainsource ofinformation onwhichtobaseanyinvestment decision would beStreamer Co'sindividual financial statements. However, where a company ispartofa group,there isthepotential forthefinancial statements (ofa subsidiary) tohavebeensubject tothe influence ofrelated partytransactions. InthecaseofStreamer Co,therehasbeena considerable amount ofpost-acquisition trading withPartyCo and,because ofthe related partyrelationship, thereisthepossibility thatthistrading isnotatarm'slength (ie notatcommercial rates).Indeed fromtheinformation inthequestion, PartyCo sellsgoods toStreamer Co ata muchlowermargin thanitdoestootherthirdparties. Thisgives Streamer Co a benefit whichislikelytoleadtohigher profits (compared towhatthey wouldhavebeenifithadpaidthemarket valueforthegoodspurchased fromPartyCo). Hadthesalesof$8mbeenpricedatPartyCo'snormal prices, theywould havebeensold toStreamer Cofor$10.9million (ata margin of25%thesegoodscost$6m;ifsoldata normal margin of45%theywould havebeensoldat$6m/55% 100).ThisgivesStreamer Coa trading 'advantage' of$4.9million ($10.9million – $6million). There mayalsobeother aspects oftherelationship where PartyCogivesStreamer Coa benefit which maynothavehappened hadStreamer Conotbeenpartofthegroup,eg accesstotechnology/research, cheapfinance, etc. Themainconcern isthatanyinformation aboutthe'benefits' PartyCo mayhavepassed ontoStreamer Co through related partytransactions isdifficult toobtain frompublished sources. ItmaybethatPartyCohasdeliberately 'flattered' Streamer Co'sfinancial statements specifically inorder toobtain a highsalepriceanda prospective purchaser would notnecessarily beabletodetermine thatthishadhappened fromeither the consolidated orentityfinancial statements. 318 Fresco Co (Jun 2012 A N S W E R H S amended) Textreferences. Chapters 4 and16. Toptips.Therewasa lottogetthrough inthisquestion. Gettheformats downquickly andthen gothrough thequestion andtransfer anyfigures thatcangostraight fromthetrialbalanceto thefinancial statements. Youneeded todoworkings forPPEandfortheright-of-use assetbut thesewerenotcomplicated. Easymarks. Thestatement ofchanges inequitywasallstraightforward. Ifyouhadremembered thetransfer toretained earnings itwaspossible toscorefullmarks onthis.ThePPEworking made itpossible toscoremarks onboththestatement ofprofitorlossandothercomprehensive income andthestatement offinancial position, soitwasworth spending a bitoftimeonthis.Thelease working, ontheotherhand,carried veryfewmarks. Examining Team's comments. Mostcandidates showed a sound knowledge ofpreparing financial statements. Mostoftheerrors aroseintheadjustments: Somecandidates deducted thelossonthefraudfromrevenue fortheyearratheraddingit to expenses andtreating itasa prioryearadjustment, withtheotherentrybeinga deduction from receivables. There weresomedifficulties withthelease,mainly involving thetiming oftheleasepayments and theinitialdeposit. Manycandidates wereconfused withthetax,especially failingtorealise that thetaxfortheyearwasa refund. Answers243 Page 266 of 405 Powered By Ù q Marking scheme Marks Statement ofprofitorlossandothercomprehensive income: Revenue Costofsales Distribution costs Administrative expenses Finance costs Income tax Othercomprehensive income Statement offinancial position: Property, plantandequipment Inventory Tradereceivables Sharecapital Sharepremium Revaluation surplus Retained earnings Current tax Non-current leaseobligation Deferred tax Tradepayables Current leaseobligation Bankoverdraft ½ 3 ½ ½ 1½ 1 1 2½ ½ ½ 1 1 1 2 ½ ½ 1 ½ ½ ½ 8 12 20 G H (a) STATEMENT OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORTHEYEARENDED 31MARCH 20X2 $'000 350,000 (311,000) 39,000 (16,100) (29,900) (2,600) (9,600) 1,800 (7,800) Revenue Costofsales(W1) Grossprofit Distribution costs(W1) Administrative expenses (W1) Finance costs(300+2,300(W3)) Lossbefore tax Income tax(W5) Lossfortheyear Othercomprehensive income: Gainonrevaluation ofproperty (W2) Totalcomprehensive lossfortheyear (b) 4,000 (3,800) STATEMENT OFFINANCIAL POSITION ASAT31MARCH 20X2 ASSETS Non-current assets Property, plantandequipment (W2) Current assets Inventories Tradereceivables (28,500– 4,000(W4)) Taxasset(W5) Totalassets 244 Financial Reporting (FR) Page 267 of 405 $'000 62,700 25,200 24,500 2,400 114,800 G q $'000 EQUITY ANDLIABILITIES Equity Sharecapital50cshares (45,000+9,000(W6)) Sharepremium (5,000+4,500(W6)) Revaluation surplus (4,000– 500(W2)) Retained earnings (5,100– 1,000(W4)– 7,800+500(W2)) Non-current liabilities Deferred tax(W5) Leaseliability (W3) Current liabilities Tradeandotherpayables Leaseliability (19,300– 15,230(W3)) Bankoverdraft Totalequityandliabilities Workings 1 Expenses Pertrialbalance Depreciation (W2) Amortisation (W2) Fraud– current yearcost(W4) 2 3 54,000 9,500 3,500 (3,200) 63,800 3,000 15,230 27,300 4,070 1,400 114,800 Costofsales $'000 298,700 7,800 4,500 – 311,000 Distribution Administrative costs expenses $'000 $'000 16,100 26,900 – – – – – 3,000 16,100 29,900 Property, plantandequipment Leased Plantand Leased property equipment plant $'000 $'000 $'000 Cost 48,000 47,500 Acc.amortisation/depreciation (16,000) (33,500) Balance 1April20X1 (FVFLP$23,000+deposit $2,000) 32,000 14,000 25,000 Revaluation surplus 4,000 Revised carrying amount 36,000 Depreciation/amortisation: 36,000/8 (4,500) (2,800) 14,00020% 25,000/5(shorter oflease termanduseful life) (5,000) 31,500 11,200 20,000 Thetransfer toretained earnings =4,000/8=500 Leaseliability Present valueoffuture leasepayments Interest 10% Instalment 31.3.X2 Balance 31.3.X2 Interest 10% Instalment 31.3.X3 Balance 31.3.X3 Total $'000 A N S W E R H S 62,700 $'000 23,000 2,300 (6,000) 19,300 1,930 (6,000) 15,230 Answers245 Page 268 of 405 Powered By Ù q 4 Fraud 5 Retained earnings – prioryear Current yearprofit Receivables Taxcredit Debit $'000 1,000 3,000 Shareissue Shares issued = 13.5m/0.75 =18m Sharecapital Sharepremium 319 Dexon $'000 9,000 4,500 13,500 18m50c 18m25c plc (a) $'000 Draftretained profit Dividends paid Draftprofitfortheyear Depreciation: Buildings (165,000/15) Plant(180,500 20%) G $'000 96,700 15,500 112,200 H 11,000 36,100 Gainoninvestment (W2) Current yearfraudloss Increase indeferred taxprovision (W4) Income tax (b) 4,000 $'000 800 (2,400) (200) (1,800) Underprovided inprioryear Taxrefund due(assetinSFP) Reduction indeferred taxprovision (3,200– (12,00025%)) Current tax(credit toprofitorloss) 6 Credit $'000 DEXON CO – STATEMENT OFFINANCIAL POSITION ASAT31MARCH 20X8 $'000 Non-current assets Property (W1) Plant(W1) Investments (W2) Current assets Inventories Tradereceivables (W5) Cashandcashequivalents 84,000 48,200 3,800 Totalassets 246 Financial Reporting (FR) Page 269 of 405 (47,100) 1,000 (2,500) (800) (11,400) 51,400 $'000 180,000 144,400 13,500 337,900 136,000 473,900 q Equityandliabilities Sharecapital Sharepremium Revaluation surplus (W6) Retained earnings (12,300– 1,500(W3) +51,400– 15,500) Totalequity Non-current liabilities Deferred tax(19,200+ 2,000(W4)) Current liabilities AsperdraftSFP Taxpayable $'000 $'000 250,000 40,000 22,800 46,700 359,500 21,200 81,800 11,400 Totalequityandliabilities 93,200 473,900 Workings 1 Property, plantandequipment Property $'000 185,000 (11,000) 174,000 6,000 180,000 Perquestion Depreciation (165,000/15) Revaluation Balance c/d 2 G Plant $'000 180,500 (36,100) 144,400 – 144,400 Financial assetsatFVthrough profitorloss $'000 13,500 (12,500) 1,000 FVatyearend(12,500 1,296/1,200) PerdraftSOFP Gain– toprofitorloss 3 Fraud 4 DRRetained earnings reprioryear DRCurrent yearprofit CRReceivables Deferred tax 5 DRRevaluation surplus (6,00020%) DRIncome taxexpense (4,00020%) CRDeferred taxliability (10,00020%) Tradereceivables $'000 1,500 2,500 $'000 1,200 800 A N S W E R H S $'000 4,000 $'000 2,000 $'000 52,200 (4,000) 48,200 PerdraftSFP Adjustment refraud 6 Total $'000 365,500 (47,100) 318,400 6,000 324,400 Revaluation surplus $'000 18,000 6,000 24,000 (1,200) 24,800 B/f Surplus relandandbuildings Deferred taxprovision (6,00020%) Netsurplus Answers247 Page 270 of 405 Powered By Ù q 320 Xtol Co (Jun 2014 amended) Textreferences. Chapters 16,17and18. Toptips.Youhavetwofinancial statements toproduce here,sobeveryorganised. Notethatyou willhavetoworkouttheeffects oftherightsissuetogetthedividend payments. Examining Team's comments. Thisquestion wasgenerally wellanswered. Mostoftheerrors that occurred involved theagencysale,therightsissue(suchasfailingtonotice thattheshares were 25c,not$1),theconvertible loannoteandthetax. Marking scheme Marks (a) Statement ofprofitorloss Revenue Costofsales Distribution costs Administrative expenses Agencysales Finance costs Income tax 1 2 ½ ½ 1 1½ 1½ (b) Statement offinancial position Property, plantandequipment Inventory Tradereceivables Sharecapital Sharepremium Equityoption Retained earnings Deferred tax Loannote Tradepayables Bankoverdraft Current taxpayable 1½ ½ ½ ½ ½ 1 2 1 1½ 1½ ½ 1 G Totalforquestion (a) 8 H 12 20 STATEMENT OFPROFIT ORLOSSFORTHEYEARENDED 31MARCH 20X4 Revenue (490,000– 20,000(W3)) Costofsales(W1) Grossprofit Distribution costs(W1) Administrative expenses (W1) Otheroperating income – agencysales(W3) Finance costs(13,380 + 900+1,176 (W4)– 10,880(W5)) Profitbefore tax Income taxexpense (28,000+3,200+3,700(W6)) Profitfortheyear 248 Financial Reporting (FR) Page 271 of 405 $'000 470,000 (294,600) 175,400 (33,500) (36,800) 2,000 (4,576) 102,524 (34,900) 67,624 q (b) STATEMENT OFFINANCIAL POSITION ASAT31MARCH 20X4 $'000 ASSETS Non-current assets Property, plantandequipment (W2) Current assets Inventories Tradereceivables 168,000 61,000 63,000 Totalassets EQUITY ANDLIABILITIES Equity Equityshares 25c Sharepremium Othercomponent ofequity– equityoption (W4) Retained earnings (26,080– 10,880(W5)+67,624) Current liabilities Tradepayables (32,200+3,000(W3)) Bankoverdraft Current taxpayable 8,300 47,126 35,200 5,500 28,000 Totalequityandliabilities Workings 1 Expenses 55,426 68,700 292,000 A N S W E R H S Perquestion Agentnotprincipal Depreciation – property (W2) Depreciation – plantandequipment (W2) 2 124,000 292,000 56,000 25,000 4,050 82,824 167,874 Non-current liabilities Deferred tax(4,600+3,700(W6)) 5%convertible loannote(50,000– 4,050(W4)+1,176) G $'000 Costofsales $'000 290,600 (15,000) 5,000 14,000 294,600 Property, plantandequipment CostperTB Accdepreciation b/dperTB Depreciation property (100,000/20 years) Depreciation P&E(112,000 12.5%) Property $'000 100,000 (25,000) 75,000 (5,000) 70,000 DistributionAdministrative costs expenses $'000 $'000 33,500 36,800 33,500 36,800 Plantand equipment Total $'000 $'000 155,500 255,500 (43,500) (68,500) 112,000 187,000 (5,000) (14,000) (14,000) 98,000 168,000 Answers249 Page 272 of 405 Powered By Ù q 3 4 Agencytransaction Should havebeen: Did: $'000 DRCash 20,000 DRCash CROtherincome (10%) 2,000 CRRevenue CRTradepayables 18,000 DRCostofsales CRCash DRTradepayables 15,000 CRCash 15,000 Loannotes PVofprincipal PVinterest flows: 20X4 20X5 20X6 Debtcomponent Equitycomponent (β) Cashreceived Liability component b/d Effective interest Cashcoupon paid Liability component c/d 5 $'000 50,0005%=2,5000.93= 50,0005%=2,5000.86 = 50,0005%=2,5000.79= 1.4.20X3 (45,9508%) 2,325 2,150 1,975 4,050 1,176 Dividend paid DRRetained earnings CRLoannoteinterest anddividends paid Tax Current tax:DRIncome tax(P/L) CRCurrent taxpayable Deferred tax: B/d(perTB) ToP/L C/d $'000 10,880 $'000 28,000 6,450 45,950 4,050 50,000 4,050 1,176 $'000 6,400 4,480 10,880 10,880 $'000 28,000 4,600 3,700 8,300 250 Financial Reporting (FR) Page 273 of 405 $'000 20,000 15,000 2,000 3,000 $'000 39,500 45,950 3,676 (2,500) 47,126 31.3.20X4 Before rightsissue(56,000$1/25c 5/7=160m4c) Afterrightsissue(56,000$1/25c 2c) 6 DRRevenue CRCostofsales CROtherincome CRTradepayables (50,0000.79) Adjustment required: DRLoannotes CROthercomponents ofequity DRFinance costs(3,676– 2,500) CRLoannotes G Correction: $'000 20,000 20,000 15,000 15,000 H q 321 Atlas Co Textreferences. Chapters 3,4,15and17. Toptips.Thisisa standard question – preparation offinancial statements froma trialbalance. Easymarks. Whiletherewerea fewdifficult bits,somemarks wereavailable foritems whichjust needed tobebrought acrossfromthetrialbalance anddealing correctly withPPEandtaxwould havebrought infivemarks. Marking scheme Marks (a) Statement ofprofitorlossandOCI Revenue Costofsales Distribution costs Administrative expenses Finance costs Income tax Othercomprehensive income 1 2 ½ ½ ½ 2½ 1 (b) Statement offinancial position Property, plantandequipment Inventory Tradereceivables Retained earnings Deferred tax Tradepayables Current tax Bankoverdraft 3½ ½ ½ 2½ 1½ ½ ½ ½ G 8 A N S W E R H S 10 2 20 (c) Earnings pershare (a) STATEMENT OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORTHEYEAR ENDED 31MARCH 20X3 $'000 Revenue 550,000 Costofsales(W1) (428,000) Grossprofit 122,000 Distribution costs (21,500) Administrative expenses (30,900) Finance costs (700) Profitbefore tax 68,900 Income taxexpense ((27,200– 1,200)+ (9,400– 6,200)) (29,200) Profitfortheyear 39,700 Othercomprehensive income: Gainonrevaluation ofproperty (W2) 7,000 Totalcomprehensive income fortheyear 46,700 Answers251 Page 274 of 405 Powered By Ù q (b) STATEMENT OFFINANCIAL POSITION ASAT31MARCH 20X3 $'000 ASSETS Non-currentassets Property,plant and equipment(W2) $'000 100,500 Currentassets Inventories Tradereceivables 43,700 42,200 85,900 186,400 Totalassets EQUITY ANDLIABILITIES Equity Sharecapital Sharepremium Revaluationsurplus Retainedearnings(11,200+39,700– dividend20,000) 50,000 20,000 7,000 30,900 107,900 Non-currentliabilities Deferredtax 9,400 Currentliabilities Tradeand otherpayables Taxpayable Overdraft 35,100 27,200 6,800 69,100 186,400 G H Workings 1 Expenses PerTB Depreciation(W2) 2 Cost of sales $'000 411,500 16,500 428,000 Distribution costs $'000 21,500 – 21,500 Administrative expenses $'000 30,900 – 30,900 Property,plant and equipment Cost Accumulateddepreciation Balance1April20X3 Revaluationsurplus Revaluedamount Depreciation(35/14) (7020%) (c) EPS=39,700/100,000=$0.40 252 FinancialReporting(FR) Land $'000 10,000 – 10,000 2,000 12,000 Buildings $'000 50,000 (20,000) 30,000 5,000 35,000 Plant $'000 94,500 24,500) 70,000 – 12,000 (2,500) 32,500 (14,000) 56,000 Page 275 of 405 Total $'000 110,000 7,000 (16,500) 100,500 q 322 Moby Co (Dec 2013 amended) Toptips.Theissues todealwithherewerethecontract withperformance obligations satisfied overtime,therevaluation andthedeferred tax.Noneofthesewerecomplicated, butmakesure youknowhowtocalculate contract assets/liabilities andhowtodealwithdeferred taxona revaluation. Easymarks. There werequitea fewmarks foritems whichonlyhadtobeliftedfromthetrial balance, soitwasimportant togetworkings downandcollect thosemarks. Theleaseandthe loannotewerebothsimple andworth several marks. Marking scheme Marks (a) Statement ofprofitorlossandothercomprehensive income Revenue Costofsales Distribution costs Administrative expenses Finance costs Income taxexpense Gainonrevaluation Deferred taxongain (b) Statement ofchanges inequity Opening balances Shareissue Dividend Totalcomprehensive income Closingbalances G (a) 2 3½ ½ 1 2 2 1 1 1 2 1 2 1 13 A N S W E R H S 7 20 STATEMENT OFPROFIT ORLOSSANDOTHERCOMPREHENSIVE INCOME FORTHEYEAR ENDED 30SEPTEMBER 20X3 $'000 Revenue (227,800+10,000(W3)) 237,800 Costofsales(W1) (187,900) Grossprofit 49,900 Distribution costs (13,500) Administrative expenses (W1) (16,350) Finance costs(900+4,000(W5)+2,930(W6)) (7,830) Profitbefore tax 12,220 Income taxexpense (W4) (350) Profitfortheyear 11,870 Othercomprehensive income: Gainonrevaluation oflandandbuildings (W2) 4,400 Deferred taxongain(W4) (1,100) Totalothercomprehensive income 3,300 Totalcomprehensive income fortheyear 15,170 Answers253 Page 276 of 405 Powered By Ù q (b) STATEMENT OFCHANGES INEQUITY FORTHEYEARENDED 30SEPTEMBER 20X3 Share Share Retained Revaluation capital premium earnings surplus Total $'000 $'000 $'000 $'000 $'000 Balance at1October 20X2 45,000 – 19,800 – 64,800 Shareissue 800 3,200 4,000 Dividend paid (2,000) (2,000) Totalcomprehensive income – – 11,870 3,300 15,170 Balance at30September 20X3 45,800 3,200 29,670 3,300 81,970 Workings 1 Expenses Distribution Administrative Costofsales costs expenses $'000 $'000 $'000 Perquestion 164,500 13,500 16,500 Contract (W3) 8,000 Depreciation (W2)– building 2,400 – owned plant 6,000 – leased plant 7,000 Insurance provision reversal – (150) 187,900 13,500 16,350 2 Property, plantandequipment Cost1.10.X2 Depreciation b/f G Revaluation 3 Land $'000 12,000 – 12,000 4,000 16,000 Building $'000 48,000 (10,000) 38,000 400 38,400 Depreciation: Building (38,400/16) (2,400) Plant(48,00012.5%) Leased (35,000/5 (shorter ofleaseterm anduseful life) Contract withperformance obligations satisfied overtime Plant $'000 65,700 (17,700) 48,000 – 48,000 Leased plant $'000 35,000 (7,000) 28,000 – 28,000 (6,000) (7,000) Revenue (work certified) Costsincurred Profittodate $'000 10,000 (8,000) 2,000 Contract asset Revenue recognised Amounts invoiced Contract asset 10,000 (4,000) 6,000 Tradereceivables Amounts invoiced Amounts received fromcustomers Tradereceivable 254 Financial Reporting (FR) Page 277 of 405 4,000 Nil 4,000 H q 4 Incometax $'000 5 Deferredtax balance: On taxable temporarydifference($24m25%) On revaluation(4,40025%) Liabilityat 30 September20X3 Balanceb/f at 1October20X2 Reducebalance by Incometax charge: Provisionforyear Prioryear over-provision Reductionindeferredtax balance Deferredtax on revaluationdebitedto revaluationsurplus Charge foryear Loannote 6 Proceeds Interest10% Balance Leasedplant 323 Vernon Co (Mar/Jun 3,400 (1,050) (900) (1,100) 350 $'000 40,000 4,000 44,000 Presentvalueof futurelease payments Interest10% Instalmentpaid Balance30.9.X2 Interest10%20X3 G 6,000 1,100 7,100 8,000 900 $'000 35,000 3,500 (9,200) 29,300 2,930 2019) A N S W E R H S Textreferences.Chapters 6, 15,18. Toptips. Start withthe calculationsinthe orderthey are presentedinthe requirement.Showyour workings,the ExaminingTeamfrequentlystates that these are not clearlygiven(ifat all)and this is vitalforgainingmaximummarks.Thiswas a seeminglysimplequestionbut withsomecomplex areas whichrequireda good understanding. Easymarks.Start withthe figuresfromthe trialbalance and set yourworkingsup forthe main adjustments.Easymarkscan be gained on the foreignexchangeadjustment.Workmethodically throughthe question,ensuringyou have answeredboth parts (a) and (b).Evenifyou cannot makeallthe adjustments,ensureyou have a profitafter tax figureto use inyourearningsper share calculationsforpart (b)as methodmarkswillbe given. ExaminingTeam'scomments.Overall,the performanceof part (a) of the questionwas good, with good answersgivenforthe foreignexchangeadjustment,the revaluation,and the investment property.Theareas that candidates struggledwithincludedignoringthe effect of discountingthe contract revenue,and the subsequentunwindingof the discount.Deferredtax inpart (a) once again provedto be trickyfora significantproportionof candidates. Mistakesweremade inpart (b)of the questionwhennot calculatingthe correctweightedaverage numberof shares or failing to use the profitafter tax intheircalculation. Answers 255 Page 278 of 405 Powered By Ù q (a) Statementof profitor lossand other comprehensiveincome Revenue Cost of sales Grossprofit Operatingexpenses Profitfromoperations Financecosts Investmentincome Profitbeforetax Taxexpense Profitforthe year Othercomprehensiveincome Gain on revaluation Totalcomprehensiveincome 75,350+3,407 (w1)+ 1,875(w2) 20,640 – 125(w2)– 400 (w3) 1,520+296(w1)+ 302 (w3)+4,000 (w4) 130+3,200 (w5) 12,000– 3,000 (w4) $’000 80,632 (46,410) 34,222 (20,115) 14,107 (4,050) 6,118 16,175 (3,330) 12,845 9,000 21,845 Workings: (1) Sale with significant financing component Asthe sale has a significantfinancingcomponent,the initialrevenueshouldbe recordedat presentvalue,withthe discountunwoundand recordedas finance income. Therefore,the initialrevenueshouldbe $7.407m($8m/1.08),whichis taken to revenueand receivables.As$4mhas been already taken, a further$3.407mmustbe added to revenueand receivables. Thereceivableof $7.407mis then increasedby 8%overthe year to get to the $8min June 20X9.AsVernonCo has a reportingdate of 31December20X8,sixmonths’ interestshouldbe added. $7.407m8%6/12=$296k,whichis added to receivablesand financeincome. G (2) (3) Overseas sale Thesale shouldinitiallybe recordedat the historicrate at the date of the transaction,whichis $1.875m(12mKr/6.4).Thisshouldbe recordedinrevenueand receivables. At31December20X8,the unsettledreceivablemustbe retranslatedat the closing rate. 12mKr/6=$2m. Therefore,the receivablemustbe increasedby $125k,withthe increasegoing throughthe profitor loss(althoughnot throughrevenue). Bonds Theprofessionalfees on the bonds mustbe added to the bond asset, and not expensed,resultingina $0.4mdecrease to operatingexpenses. Ifthe bonds are heldat amortisedcost, the followingcalculationwilltake place: b/f Int 8% Payment c/f $000 $000 $000 c 9,400 752 (450) 10,602 VernonCo shouldrecord$752kininvestmentincome.Asonly$450khas been recorded,a further$302kmustbe added intoinvestmentincome. 256 FinancialReporting(FR) Page 279 of 405 H q (4) (5) (b) Revaluations The$12m gainontheproperty usedbyVernon Comustbeshown inother comprehensive income, netofthe$3mdeferred taxliability applicable toit. The$4mgainoninvestment properties mustgothrough thestatement ofprofitor loss,notothercomprehensive income. Tax Thetaxof$130k inthetrialbalance willrepresent anunder-provision, asitisa debit balance. The$3.2mtaxestimate fortheyearshould beaddedtothisinorderto calculate thetaxexpense fortheyear. Earnings pershare 12,845,000/41,870,689 (w1)= $0.307,or30.7c (w1) Weighted average number ofshares Date Number 1January 30,000,000 1April 35,000,000 1July 49,000,000 Rightsfraction 3.10/2.9 (w2) 3.10/2.9 (w2) Period 3/12 3/12 6/12 Weighted average 8,017,241 9,353,448 24,500,000 41,870,689 (w2) Theoretical ex-rights price 5 at$3.10 $15.50 2 at$2.40 $4.80 7 $20.30 TERP=$20.30/7=$2.90 Therightsfraction ismarket valuebefore issue/TERP (3.10/2.9 OF)andshould be applied toallperiods uptothedateoftherightsissue. G 324 (a) Dickson Co STATEMENT OFCASHFLOWSFORYEARENDED 31MARCH 20X8 $'000 Cashflowsfrominvesting activities Development expenditure (W1) (190) Purchase ofproperty, plant&equipment (W1) (192) Proceeds fromsaleofproperty, plant&equipment 110 Netcashusedininvesting activities Cashflowsfromfinancing activities Proceeds fromrightsissue(W2) Proceeds fromissueofdebentures (W3) Payment ofleaseliabilities (W3) Dividends paid(W2) Netcashfromfinancing activities 300 50 (31) (156) A N S W E R H S $'000 (272) 163 Answers257 Page 280 of 405 Powered By Ù q Workings 1 Assets Property, plant Development Right-of-use andequipment expenditure asset $'000 $'000 $000 B/d 657 160 80 Disposals (103) P/L (47) (10) OCI 100 190 Additions (β) Amortisation (60) Newright-of-use asset 56 Cashadditions (β) 192 – – C/d 799 290 126 2 Equity B/d P/L OCI Bonus issue(400/8) Rightsissue(β) Dividend paid(β) C/d 3 G Liabilities B/d SPLOCI Newlease Cashreceived (paid)(β) C/d (b) (c) Sharecapital Revaluation Retained andpremium surplus earnings $'000 $'000 $'000 500 60 255 180 100 50 (50) 300 – – (156) 850 160 229 Debentures Leases $'000 $'000 100 92* 50 150 56 (31) 117 *Non-current +current Thestatement ofcashflowsisoneoftheprimary financial statements andshould beused inconjunction withtheotherprimary financial statements tohelptheusersoffinancial statements tobetter understand howtheactivities ofthecompany havegenerated orused cashintheperiod. Users cangainfurther appreciation ofthechangeinnetassets, oftheentity's financial position (liquidity andsolvency) andtheentity's abilitytoadapttochanging circumstances byaffecting theamount andtiming ofcashflows.Astatement ofcashflows enhances comparability ascashflowsarenotaffected bydiffering accounting policies usedforthesametypeoftransactions orevents. Cashflowinformation ofa historical nature canbeusedasanindicator oftheamount, timing andcertainty offuture cashflows.Pastforecast cashflowinformation canbe checked foraccuracy asactualfigures emerge. Therelationship between profitandcash flowscanbeanalysed ascanchanges inpricesovertime. Dickson Cohasreported a profitfortheyearof$180,000 andhasmadea cashinflow fromoperations of$40,000.Thisa positive factorwhichshows thatthenormal business of thecompany isgenerating sufficient cashforittosupport itself.However, therearesome issues tohighlight: Theoperating profit fortheyearended 31March 20X8was$357,000 (seeappendix forcalculation) which issignificantly higher thanthecashflowfromoperations ($40,000). Thissuggests thatthere maybeissues overtheworking capital cycle(the timeittakestorecover themoney fromoperations). 258 Financial Reporting (FR) Page 281 of 405 H q Inparticular, inventories haveincreased from$227,000to$360,000yearonyear(a 59%increase), witha notable decrease intradereceivables (adropof15%).Weare notgiventherevenue figures fortheprioryear,butthisinformation suggests that salesmaybeonthedecline asmoreinventory isheldandbothcashandtrade receivables havedeclined. Withtheincrease ininventory, Dickson Coshould review whether there isanyriskof obsolescence. There isthepotential thatinventory isoverstated at31March 20X8 which isover-inflating thegrossprofit. Investments havebeenclassified ascashequivalents, however, itshould besomething toreview asinvestments should onlybeclassified assuchiftheyarereadily convertible toknown amounts ofcash. Development expenditure of$190,000 wascapitalised during theyear.Itis important thattheseexpenses aregenuine development expenditure (asopposed to research costswhichmustbeexpensed) andthatfuture income willbegenerated fromtheseprojects. There isa riskthatcostswillnothavebeencorrectly capitalised inlinewithIAS38Intangible Assets, leading tounderstated expenses inthe statement ofprofitandloss,andanoverstated profitfortheyearended 31March 20X8. Thenewrightsshareissuehasraised $300,000andthedebenture issuea further $50,000.Suchfinancing ofa company should berestricted tofunding capital investments, andDickson Cohasspent$192,000 onnewproperty, plantand equipment anda further $190,000 ondevelopment expenditure. However, thisis partially offsetbytheproceeds ofsaleonproperty, plantandequipment of $110,000. Thisleaves a netoutflow of$272,000spentoncapitalpurchases to support thefuture business ofDickson Co.Thisleaves $78,000fromthefinancing activities of20X8whichDickson Cohasusedtosupport thegeneral funding ofthe business. Thisisnota sustainable option, especially asthisfinancing has contributed tothelargedividend payment of$156,000 during theyear.The justification forthisdividend isquestionable giventhecashposition ofthecompany. Conclusion G A N S W E R H S TheBoardshould carefully review thecurrent inventory holding andtheworking capital cycle.Anyfuture capitalfinancing should beforspecific long-term objectives. Also,all capitalised costsmustmeettheIAS38criteria andbeamortised accordingly. Itis recommended thattheBoarddoesnotissuea sizeable dividend nextyearinorderto support theworking capitalofthebusiness. Appendix $'000 Profitbefore tax 342 Add:finance costs 15 Operating profit 357 325 Haverford (Mar/Jun 2018) Textreference. Chapters 5,6,11,15. Toptips.Where adjustments toprofitarerequested, ensure thattheseareclearlystated, especially ifthequestion asksfora schedule ofadjustments, orwantsa clearexplanation ofwhat theadjustments aremadeupof.Showyourworkings, theExamining Teamfrequently statesthat thesearenotclearlygiven(ifatall)andthisisvitalforgaining maximum marks. Youdonotneed toprepare a fullstatement orprofitorloss. Answers259 Page 282 of 405 Powered By Ù q Easymarks. Statement ofchanges inequity, usingthealready givendetails inthequestion regarding thedividend paidandthetransfer ofprofit figures. Ensure theworkings areshown clearly asmarks aregained forshowing method aswellasa correct figure (credit isgivenwhere thefinal answer maybewrong butthemethod itselfiscorrect). Examining Team's comments. Candidates struggled withthetreatment ofa bonus issueof shares andthatanyimpairment should notreduce a revaluation surplus toa negative reserve figure. Marking scheme Marks (a) Convertible loannotes Contract Depreciation/impairment Inventory 1 2 2 1 (b) Opening balances Convertible loannotes Bonus issue Profit/Dividend/revaluation 1 2 2 (c) PPE Contract Othercurrent assets Equity Convertible loannotes Current liabilities 1 2 2 ½ 2 ½ G 6 6 8 20 (a) Adjustments toHaverford Co'sprofitfortheyearended 31December 20X7 $'000 Draftprofit 2,250 Convertible loannotes(w1) (135) Contract revenue (w2) 5,600 Contract costofsales(w2) (1,900) Depreciation (w4) (720) Property impairment (w4) (480) Closinginventories 390 Revised profit 5,005 (b) Statement ofchanges inequityfortheyearended 31December 20X7 Share Retained Revaluation capital OCE earnings surplus Option $'000 $'000 $'000 $'000 $'000 Balance asat1January20X7 20,000 3,000 6,270 800 – Profit– from(a) – – 5,005 – – Revaluation loss(W4) – – – (800) – Bonus issue(W3) 4,000 (3,000) (1,000) – – Convertible loannotesissued (W1) – – – – 424 Dividend paid – – (3,620) – – Balance asat 31December 20X7 24,000 – 6,655 – 424 260 Financial Reporting (FR) Page 283 of 405 H q (c) Statementof financialpositionforHaverfordCo as at 31December20X7 $'000 ASSETS Non-currentassets Property(W3) 16,000 Currentassets Inventory(W5) 4,700 Tradereceivables 5,510 Contract asset (W2) 4,200 Cash 10,320 Totalassets 37,5340,730 EQUITY ANDLIABILITIES Equity Sharecapital Retainedearnings Convertibleoption Totalequity Non-currentliabilities Convertibleloannotes (W1) Currentliabilities Totalequityand liabilities 24,000 6,655 424 31,079 7,711 1,940 40,730 Workings 1 Convertibleloannotes 20X7 20X8 20X9 G Payment $’000 320 320 8,320 Discountrate $’000 0.943 0.890 0.840 Presentvalue $’000 302 285 6,989 7,576 A N S W E R H S Asthe fullamountof $8mhas been taken to liabilities,adjustmentrequiredis: DebitLiability $424k CreditEquity $424k Theliabilityshouldthen be heldat amortisedcost, usingthe effectiveinterestrate. Balance Interest Payment Balance b/f 6% Payment c/f $000 $000 $000 $000 7,576 455 (320) 7,711 Asonly$320khas been recordedinfinancecosts: DebitFinancecosts $135k CreditLiability $135k 2 Contract withcustomer: Revenuerecognised(14,00040%) Costs to date 5,600 (1,900) Profitrecognisedto date 3,700 Answers 261 Page 284 of 405 Powered By Ù q Statement offinancial position 3 Revenue recognised ($14,000 40%) Less:amounts invoices Contract asset $’000 5,600 (1,400) 4,200 Amounts invoiced todate Amounts received fromcustomers Adjustment totradereceivables 1,400 (1,400) Nil $5.6mshould berecorded inrevenue, and$1.9m incostofsales,givinganoverall increase tothedraftprofit of$3.7m. $4.2mshould thenberecorded inthestatement offinancial position asa current asset. Bonus issue The1for5 bonus issuewillleadtoanincrease insharecapitalof$4m($20m1/5). Ofthis,$3mwillbedebited toothercomponents ofequitytotakeittozero.The remaining $1mwillbededucted fromretained earnings. Adjustment: DebitSharepremium DebitRetained earnings CreditSharecapital 4 G 5 $3m $1m $4m Property Theassetshould firstbedepreciated. $18m/25 =$720k.Thisshould bededucted fromthedraftprofitandtheasset,givinga carrying amount of$17,280k. DebitDraftprofit $720k CreditProperty $720k Thentheassetshould berevalued from$17,280k to$16,000k, givinga revaluation lossof$1,280k. Astherevaluation surplus isonly$800k,only$800kcanbedebited tothis,withtheremaining $480kbeingdebited fromthedraftprofit fortheyear. DebitRevaluation surplus $800k DebitDraftprofit $480k CreditProperty $1,280k Inventories Closinginventories should beadjusted from$4,310k to$4,700k. DebitInventories $390k CreditDraftprofit $390k 262 Financial Reporting (FR) Page 285 of 405 H q Mock exams G H Page 286 of 405 Powered By Ù q G H 264 Financial Reporting (FR) Page 287 of 405 G q ACCA Financial Mock Reporting (FR) Examination (September 1 2016 CBE) Questions Timeallowed 3 hours Thismockexamisdividedintothreesections: SectionA ALL15questions arecompulsory andMUSTbeattempted SectionB ALL15questions arecompulsory andMUSTbeattempted SectionC BOTHquestions arecompulsory andMUSTbeattempted H DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS 265 Page 288 of 405 Powered By Ù q G H 266 Financial Reporting (FR) Page 289 of 405 q Section A – ALL 15 questions be attempted are compulsory and MUST Eachquestion isworth 2 marks. 1 Identify, byselecting therelevant boxinthetablebelow,whichofthefollowing statements aretrueorfalseregarding thedutiesoftheIFRSInterpretations Committee? 2 Tointerpret theapplication ofIFRSStandards True False Toworkdirectly withnational standard setters tobringabout convergence withIFRSStandards True False Toprovide guidance onfinancial reporting issues not specifically addressed inIFRSStandards True False Topublish draftinterpretations forpubliccomment True False Q U E T IO N S S Whichofthefollowing willbetreated asa subsidiary ofPoulgo Coasat31December 20X7? (1) Theacquisition of60%ofZakron Co'sequitysharecapitalon1March20X7.Zakron Co'sactivities aresignificantly different fromtherestofthePoulgo groupof companies. (2) Theoffertoacquire 70%ofUntoCo'sequitysharecapitalon1November 20X7.The negotiations werefinallysigned offduring January20X8. Theacquisition of45%ofSpeeth Co'sequitysharecapitalon31December 20X7. Poulgo Coisabletoappoint threeofthetenmembers ofSpeeth Co'sboard. 1only 2 and3 3 only 1and2 (3) G H Mockexam1(September 2016CBE):Questions267 Page 290 of 405 Powered By Ù q 3 On1January20X6,Gardenbugs Coreceived a $30,000government grantrelating to equipment whichcost$90,000andhada useful lifeofsixyears.Thegrantwasnetted off against thecostoftheequipment. On1January20X7,whentheequipment hada carrying amount of$50,000,itsusewaschanged sothatitwasnolonger beingusedinaccordance withthegrant.Thismeant thatthegrantneeded toberepaid infullbutby31December 20X7,thishadnotyetbeendone. Usingthedraganddropoptions inthetablebelow,statethejournal entryrequired to reflectthecorrect accounting treatment ofthegovernment grantandtheequipment in thefinancial statements ofGardenbugs Cofortheyearended31December 20X7? Debit Depreciation expense Credit Liability Property, plantandequipment $10,000 $15,000 $20,000 $30,000 G H 4 Thefollowing twoissues relate toSpikoCo'smining activities: Issue1:SpikoCobeganoperating a newmineinJanuary20X3under a five-year government licence whichrequired SpikoCotolandscape theareaaftermining ceasedat anestimated costof$100,000. Issue2:During 20X4,SpikoCo'smining activities caused environmental pollution onan adjoining pieceofgovernment land.There isnolegislation whichrequires SpikoCoto rectifythisdamage, however, SpikoCodoeshavea published environmental policywhich includes assurances thatitwilldoso.Theestimated costoftherectification is$1,000,000. Inaccordance withIAS37Provisions, Contingent Liabilities andContingent Assets, which ofthefollowing statements iscorrect inrespect ofSpikoCo'sfinancial statements forthe yearended31December 20X4? Aprovision isrequired forthecostofbothissues 1and2 Bothissues 1and2 require disclosure only Aprovision isrequired forthecostofissue1butissue2 requires disclosure only Issue1requires disclosure onlyandissue2 should beignored 268 Financial Reporting (FR) Page 291 of 405 q 5 Parket Coacquired 60%ofSuketCoon1January20X7.Thefollowing extract hasbeen takenfromtheindividual statements ofprofitorlossfortheyearended 31March20X7: Parket Co $'000 710 Costofsales SuketCo $'000 480 Parket Coconsistently madesalesof$20,000permonth toSuketCothroughout theyear. Attheyearend,SuketCoheld$20,000ofthisininventory. Parket Comadea mark-up on costof25%onallsalestoSuketCo. Usingthepulldownlistbelowselectthecorrect figureforParketCo'sconsolidated cost ofsalesfortheyearended31March20X7? Q U E T IO N S S Pulldownlist: $954,000 $950,000 $774,000 $766,000 6 QuiloCohasdecided tochangeitsdepreciation method tobetter reflect thepattern ofuse ofitsequipment. Whichofthefollowing correctly reflects whatthischangerepresents andhowitshould beapplied? Itisa changeofaccounting policyandmustbeapplied prospectively G 7 Itisa changeofaccounting policyandmustbeapplied retrospectively Itisa changeofaccounting estimate andmustbeapplied retrospectively Itisa changeofaccounting estimate andmustbeapplied prospectively H Included within thefinancial assetsofZinetCoat31March20X9arethefollowing two recently purchased investments inpublicly traded equityshares: Investment 1– 10%oftheissued sharecapitalofHaruka Co.Thisshareholding was acquired asa long-term investment asZinetCowishes toparticipate asanactive shareholder ofHaruka Co. Investment 2 – 10%oftheissued sharecapitalofLukasCo.Thisshareholding wasacquired forspeculative purposes andZinetCoexpects toselltheseshares inthenearfuture. Neither oftheseshareholdings givesZinetCosignificant influence overtheinvestee companies. Wherever possible, thedirectors ofZinetCowishtoavoidtakinganyfairvaluemovements toprofitorloss,soastominimise volatility inreported earnings. Howshould thefairvaluemovements intheseinvestments bereported inZinetCo's financial statements fortheyearended31March20X9? Inprofitorlossforbothinvestments Inothercomprehensive income forbothinvestments Inprofitorlossforinvestment 1andinothercomprehensive income forinvestment 2 Inothercomprehensive income forinvestment 1andinprofitorlossforinvestment 2 Mockexam1(September 2016CBE):Questions269 Page 292 of 405 Powered By Ù q 8 ShibaCoentered intoa non-cancellable four-month leasetohireanofficeon1December 20X7.Theterms oftheleaseagreement wereasfollows: Leaserental $5,000permonth Cashbackincentive received atthestartofthelease $1,000 Useful lifeoftheproperty Eightyears Whatisthechargeinthestatement ofprofitorlossofShibaCofortheyearended 31December 20X7inrespect ofthislease,assuming theIFRS16Leasesoptional recognition exemptions areapplied? $2,375 $4,000 $4,750 $5,250 9 Trasten Cooperates inanemerging market witha fast-growing economy where prices increase frequently. WhichTWOofthefollowing statements aretruewhenusinghistorical costaccounting compared tocurrent valueaccounting inthistypeofmarket? Capitalemployed whichiscalculated usinghistorical costsisunderstated compared tocurrent valuecapitalemployed Historical costprofits areoverstated incomparison tocurrent valueprofits Capitalemployed whichiscalculated usinghistorical costsisoverstated compared tocurrent valuecapitalemployed Historical costprofits areunderstated incomparison tocurrent valueprofits G H 10 PatulaCoacquired 80%ofSankaCoon1October 20X5.Atthisdate,someofSankaCo's inventory hada carrying amount of$600,000buta fairvalueof$800,000.By 31December 20X5,70%ofthisinventory hadbeensoldbySankaCo. Theindividual statements offinancial position at31December 20X5forbothcompanies showthefollowing: PatulaCo SankaCo $'000 $'000 Inventories 3,250 1,940 Whatwillbethetotalinventories figureintheconsolidated statement offinancial position ofPatulaCoasat31December 20X5? $ 11 TopTrades Cohasbeentrading fora number ofyearsandiscurrently goingthrough a period ofexpansion. Anextract fromthestatement ofcashflowsfortheyearended 31December 20X7forTop Trades Coispresented asfollows: $'000 Netcashfromoperating activities 995 Netcashusedininvesting activities (540) Netcashusedinfinancing activities (200) Netincrease incashandcashequivalents 255 Cashandcashequivalents atthebeginning oftheperiod 200 Cashandcashequivalents attheendoftheperiod 455 270 Financial Reporting (FR) Page 293 of 405 q Whichofthefollowing statements iscorrect according totheextract ofTopTrades Co's statement ofcashflows? Thecompany hasgoodworking capitalmanagement Netcashgenerated fromfinancing activities hasbeenusedtofundtheadditions to non-current assets Netcashgenerated fromoperating activities hasbeenusedtofundtheadditions to non-current assets Existing non-current assetshavebeensoldtocoverthecostoftheadditions tononcurrent assets 12 Q U E T IO N S S Rooney Coacquired 70%oftheequitysharecapitalofMarek Co,itsonlysubsidiary, on 1January20X6.Thefairvalueofthenon-controlling interest inMarek Coatacquisition was$1.1million. Atthatdatethefairvalues ofMarek Co'snetassetswereequaltotheir carrying amounts, except fora building whichhada fairvalueof$1.5million aboveits carrying amount and30yearsremaining useful life. During theyearto31December 20X6,Marek CosoldgoodstoRooney Co,givingrisetoan unrealised profitininventory of$550,000attheyearend.Marek Co'sprofitaftertaxfor theyearended 31December 20X6was$3.2million. Usingthepulldownlistprovided, statetheamount tobepresented asthenon-controlling interest intheconsolidated statement offinancial position ofRooney Coasat 31December 20X6? Pulldownlist: $1,895,000 $1,495,000 $1,910,000 $1,880,000 G 13 H Whena gainona bargain purchase (negative goodwill) arises, IFRS3 Business Combinations requires anentitytofirstofallreview themeasurement oftheassets, liabilities andconsideration transferred inrespect ofthecombination. Whena bargain purchase isconfirmed, howisitthenrecognised? Itiscredited directly toretained earnings Itiscredited toprofitorloss Itisdebited toprofitorloss Itisdeducted frompositive goodwill Mockexam1(September 2016CBE):Questions271 Page 294 of 405 Powered By Ù q 14 On 1October20X5,AnitaCo purchased75,000 of BinitaCo's 100,000equityshares when BinitaCo's retainedearningsamountedto $90,000. On 30 September20X7,extractsfromthe statements of financialpositionof the two companieswere: AnitaCo BinitaCo $'000 $'000 Equityshares of $1each 125 100 Retainedearnings 300 150 Total 425 250 What is the total equitywhichshouldappear in AnitaCo's consolidatedstatement of financialpositionas at 30 September20X7? $ 15 On 1October20X1,BashCo borrowed$6 millionfora termof one year, exclusivelyto financethe constructionof a newpieceof productionequipment.Theinterestrate on the loanis 6%and is payable on maturityof the loan.Theconstructioncommencedon 1November20X1but no constructiontookplace between1December20X1and 31January 20X2due to employeestakingindustrialaction.Theasset was availableforuse on 30 September20X2havinga constructioncost of $6 million. Usingthe pulldownlistprovided,select the correct figurefor the carryingamount of the productionequipmentin BashCo's statement of financialpositionas at 30 September 20X2? Pulldownlist: $5,016,000 $6,270,000 $6,330,000 $6,360,000 G 272 H (30 marks) FinancialReporting(FR) Page 295 of 405 q Q U E T IO N S S G H Thisisa blankpage. Section Bbeginsonpage292. Mockexam1(September 2016CBE):Questions273 Page 296 of 405 Powered By Ù G q Section B – ALL be attempted 15 questions are compulsory and MUST Please usethegridprovided onpagetwooftheCandidate Answer Booklet torecord your answers toeachmultiple choicequestion. Donotwriteouttheanswers totheMCQsonthelined pagesoftheanswer booklet. Eachquestion isworth 2 marks. Thefollowing scenariorelatestoquestions 16–20. Aphrodite Cohasa yearendof31December andoperates a factorywhichmakes computer chipsformobile phones. Itpurchased a machine on1July20X3for$80,000whichhada useful lifeoftenyearsandisdepreciated onthestraight linebasis,timeapportioned intheyearsof acquisition anddisposal. Themachine wasrevalued to$81,000on1July20X4.There wasno changetoitsuseful lifeatthatdate. Afireatthefactoryon1October 20X6damaged themachine leaving itwitha lower operating capacity. Theaccountant considers thatAphrodite Cowillneedtorecognise animpairment loss inrelation tothisdamage. Theaccountant hasascertained thefollowing information at1October 20X6: (1) Thecarrying amount ofthemachine is$60,750. (2) (3) (4) 16 Anequivalent newmachine would cost$90,000. Themachine couldbesoldinitscurrent condition fora grossamount of$45,000. Dismantling costswould amount to$2,000. Initscurrent condition, themachine couldoperate forthreemoreyearswhichgivesita valueinusefigureof$38,685. Inaccordance withIAS16Property, PlantandEquipment, whatisthedepreciation charged toAphrodite Co'sprofitorlossinrespect ofthemachine fortheyearended 31December 20X4? $9,000 $8,000 17 $8,263 $8,500 IAS36Impairment ofAssets contains a number ofexamples ofinternal andexternal events whichmayindicate theimpairment ofanasset. Inaccordance withIAS36,whichofthefollowing woulddefinitely NOTbeanindicator of thepotential impairment ofanasset(orgroupofassets)? Anunexpected fallinthemarket valueofoneormoreassets Adverse changes intheeconomic performance ofoneormoreassets Asignificant changeinthetechnological environment inwhichanassetisemployed making itssoftware effectively obsolete Thecarrying amount ofanentity's netassetsbeingbelow theentity's market capitalisation 274 Financial Reporting (FR) Page 297 of 405 H G q 18 Usingthepulldownlistbelow,selectthetotalimpairment lossassociated withAphrodite Co'smachine at1October 20X6? Q U E T IO N S S Pulldownlist: $nil $17,750 $22,065 $15,750 19 Theaccountant hasdecided thatitistoodifficult toreliably attribute cashflowstothisone machine andthatitwould bemoreaccurate tocalculate theimpairment onthebasisof thefactoryasa cashgenerating unit. Inaccordance withIAS36,whichofthefollowing isTRUEregarding cashgenerating units? Acashgenerating unittowhichgoodwill hasbeenallocated should betested for impairment everyfiveyears Acashgenerating unitmustbea subsidiary oftheparent 20 There isnoneedtoconsistently identify cashgenerating unitsbasedonthesame typesofassetfromperiod toperiod Acashgenerating unitisthesmallest identifiable groupofassetsforwhich independent cashflowscanbeidentified On1July20X7,itisdiscovered thatthedamage tothemachine isworse thanoriginally thought. Themachine isnowconsidered tobeworthless andtherecoverable amount ofthe factoryasa cashgenerating unitisestimated tobe$950,000. At1July20X7,thecashgenerating unitcomprises thefollowing assets: $'000 Building 500 Plantandequipment (including thedamaged machine ata carrying amount of $35,000) 335 Goodwill 85 Netcurrent assets(atrecoverable amount) 250 ,170 H Inaccordance withIAS36,whatwillbethecarrying amount ofAphrodite Co'splantand equipment whentheimpairment losshasbeenallocated tothecashgenerating unit? $262,500 $300,000 $237,288 $280,838 Mockexam1(September 2016CBE):Questions275 Page 298 of 405 Powered By Ù q Thefollowingscenario relates to questions 21–25. On 1January 20X5,BlocksCo entered intonewagreementsas follows: Agreementone Agreementtwo Thisagreementmeetsthe definitionof a lease underIFRS16Leasesand grants BlocksCo the rightto use a pieceof machinery.Underthe termsof the agreement,BlocksCo mustpay a depositof $20,000 on inceptionof the lease on 1January 20X5followedby fiveequal annual instalmentsof $55,000, startingon 31December20X5.Thepresentvalueof the futurelease payments on 1January 20X5is $200,000. Theimplicitrate of interestis 11.65%. Thisagreementmeetsthe definitionof a lease underIFRS16Leasesand grants BlocksCo the rightto use a van forninemonths.Thefairvalueof the van is $120,000and it has an estimatedusefullifeof fiveyears. The agreementrequiresBlocksCo to makeno payment inmonthone and $4,800 per monthinmonths2–9. BlocksCo wishesto take advantage of any optional recognitionexemptionsavailableunderIFRS16. Agreementthree Thissale and leasebackrelatesto a cuttingmachinepurchasedby BlocksCo on 1January 20X4for$300,000. Thecarryingamountof the machineas at 31December20X4was $250,000. On 1January 20X5,it was soldto Cogs Co for$370,000(beingits fairvalue)and BlocksCo willlease the machineback forfiveyears, the remainderof its usefullife,at $80,000 per annum.The presentvalueof the annual paymentsis $350,000 and the transaction satisfiesthe IFRS15criteriato be recognisedas a sale. 21 Accordingto IFRS16Leases,whichof the followingis characteristicof a lease? Ownershipof the asset is passed to the lesseeby the end of the lease term G 22 23 276 Thelessoris responsibleforthe generalmaintenanceand repairof the asset Thelesseeobtainscontroloverthe use of the asset Thelease termis fora majorpart of the usefullifeof the asset Foragreement one, what is the financecost charged to profitor lossfor the year ended 31December20X6? $23,300 $12,451 $19,607 $16,891 Thefollowingcalculationshave been prepared foragreementone: Year Interest Annualpayment Balance $ $ $ 31December20X7 15,484 (55,000) 93,391 31December20X8 10,880 (55,000) 49,271 31December20X9 5,729 (55,000) 0 Howwillthe lease obligationbe shownin the statement of financialpositionas at 31December20X7? $44,120as a non-currentliabilityand $49,271as a currentliability $49,271as a non-currentliabilityand $44,120as a currentliability $93,391as a non-currentliability $93,391as a currentliability FinancialReporting(FR) Page 299 of 405 H G q 24 Foragreement two, what wouldbe charged to profitor lossfor the quarter ended 31March20X5? $ 25 Foragreement three, what profitshouldbe recognisedfor the year ended 31December 20X5as a resultof the sale and leaseback?Selectyouranswer fromthe pulldownlist provided. Q U E T IO N S S Pulldownlist: $6,486 $120,000 $113,514 $107,028 Thefollowingscenario relates to questions 26–30. MightyITCo provideshardware,softwareand ITservicesto smallbusinesscustomers. MightyITCo has developedan accountingsoftwarepackage. Thecompanyoffersa supplyand installationservicefor$1,000and a separate two-yeartechnicalsupportservicefor$500. Alternatively,it also offersa combinedgoodsand servicescontract whichincludesboth of these elementsfor$1,200.Paymentforthe combinedcontract is due one monthafter the date of installation. InDecember20X5,MightyITCo revaluedits corporateheadquarters. Priorto the revaluation,the carryingamountof the buildingwas $2 millionand it was revaluedto $2.5 million. H MightyITCo also revalueda sales officeon the same date. Theofficehad been purchasedfor $500,000 earlierinthe year, but subsequentdiscoveryof defects reducedits valueto $400,000. Nodepreciationhad been charged on the sales officeand any impairmentlossis allowablefor tax purposes. MightyITCo's incometax rate is 30%. 26 Inaccordance withIFRS15RevenuefromContracts withCustomers,whenshouldMighty ITCo recogniserevenuefromthe combinedgoods and servicescontract? 27 Supplyand install:on installation Technicalsupport:overtwoyears Supplyand install:whenpayment is made Technicalsupport:overtwoyears Supplyand install:on installation Technicalsupport:on installation Supplyand install:whenpayment is made Technicalsupport:whenpayment is made Foreach combinedcontract sold,what is the amount of revenuewhichMightyITCo shouldrecognisein respect of the supplyand installationservicein accordance withIFRS 15? $ Mockexam1(September2016CBE):Questions 277 Page 300 of 405 Powered By Ù G q 28 Mighty ITCosellsa combined contract on1January20X6,thefirstdayofitsfinancial year.Mighty ITCofinancial statements areprepared inaccordance withIFRS15. Usingthepulldownlist,selectwhatisthetotalamount fordeferred income whichwillbe reported inMightyITCo'sstatement offinancial position asat31December 20X6? Pulldownlist: $400 $250 $313 $200 29 30 Inaccordance withIAS12Income Taxes,whatistheimpactoftheproperty revaluations ontheincome taxexpense ofMightyITCofortheyearended31December 20X5? Income taxexpense increases by$180,000 Income taxexpense increases by$120,000 Income taxexpense decreases by$30,000 Noimpact onincome taxexpense InJanuary20X6,theaccountant atMighty ITCoproduced thecompany's draftfinancial statements fortheyearended 31December 20X5.Hethenrealised thathehadomitted to consider deferred taxondevelopment costs.In20X5,development costsof$200,000had beenincurred andcapitalised. Development costsaredeductible infullfortaxpurposes in theyeartheyareincurred. Thedevelopment isstillinprocess at31December 20X5. Whatadjustment isrequired totheincome taxexpense inMightyITCo'sstatement of profitorlossfortheyearended31December 20X5toaccount fordeferred taxonthe development costs? Increase of$200,000 Increase of$60,000 Decrease of$60,000 Decrease of$200,000 (30marks) 278 Financial Reporting (FR) Page 301 of 405 H G q Section C – BOTH be attempted Question questions are compulsory and MUST 31 Afterpreparing a draftstatement ofprofitorloss(before interest andtax)fortheyearended 31 March20X6(before anyadjustments whichmayberequired bynotes(i)to(iv)below), the summarised trialbalance ofTriageCoasat31March20X6is: $'000 Q U E T IO N S S $'000 50,000 3,500 30,000 40,000 Equityshares of$1each Retained earnings asat1April20X5 Draftprofitbefore interest andtaxforyearended 31March20X6 6%convertible loannotes(note(i)) Freehold property (original life25years)– atcost(note(ii)) 75,000 Plantandequipment – atcost(note(ii)) 72,100 Accumulated amortisation/depreciation at1April20X5:leased property 15,000 plantandequipment 28,100 Tradereceivables (note(iii)) 28,000 Othercurrent assets 9,300 Current liabilities 17,700 Deferred tax(note(iv)) 3,200 Interest payment (note(i)) 2,400 Current tax(note(iv)) 700 0 187,500 187,500 Thefollowing notesarerelevant: (i) TriageCoissued 400,000$1006%convertible loannoteson1April20X5.Interest is payable annually inarrears on31Marcheachyear.Theloanscanbeconverted toequity shares onthebasisof20shares foreach$100loannoteon31March20X8orredeemed atparforcashonthesamedate.Anequivalent loanwithout theconversion rightswould haverequired aninterest rateof8%. Thepresent valueof$1receivable attheendofeachyear,basedondiscount ratesof6% and8%,are: 6% 8% Endofyear: 1 0.94 0.93 2 0.89 0.86 3 0.84 0.79 (ii) Non-current assets: Thedirectors decided torevalue thefreehold property at$66.3million on1October 20X5. TriageCodoesnotmakeanannual transfer fromtherevaluation surplus toretained earnings toreflect therealisation oftherevaluation gain;however, therevaluation will giverisetoa deferred taxliability atthecompany's taxrateof20%. Thefreehold property isdepreciated ona straight linebasisandplantandequipment at 15%perannum usingthereducing balance method. H Nodepreciation hasyetbeencharged onanynon-current assetsfortheyearended 31 March20X6. (iii) InSeptember 20X5,thedirectors ofTriageCodiscovered a fraud.Intotal,$700,000 whichhadbeenincluded asreceivables intheabovetrialbalance hadbeenstolen byan employee. $450,000ofthisrelated totheyearended 31March20X5,theresttothe current year.Thedirectors arehopeful that50%ofthelosses canberecovered fromthe company's insurers. Mockexam1(September 2016CBE):Questions279 Page 302 of 405 Powered By Ù G q (iv) Aprovision of$2.7million isrequired forcurrent income taxontheprofitoftheyearto 31March20X6.Thebalance oncurrent taxinthetrialbalance istheunder/over provision oftaxfortheprevious year.Inaddition tothetemporary differences relating totheinformation innote(ii),at31March20X6,thecarrying amounts ofTriageCo's netassetsare$12million morethantheirtaxbase. Required (a) Prepare a schedule ofadjustments required tothedraftprofitbefore interest andtax(in theabovetrialbalance) togivetheprofitorlossofTriageCofortheyearended 31 March20X6asa result oftheinformation innotes(i)to(iv)above. (b) Prepare thestatement offinancial position ofTriageCoasat31March20X6. (c) Theissueofconvertible loannotescanpotentially dilute thebasicearnings pershare (EPS). Calculate thediluted earnings pershareforTriageCofortheyearended 31March20X6(there isnoneedtocalculate thebasicEPS). Note.A statement ofchanges inequityandthenotestothestatement offinancial position are notrequired. Thefollowing markallocation isprovided asguidance forthisquestion: (a) 5 marks (b) 12marks (20marks) (c) 3 marks Question 32 Gregory Coisa listedcompany and,until1October 20X5,ithadnosubsidiaries. Onthatdate, itacquired 75%ofTamsin Co'sequityshares bymeans ofa shareexchange oftwonewshares inGregory Coforeveryfiveacquired shares inTamsin Co.These shares wererecorded atthe market priceonthedayoftheacquisition andweretheonlyshares issued byGregory Co during theyearended 31March20X6. Thesummarised financial statements ofGregory Coasa singleentityat31March20X5andas a groupat31March20X6are: Gregory Gregory Co group singleentity STATEMENTS OFPROFIT ORLOSSFORTHEYEARENDED 31March20X6 31March20X5 $'000 $'000 Revenue 46,500 28,000 Costofsales (37,200) 20,800) Grossprofit 9,300 7,200 Operating expenses (1,800) 1,200) Profitbefore tax(operating profit) 7,500 6,000 Income taxexpense (1,500) 1,000) Profitfortheyear 6,000 5,000 Profitforyearattributable to: Equityholders oftheparent 5,700 Non-controlling interest 300 6,000 280 Financial Reporting (FR) Page 303 of 405 H G q STATEMENTS OFFINANCIAL POSITION ASAT 31March20X6 $'000 31March20X5 $'000 Currentassets 54,600 3,000 57,600 44,000 41,500 – 41,500 36,000 Totalassets 101,600 77,500 46,000 6,000 18,700 70,700 3,600 74,300 27,300 101,600 40,000 – 13,000 53,000 – 53,000 24,500 77,500 Assets Non-currentassets Property,plant and equipment Goodwill Equityand liabilities Equity Equityshares of $1each Othercomponentof equity(sharepremium) Retainedearnings Equityattributableto ownersof the parent Non-controllinginterest Currentliabilities Totalequityand liabilities Q U E T IO N S S Otherinformation: (i) Eachmonthsincethe acquisition,GregoryCo's sales to TamsinCo wereconsistently$2 million.GregoryCo had chosento onlymakea grossprofitmarginof 10%on these sales as TamsinCo is part of the group. (ii) Thevaluesof property, plant and equipmentheldby both companieshave been risingfor severalyears. (iii) On reviewingthe abovefinancialstatements,GregoryCo's chiefexecutiveofficer(CEO) made the followingobservations: (1) Isee the profitforthe year has increasedby $1millionwhichis up 20%on last year, but Ithoughtit wouldbe moreas TamsinCo was supposedto be a very profitablecompany. (2) Ihave calculatedthe earningsper share (EPS)for20X6at 13cents (6,000/46,000 100)and for20X5at 12.5cents (5,000/40,000 100)and, althoughthe profit has increased20%,our EPShas barelychanged. (3) Iam worriedthat the lowpriceat whichweare sellinggoodsto TamsinCo is underminingour group'soverallprofitability. (4) Inote that our share priceis now$2.30,howdoes thiscomparewithour share priceimmediatelybeforewebought TamsinCo? Required (a) Replyto the fourobservationsof the CEO. (8 marks) H (b) Usingthe abovefinancialstatements,calculatethe followingratiosforGregoryCo forthe years ended 31March20X6and 20X5and commenton the comparativeperformance: (i) Returnon capital employed(ROCE) (ii) Netasset turnover (iii) Grossprofitmargin (iv) Operatingprofitmargin Note.Fourmarksare availableforthe ratiocalculations. (12marks) Note.Youranswersto (a) and (b)shouldreflectthe impactof the consolidationof TamsinCo duringthe year ended 31March20X6. (20 marks) Mockexam1(September2016CBE):Questions 281 Page 304 of 405 Powered By Ù q G H 282 FinancialReporting(FR) Page 305 of 405 q Answers G H DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE MOCK EXAM Page 306 of 405 Powered By Ù q G H 284 Advanced Performance Management (APM) Page 307 of 405 G q A plan of attack Managing your nerves Asyoustartthismockexama number ofthoughts arelikelytocrossyourmind.Atbest, examinations causeanxiety soitisimportant tostayfocused onyourtaskfortheexamperiod! Developing anawareness ofwhatisgoingonemotionally within youmayhelpyoumanage your nerves. Remember, youareunlikely tobanish theflowofadrenaline, butthekeyistoharness itto helpyouworksteadily andquickly through youranswers. Working through thismockexamwillhelpyoudevelop theexamstamina youwillneedtokeep goingforthreehours. Managing your time Planning andtimemanagement aretwoofthekeyskillswhichcomplement thetechnical knowledge youneedtosucceed. Tokeepyourself ontime,donotbeafraidtojotdownyour targetcompletion times foreachquestion, perhaps nexttothetitleofthequestion ontheexam. Asallthequestions arecompulsory, youdonothavetospendtimewondering whichquestion to answer! Doing the exam Actually doingtheexamisa personal experience. There isnota singlerightway.Aslongasyou submit complete answers toallquestions afterthethreehours areup,thenyourapproach obviously works. Looking through the exam Section A has15OTQs.Thisisthesection oftheexamwhere theexamining teamcantest knowledge acrossthebreadth ofthesyllabus. Makesureyoureadthesequestions carefully. The distractors aredesigned topresent plausible, butincorrect, answers. Don'tletthemmislead you. Ifyoureallyhavenoidea– guess.Youmayevenberight. Section B has15OTQsintotal– questions 16–30.These arearranged asthreescenarios withfive questions each. A N S W E R H S Scenario 1isonimpairment ofassets. Scenario 2 isonleasing. Scenario 3 isonrevenue recognition. Section C hastwo20-mark questions. Question 31isonaccounting adjustments andthepreparation ofa statement offinancial position. Question 32isoninterpretation offinancial statements. Allocating your time BPP'sadviceistoalwaysallocate yourtimeaccording tothemarks forthequestion. However, usecommon sense.Ifyou're doinga question buthaven't a cluehowtodopart(b),youmightbe better offreallocating yourtimeandgetting moremarks onanother question, where youcanadd something youdidn'thavetimeforearlier on.Makesureyouleavetimetorecheck theOTQsand makesureyouhaveanswered themall. Mockexam1(September 2016CBE):Answers285 Page 308 of 405 Powered By Ù q Section A 1 Tointerpretthe applicationof IFRSStandards True Toworkdirectlywithnationalstandard setters to bringabout convergencewithIFRSStandards 2 False Toprovideguidanceon financialreportingissuesnot specificallyaddressed inIFRSStandards True Topublishdraft interpretationsforpubliccomment True A 1only Theacquisitionof 60%of ZakronCo's equityshare capital on 1.March20X7.Zakron Co's activitiesare significantlydifferentfromthe rest of the Poulgogroupof companies. 3 Debit Depreciationexpense $20,000 Liability Property,plant and equipment G 4 5 Credit $30,000 $10,000 Therepaymentof the grant mustbe treated as a change inaccountingestimate.The carryingamountof the asset mustbe increasedas the nettingoffmethodhas been used. Theresultingextra depreciationmustbe charged immediatelyto profitor loss. Original Asifno grant Adjustment $ $ $ Cost 90,000 90,000 Grant (30,000) 60,000 Depreciation (10,000)[1yr] (30,000)[2yr] DebitDep'nexp20,000 Carryingamount 50,000 [1/1/X7] 60,000 [31/12/X7]DebitPPE10,000 CreditLiability30,000 A Aprovisionis requiredforthe cost of both issues1and 2. $774,000 710,000+(480,000 3/12)– (20,000 3)+(20,000 25/125)=$774,000 6 7 D D Itis a change of accountingestimateand mustbe appliedprospectively. Inothercomprehensiveincomeforinvestment1and inprofitor lossforinvestment2 Note. Investment2 is heldfortrading. 8 C $4,750 Nettotal beingpaid overfourmonths(($5,000×4 months)– $1,000)=19,000 Annualcharge spread evenlyoverthe lease term($19,000/4months)=4,750 286 FinancialReporting(FR) Page 309 of 405 H G q 9 Capitalemployed whichiscalculated usinghistorical costsisunderstated compared to current valuecapitalemployed. Historical costprofits areoverstated incomparison tocurrent valueprofits. Thisisthecaseina period ofinflation. 10 11 12 $5,250,000 3,250+1,940+(800– 60030%)= 5,250,000 C Netcashgenerated fromoperating activities hasbeenusedtofundtheadditions to non-current assets. $1,880,000 FVofNCIatacquisition Profitforyear30% Dep'nonFVA(1.5m/30) Unrealised profit 3,200 (50) (550) 2,60030% 1,100 780 1,880 13 B Itiscredited toprofitorloss. 14 $470,000 15 Retained earnings =300+((150– 90)75%)= 345 Totalequity= 125+345=470 $6,270,000 Production costofPPE Capitalisation ofborrowing costs: $6m6%9/12= Totalcostcapitalised (andcarrying amount) at30September 20X2 $'000 6,000 270 6,270 A N S W E R H S Mockexam1(September 2016CBE):Answers287 Page 310 of 405 Powered By Ù q Section 16 17 18 19 D $8,500 Depreciation 1Januaryto30June20X4(80,000/10 6/12)= 4,000 Depreciation 1Julyto31December 20X4(81,000/9 6/12)= 4,500 Totaldepreciation =8,500 D Thecarrying amount ofanentity's netassetsbeingbelow theentity's market capitalisation Thismeans thatthesharepriceishigh,sothemarket haspositive expectations of theentity. $17,750 VIUislower thanFV(lesscoststosell),soimpairment is60,750– 43,000=$17,750 D Acash-generating unitisthesmallest identifiable groupofassetsforwhich independent cashflowscanbeidentified. 20 A 21 C 22 B C $262,500 Theimpairment lossof$220m(1,170 – 950)isallocated: $35mtodamaged plant and$85mtogoodwill, theremaining $100m allocated proportionally tothebuilding andtheundamaged plant.Thecarrying amount oftheplantwillthenbe$262,500. Thelessee obtains control overtheuseoftheasset. Theotheroptions arenotpartofthedefinition ofa lease. $19,607 Yr1200,00011.65% = 23,300 Yr2 (200,000+23,300– 55,000) 11.65% = $19,607 G 23 24 B $49,271 asa non-current liability and$44,120 asa current liability $12,800 4,8008 =38,400/3=12,800 25 26 27 $6,486 Profitonsale=120,000 Amount relating torightsretained =120,000350,000/370,000 =113,514 Amount relating torightstransferred =120,000– 113,514 =6,486 A Supplyandinstall: oninstallation Technical support: overtwoyears Theperformance obligation forthegoodsissatisfied whenthepackage issupplied. Thetechnical support obligation issatisfied overtime. $800 1,000/1,500 1,200=$800 28 $200 500/1,500 1,200=400/2=$200 29 C Income taxexpense decreases by$30,000 $30,000(400– 50030%). Revaluation anddeferred taxofheadquarters goesthrough OCI. 288 Financial Reporting (FR) Page 311 of 405 H q 30 B Increase of$60,000 $60,000(20030%) DebitIncome taxexpense CreditDeferred taxliability A N S W E R G H S Mockexam1(September 2016CBE):Answers289 Page 312 of 405 Powered By Ù q Section Question C 31 Textreferences.Chapter 16. Toptips. Makesure you are clear howto set out a scheduleof adjustments.Youmustshowthe effect on profitor lossinorderto get the marks. Easymarks.Thiswas quitea demandingquestionand noneof the markswereveryeasy, but if you dealt withit methodicallyand rememberedto lookat the impactof the adjustmentson the statement of financialposition,there wereplentyof marksavailable. ExaminingTeam'scomments.Somecandidates prepared a seriesof workingsbut did not attempt to summarisethemor state theireffecton profitor loss.Somecandidates did not attempt to calculatethe debt componentof the convertibleloannote or did not correctlysplitthe depreciationof the leased propertyintothe periodsbeforeand after the revaluation. Markingscheme Marks (a) G Scheduleof adjustments Profitbeforeinterestand tax Loanfinancecosts Depreciationcharges Fraudloss Incometax ½ 1 1½ ½ 1½ H 5 (b) Statementof financialposition Property,plant and equipment Tradereceivables Othercurrentassets Equityshares Equityoption Revaluationsurplus Retainedearnings Deferredtax Loannote Currentliabilities Currenttax payable 2½ 1 ½ ½ 1 1 1½ 1 1½ ½ 1 DilutedEPS Totalforquestion 290 12 3 20 FinancialReporting(FR) Page 313 of 405 q (a) TriageCo– Schedule ofadjustments toprofitfortheyearended 31March20X6 $'000 Draftprofitbefore interest andtaxpertrialbalance 30,000 Adjustments re: Note(i) Convertible loannotefinance costs(w(i)) (3,023) Note(ii) Amortisation offreehold property (1,500+1,700(w(ii))) (3,200) Depreciation ofplantandequipment (w(ii)) (6,600) Note(iii) Current yearlossonfraud(700– 450seebelow) (250) Note(iv) Income taxexpense (2,700+700– 800(w(iii))) (2,600) Profitfortheyear 14,327 The$450,000fraudlossintheprevious yearisa priorperiod adjustment (reported inthe statement ofchanges inequity). Thepossible insurance claimisa contingent assetandshould notberecognised. (b) TriageCo– Statement offinancial position asat31March20X6 $'000 Assets Non-current assets Property, plantandequipment (64,600+37,400(w(ii))) Current assets Tradereceivables (28,000– 700fraud) 27,300 Othercurrent assetspertrialbalance 9,300 Totalassets $'000 102,000 36,600 138,600 G Equityandliabilities Equity Equityshares of$1each Othercomponent ofequity(w(i)) Revaluation surplus (7,800– 1,560(w(ii))) Retained earnings (w(iv)) Non-current liabilities Deferred tax(w(iii)) 6%convertible loannotes(w(i)) Current liabilities Pertrialbalance Current taxpayable Totalequityandliabilities (c) 2,208 6,240 17,377 3,960 38,415 17,700 2,700 Diluted earnings pershare(w(v)) 50,000 A N S W E R H S 25,825 75,825 42,375 20,400 138,600 29cents Mockexam1(September 2016CBE):Answers291 Page 314 of 405 Powered By Ù G q Workings (monetary figures inbrackets in$'000) (i) 6%convertible loannotes Theconvertible loannotesarea compound financial instrument having a debtandan equitycomponent whichmustbothbequantified andaccounted forseparately: Yearended 31March (ii) Outflow $'000 2,400 2,400 42,400 8% Present value $'000 20X6 0.93 2,232 20X7 0.6 2,064 20X8 0.79 33,496 Debtcomponent 37,792 Equitycomponent (=balance) 2,208 Proceeds ofissue 40,000 Thefinance costwillbe$3,023,000 (37,792 8%)andthecarrying amount oftheloan notesat31March20X6willbe$38,415,000 (37,792 + (3,023– 2,400)). Non-current assets Freehold property Thegainonrevaluation andcarrying amount ofthefreehold property is: Carrying amount at1April20X5(75,000– 15,000) Amortisation todateofrevaluation (1October 20X5)(75,000/25 6/12) Carrying amount atrevaluation Gainonrevaluation =balance Revaluation at1October 20X5 Amortisation toyearended 31March20X6(66,300/19.5 years6/12) Carrying amount at31March20X6 $'000 60,000 (1,500) 58,500 7,800 66,300 (1,700) 64,600 Annual amortisation is$3m(75,000/25 years);therefore theaccumulated amortisation at 1April20X5of$15m represents fiveyears'amortisation. Atthedateofrevaluation (1October 20X5),therewillbea remaining lifeof19.5years. Oftherevaluation gain,$6.24m (80%)iscredited totherevaluation surplus and$1.56m (20%)iscredited todeferred tax. Plantandequipment $'000 Carrying amount at1April20X5(72,100 – 28,100) 44,000 Depreciation foryearended 31March20X6(15%reducing balance) (6,600) Carrying amount at31March20X6 37,400 (iii) Deferred tax Provision required at31March20X6: Revalued property andotherassets(7,800+12,000)20% Provision at1April20X5 Increase inprovision Revaluation oflandandbuildings (7,80020%) Balance credited toprofitorloss (iv) Retained earnings Balance at1April20X5 Priorperiod adjustment (fraud) Adjusted profitforyear(from(a)) Balance at31March20X6 3,960 (3,200) 760 (1,560) (800) 3,500 (450) 14,327 17,377 292 Financial Reporting (FR) Page 315 of 405 H q (v) Themaximum additional shares onconversion is8 million (40,00020/100),givingtotal shares of58million. Theloaninterest 'saved' is$2.418m (3,023(from(w(i))above80%(ieaftertax)),giving adjusted earnings of$16.745m (14,327 + 2,418)). Therefore diluted EPSis Question $16,745,000 100 =29cents 58 million shares 32 Textreferences. Chapter 19. Toptips.It'snotallabouttheratios. Youhavetolookatthefinancial statements combined with theinformation inthequestion andworkoutwhatisgoingonwiththecompany. Inthiscaseit's important toconsider thegroupaspects. Easymarks. Theratioswereeasymarks andiftheywereconsidered inthelightoftherestofthe information itshould havebeenpossible togetgoodmarks forthecomments. Examining Team's comments. Thisquestion combined interpretation withanelement of consolidation andcandidates founditchallenging. Inpart(a)mostcandidates launched into irrelevant detailregarding ratiomovements without stopping toconsider thereason forthe difference between thetwoyears'financial statements. Theratiocalculations inpart(b)were generally welldone.Thecomments oncomparative performance weregenerally inadequate – to saythata ratiohasgoneupordownandthatthisisgoodorbadisnotenough. Marking scheme Marks G (a) 2 marks foreachreplytotheCEO'sobservations 8 (b) 1markforeachpairofratios 1markperrelevant comment upto 4 8 Totalforquestion (a) 8 A N S W E R H S 12 20 Note.References to20X6and20X5aretotheyearsending 31March20X6and20X5 respectively. Comment (1):I seetheprofitfortheyearhasincreased by$1mwhichisup20%onlast year,butI thought itwould bemoreasTamsin Cowassupposed tobea veryprofitable company. There aretwoissues withthisstatement. First,lastyear'sprofitisnotcomparable withthe current year'sprofitbecause in20X5Gregory Cowasa singleentityandin20X6itisnow a groupwitha subsidiary. Asecond issueisthattheconsolidated statement ofprofitor lossfortheyearended 31March20X6onlyincludes sixmonths oftheresults ofTamsin Co, and,assuming Tamsin Coisprofitable, future results willinclude a fullyear'sprofit. This latterpointmay,atleastinpart,mitigate theCEO'sdisappointment. Comment (2):I havecalculated theEPSfor20X6at13cents(6,000/46,000 100shares) andat12.5centsfor20X5(5,000/40,000 100)and,although theprofithasincreased 20%,ourEPShasbarelychanged. Mockexam1(September 2016CBE):Answers293 Page 316 of 405 Powered By Ù q Thestated EPScalculationfor20X6is incorrectfortworeasons.First,it isthe profit attributableto onlythe equityshareholdersof the parent whichshouldbe used and, second,the 6 millionnewshares wereonlyinissueforsixmonthsand shouldbe pro-rated by 6/12months.Thus,the correctEPSfor20X6is 13.3cents (5,700/43,000100).This givesan increaseof 6%(13.3– 12.5)/12.5)on 20X5EPSwhichis stilllessthan the increase inprofit.Thereason whythe EPSmay not have increasedinlinewithreportedprofitis that the acquisitionwas financedby a share exchangewhichincreasedthe numberof shares in issue.Thus,the EPStakes account of the additionalconsiderationused to generate profit, whereasthe trend of absoluteprofitdoes not take additionalconsiderationintoaccount. Thisis whythe EPSis oftensaid to be a moreaccurate reflectionof companyperformance than the trend of profits. Comment(3):Iam worriedthat the lowpriceat whichweare sellinggoodsto TamsinCo is underminingour group'soverallprofitability. Assumingthe consolidatedfinancialstatements have been correctlyprepared, all intragrouptradinghas been eliminated,thus the pricingpolicywillhave had no effecton these financialstatements.Thecommentis incorrectand reflectsa misunderstandingof the consolidationprocess. Comment(4):Inote that our share priceis now$2.30,howdoes thiscomparewithour share priceimmediatelybeforewebought TamsinCo? Theincreaseinshare capital is6 millionshares, the increaseinthe share premiumis $6m, thus the total proceedsforthe 6 millionshares was $12mgivinga share priceof $2.00 at the date of acquisitionof TamsinCo. Thecurrentpriceof $2.30presumablyreflectsthe market'sfavourableviewof GregoryCo's currentand futureperformance. (b) 20X6 20X5 Returnon capital employed(ROCE)(7,500/74,300100) 10.1% 11.3% Netasset turnover(46,500/74,300) 0.63 times 0.53 times Grossprofitmargin(9,300/46,500100) 20.0% 25.7% Operatingprofitmargin(7,500/46,500100) 16.1% 21.4% Lookingat the aboveratios,it appears that the overallperformanceof GregoryCo has declinedmarginally;the ROCEhas fallenfrom11.3%to 10.1%.Thishas been caused by a substantialfallinthe grossprofitmargin(downfrom25.7%in20X5to 20%in20X6);thisis overa 22%(5.7%/25.7%) decrease. Thegroup/companyhave relativelylowoperating expenses(at around 4%of revenue),so the poorgrossprofitmarginfeeds throughto the operatingprofitmargin.Theoveralldeclineinthe ROCE,due to the weakerprofitmargins, has been mitigatedby an improvementinnet asset turnover,increasingfrom0.53 timesto 0.63 times.Despitethe improvementinnet asset turnover,it is stillverylowwithonly 63 cents of sales generated fromevery$1investedinthe business,althoughthiswill depend on the type of businessGregoryCo and TamsinCo are engaged in. On thisanalysis,the effect of the acquisitionof TamsinCo seemsto have had a detrimentaleffect on overallperformance,but thismay not necessarilybe the case; there couldbe somedistortingfactors inthe analysis.Asmentionedabove,the 20X6results includeonlysixmonthsof TamsinCo's results,but the statement of financialposition includesthe fullamountof the considerationforTamsinCo. (Theconsiderationhas been calculated[seecomment(4)above]as $12mforthe parent's 75%share plus$3.3m[3,600 – 300 share of post-acquisitionprofit]forthe non-controllinginterest's25%,givingtotal considerationof $15.3m.)Theabovefactors disproportionatelyincreasethe denominatorof ROCEwhichhas the effect of worseningthe calculatedROCE.Thisdistortionshouldbe correctedin20X7whena fullyear's resultsforTamsinCo willbe includedingroupprofit. Anotherfactor is that it couldtake timeto fullyintegratethe activitiesof the two companiesand moresavingsand othersynergiesmay be forthcomingsuch as bulkbuying discounts. G 294 FinancialReporting(FR) Page 317 of 405 H q Thenon-controlling interest shareintheprofitfortheyearin20X6of$300,000allows a roughcalculation ofthefullyear'sprofitofTamsin Coat$2.4m(300,000/25% × 12/6,ie the$300,000represents 25%of6/12oftheannual profit). Thisfigureissubject tosome uncertainty suchastheeffectofprobable increased post-acquisition depreciation charges. However, a profitof$2.4montheinvestment of$15.3m represents a return of16% (andwould behigher iftheprofitwasadjusted toa pre-tax figure) whichismuchhigher thanthecurrent yearROCE(at10.1%) ofthegroup.Thisimplies thattheperformance of Tamsin Coismuchbetter thanthatofGregory Co(asa separate entity) andthatGregory Co'sperformance in20X6musthavedeteriorated considerably fromthatin20X5andthis istherealcauseofthedeteriorating performance ofthegroup. Another issuepotentially affecting theROCEisthat,asa result oftheconsolidation process, Tamsin Co'snetassets, including goodwill, areincluded inthestatement of financial position atfairvalue,whereas Gregory Co'snetassetsappear tobebasedon historical cost(asthereisnorevaluation surplus). Asthevalues ofproperty, plantand equipment havebeenrising,thisineffectfavourably flatters the20X5ratios. Thisis because thestatement offinancial position of20X5onlycontains Gregory Co'sassets which, athistorical cost,mayconsiderably understate theirfairvalueand,ona comparative basis,overstate 20X5ROCE. Insummary, although onfirstimpression theacquisition ofTamsin Coappears tohave caused a marginal worsening ofthegroup's performance, thedistorting factors and imputation ofthenon-controlling interest's profitin20X6indicate theunderlying performance maybebetter thantheratiosportray andthecontribution fromTamsin Cois a verysignificant positive. Future performance maybeevenbetter. Without information ontheseparate financial statements ofTamsin Co,itisdifficult to forma moredefinite view. A N S W E R G H S Mockexam1(September 2016CBE):Answers295 Page 318 of 405 Powered By Ù q G H 296 Financial Reporting (FR) Page 319 of 405 G q ACCA Financial Mock Reporting (FR) Examination Specimen 2 CBE Questions Timeallowed 3 hours Thismockexamisdividedintothreesections: SectionA ALL15questions arecompulsory andMUSTbeattempted SectionB ALL15questions arecompulsory andMUSTbeattempted SectionC BOTHquestions arecompulsory andMUSTbeattempted H DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS 297 Page 320 of 405 Powered By Ù q G H 298 Financial Reporting (FR) Page 321 of 405 G q Section A – ALL 15 questions be attempted are compulsory and MUST Eachquestionis worth2 marks. Identifywhetherthe followingcosts shouldor shouldnot be capitalisedin the initial carryingamount of an itemof plant. Cost of a three-year plant maintenanceagreement Cost of installinga newpower supplyrequiredto operate the l Cost of a three-weektraining coursefor staff to operate the plant Cost of transportingthe plant to the factory Q U E T IO N S S Theinitial carrying amount of plant should include: Theinitial carrying amount of plant should NOTinclude: 2 Whena parent is evaluatingthe assets of a potentialsubsidiary,certainintangibleassets can be recognisedseparately fromgoodwill,eventhoughthey have not been recognisedin the subsidiary'sownstatement of financialposition. H Whichof the followingis an exampleof an intangibleasset of the subsidiarywhichmay be recognisedseparately fromgoodwillwhenpreparingconsolidatedfinancial statements? 3 Anewresearchprojectwhichthe subsidiaryhas correctlyexpensedto profitor loss but the directorsof the parent have reliablyassessed to have a substantialfairvalue Aglobaladvertisingcampaignwhichwas concludedinthe previousfinancialyear and fromwhichbenefitsare expectedto flowinthe future Acontingentasset of the subsidiaryfromwhichthe parent believesa flowof future economicbenefitsis possible Acustomerlistwhichthe directorsare unableto valuereliably On 1October20X4,FlashCo acquiredan itemof plant undera five-yearlease agreement. Underthe termsof the agreement,an immediatedepositof $2 millionis payable on inceptionof the lease and the presentvalueof futurelease paymentsat that date have been calculatedas $22,745,000.Annualrentalsof $6 millionare payable on 30 September each year forfiveyears. Theagreementhad an implicitrate of interestof 10%per annum. What is the current liabilityfor the leased plant in FlashCo's statement of financial positionas at 30 September20X5? $ Mockexam1(Specimenexam):Questions 299 Page 322 of 405 Powered By Ù q 4 Financial statements represent transactions inwords andnumbers. Tobeuseful, financial information mustrepresent faithfully thesetransactions interms ofhowtheyarereported. Identify, byselecting therelevant boxinthetablebelow,whether thestatement regarding faithful representation istrueorfalse. 5 Charging therental payments foranitemofplanttothe statement ofprofitorlosswhere therental agreement meets the criteria fora leaseandnorecognition exemptions areavailable True False Including a convertible loannoteinequityonthebasisthatthe holders arelikelytochoose theequityoption onconversion True False Treating redeemable preference shares aspartofequityinthe statement offinancial position True False Derecognising factored tradereceivables soldwithout recourse to theseller True False On1October 20X4,Kalatra Cocommenced drilling foroilfromanundersea oilfield. Kalatra Coisrequired todismantle thedrilling equipment attheendofitsfive-year licence. Thishasanestimated costof$30mon30September 20X9.Kalatra Co'scostofcapitalis 8%perannum and$1infiveyears'timehasa present valueof68cents. Selecting youranswer fromthepulldownlist,identify theprovision whichKalatraCo wouldreport initsstatement offinancial position asat30September 20X5inrespect of itsoiloperations? Pulldownlist: G H $32,400,000 $22,032,000 $20,400,000 $1,632,000 6 Whena singleentitymakes purchases orsalesina foreign currency, itwillbenecessary to translate thetransactions intoitsfunctional currency before thetransactions canbe included initsfinancial records. Inaccordance withIAS21TheEffectofChanges inForeign Currency Exchange Rates, whichofthefollowing foreign currency exchange ratesmaybeusedtotranslate the foreign currency purchases andsales? (1) Theratewhichexisted onthedaythatthepurchase orsaletookplace (2) Theratewhichexisted atthebeginning oftheaccounting period (3) (4) Anaverage ratefortheyear,provided therehavebeennosignificant fluctuations throughout theyear Theratewhichexisted attheendoftheaccounting period (2)and(4) (1)only (3)only (1)and(3) 300 Financial Reporting (FR) Page 323 of 405 q 7 On 1October20X4,HoyCo had $2.5 millionof equityshare capital (sharesof 50 cents each) inissue. Nonewshares wereissuedduringthe year ended 30 September20X5,but on that date there wereoutstandingshare optionswhichhad a dilutiveeffectequivalentto issuing 1.2millionshares forno consideration. Hoy'sprofitafter tax forthe year ended 30 September20X5was $1,550,000. Inaccordance withIAS33 Earningsper Share, what is Hoy'sdilutedearningsper share for the year ended 30 September20X5? $0.25 $0.41 $0.31 $0.42 8 G 9 Q U E T IO N S S ForkCo ownsan 80%investmentinSpoonCo whichit purchasedseveralyears ago. The goodwillon acquisitionwas valuedat $1,674,000and there has been no impairmentof that goodwillsincethe date of acquisition. On 30 September20X4,ForkCo disposedof its entireinvestmentinSpoonCo, detailsof whichare as follows: $'000 Salesproceedsof ForkCo's entireinvestmentinSpoonCo 5,580 Cost of ForkCo's entireinvestmentinSpoonCo 3,720 Immediatelybeforethe disposal,the consolidatedfinancialstatements of ForkCo included the followingamountsinrespect of SpoonCo: $'000 Carryingamountof the net assets (excludinggoodwill) 4,464 Carryingamountof the non-controllinginterests 900 What is the profit/losson disposal(beforetax) whichwillbe recordedin ForkCo's consolidatedstatement of profitor lossfor the year ended 30 September20X4? $1,860,000profit $2,016,000profit $342,000profit $558,000 loss H Consolidatedfinancialstatements are presentedon the basis that the companieswithin the groupare treated as ifthey are a singleeconomicentity. WhichTWOof the followingare requirementsof preparingconsolidatedfinancial statements? Allsubsidiariesmustadopt the accountingpoliciesof the parent intheirindividual financialstatements Subsidiarieswithactivitieswhichare substantiallydifferentto the activitiesof other membersof the groupshouldnot be consolidated Allentityfinancialstatements withina groupshouldnormallybe prepared to the same accountingyear end priorto consolidation Unrealisedprofitswithinthe groupmustbe eliminatedfromthe consolidated financialstatements Mockexam2 (SpecimenCBE):Questions 301 Page 324 of 405 Powered By Ù G q 10 Aparent sellsgoodstoits80%owned subsidiary during thefinancial year,someofwhich remains ininventory attheyearend. Usingthedraganddropoptions below,selectthecorrect adjustment required inthe consolidated statement offinancial position toeliminate anyunrealised profitin inventory? Groupretained earnings Credit Inventory Debit Non-controlling interest 11 CaddyCoacquired 240,000ofAmbel Co's800,000equityshares for$6pershareon 1October 20X4.Ambel Co'sprofitfortheyearended 30September 20X5was$400,000 anditpaidanequitydividend on20September 20X5of$150,000. Ontheassumption thatAmbel Coisanassociate ofCaddyCo,whatwouldbethe carrying amount oftheinvestment inAmbel Cointheconsolidated statement offinancial position ofCaddyCoasat30September 20X5? $1,560,000 $1,395,000 $1,515,000 $1,690,000 12 Quartile Coisinthejewellery retailbusiness whichcanbeassumed tobehighlyseasonal. Fortheyearended 30September 20X5,Quartile Coassessed itsoperating performance bycomparing selected accounting ratioswiththoseofitsbusiness sector average as provided byanagency.Assume thatthebusiness sector usedbytheagencyisa meaningful representation ofQuartile Co'sbusiness. WhichTWOofthefollowing circumstances mayinvalidate thecomparison ofQuartile Co'sratioswiththoseofthesectoraverage? Inthecurrent year,Quartile Cohasexperienced significant risingcostsforits purchases Thesector average figures arecompiled fromcompanies whose yearendsare between 1July20X5and30September 20X5 Quartile Codoesnotrevalue itsproperties, butisawarethatotherentities inthis sector do During theyear,Quartile Codiscovered anerrorrelating totheinventory countat 30September 20X4.Thiserrorwascorrectly accounted forinthefinancial statements forthecurrent yearended 30September 20X5 13 Whichofthefollowing criticisms doesNOTapplytohistorical costfinancial statements during a period ofrisingprices? Theyaredifficult toverifybecause transactions couldhavehappened manyyears ago Theycontain mixed values; someitems areatcurrent values andsomeareatoutof datevalues Theyunderstate assetsandoverstate profit Theyoverstate gearing inthestatement offinancial position 302 Financial Reporting (FR) Page 325 of 405 H G q 14 Thefollowinginformationhas been taken or calculatedfromFowler'sfinancialstatements forthe year ended 30 September20X5: Cash cycleat 30 September20X5 70 days Inventoryturnover sixtimes Year-endtrade payables at 30 September20X5 $230,000 Creditpurchasesforthe year ended 30 September20X5 $2 million Cost of sales forthe year ended 30 September20X5 $1.8million What is Fowler'strade receivablescollectionperiodas at 30 September20X5? 106days 89 days 56 days 51days 15 Q U E T IO N S S On 1October20X4,PyramidCo acquired80%of SquareCo's 9 millionequityshares. At the date of acquisition,SquareCo had an itemof plant whichhad a fairvalueof $3 million inexcessof its carryingamount.Atthe date of acquisitionit had a usefullifeof fiveyears. PyramidCo's policyis to valuenon-controllinginterestsat fairvalueat the date of acquisition.Forthispurpose,SquareCo's shares had a valueof $3.50 each at that date. In the year ended 30 September20X5,SquareCo reporteda profitof $8million. Atwhat amount shouldthe non-controllinginterests in SquareCo be valuedin the consolidatedstatement of financialpositionof the Pyramidgroup as at 30 September 20X5? $26,680,000 $7,900,000 $7,780,000 $12,220,000 H (30 marks) Mockexam2 (SpecimenCBE):Questions 303 Page 326 of 405 Powered By Ù G q Section B – ALL be attempted 15 questions are compulsory and MUST Eachquestion isworth 2 marks. Thefollowing scenariorelatestoquestions 16–20. Telepath Cohasa yearendof30September andownsanitemofplantwhichitusestoproduce andpackage pharmaceuticals. Theplantcost$750,000on1October 20X0,andatthatdate, hadanestimated useful lifeoffiveyears.Areview oftheplanton1April20X3concluded thatthe plantwould lastfora further threeanda halfyearsandthatitsfairvaluewas$560,000. Telepath Coadopts thepolicyofrevaluing itsnon-current assetstotheirfairvaluebutdoesnot makeanannual transfer fromtherevaluation surplus toretained earnings torepresent the additional depreciation charged duetotherevaluation. On30September 20X3,Telepath Cowasinformed bya major customer thatitwould nolonger beplacingorders withTelepath Co.Asa result, Telepath revised itsestimates thatnetcash inflows earned fromtheplantforthenextthreeyearswould be: Yearended 30September: $ 20X4 220,000 20X5 180,000 20X6 200,000 Telepath Co'scostofcapitalis10%whichresults inthefollowing discount factors: Valueof$1at30September: 20X4 0.91 20X5 0.83 20X6 0.75 Telepath CoalsoownsRildaCo,a 100%subsidiary, whichistreated asa cash-generating unit. On30September 20X3,therewasanimpairment toRilda'sassetsof$3,500,000. Thecarrying amount oftheassetsofRildaCoimmediately before theimpairment were: Goodwill Factorybuilding Plant Receivables andcash(atrecoverable amount) 16 $ 2,000,000 4,000,000 3,500,000 2,500,000 12,000,000 Usetheoptions below tocomplete thefollowing definition inaccordance withIAS36 Impairment ofAssets. Anassetisimpaired ifits is thanits recoverable amount. Therecoverable amount ofanassetisdefined asthehigher ofitsfair valuelesscostsofdisposal andits . Options: carrying amount historical cost less replacement cost greater valueinuse 304 Financial Reporting (FR) Page 327 of 405 H q 17 Priortoconsidering anyimpairment, whatisthecarrying amount ofTelepath Co'splant andthebalance ontherevaluation surplus at30September 20X3? 18 Plantcarrying amountRevaluation surplus $’000 $’000 480 nil 300 185 480 185 300 nil Q U E T IO N S S Calculate thevalueinuseofTelepath Co'splantasat30September 20X3. $ 19 Whichofthefollowing areTRUEinaccordance withIAS36Impairment ofAssets? (1) Acash-generating unitisthesmallest identifiable groupofassetsforwhich individual cashflowscanbeidentified andmeasured (2) Whenconsidering theimpairment ofa cash-generating unit,thecalculation ofthe carrying amount andtherecoverable amount doesnotneedtobebasedonexactly thesamegroupofnetassets (3) Whenitisnotpossible tocalculate therecoverable amount ofa singleasset,then thatofitscash-generating unitshould bemeasured instead (1)only (2)and(3) (3)only (1)and(3) G 20 H Calculate thecarrying amount ofRildaCo'splantat30September 20X3afterthe impairment losshasbeencorrectly allocated toitsassets. $ Thefollowing scenariorelatestoquestions 21–25. Ata boardmeeting inJune20X3,Neutron Co'sdirectors madethedecision toclosedownoneof itsfactories by30September 20X3andmarket boththebuilding andtheplantforsale.The decision hadbeenmadepublic,wascommunicated toallaffected parties andwasfully implemented by30September 20X3. Thedirectors ofNeutron Cohaveprovided thefollowing information relating totheclosure: Ofthefactory's 250employees, 50willberetrained anddeployed toothersubsidiaries within the Neutron groupduring theyearended 30September 20X4ata costof$125,000. Theremainder accepted redundancy atanaverage costof$5,000each. Thefactory's planthada carrying amount of$2.2million, butisonlyexpected tosellfor $500,000,incurring $50,000ofselling costs.Thefactoryitselfisexpected tosellfora profitof $1.2million. Thecompany alsorented a number ofmachines inthefactoryunder short-term leaseswhich haveanaverage ofthreemonths torunafter30September 20X3.Thepresent valueofthese Mockexam2 (Specimen CBE):Questions305 Page 328 of 405 Powered By Ù q future leasepayments at30September 20X3was$1million, however, thelessor hasstatedthat theywillaccept$850,000ifpaidon30October 20X3asa fullsettlement. Penalty payments, duetothenon-completion ofsupplycontracts, areestimated tobe $200,000,50%ofwhichisexpected toberecovered fromNeutron Co'sinsurers. 21 WhichTWOofthefollowing arerequired ifanoperation istobeclassified asa discontinued operation inaccordance withIFRS5 Non-current AssetsHeldforSaleand Discontinued Operations? Theoperation represents a separate major lineofbusiness orgeographical area Theoperation isa subsidiary Theoperation hasbeensoldorisheldforsale Theoperation isconsidered nottobecapable ofmaking a future profitfollowing a period oflosses 22 G 23 IFRS5 Non-current Assets HeldforSaleandDiscontinued Operations prescribes the recognition criteria fornon-current assetsheldforsale.Foranassetora disposal groupto beclassified asheldforsale,thesalemustbehighlyprobable. Whichofthefollowing mustapplyforthesaletobeconsidered highlyprobable? (1) (2) (3) (4) Abuyermusthavebeenlocated Theassetmustbemarketed ata reasonable price Management mustbecommitted toa plantoselltheasset Thesalemustbeexpected totakeplacewithin thenextsixmonths (2)and(3) (3)and(4) (1)and(4) (1)and(2) H Calculate theemployee costassociated withtheclosure andsaleofNeutron Co'sfactory whichshould becharged toprofitorlossfortheyearended30September 20X3. $ 24 Whatistheprofitorlossondiscontinued operations relating toproperty, plantand equipment fortheyearended30September 20X3? $1.75million loss $1.75million profit $550,000loss $550,000profit 306 Financial Reporting (FR) Page 329 of 405 G q 25 Inrespect of the leases and penalty payments, what provisionis requiredin the statement of financialpositionof NeutronCo as at 30 September20X3? $950,000 $1,200,000 $1,050,000 $1,100,000 Q U E T IO N S S Thefollowingscenario relates to questions 26–30. SpeculateCo is preparingits financialstatements forthe year ended 30 September20X3.The followingissuesare relevant: (i) Financialassets ShareholdingA– a long-terminvestmentin10,000of the equityshares of another company. Theseshares wereacquiredon 1October20X2at a cost of $3.50 each. Transactioncosts of 1%of the purchase pricewereincurred.On 30 September20X3the fairvalueof these shares is $4.50 each. ShareholdingB– a short-termspeculativeinvestmentin2,000 of the equityshares of another company. Theseshares wereacquiredon 1December20X2at a cost of $2.50 each. Transactioncosts of 1%of the purchase pricewereincurred.On 30 September20X3 the fairvalueof these shares is $3.00 each. Wherepossible,SpeculateCo makesan irrevocableelectionforthe fairvaluemovements on financialassets to be reportedinothercomprehensiveincome. (ii) Taxation Theexistingdebit balance on the currenttax account of $2.4millionrepresentsthe over/underprovisionof the tax liabilityforthe year ended 30 September20X2.Aprovision of $28 millionis requiredforincometax forthe year ended 30 September20X3.The existingcreditbalance on the deferredtax account is $2.5 millionand the provision requiredat 30 September20X3is $4.4 million. (iii) Revenue On 1October20X2,SpeculateCo soldone of its productsfor$10million.Aspart of the sale agreement,SpeculateCo is committedto the ongoingservicingof the productuntil 30 September20X5(iethree years after the sale).Thesale valueof thisservicehas been includedinthe sellingpriceof $10million.Theestimatedcost to SpeculateCo of the servicingis $600,000 per annumand SpeculateCo's grossprofitmarginon thistype of servicingis 25%.Ignorediscounting. 26 Whichof the followingmeet the definitionof a financialasset in accordance withIFRS9 FinancialInstruments? (1) Anequityinstrumentof another entity (2) Acontract to exchangefinancialinstrumentswithanother entityunderconditions whichare potentiallyfavourable (3) Acontract to exchangefinancialinstrumentswithanother entityunderconditions whichare potentiallyunfavourable (4) Cash (1)and (2)only (1),(2)and (4) (1),(3)and (4) H (4)only Mockexam2 (SpecimenCBE):Questions 307 Page 330 of 405 Powered By Ù q 27 Usingthepulldownlistbelow,selectthecorrect amount willbeincluded inother comprehensive income fortheyearended30September 20X3,inrespect ofthefinancial assetsofSpeculate Co. Pulldownlist: Nil $9,650 $10,000 $10,650 28 Calculate thetotalamount whichwillbecharged tothestatement ofprofitorlossforthe yearended30September 20X3inrespect oftaxation. $ 29 G 30 Whatistheamount ofdeferred income whichSpeculate Coshould recognise inits statement offinancial position asat30September 20X3relating tothecontract forthe supplyandservicing ofproducts? $1.2million $1.6million $600,000 $1.5million H Which TWOofthefollowing areTRUEinrespect oftheincome which Speculate Cohas deferred at30September 20X3? Thedeferred income willbesplitevenly between thecurrent andnon-current liabilities inSpeculate Co'sstatement offinancial position asat30September 20X3 Thecostsassociated withthedeferred income ofSpeculate Coshould berecognised inthestatement ofprofitorlossatthesametimeastherevenue isrecognised Thedeferred income canonlyberecognised asrevenue bySpeculate Cowhenthere isa signed written contract ofservice withitscustomer Whenrecognising therevenue associated withtheservice contract ofSpeculate Co, thestageofitscompletion isirrelevant (30marks) 308 Financial Reporting (FR) Page 331 of 405 G q Section C – Both questions attempted Question are compulsory and MUST be 31 Afterpreparing a draftstatement ofprofitorlossfortheyearended 30September 20X5and addingthecurrent year'sdraftprofit(before anyadjustments required bynotes(i)to(iii)below) toretained earnings, thesummarised trialbalance ofKandyCoasat30September 20X5is: Equityshares of$1each Retained earnings asat30September 20X5 Proceeds of6%loannote(note(i)) Investment properties atfairvalue(note(ii)) Land($5million) andbuildings – atcost(note(ii)) Plantandequipment – atcost(note(ii)) Accumulated depreciation at1October 20X4:buildings plantandequipment Current assets Current liabilities Deferred tax(notes (ii)and(iii)) Interest paid(note(i)) Current tax(note(iii)) Suspense account (note(ii)) $'000 20,000 35,000 58,500 68,700 1,800 184,000 Q U E T IO N S S $'000 20,000 15,500 30,000 20,000 34,500 43,400 2,500 1,100 17,000 184,000 Thefollowing notesarerelevant: (i) Theloannotewasissued on1October 20X4andincurred issuecostsof$1million which werecharged toprofitorloss.Interest of$1.8million ($30million at6%)waspaidon 30September 20X5.Theloanisredeemable on30September 20X9ata substantial premium whichgivesaneffective interest rateof9%perannum. Nootherrepayments are dueuntil30September 20X9. (ii) H Non-current assets: On1October 20X4,Kandyowned twoinvestment properties. Thefirstproperty hada carrying amount of$15million andwassoldon1December 20X4for$17million. The disposal proceeds havebeencredited toa suspense account inthetrialbalance above.On 31December 20X4,thesecond property became owner occupied andsowastransferred to landandbuildings atitsfairvalueof$6million. Itsremaining useful lifeon31December 20X4wasconsidered tobe20years.Ignore anydeferred taximplications ofthisfairvalue. Thepriceofproperty hasincreased significantly inrecent yearsandsothedirectors decided torevalue thelandandbuildings. Thedirectors accepted thereport ofan independent surveyor who,on1October 20X4,valued thelandat$8million andthe buildings at$39million onthatdate.Thisrevaluation specifically excludes thetransferred investment property described above.Theremaining lifeofthesebuildings at1October 20X4was15years.Kandydoesnotmakeanannual transfer toretained profits toreflect therealisation oftherevaluation gain;however, therevaluation willgiverisetoa deferred taxliability. Theincome taxrateapplicable toKandyis20%. Plantandequipment isdepreciated at12.5% perannum usingthereducing balance method. Nodepreciation hasyetbeencharged onanynon-current assetfortheyearended 30 September 20X5. Mockexam2 (Specimen CBE):Questions309 Page 332 of 405 Powered By Ù G q (iii) Aprovisionof $2.4millionis requiredforincometax on the profitforthe year to 30 September20X5.Thebalance on currenttax inthe trialbalance is the under/over provisionof tax forthe previousyear. Inadditionto the temporarydifferencesrelatingto the informationinnote (ii),Kandyhas furthertaxabletemporarydifferencesof $10million as at 30 September20X5. Required (a) Preparea scheduleof adjustmentsrequiredto the retainedearningsof KandyCo as at 30 September20X5as a resultof the informationinnotes (i)to (iii)above. (b) Preparethe statement of financialpositionof KandyCo as at 30 September20X5. Note.Thenotes to the statement of financialpositionare not required. (c) Preparethe extractsfromKandyCo's statement of cash flowsforoperatingand investing activitiesforthe year ended 30 September20X5whichrelate to property, plant and equipment. Thefollowingmarkallocationis providedas guidanceforthisquestion: (a) (b) (c) 8 marks 9 marks 3 marks Question (20 marks) 32 Thesummarisedconsolidatedfinancialstatements forthe year ended 30 September20X5(and the comparativefigures)forthe Tangiergroupare shownbelow. Consolidatedstatements of profitor lossforthe year ended 30 September: 20X5 20X4 $m $m Revenue 2,700 1,820 Cost of sales (1,890) (1,092) Grossprofit 810 728 Administrative expense (345) 200) Distributioncosts (230) (130) Financecosts (40) (5) Profitbeforetaxation 195 393 Incometax expense (60) (113) Profitforthe year 135 280 Consolidatedstatements of financialpositionas at 30 September: 20X5 20X5 20X4 $m $m $m Non-currentassets Property,plant and equipment 680 Intangibleasset: 300 manufacturinglicences Goodwill 230 1,210 Currentassets Inventory 200 110 Tradereceivables 195 75 Bank – 395 120 Totalassets 1,605 310 FinancialReporting(FR) Page 333 of 405 20X4 $m 310 100 200 610 305 915 H q 20X5 $m 20X5 $m 330 100 375 805 Equityshares of$1each Othercomponents ofequity Retained earnings Non-current liabilities 5%secured loannotes 10%secured loannotes Current liabilities Bankoverdraft Tradepayables Current taxpayable Totalequityandliabilities 100 300 400 110 210 80 400 1,605 20X4 $m 100 – – 160 110 20X4 $m 250 – 295 545 Q U E T IO N S S 00 270 915 At1October 20X4,theTangier groupconsisted oftheparent, Tangier Co,andtwowholly owned subsidiaries whichhadbeenowned formanyyears.On1January20X5,Tangier Copurchased a third100%owned investment ina subsidiary calledRaremetal Co.Theconsideration paidfor Raremetal Cowasa combination ofcashandshares. Thecashpayment waspartlyfunded bythe issueof10%loannotes. On1January20X5,Tangier Coalsowona tender fora newcontract to supplyaircraft engines whichTangier Comanufactures under a recently acquired long-term licence. Raremetal Cowaspurchased witha viewtosecuring thesupplyofspecialised materials usedinthemanufacture oftheseengines. Thebidding process hadbeenverycompetitive and Tangier Cohadtoincrease itsmanufacturing capacitytofulfilthecontract. Required (a) G (b) Comment onhowthenewcontract andthepurchase ofRaremetal Comayhaveaffected thecomparability oftheconsolidated financial statements ofTangier Cofortheyears ended 30September 20X4and20X5. Calculate appropriate ratiosandcomment onTangier Co'sprofitability andgearing. Your analysis should identify instances where thenewcontract andthepurchase ofRaremetal Cohavelimited theusefulness oftheratiosandyouranalysis. H Note.Yourratiosshould bebasedontheconsolidated financial statements provided and youshould notattempt toadjustfortheeffects ofthenewcontract ortheconsolidation. Working capitalandliquidity ratiosarenotrequired. (c) Explain whatfurther information youmightrequire tomakeyouranalysis moremeaningful. Thefollowing markallocation isprovided asguidance forthisquestion: (a) (b) (c) 5 marks 12marks (upto5 marks fortheratiocalculations) 3 marks (20marks) Mockexam2 (Specimen CBE):Questions311 Page 334 of 405 Powered By Ù q G H 312 Financial Reporting (FR) Page 335 of 405 q Answers G H DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE MOCK EXAM Page 336 of 405 Powered By Ù q G H 314 Financial Reporting (FR) Page 337 of 405 G q A plan of attack What'sthe worstthingyou couldbe doingrightnowifthiswas the actual exam?Wonderinghow to celebratethe end of the examinthree hours'time?Panicking,flappingand generallygettingin a rightoldstate? Well,they're allpretty bad, so turn back to the examand let's sort out a plan of attack! First things first Youhave three hoursforthisexam.Thisexamis the examiningteam's specimenexam,so it is the best indicationof what you willsee inyourexam.Readit carefully. TheFinancialReportingexamhas 152-markquestionsinSectionA,152-markquestionsin SectionBand twolong-formquestionsinSectionC. Allquestionsare compulsory.Therefore,you do not have to spend timeworkingout whichquestionsto answer. It'sa good idea to juststart withthe SectionAquestions.Onceyou have themdone, you willfeel morerelaxed.Leaveany that you are unsureof and comeback to themlater but don't leaveany unanswered. SectionB:Questions16–20are on non-currentassets. Questions21–25are on discontinued operations.Questions26–30coverthree issues– financialassets, taxationand revenue.Foreach of these SectionBquestions,makesure you read the scenariocarefully. Question31requiresyou to adjust retainedearningsand prepare a statement of financial positionand somecash flowextracts.Thereisnothingdifficulthere but you need to work methodically. Question32 is an interpretationquestion.Rememberthat you do not get marksforsimplysaying that a ratio wentup or down.Itisyourjobto lookat whythishappened. You've got spare time at the end of the exam…? Ifyou have allocatedyourtimeproperly,then you shouldn'thave timeon yourhands at the end of the examand you shouldstart by checkingthe SectionAquestionsto makesure you have left noneunanswered.Butifyou findyourselfwithfiveor ten minutesto spare, checkoveryourwork to makesure that there are no sillyarithmeticalerrors. A N S W E R H S Forget about it! Anddon't worryifyou foundthe examdifficult.Morethan likely,othercandidates willtoo. Ifthis werethe real thing,you wouldneed to forget the examthe minuteyou leavethe examhalland thinkabout the next one. Or, ifit's the last one, celebrate! Mockexam1(Specimenexam):Answers 315 Page 338 of 405 Powered By Ù q Section A 1 Theinitial carrying amount of plant should include: Cost of transportingthe plant to the factory Cost of installinga newpower supplyrequiredto operate the l Theinitial carrying amount of plant should NOTinclude: Cost of a three-year plant maintenanceagreement 2 3 Cost of a three-weektraining coursefor staff to operate the A Theresearchprojectonlyas the customerlistcannot be reliablyvalued.The advertisingcampaigncannot be capitalisedand contingentassets are not recognised. $4,098,050 Year 30 Sept X5 30 Sept X6 Opening ($) Interest @ 10% ($) Payment ($) 22,745,000 2,274,500 (6,000,000) 19,019,500 (6,000,000) 14,921,450 19,019,500 1,901,950 Closing ($) Current 4098,050 4 G H Chargingthe rentalpaymentsforan itemof plant to the statement of profitor losswherethe rentalagreementmeetsthe criteriafora lease False Includinga convertibleloannote inequityon the basis that the holdersare likelyto choosethe equityoptionon conversion False Treatingredeemablepreferenceshares as part of equityinthe statement of financialposition False Derecognisingfactored trade receivablessoldwithoutrecourse to the seller True 6 7 Tradereceivablesfactored withoutrecourseare no longeran asset of the sellerand thereforethe statement is true. Theotherstatements are allfalse. $22,032,000 Dismantlingprovisionat 1October20X4is $20.4 million(30,000 0.68)discounted Thiswillincreaseby an 8%financecost by 30 September20X5=$22,032,000 D Therate at the transactiondate or the average rate (1,550/(2,5002 +1,200))=$0.25 A 8 C 5 Salesproceeds Netassets at disposal Goodwillat disposal Less:carryingamountof NCI 4,464 1,674 (900) 316 FinancialReporting(FR) Page 339 of 405 $'000 5,580 (5,238) 342 G q 9 Allentityfinancial statements within a groupshould normally beprepared tothesame accounting yearendpriortoconsolidation. Unrealised profits within thegroupmustbeeliminated fromtheconsolidated financial statements. Adjustments willbemadeonconsolidation fordifferent accounting policies. Subsidiaries withdissimilar activities arestillconsolidated. 10 11 12 13 14 Debit Groupretained earnings Credit Inventory Asthesaleismadebytheparent, thereisnochargeagainst non-controlling interest. C $'000 Cost(240,000$6) 1,440 Shareofassociate's profit(400240/800) 120 Lessdividend received (150240/800) (45) 1,515 Thesector average figures arecompiled fromcompanies whose yearendsarebetween 1July20X5and30September 20X5. Quartile Codoesnotrevalue itsproperties, butisawarethatotherentities inthissector do. Risingcostswillhaveaffected allofthebusiness sector andtheinventory adjustment will havebeencorrected intheprioryear,sonoactualeffectin20X5. A Theyareeasytoverifybecause therewillbea record ofthetransaction. D Inventory turnover is61days(365/6). A N S W E R H S Tradepayables period is42days(230,000365/2million). Therefore, receivables collection period is51days(70– 61+42). 15 C FVNCIat1October 14(900020%$3.50) Post-acquisition profit(8000– (3000/5))= 7,400at20% $’000 6,300 1,480 7,780 Mockexam2 (Specimen CBE):Answers317 Page 340 of 405 Powered By Ù q Section B 16 Anassetisimpaired whenits carrying amountis greaterthanitsrecoverable amount. Therecoverable amount ofanassetisdefined asthehigher ofitsfairvaluelesscostsof disposal andits valueinuse. 17 C Annual depreciation priortotherevaluation is$150,000 (750/5).Atthedateof revaluation (1April20X3),thecarrying amount is$375,000(750–(150 2.5yrs)). Revalued to$560,000witha remaining lifeof3.5yearsresults ina depreciation chargeof$160,000 perannum whichmeans $80,000forsixmonths. Thecarrying amount at30September 20X3istherefore $480,000(560– 80). Alternative calculation: $560,000– ($560,000/3.5 6/12)= $480,000. Therevaluation surplus hasa balance of$185,000 (560,000– 375,000). 18 $499,600 Cashflow $'000 220 180 200 Yearended: 30September 20X4 30September 20X5 30September 20X6 19 D 20 $2,800,000 0.91 0.83 0.75 Present value $'000 200.2 149.4 150.0 499.6 TheassetsoftheCGUmustremain thesamewhencalculating impairment. G Goodwill Property Plant Cashand receivables 21 Discount factor at10% Carrying amount before Impairment loss $'000 $'000 2,000 2,000 4,000 800 3,500 700 2,500 12,000 – 3,500 Carrying amount after $'000 – 3,200 2,800 2,500 8,500 Theoperation represents a separate major lineofbusiness orgeographical area and 23 Theoperation hasbeensoldorisheldforsale Theoperation doesnothavetobea subsidiary. Future profitforecasts arenotrelevant. A Abuyerdoesnotneedtohavebeenspecifically located andthesalemustbe expected totakeplacewithin thenext12months. $1,000,000 24 200employees at$5,000=$1,000,000 redundancy costs.Theretraining costsarea future cost. A Impairment lossonplantis$1,750,000 (2,200,000– (500,000– 50,000)). 25 C Onerous contract $850,000+penalty payments $200,000=$1,050,000. The possible insurance receipt should beignored asthereisnocertainty thatitwould be received anditwould notbenetted offagainst theprovision anyway. 26 B Acontract toexchange financial instruments under potentially unfavourable conditions would bea financial liability. 22 318 Financial Reporting (FR) Page 341 of 405 H G q 27 $9,650 Shareholding Aisnotheldfortrading asanelection made– FVTOCI. Shareholding Bisheldfortrading andsoFVTPL(transaction costsarenotincluded in carrying amount). Costofshareholding Ais10,000$3.501.01=$35,350. FVat30September 20X310,000$4.50=$45,000. Gain=45,000– 35,350=$9,650. 28 $32,300 DTprovision required at30September 20X3 DTProvision at1October 20X2 Writeoffoftheunder provision fortheyearended 30September 20X2 Income taxfortheyearended 30September 20X3 Chargefortheyearended 30September 20X3 $'000 4,400 2,500) 1,900 2,400 28,000 32,300 29 B At30September 20X3,therearetwomoreyearsofservicing work,thus$1.6million ((600,0002)100/75) mustbetreated asdeferred income. 30 Thedeferred income willbesplitevenly between thecurrent andnon-current liabilities in Speculate Co'sstatement offinancial position asat30September 20X3. Thecostsassociated withthedeferred income ofSpeculate Coshould berecognised inthe statement ofprofitorlossatthesametimeastherevenue isrecognised. Awritten service contract isnotneeded, butthestageofcompletion isimportant in recognising revenue. A N S W E R H S Mockexam2 (Specimen CBE):Answers319 Page 342 of 405 Powered By Ù G q Section Question C 31 Marking scheme Marks (a) (b) (c) (a) Schedule ofretained earnings asat30September 20X4 Retained earnings pertrialbalance Issuecosts Loanfinance costs Gainsoninvestment properties Depreciation charges Income taxexpense ½ 1 1 1 3 1½ Statement offinancial position Property, plantandequipment Current assets Equityshares Revaluation surplus Deferred tax 6%loannote Current liabilities (pertrialbalance) Current taxpayable 2 ½ ½ 2 1 1½ ½ 1 Extracts fromthestatement ofcashflows Cashflowsfromoperating activities: Addbackdepreciation Lessgainonrevaluation ofinvestment property Lessgainondisposal ofinvestment property Cashflowsfrominvesting activities: Investment property disposal proceeds 8 9 H 1 ½ ½ 1 3 20 Schedule ofretained earnings ofKandyasat30September 20X5 Retained earnings pertrialbalance Adjustments re: Note(i) Addbackissuecostsofloannote(W1) Loanfinance costs(29,0009%)(W1) Note(ii) Gainondisposal ofinvestment property (17,000– 15,000) Gainonrevaluation ofinvestment property priortotransfer (6,000– 5,000) Depreciation ofbuildings (W2) Depreciation ofplantandequipment (W2) Note(iii) Income taxexpense (W3) Adjusted retained earnings 320 Financial Reporting (FR) Page 343 of 405 $'000 15,500 1,000 (2,610) 2,000 1,000 (2,825) (3,000) (800) 10,265 q (b) STATEMENT OFFINANCIAL POSITION ASAT30SEPTEMBER 20X5 Assets Non-current assets Property, plantandequipment (50,175 + 21,000(W2)) Current assets(pertrialbalance) Totalassets Equityandliabilities Equity Equityshares of$1each Revaluation surplus (32,000– 6,400(W2)and(W3)) Retained earnings (from(a)) Non-current liabilities Deferred tax(W3) 6%loannote(W1) Current liabilities Pertrialbalance Current taxpayable Totalequityandliabilities $'000 $'000 71,175 68,700 139,875 25,600 10,265 8,400 29,810 43,400 2,400 20,000 35,865 55,865 38,210 45,800 39,875 Workings (monetary figures inbrackets in$'000) 1 Loannote Theissuecostsshould bededucted fromtheproceeds oftheloannoteandnot charged asanexpense. Thefinance costoftheloannote,attheeffective rateof9% applied tothecarrying amount oftheloannoteof$29million (30,000– 1,000),is $2,610,000. Theinterest actually paidis$1.8million. Thedifference between these amounts of$810,000 (2,610– 1,800)isaddedtothecarrying amount oftheloan notetogive$29,810,000 (29,000+810)forinclusion asa non-current liability inthe statement offinancial position. G 2 A N S W E R H S Non-current assets Landandbuildings Thegainonrevaluation andcarrying amount ofthelandandbuildings willbe: Carrying amount at1October 20X4(35,000– 20,000) Revaluation atthatdate(8,000+39,000) Gainonrevaluation Buildings depreciation fortheyearended 30September 20X5: Landandbuildings existing at1October 20X4(39,000/15 years) Transferred investment property (6,000/209/12) Carrying amount at30September 20X5(47,000+6,000– 2,825) $'000 15,000 47,000 32,000 2,600 225 2,825 50,175 Plantandequipment Carrying amount at1October 20X4(58,500– 34,500) 24,000 Depreciation foryearended 30September 20X5(12.5% reducing balance) (3,000) Carrying amount at30September 20X5 21,000 Mockexam2 (Specimen CBE):Answers321 Page 344 of 405 Powered By Ù q 3 Taxation Incometax expense: Provisionforyear ended 30 September20X5 Lessoverprovisioninpreviousyear Deferredtax (seebelow) $'000 2,400 (1,100) (500) 800 Deferredtax Provisionrequiredat 30 September20X5((10,000+32,000)20%) Provisionat 1October20X4 Movementinprovision Charge to revaluationof land and buildings(32,00020%) Balance– creditto profitor loss (c) 8,400 (2,500) 5,900 (6,400) (500) $'000 Cash flowsfromoperatingactivities: Addback depreciation Deductgain on revaluationof investmentproperty Deductgain on disposalof investmentproperty Cash flowsfrominvestingactivities: Investmentpropertydisposalproceeds Question $'000 5,825 (1,000) (2,000) 17,000 32 Markingscheme Marks G (a) (b) Analysisof results Alikeforlikecomparisontakingaccount of the consolidationand the contract Upto 5 marksforratiocalculations Profitability Gearingand interestcover 5 5 4½ 2½ 12 (c) Additionalinformation Anythree of the sixsuggestionsprovided (a) Note.Referencesto '20X5'are inrespect of the year ended 30 September20X5and '20X4' refersto the year ended 30 September20X4. Thekeymatter to note is that the ratiosfor20X4and 20X5willnot be directlycomparable because twosignificantevents,the acquisitionof RaremetalCo and securingthe new contract, have occurredbetweenthese dates. Thismeans that the underlyingfinancial statements are not directlycomparable.Forexample,the 20X4statement of profitor loss (SOPL)willnot includethe resultsof RaremetalCo or the effect of the newcontract. However,the 20X5SOPLwillcontainninemonthsof the resultsof RaremetalCo (although intragrouptransactionswillhave been eliminated)and ninemonthsof the effectsof the newcontract (whichmay have resultedineithera net profitor loss).Likewise,the 20X4 statement of financialpositiondoes not containany of RaremetalCo's assets and liabilities,whereasthat of 20X5containsallof the net assets of RaremetalCo and the cost 322 FinancialReporting(FR) Page 345 of 405 3 20 H G q of the newlicence.Thisdoes not mean that comparisonsbetweenthe twoyears are not worthwhile,justthat they need to be treated withcaution.Forsomeratios,it may be necessaryto excludeallof the subsidiariesfromthe analysisand use the singleentity financialstatements of TangierCo as a basis forcomparisonwiththe performanceof previousyears. Similarly,it may stillbe possibleto comparesomeof the ratiosof the Tangiergroupwiththose of othergroupsinthe same sectoralthoughnot allgroupswill have experiencedsimilaracquisitions. Assumingthere has been no impairmentof goodwill,the investmentinRaremetalCo has resultedinadditionalgoodwillof $30 millionwhichmeans that the investmenthas cost morethan the carryingamountof RaremetalCo's net assets. Althoughthere is no indicationof the precisecost, it is knownto have been achievedby a combinationof a share exchange(hencethe $180millionnewissueof shares)and a cash element(funded fromthe proceedsof the loanissueand the decrease inthe bank balance).Anyintragroup sales have been eliminatedon consolidationand it is not possibleto determineinwhich individualcompanyany profiton these intragroupsales willbe reported;it is therefore difficultto measureany benefitsof the investment.Indeed,the benefitof the investment mightnot be a financialone but merelyto securethe supplyof raw materials.Itwouldbe usefulto establishthe cost of the investmentand the profit(ifany) contributedby RaremetalCo so that an assessmentof the benefitof the investmentmightbe made. (b) Relevantratios: 20X5 20X4 Grossprofitmargin%(810/2,700100) 30.0% 40.0% Operatingprofitmargin(235/2,700100) 8.7% 21.9% ROCE(235/(805+400)) 19.5% 61.7% Non-currentasset turnover(2,700/1,210) 2.23times 2.98times Debt/equity(400/805) 49.7% 18.3% Interestcover(235/40) 5.9 times 79.6times Allof the issuesidentifiedinpart (a) makea comparisonof ratiosdifficultand, ifmore informationwas available,then someadjustmentsmay be required.Forexample,ifit is establishedthat the investmentis not generatingany benefits,then it mightbe argued that the inclusionof the goodwillinthe ROCEand non-currentasset turnoveris unjustified(it may be impairedand shouldbe writtenoff).Goodwillhas not been excludedfromany of the followingratios. Theincreaseinrevenuesof 48.4%(880/1,820100)in20X5willbe partly due to the consolidationof RaremetalCo and the revenuesassociated withthe newcontract. Yet, despitethese increasedrevenues,the companyhas suffereda dramaticfallinits profitability.Thishas been caused by a combinationof a fallinggrossprofitmargin(from 40%in20X4to only30%in20X5)and markedlyhigheroperatingoverheads(operating profitmarginhas fallenfrom21.9%in20X4to 8.7%in20X5).Again,it is importantto note that someof these costs willbe attributableto the consolidationof RaremetalCo and some to the newcontract. Itcouldbe speculatedthat the 73%increaseinadministrative expensesmay be due to one-offcosts associated withthe tenderingprocess(consultancy fees, etc) and the acquisitionof RaremetalCo and the 77%increaseinhigherdistribution costs couldbe due to additionalfreight,packingand insurancecost of the engines, deliverydistancesmay also be longer– evento foreigncountries(althoughsomeof the increaseindistributioncosts may also be due to consolidation). Thisis allreflectedinthe ROCEfallingfroman impressive61.7%in20X4to only19.5%in 20X5(thougheventhisfigureis respectable).Thefallinthe ROCEis attributableto a dramaticfallinprofitmarginat operatinglevel(from21.9%in20X4to only8.7%in20X5) whichhas been compoundedby a reductioninthe non-currentasset turnover,withonly $2·23beinggenerated fromevery$1investedinnon-currentassets in20X5(from$2.98in 20X4). Theinformationinthe questionpointsstronglyto the possibility(evenprobability)that the newcontract may be responsibleformuchof the deteriorationinTangierCo's operating performance.Forexample,it islikelythat the newcontract may account forsomeof the increasedrevenue;however,the biddingprocesswas 'verycompetitive'whichmay imply that TangierCo had to cut its prices(and thereforeits profitmargin)inorderto winthe contract. A N S W E R H S Mockexam2 (SpecimenCBE):Answers 323 Page 346 of 405 Powered By Ù q (c) Thecostsoffulfilling thecontract havealsobeenheavy:investment inproperty, plantand equipment hasincreased by$370million (atcarrying amount), representing anincrease of 61%(nodoubtsomeofthisincrease willbeduetotheacquisition ofRaremetal Co).The increase inlicence coststomanufacture thenewengines hascost$200million plusany amortisation andthereisalsotheadditional goodwill of$30million. Aneight-fold increase infinance costcaused bytheincreased borrowing atdouble the interest rateoftheborrowing in20X4and(presumably) someoverdraft interest hasledto thedramatic fallinthecompany's interest cover(from79.6in20X4toonly5.9in20X5). Thefinance costofthenew$300million 10%loannotestopartlyfundtheinvestment in Raremetal Coandothernon-current assetshasalsoincreased debt/equity (oneformof gearing measure) from18.3% in20X4to49.7%in20X5despite alsoissuing $180million in newequityshares. Atthislevel,particularly inviewofitslargeincrease from20X4,itmay givedebtholders (andothers) causeforconcern asthereisincreased riskforallTangier Co'slenders. Ifitcouldbedemonstrated thattheoverdraft couldnotbecleared forsome time,thiswould beanargument forincluding itinthecalculation ofdebt/equity, making the20X5gearing levelevenworse. Itisalsoapparent fromthemovement intheretained earnings thatTangier Copaida dividend during 20X5of$55million (295,000+135,000– 375,000)whichmaybea questionable policywhenthecompany israising additional finance through borrowings andcontributes substantially toTangier Co'soverdraft. Overall, theacquisition ofRaremetal Cotosecure supplies appears tohavebeenan expensive strategy, perhaps a lessexpensive onemighthavebeentoenterintoa long-term supplycontract withRaremetal Co. Further information whichwould beuseful toobtain would therefore include: (i) Thecostoftheinvestment inRaremetal Co,thecarrying amount oftheassets acquired andwhether Tangier Cohascarried outa goodwill impairment testas required under IFRS. (ii) G Thebenefits generated fromtheinvestment; forexample, Raremetal Co'sindividual financial statements anddetails ofsalestoexternal customers (notallofthese benefits willbemeasurable infinancial terms). (iii) Theabovetwopiecesofinformation would demonstrate whether theinvestment in Raremetal Cohadbeenworthwhile. (iv) Theamount ofintragroup salesmadeduring theyearandthoseexpected tobe madeintheshorttomedium term. (v) Thepricing strategy agreed withRaremetal Cosothattheeffects ontheprofits reported intheindividual financial statements ofRaremetal CoandTangier Cocan bemorereadily determined. (vi) Moreinformation isneeded toestablish ifthenewcontract hasbeendetrimental to Tangier Co'sperformance. Thecontract waswonsometime between 1October 20X4 and1January20X5andthereisnoinformation ofwhenproduction andsales started, butclearlytherehasnotbeena fullyear'srevenue fromthecontract. Also thereisnoinformation onthelength ortotalvalueofthecontract. 324 Financial Reporting (FR) Page 347 of 405 H G q ACCA Financial Mock Reporting (FR) Examination December 3 2016 CBE Questions Timeallowed 3 hours Thismockexamisdividedintothreesections: SectionA ALL15questions arecompulsory andMUSTbeattempted SectionB ALL15questions arecompulsory andMUSTbeattempted SectionC BOTHquestions arecompulsory andMUSTbeattempted H DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS 325 Page 348 of 405 Powered By Ù q G H 326 Financial Reporting (FR) Page 349 of 405 q Section A – ALL 15 questions be attempted are compulsory and MUST Eachquestion isworth 2 marks. 1 Whichofthefollowing isa possible advantage ofa rules-based system offinancial reporting? Itencourages theexercise ofprofessional judgement Itprevents a fire-fighting approach totheformulation ofstandards Itoffersaccountants moreprotection intheeventoflitigation Itensures thatnostandards conflict witheachother 2 IFRS10Consolidated Financial Statements statesthat'Aparent shallprepare consolidated financial statements usinguniform accounting policies forliketransactions andother events insimilar circumstances'. Whichofthefollowing situations requires anadjustment because ofthisconstraint? Asubsidiary hasbeenacquired anditslandistobeincluded intheconsolidated financial statements atfairvalue Asubsidiary carries itsassetsathistorical costbuttheparent's assetsarecarried at revalued amounts There havebeenintragroup transactions during theyearwhichhaveresulted in unrealised profitininventory attheyearend There hasbeenintragroup trading whichhasresulted inintragroup balances for receivables andpayables attheyearend G 3 Q U E T IO N S S H Thefollowing trialbalance extract relates toTopsyCoasat30April20X6: $'000 $'000 Landatcost 800 Building: Valuation at1May20X2 1,500 Accumulated depreciation at30April20X5 90 Revaluation surplus at30April20X5 705 On1May20X2,whenthecarrying amount ofthebuilding was$750,000,itwasrevalued forthefirsttimeto$1.5m anditsremaining useful lifeatthatdatewasestimated tobe 50years.TopsyCohascorrectly accounted forthisrevaluation intheabovetrialbalance. However, TopsyCohasnotyetcharged depreciation fortheyearended 30April20X6or transferred theexcess depreciation fromtherevaluation surplus toretained earnings at 30April20X6. InFebruary 20X6,theland,butnotthebuilding, wasindependently valued at$950,000. Thisadjustment hasyettobemadefortheyearended 30April20X6. Whatisthebalance ontherevaluation surplus ofTopsyCoasat30April20X6afterthe required adjustments havebeenmade? $ Mockexam3 (December 2016):Questions327 Page 350 of 405 Powered By Ù q 4 PlowCopurchased 3,500ofthe10,000$1equityshares ofStyreCoon1August 20X4for $6.50pershare. StyreCo'sprofitfortheyearended 31July20X5was$7,500.StyreCopaida dividend of $0.50pershareon31December 20X4. Whatisthecarrying amount oftheinvestment inStyreCointheconsolidated statement offinancial position ofPlowCoasat31July20X5? $25,375 $22,750 5 6 Identify, byselecting therelevant boxinthetablebelow,whether thefollowing statements arecorrect orincorrect whencalculating theimpairment lossofanasset. 7 Assets should becarried atthelower oftheircarrying amount andrecoverable amount Correct Incorrect Therecoverable amount ofanassetisthehigher of valueinuseandfairvaluelesscostsofdisposal Correct Incorrect Whichofthefollowing statements isNOTtrue? G $27,125 $23,625 Insomecountries, accounting standards canbea detailed setofruleswhich companies mustfollow Localaccounting standards canbeinfluenced bythetaxregime within a country Accounting standards ontheirownprovide a complete system ofregulation Accounting standards areparticularly important where a company's shares are publicly traded Merlot Cohadissued sharecapitalon1January20X9of2,000,000equity$1shares. On 1October 20X9,a rightsissuewasmadeona oneforfourbasiswhichwasfullytakenup. On30September 20X9,eachsharehada market valueof$3.25,givinga theoretical exrightsvalueof$2.84pershare. Usingthepulldownlisttoselectyouranswer, whatistheweighted average number of shares inissuefortheyearended 31December 20X9,inaccordance withIAS33Earnings perShare? shares Pulldownlist: 2,341,549 1,935,769 2,125,000 2,431,778 328 Financial Reporting (FR) Page 351 of 405 H G q 8 Whichof the followingwouldresultin a credit to the deferredtax account? (1) Interestreceivable,whichwillbe taxed whenthe interestis received (2) (3) Aloan,the repaymentof whichwillhave no tax consequences Interestpayable, whichwillbe allowablefortax whenpaid (4) Prepaidexpenses,whichhave been deducted to calculatethe taxableprofitsof the previousyear 1and 2 3 and 4 1and 4 2 and 3 9 IFRS15RevenuefromContracts withCustomersstates that, whereperformance obligationsare satisfiedovertime,entitiesshouldapply an appropriatemethodof measuringprogress. WhichTWOof the followingare appropriate OUTPUT methodsof measuringprogress? Totalcosts to date of the contract as a percentage of total contract revenue 10 11 Q U E T IO N S S Physicalmilestonesreached as a percentage of physicalcompletion Surveysof performancecompletedto date as a percentage of total contract revenue Labourhoursexpendedas a percentage of total expectedlabourhours FiferCo has a currentratioof 1.2:1whichis belowthe industryaverage. FiferCo wants to increaseits currentratio by the year end. Whichof the followingactions, taken beforethe year end, wouldlead to an increase in the current ratio? Returnsomeinventorywhichhad been purchasedforcash and obtaina fullrefund on the cost Makea bulkpurchase of inventoryforcash to obtaina large discount Makean earlypayment to suppliers,eventhoughthe amountis not due Offerearlypayment discountsinorderto collectreceivablesmorequickly H On 1October20X8,PictureCo acquired60%shares inFrameCo. At1April20X8,the creditbalances on the revaluationsurplusesrelatingto PictureCo and FrameCo's equity financialasset investmentsstood at $6,400 and $4,400 respectively. Thefollowingextract was taken fromthe financialstatements forthe year ended 31March 20X9: PictureCo FrameCo $ $ Othercomprehensiveincome:losson fairvalueof equity financialasset investments (1,400) (800) Assumethe lossesaccrued evenlythroughoutthe year. Mockexam3 (December2016CBE):Questions 329 Page 352 of 405 Powered By Ù G q Whatistheamount oftherevaluation surplus intheconsolidated statement offinancial position ofPicture Coasat31March20X9? $4,520 $4,760 12 Alocalauthority department isresponsible forwastecollections. Theyhaveanannual budget toprovide a regular collection service fromhouseholds inthelocalarea.Thebudget wasincreased toenable thedepartment toincrease thepercentage ofwastedisposed ofin anenvironmentally friendly manner. Whichofthefollowing isthebestmeasurement tojustifytheincrease inthebudget? Anincrease inthenumber ofcollections madeduring theperiod Thepercentage ofwasterecycled rather thanbeingplacedinlandfill sites 13 $5,240 $9,160 Thefairvalueofthemachinery usedinmaking thecollections Abreakdown ofexpenditure between thecostofmaking collections andthecostof processing waste Panther Coowns80%ofTigerCo.Anextract fromthecompanies' individual statements of financial position asat30June20X8shows thefollowing: Property, plantandequipment (carrying amount) Panther Co $'000 370 TigerCo $’000 285 On1July20X7,Panther Cosolda pieceofequipment whichhada carrying amount of $70,000toTigerCofor$150,000. Theequipment hadanestimated remaining lifeoffive yearswhensold. Usingthepulldownlistbelow,selectthecarrying amount ofproperty, plantand equipment intheconsolidated statement offinancial position ofPanther Coasat30 June20X8? Pulldownlist: $591,000 $575,000 $671,000 $534,000 330 Financial Reporting (FR) Page 353 of 405 H q 14 15 On1July20X7,LimeCoacquired 90%ofSodaCo'sequitysharecapital.Onthisdate, SodaCohadaninternally generated customer listwhichwasvalued at$35mbyan independent teamofexperts. At1July20X7,SodaCowasalsoinnegotiations witha potential newmajor customer. Ifthenegotiations aresuccessful, thenewcustomer willsign thecontract on15July20X7andthevalueofthetotalcustomer basewould thenbeworth $45m. Whatamount wouldberecognised forthecustomer listintheconsolidated statement of financial position ofLimeCoasat1July20X7? $0 $10m $35m $45m Q U E T IO N S S Whichofthefollowing statements relating togoodwill iscorrect? Goodwill isamortised overitsuseful lifewiththechargeexpensed toprofitorloss Ontheinvestment inanassociate, anyrelated goodwill should beseparately identified intheconsolidated financial statements Thetesting ofgoodwill forimpairment isonlyrequired whencircumstances exist whichindicate potential impairment Ifthefairvalueofa subsidiary's contingent liabilities canbereliably measured atthe dateofacquisition, theyshould beincluded inconsolidated netassetsandwill increase goodwill G H (30marks) Mockexam3 (December 2016CBE):Questions331 Page 354 of 405 Powered By Ù q Section B – ALL be attempted 15 questions are compulsory and MUST Eachquestion isworth 2 marks. Thefollowing scenario relatestoquestions 16–20. Artem Coprepares financial statements to30Juneeachyear. During theyearto30June20X5,thecompany spent$550,000onnewplantasfollows: $'000 Plantcost 525 Delivery tosite 3 Building alterations toaccommodate theplant 12 Costsofinitial testing ofthenewplant 2 Plantoperator training costs 8 Artem Co'sfixtures andfittings werepurchased on1July20X2ata costof$50,000.The directors havedepreciated themona straight-line basisoveranestimated useful lifeofeight yearsassuming a $5,000residual value.At1July20X4,thedirectors realise thattheremaining useful lifeofthefixtures isfiveyears.There isnochangetotheestimated residual value. Artem Cobegana research project inOctober 20X3withtheaimofdeveloping a newtypeof machine. Ifsuccessful, Artem Cowillmanufacture themachines andsellthemtocustomers as wellasusingthemintheirownproduction processes. During theyearended 30June20X4,costs of$25,000wereincurred onconducting feasibility studies andsomemarket research. During the yearended 30June20X5,a further $80,000wasincurred onconstructing andtesting a prototype ofthemachine. 16 Inaccordance withIAS16Property, PlantandEquipment, whatisthevalueofadditions toplantforArtem Cofortheyearended30June20X5? G H $ 17 Whichofthefollowing isTRUEinrelation tothechangeintheremaining useful lifeofthe fixtures andfittings? Itisa changeofaccounting policywhichshould beretrospectively applied 18 Itisa changeofaccounting policywhichshould bedisclosed inthenotestothe financial statements Itisa changeofaccounting estimate whichshould beretrospectively applied Itisa changeofaccounting estimate whichshould beprospectively applied Usingthepulldownlist,selectwhatthedepreciation chargeforthefixtures andfittings forArtem Cofortheyearended30June20X5is,inaccordance withIAS16. Pulldownlist: $7,500 $9,000 $7,750 $6,750 332 Financial Reporting (FR) Page 355 of 405 q 19 Inaccordance withIAS38Intangible Assets, whatisthecorrect treatment ofthe$25,000 costsincurred ontheresearch project byArtem Coduring theyearended30June20X4? 20 Theyshould berecognised asanintangible non-current assetasfuture economic benefits areexpected fromtheuseandsaleofthemachinery Theyshould bewritten offtoprofitorlossasanexpense astheyareresearch costs atthisdate Theyshould beincluded intangible non-current assetsasmachinery whichwillbe putintouseoncecompleted Theyshould besetagainst a provision madefortheestimated totalcostofthe project whichwassetupatthestartoftheresearch Q U E T IO N S S Inaccordance withIAS38,whichofthefollowing istruewhenArtem Comoves tothe production andtesting stageoftheprototype during theyearended30June20X5? Theproject hasmoved tothedevelopment stage.IftheIAS38development expenditure criteria aremet,Artem Cocanchoose whether ornottorecognise the $80,000costsasanintangible non-current asset Theproject isstillinitsresearch stageandthe$80,000costsincurred byArtem Co cannot berecognised asanintangible non-current assetuntila product isreadyfor sale Theproject hasmoved tothedevelopment stage.IftheIAS38development expenditure criteria aremet,Artem Comustrecognise the$80,000costsasan intangible non-current asset Theproject isstillinitsresearch stageandsoArtem Comustexpense the$80,000 coststoprofitorloss G H Thefollowing scenariorelatesto questions 21–25. Maykorn Coprepares itsfinancial statements to30September eachyear.Maykorn Co'sdraft financial statements werefinalised on20October 20X3.Theywereauthorised forissueon 15December 20X3andtheannual general meeting ofshareholders tookplaceon23December 20X3. On30September 20X3,Maykorn Comoved outofoneofitsproperties andputitupforsale.The property metthecriteria asheldforsaleon30September 20X3.On1October 20X2,theproperty hada carrying amount of$2.6manda remaining lifeof20years.Theproperty isheldunder the revaluation model. Theproperty wasexpected tosellfora grossamount of$2.5mwithselling costsestimated at$50,000. Maykorn Codecided tosellanitemofplantduring theyearended 30September 20X3.On 1October 20X2,theplanthada carrying amount of$490,000anda remaining useful lifeof seven years.Theplantmettheheldforsalecriteria on1April20X3.At1April20X3,theplanthad a fairvaluelesscoststosellof$470,000,whichhadfallento$465,000at30September 20X3. Mockexam3 (December 2016CBE):Questions333 Page 356 of 405 Powered By Ù G q 21 22 Identify, byselecting therelevant boxinthetablebelow,whether thefollowing statements aretrueandinaccordance withIAS10Events AftertheReporting Period, for Maykorn Co? 24 True False Aneventwhichoccursbetween 30September 20X3and15 December 20X3andwhichprovides evidence ofa condition whichexisted at30September 20X3should beconsidered asanadjusting event True False Inaccordance withIAS10,whichofthefollowing events wouldbeclassedasa nonadjusting eventinMaykorn Co'sfinancial statements fortheyearended30September 20X3? During October 20X3,therewasevidence ofa permanent diminution inthecarrying amount ofa property heldat30September 20X3 On1December 20X3,theacquisition ofa subsidiary wascompleted, following lengthy negotiations whichbeganinSeptember 20X3 Thesaleofinventory during October 20X3ata valuelessthanitscost.This inventory wasincluded inthefinancial statements atcoston30September 20X3 Theinsolvency ofa major customer during October 20X3,whose balance was included within receivables at30September 20X3 23 Allevents whichoccurbetween 30September 20X3and15 December 20X3should beconsidered asevents occurring afterthereporting period Whatisthetotalamount charged toMaykorn Co'sprofitorlossinrespect ofthe property fortheyearended30September 20X3? $130,000 $180,000 $150,000 $100,000 Inaccordance withIFRS5 Non-current AssetsHeldforSaleandDiscontinued Operations, whatisthecarrying amount oftheplantinMaykorn Co'sstatement offinancial position asat30September 20X3? Selectyouranswer usingthepulldownlistprovided. Pulldownlist: $420,000 $470,000 $455,000 $465,000 334 Financial Reporting (FR) Page 357 of 405 H G q 25 Whichofthefollowing itemsshould beclassedasanassetheldforsaleunderIFRS5? Maykorn Co'sheadofficebuilding istobedemolished, atwhichpointthelandwill beputupforsale.A number ofprospective bidders havedeclared aninterest and thelandisexpected tosellwithin a fewmonths ofthedemolition Anitemofplantwasputupforsaleatthestartoftheyearfor$500,000.Sixparties havemadea bidtoMaykorn Cofortheplantbutnoneofthesebidshavebeen above$200,000 Achainofretailoutlets arecurrently advertised forsale.Maykorn Cohas provisionally accepted a bid,subject tosurveys beingcompleted. Thesurveys are notexpected tohighlight anyproblems. Theoutlets arecurrently empty AbrandnamewhichMaykorn Copurchased in20X2isassociated withthesaleof potentially harmful products. Maykorn Cohasdecided tostopproducing products under thisbrand,whichiscurrently heldwithin intangible assets Q U E T IO N S S Thefollowing scenariorelatestoquestions 26–30. Vitrion Coissued $2m6%convertible loannoteson1April20X2.Theconvertible loannotesare redeemable on31March20X5atparforcashorcanbeexchanged forequityshares inVitrion Co onthatdate.Similar loannoteswithout theconversion option carryaninterest rateof9%. Thefollowing tableprovides information aboutdiscount rates: Year1 Year2 Year3 6% 0.943 0.890 0.840 9% 0.917 0.842 0.772 On1April20X3,Vitrion Copurchased 50,000$1equityshares inGowhizzo Coat$4pershare, incurring transaction costsof$4,000.Theintention istoholdtheshares fortrading. By31March 20X4theshares aretrading at$7pershare.Inaddition tothegainoninvestment, Vitrion Coalso received a dividend fromGowhizzo Coduring theyearto31March20X4. 26 Inaccordance withIAS32Financial Instruments: Presentation, whichofthefollowing describes anequityinstrument? 27 H Acontractual obligation todeliver cashoranother financial assettoanother entity Acontract whichisevidence ofa residual interest intheassetsofanentityafter deducting allofitsliabilities Acontractual righttoexchange financial instruments withanother entityunder potentially favourable conditions Acontract whichgivesrisetobotha financial assetofoneentityanda financial liability ofanother Inaccordance withIAS32,howshould theissueoftheconvertible loannotesbe recognised inVitrion Co'sfinancial statements? Asdebt.Interest should becharged at6%because itcannot beassumed thatloan noteholders willchoose theequityoption Asequitybecause theloannotesareconvertible toequityshares Asdebtandequitybecause theconvertible loannotescontain elements ofboth Asdebt.Interest should becharged at9%toallowfortheconversion oftheloan notes Mockexam3 (December 2016CBE):Questions335 Page 358 of 405 Powered By Ù q 28 29 Whatamount inrespect oftheloannoteswillbeshown under non-current liabilities in Vitrion Co'sstatement offinancial position asat1April20X2(tothenearest $'000)? $2,000,000 $1,848,000 $1,544,000 $2,701,000 Inaccordance withIFRS9 Financial Instruments, atwhatamount willtheGowhizzo Co shares beshown under investments inequityinstruments inVitrion Co'sstatement of financial position asat31March20X4? $ 30 Whereshould thegainontheinvestment inGowhizzo Coanditsdividend be recognised inVitrionCo'sfinancialstatements fortheyearended31March20X4? Bothinprofitorloss Gainoninvestment inother comprehensive income andthedividend inprofitorloss Gainoninvestment inprofitorlossandthedividend inother comprehensive income Bothinother comprehensive income (30 marks) G 336 Financial Reporting (FR) Page 359 of 405 H G q Section C – BOTH be attempted Question questions are compulsory and MUST 31 On1January20X6,Laurel Coacquired 60%oftheequitysharecapitalofRakewood Coina shareexchange inwhichLaurel Coissued threenewshares foreveryfiveshares itacquired in Rakewood Co.Theshareissuehasnotyetbeenrecorded byLaurel Co.Additionally, on31 December 20X6,Laurel Cowillpaytotheshareholders ofRakewood Co$1.62pershare acquired. Laurel Co'scostofcapitalis8%perannum. Q U E T IO N S S Atthedateofacquisition, shares inLaurel CoandRakewood Cohada market valueof$7.00 and$2.00eachrespectively. STATEMENTS OFPROFIT ORLOSSFORTHEYEARENDED 30SEPTEMBER 20X6 Laurel Co Rakewood Co $'000 $'000 Revenue 84,500 52,000 Costofsales (58,200) 34,000) Grossprofit Distribution costs Administrative expenses Investment income (note(iv)) Finance costs 26,300 (2,000) (4,100) 500 (300) 18,000 (1,600) (2,800) 400 – Profitbefore tax Income taxexpense 20,400 (4,800) 14,000 (3,600) Profitfortheyear 15,600 10,400 H Equityasat1October 20X5 $'000 $'000 Equityshares of$1each 20,000 15,000 Retained earnings 72,000 25,000 Thefollowing information isrelevant: (i) Atthedateofacquisition, Laurel Coconducted a fairvalueexercise onRakewood Co'snet assetswhichwereequaltotheircarrying amounts withthefollowing exceptions: Anitemofplanthada fairvalueof$4maboveitscarrying amount. Atthedateof acquisition ithada remaining lifeoftwoyears. Inventory of$800,000hada fairvalueof$1m.Allofthisinventory hadbeensoldby 30September 20X6. (ii) Laurel Co'spolicyistovaluethenon-controlling interest atfairvalueatthedateof acquisition. Forthispurpose Rakewood Co'ssharepriceat1January20X6canbedeemed toberepresentative ofthefairvalueoftheshares heldbythenon-controlling interest. (iii) Laurel Cohadtraded withRakewood Coformanyyearsbefore theacquisition. Salesfrom Rakewood CotoLaurel Cothroughout theyearended 30September 20X6were consistently $1.2m permonth. Rakewood Comadea mark-up oncostof20%onthese sales.Laurel Cohad$1.8m ofthesegoodsininventory asat30September 20X6. Mockexam3 (December 2016CBE):Questions337 Page 360 of 405 Powered By Ù G q (iv) Laurel Co'sinvestment income consists of: Itsshareofa dividend of$500,000paidbyRakewood CoinAugust 20X6. Adividend of$200,000 received from ArticCo,a25%owned associate which ithasheld forseveral years.Theprofit aftertaxofArticCofortheyearended 30September 20X6 was$2.4million. (v) Assume, except where indicated otherwise, thatallitems ofincome andexpense accrue evenly throughout theyear. (vi) There were noimpairment losses within thegroup during theyearended 30September 20X6. Required (a) Calculate theconsolidated goodwill at thedateofacquisition ofRakewood Co. (7marks) (b) Prepare theconsolidated statement ofprofitorlossforLaurel Cofortheyearended 30September 20X6. (13marks) (20marks) Question 32 Landing Coisconsidering theacquisition ofArchway Co,a retailcompany. Thesummarised financial statements ofArchway Cofortheyearended 30September 20X6are: STATEMENT OFPROFIT ORLOSS $'000 Revenue 94,000 Costofsales (73,000) Grossprofit Distribution costs Administrative expenses Finance costs 21,000 (4,000) (6,000) (400) Profitbefore tax Income taxexpense (at20%) 10,600 (2,120) Profitfortheyear 8,480 STATEMENT OFFINANCIAL POSITION $'000 ASSETS Non-current assets Property, plantandequipment $'000 29,400 Current assets Inventory Bank Totalassets 10,500 100 EQUITY ANDLIABILITIES Equity Equityshares of$1each Retained earnings 10,600 40,000 10,000 8,800 18,800 Current liabilities 4%loannotes(redeemable 1November 20X6) Tradepayables Current taxpayable 10,000 9,200 2,000 Totalequityandliabilities 21,200 40,000 338 Financial Reporting (FR) Page 361 of 405 H q Fromenquiries made,Landing Cohasobtained thefollowing information: (i) Archway Copaysanannual licence feeof$1mtoCardolCo(included incostofsales)for therighttopackage andsellsomegoodsunder a well-known brandnameowned by CardolCo.IfArchway Coisacquired, thisarrangement would bediscontinued. Landing Coestimates thatthiswould notaffectArchway Co'svolume ofsales,butwithout theuse ofthebrandnamepackaging, overall salesrevenue would be5%lower thancurrently. (ii) Archway Cobuys50%ofitspurchases forresale fromCardolCo,oneofLanding Co's rivals,andreceives a bulkbuyingdiscount of10%offnormal prices(thisdiscount doesnot applytotheannual licence feereferred toinnote(i)above). Thisdiscount would notbe available ifArchway Coisacquired byLanding Co. (iii) The4%loannoteshavebeenclassified asa current liability duetotheirimminent redemption. Assuch,theyshould notbetreated aslong-term funding. However, theywill bereplaced immediately afterredemption by8%loannoteswiththesamenominal value, repayable intenyears'time. (iv) Landing Cohasobtained someofArchway Co'sretailsector average ratiosfortheyear ended 30September 20X6.Ithasthencalculated theequivalent ratiosforArchway Coas shown below: Q U E T IO N S S Sectoraverage Archway Co Annual salespersquare metre offloorspace $8,000 $7,833 Return oncapitalemployed (ROCE) 18.0% 58.5% Netasset(totalassetslesscurrent liabilities) turnover 2.7times 5.0times Grossprofitmargin 22.0% 22.3% Operating profit(profit before interest andtax) margin 6.7% 1.7% Gearing (debt/equity) 30.0% Nil Anoteaccompanying thesector average ratiosexplains thatitisthepractice ofthesector tocarryretailproperty atmarket value.Themarket valueofArchway Co'sretailproperty is$3mmorethanitscarrying amount (ignore theeffectofanyconsequent additional depreciation) andgives12,000square metres offloorspace. G H Required (a) Aftermaking adjustments tothefinancial statements ofArchway Cowhichyouthinkmay beappropriate forcomparability purposes, restate: (i) Revenue; (ii) Costofsales; (iii) Finance costs; (iv) Equity(assume thatyouradjustments toprofitorlossresult inretained earnings of $2.3million at30September 20X6);and (5 marks) (v) Non-current liabilities. (b) Recalculate comparable sector average ratiosforArchway Cobasedonyourrestated (6 marks) figures in(a)above. (c) Comment ontheperformance andgearing ofArchway Cocompared totheretailsector average asa basisforadvising Landing Coregarding thepossible acquisition ofArchway (9 marks) Co. (20 marks) Mockexam3 (December 2016CBE):Questions339 Page 362 of 405 Powered By Ù q G H 340 Financial Reporting (FR) Page 363 of 405 q Answers G H DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE MOCK EXAM Page 364 of 405 Powered By Ù q G H 342 Financial Reporting (FR) Page 365 of 405 G q A plan of attack IfthisweretherealFinancial Reporting examandyouhadbeentoldtobegin,whatwould be goingthrough yourmind? Perhaps you'rehavinga panic.You've spentmostofyourstudytimeongroups and interpretation ofaccounts (because that'swhatyourtutor/BPP Workbook toldyoutodo),plusa selection ofothertopics,andyou'rereallynotsurethatyouknowenough. Socalmdown.Spend thefirstfewmoments orsolooking attheexamination, anddevelop a planofattack. Looking through theexamination Thefirstsection is152-mark questions. These willcoverallsections ofthesyllabus. Someyou mayfindeasyandsomemoredifficult. Don'tspenda lotoftimeonanything youreallydon't know. Youarenotpenalised forwrong answers, soyoushould answer allofthem. Ifallelsefails– guess! Section B has152-mark questions intotalarranged around threescenarios. Scenario 1isonnon-current assets. Scenario 2 isonIAS10andIFRS5. Scenario 3 dealswithfinancial instruments. Section C hastwo20-mark questions Question 31isa consolidated financial statements preparation question. Question 32dealswithaccounting adjustments andinterpretation offinancial statements. Allofthesequestions arecompulsory. Thismeans thatyoudonothavetowastetimewondering whichquestions toanswer. Allocating your time BPP'sadviceisalwaysallocate yourtimeaccording tothemarksforthequestion intotaland forthepartsofthequestion. Butusecommon sense.Ifyou'reconfronted bya Section A question ona topicofwhichyouknownothing, pickananswer andmoveon.Usethetimetopick upmarks elsewhere. Aftertheexam…forget aboutit! Anddon'tworryifyoufoundtheexamdifficult. Morethanlikelyothercandidates willtoo.Ifthis weretherealthingyouwould needtoforgettheexamtheminute youlefttheexamhalland thinkaboutthenextone.Or,ifit'sthelastone,celebrate! A N S W E R H S Mockexam3 (December 2016):Answers343 Page 366 of 405 Powered By Ù q Section A 1 2 C B Theotheroptions areadvantages ofa principles-based system. Asubsidiary carries itsassetsathistorical cost,buttheparent's assetsarecarried at revalued amounts. Thissituation involves different accounting policies. 3 $840,000 $ At30April20X5 Increase invalueoflandintheyear($900,000– $750,000) Annual transfer toretained earnings Depreciation basedonrevalued amount ($1,500,000/50 years) Depreciation basedonhistoric cost($750,000/50 years) $ 705,000 150,000 855,000 30,000 (15,000) At30April20X6 4 D $23,625 Costofinvestment Shareofpost-acq profit Lessdividend received 3,5006.50 35%7,000 3,500$0.50 (15,000) 840,000 22,750 2,625 (1,750) 23,625 5 G Assets should becarried atthelower oftheircarrying amount andrecoverable amount Correct Therecoverable amount ofanassetisthehigher ofvalueinuse andfairvaluelesscostsofdisposal Correct 6 C 7 2,341,549 shares 1JanuaryX9–30September X9 1October X9–31December X9 8 C H Asystem ofregulation willalsoinclude taxrulesandcompany legislation. 2,000,0003.25/2.84 9/12 2,500,000×3/12 1,716,549 625,000 2,341,549 Interest receivable, whichwillbetaxedwhentheinterest isreceived Prepaid expenses, whichhavebeendeducted tocalculate thetaxable profits ofthe previous year 9 D Physical milestones reached asa percentage ofphysical completion Surveys ofperformance completed todateasa percentage oftotalcontract revenue Theotheroptions areinputmethods ofmeasurement. 10 C Thiswillreduce assetsandliabilities bythesameamount andsoincrease theratio. 11 B (6,400– 1,400loss– (800loss60%6/12))= 4,760 12 13 B Thismeasurement relates totheenvironmental impact. $591,000 Carrying amount 370,000+285,000– 64,000(seebelow) =591,000 Theunrealised profitonthesaleis80,000(150,000– 70,000)ofwhich64,000(80,0004 years/5years)isstillunrealised at30June20X8. 344 Financial Reporting (FR) Page 367 of 405 q 14 C $35m Thisisthevaluation atacquisition. 15 D Ifthefairvalueofa subsidiary's contingent liabilities canbereliably measured atthe dateofacquisition, theyshould beincluded inconsolidated netassetsandwill increase goodwill. Goodwill isnotamortised under IFRSandgoodwill isnotrecognised onacquisition of anassociate. Goodwill istested forimpairment annually. A N S W E R G H S Mockexam3 (December 2016CBE):Answers345 Page 368 of 405 Powered By Ù q Section 16 B $542,000 Plantcost Delivery tosite Building alterations toaccommodate theplant Costsofinitial testing ofthenewplant 17 18 19 20 21 G Training costsarenotincluded within thecapitalised amount ofnewplant. D Itisa changeofaccounting estimate andsoisapplied prospectively. $6,750 Carrying amount atdateofrevised remaining lifeis(50,000– (50,000– 5,000)/8years 2 years)= 38,750 Depreciation yearended 30June20X5istherefore 38,750– 5,000/5years=6,750pa B Theyshould bewritten offtoprofitorlossasanexpense astheyareresearch costs atthisdate. C True Aneventwhichoccursbetween 30September 20X3and15 December 20X3andwhichprovides evidence ofa condition which existed at30September 20X3should beconsidered asan adjusting event True B 23 B 25 26 Theproject hasmoved tothedevelopment stage.IftheIAS38development expenditure criteria aremet,Artem Comustrecognise the$80,000costsasan intangible non-current asset. IAS38doesnotallowa choiceregarding whether ornottocapitalise development costs. Allevents whichoccurbetween 30September 20X3and15 December 20X3should beconsidered asevents occurring after thereporting period 22 24 $'000 525 3 12 2 542 On1December 20X3,theacquisition ofa subsidiary wascompleted, following lengthy negotiations whichbeganinSeptember 20X3. Thisdoesnotprovide evidence ofa condition existing attheyearend. Property isdepreciated by$130,000 ($2,600,000/20) givinga carrying amount of $2,470,000. Whenclassed asheldforsale,property isrevalued toitsfairvalueof $2,500,000(asitiscarried under therevaluation model, $30,000would goto revaluation surplus). Heldforsaleassetsaremeasured atthelower ofcarrying amount (now$2,500,000) andfairvaluelesscoststosell($2,500,000 – $50,000= $2,450,000), givinganimpairment of$50,000.Totalchargetoprofitorlossis $130,000 + $50,000=$180,000. $455,000 Carrying amount at1Aprilis$455,000(490– (490/76/12)). C Achainofretailoutlets arecurrently advertised forsale.Maykorn Cohas provisionally accepted a bid,subject tosurveys beingcompleted. Thesurveys are notexpected tohighlight anyproblems. Theoutlets arecurrently empty. Thisistheonlyoption where thereisevidence ofa 'highlyprobable' sale. B Acontract whichisevidence ofa residual interest intheassetsofanentityafter deducting allofitsliabilities 346 Financial Reporting (FR) Page 369 of 405 H q 27 28 C B Asdebtandequitybecause theconvertible loannotescontain elements ofboth $1,848,000 120,0000.917 120,0000.842 2,120,000 0.772 29 $350,000 30 50,000shares at$7each A Bothinprofitorloss 110,040 101,040 1,636,640 1,847,720 rounded to1,848,000 TheGowhizzo shares areheldfortrading rather thanlongterminvestment purposes. A N S W E R G H S Mockexam3 (December 2016CBE):Answers347 Page 370 of 405 Powered By Ù q Section C Question 31 Textreference. Chapter 9. Toptips.Thisquestion requires calculation ofgoodwill onacquisition andthepreparation ofa consolidated statement ofprofitorloss.Takecareincalculating retained earnings atacquisition, whichmustinclude thefirstthreemonths ofthecurrent year.Whenever youseenote(v)realise thatyouaredealing witha mid-year acquisition. Thismeans thattheincome andexpenses ofthe subsidiary mustbemultiplied by9/12throughout. NotethatallofLaurel's investment income (per note(iv))willbedisregarded. Easymarks. Thegoodwill calculation isstraightforward aslongasyoutakecareincalculating theretained earnings. Marking scheme Marks (a) Goodwill Shareexchange Deferred consideration NCI Netassets:Equityshares Retained earnings Fairvalueadjustments 1 1 1 ½ 1½ 2 (b) Statement ofprofitorloss Revenue Costofsales Distribution costs Administrative expenses Investment income Finance costs Income tax NCI 1½ 4½ ½ ½ 1½ 1½ 1 2 G (a) Laurel Co:Consolidated goodwill onacquisition ofRakewood Co Investment atcost Shares (15,00060%3/5$7.00) Deferred consideration (9,000$1.62/1.08) Non-controlling interest (15,00040%$2.00) Netassets(basedonequity) ofRakewood Coasat1January20X6 Equityshares Retained earnings at1October 20X5 Earnings 1October 20X5toacquisition (10,4003/12) Fairvalueadjustments: plant inventory Netassetsatdateofacquisition Consolidated goodwill $'000 7 H 13 20 $'000 37,800 13,500 12,000 63,300 15,000 25,000 2,600 4,000 200 (46,800) 16,500 348 Financial Reporting (FR) Page 371 of 405 G q (b) Laurel Co:Consolidated statement ofprofitorlossfortheyearended 30September 20X6 $'000 Revenue (84,500+(52,0009/12)– (1,2009months) intragroup sales) 112,700 Costofsales(working) 74,900) Grossprofit Distribution costs(2,000+(1,6009/12)) Administrative expenses (4,100+(2,800×9/12)) Investment income (4009/12) Income fromassociate (2,40025%basedonunderlying earnings) Finance costs(300+(13,500 8%9/12redeferred consideration)) 37,800 (3,200) (6,200) 300 600 (1,110) Profitbefore tax Income taxexpense (4,800+(3,6009/12)) 28,190 (7,500) Profitfortheyear 20,690 Profitforyearattributable to: Owners oftheparent Non-controlling interest ((10,400 9/12)– 200reinventory – (1,500depreciation – 300URP) 40%) Working in$'000 Costofsales Laurel Co Rakewood Co(34,0009/12) Intragroup purchases (1,2009months) Fairvalueinventory adjustment URPininventory at30September 20X6(1,80020/120) Additional depreciation (4,000/2years9/12) Question 18,370 2,320 20,690 $'000 58,200 25,500 (10,800) 200 300 1,500 74,900 A N S W E R H S 32 Textreference. Chapter 19. Toptips.Thisisaninterpretation question takingaccount ofa prospective acquisition. Asalways withinterpretation questions, mostofthemarksarenotforratios.Youmusttakeaccount ofall theinformation andconsider thegroupaspects. HowwouldArchway's results lookfollowing its acquisition byLanding? Easymarks.Theratiosbasedontheamended figures areaneasyfivemarks– butdon'tspend toolongonthem. Mockexam3 (December 2016CBE):Answers349 Page 372 of 405 Powered By Ù q Marking scheme Marks (a) Revenue Costofsales Loaninterest Equity Non-current liabilities (b) 1markperratio (c) 1markperrelevant comment (a) Archway Co'srestated figures ½ 2 ½ 1½ ½ 5 6 9 20 Ontheassumption thatLanding Copurchases Archway Co,thefollowing adjustments relate totheeffects ofnotes(i)to(iii)inthequestion andtheproperty revaluation: $'000 Revenue (94,00095%) 89,300 Costofsales(seebelow) 76,000 Loaninterest (10,0008%) 800 Equity(10,000+2,300RE+3,000revaluation) 15,300 Non-current liabilities: 8%loannotes 10,000 G (b) (c) Thecostofsalesshould befirstadjusted fortheannual licence feeof$1m,reducing thisto $72m.Halfofthese,$36m,arenetofa discount of10%whichequates to$4m (36,000/90% – 36,000).Adjusted costofsalesis$76m(73,000– 1,000+4,000). These figures would givethefollowing ratios: Annual salespersquare metre offloorspace (89,300/12,000) $7,442 ROCE (13,300– 10,000)/(15,300 +10,000) 100 13% Netassetturnover (89,300/(15,300 +10,000)) 3.5times Grossprofitmargin ((89,300– 76,000)/89,300 100) 15% Operating profitmargin ((13,300 – 10,000)/89,300 100) 3.7% Gearing (debt/equity) (10,000/15,300) 65.4% Performance Archway Co Archway Co Sector Asreported as adjusted average salespersquare metre offloorspace $7,833 $7,442 $8,000Annual 13% 58.5% 18.0%ROCE 3.5times 2.7times Netassetturnover 5.0times 15% profitmargin 22.3% 22.0%Gross 3.7% 6.7% Operating profitmargin 11.7% 65.4% (debt/equity) nil 30.0%Gearing Acomparison ofArchway Co'sratiosbaseduponthereported results compares very favourably tothesector average ratiosinalmost everyinstance. ROCEisparticularly impressive at58.5%compared toa sector average of18%;thisrepresents a return ofmore thanthreetimes thesector average. Thesuperior secondary ratiosofprofitmargin and assetutilisation (netassetturnover) appear toconfirm Archway Co'saboveaverage 350 Financial Reporting (FR) Page 373 of 405 H G q performance. Itisonlysalespersquare metre offloorspacewhichisbelow thesector average. Theunadjusted figureisveryclosetothesector average, astooisthegrossprofit margin, implying a comparable salesvolume performance. However, thereduction in selling pricescaused bytheremoval ofthebrandpremium causessalespersquare metre tofallmarginally. Asindicated inthequestion, should Archway Cobeacquired byLanding Co,manyfigures particularly related tothestatement ofprofitorlosswould beunfavourably impacted as shown aboveintheworkings forArchway Co'sadjusted ratios. Whentheseeffects are takenintoaccount andtheratiosarerecalculated, a verydifferent picture emerges. Allthe performance ratios, withtheexception ofnetassetturnover, aresignificantly reduced due totheassumed cessation ofthefavourable trading arrangements. Themostdramatic effectisontheROCE,which, having beenmorethanthreetimes thesector average, would be27.8%(18.0– 13.0)/18.0 ×100)below thesector average (at13.0%compared to18.0%). Analysing thecomponent partsoftheROCE(netassetturnover andprofitmargins), both aspects arelower whenthereported figures areadjusted. Thenetassetturnover (although adjusted toa lower multiple) isstillconsiderably higher thanthesector average. Thefallinthisratioisduetoa combination oflower revenues (caused bythelossofthebranding) andtheincrease incapitalemployed (equaltonet assets) duetoclassifying theloannotesasdebt(non-current). Grossmargin deteriorates from22.3%toonly15.0%caused bya combination oflower revenues (referred toabove) andthelossofthediscount onpurchases. Thedistribution costsandadministrative expenses forArchway Coarelessthanthoseofitsretailsector interms ofthepercentage ofsalesrevenue (at11.3% compared to15.3%), whichmitigates (slightly) thedramatic reduction intheprofitbefore interest andtax.Thereduction insalespersquare metre of floorspaceiscaused onlybythereduced (5%)volume fromtheremoval ofthebranded sales. Gearing Thegearing ratioofnilbasedontheunadjusted figures isnotmeaningful duetoprevious debtbeingclassified asa current liability because ofitsimminent redemption. Whenthis debtisreplaced bythe8%loannotesand(more realistically) classified asa non-current liability, Archway Co'sgearing ismuchhigher thanthesector average. There isno information astohowtheincreased interest payable at8%(double theprevious 4%) compares tothesector's average finance cost.Ifsucha figurewereavailable, itmaygive anindication ofArchway Co'screditstatusalthough thedoubling oftheratedoesimplya greater degree ofriskinArchway Coseenbythelender. Summary andadvice BaseduponArchway Co'sreported figures, itspurchase byLanding Cowould appear to bea goodinvestment. However, whenArchway Co'sperformance isassessed basedonthe results andfinancial position whichmightbeexpected under Landing Co'sownership, the recalculated ratiosaregenerally inferior toArchway Co'sretailsector averages. Inan investment decision suchasthis,animportant projected ratiowould bethereturn onthe investment (ROI)whichLanding Comightexpect. Theexpected netprofitaftertaxcanbe calculated as$2m((3,300before interest andtax– 800interest) 80%post-tax), however, thereisnoinformation inthequestion astowhatthepurchase consideration of Archway Cowould be.Thatsaid,ata (probable) minimum purchase pricebasedon Archway Co'snetassetvalue(withnogoodwill premium), theROIwould onlybe7.9% (2,000/25,300 100)whichisverymodest andshould becompared toLanding Co's existing ROI.A purchase priceexceeding $25.3m would obviously result inanevenlower expected ROI.Itispossible thatunder Landing Co'smanagement, Archway Co'sprofit margins couldbeimproved, perhaps coming toa similar arrangement regarding accessto branded sales(orfranchising) ascurrently exists withCardolCo,butwitha different company. Ifso,thepurchase ofArchway Comaystillbea reasonable acquisition. A N S W E R H S Mockexam3 (December 2016CBE):Answers351 Page 374 of 405 Powered By Ù q G H 352 Financial Reporting (FR) Page 375 of 405 q ACCA Financial Mock Reporting (FR) Examination 4 Questions Timeallowed 3 hours Thismockexamisdividedintothreesections: SectionA ALL15questions arecompulsory andMUSTbeattempted SectionB ALL15questions arecompulsory andMUSTbeattempted SectionC BOTHquestions arecompulsory andMUSTbeattempted G H DO NOT OPEN THIS EXAM UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS 353 Page 376 of 405 Powered By Ù q G H 354 Financial Reporting (FR) Page 377 of 405 q Section A – ALL 15 questions be attempted are compulsory and MUST 1 According totheConceptual Framework forFinancial Reporting oftheInternational Accounting Standards Board(IASB),verifiability means that“different knowledgeable and independent observers couldreacha consensus offaithful representation.” Whichofthefollowing procedures directly verifies thattherelevant balances are faithfully represented? Confirming thecashbalance byconducting a physical countofcash Confirming theinventory byreviewing theyearendlistofinventory Confirming a revaluation oflandbyagreeing therevaluation surplus toa minute of theboardmeeting where thedirectors agreed itsestimate Confirming thecarrying amount ofreceivables byreviewing theyearend statements issued tocustomers atthatdate (2 marks) (ACCAExaminer's report September 2019) 2 CyanideCohadthefollowing bankloansoutstanding during thewhole of20X7which formthecompany's general borrowings fortheyear: $m 9%loanrepayable 20X9 30 11% loanrepayable 20Y2 48 CyanideCobeganconstruction ofa qualifying asseton1April20X7and$12million ofthe loanfunding wastransferred totheconstruction project onthatdatetofundconstruction. On1August 20X7,anadditional $4million wastransferred forthesamepurpose. Calculate theborrowing costswhichcanbecapitalised inrespect ofthisproject forthe yearended31December 20X7.Round thecapitalisation ratetoonedecimal placeto calculate youranswer. $1,098,667 $823,998 $1,500,000 $700,000 (2 marks) G 3 Q U E T IO N S S H Extracts fromthestatements offinancial position ofPolonium Coareasfollows: Statements offinancial position asat30September: 20X5 20X4 $m $m Ordinary shares of$1each 750 500 Sharepremium 350 100 On1October 20X4,a bonus issueofonenewshareforeverytenheldwasmade,financed fromsharepremium. Thiswasfollowed bya further issueforcash. Usingthepulldownlist,whatamount willappearunder 'cashflowsfromfinancing activities' inthestatement ofcashflowsofPolonium Cofortheyearended30September 20X5inrespect ofshareissues? Pulldownlist: $500million $450million $550million $250million (2 marks) Mockexam4:Questions355 Page 378 of 405 Powered By Ù G q 4 5 Radium Copurchased a machine on1October 20X7for$1,500,000. Themachine hasa useful lifeof10yearswithanestimated residual valueof$75,000.ItisRadium Co'spolicy todepreciate overtheuseful livesofnon-current assetsona straight-line basis. On1January20X8,Radium Copurchased anupgraded motherboard toimprove the capacityofthemachine. Thiscost$30,000andhasa useful lifeof5 years(noresidual value). Usingtheclickanddragoptions below,selectthecorrect depreciation expense forthe yearto31March20X8. Depreciation expense for Depreciation expense for theoriginal machine themotherboard $71,250 $750 $72,250 $1,500 $75,000 $6,000 (2 marks) Muchmoo Cohasa dairyfarmwith100headofcattle.Muchmoo Coproduces milkand dairyproduce, including butter anda specialist blueveincheese forsaletothepublicand localfarmshops. Oncethedairycowshaveceasedtoproduce milk,theyarelooked after bythefarmer’s daughter whorunsananimal sanctuary, where theyliveouttheirdays grazing onthefieldsinSnowdonia. Thefinancial accountant ofMuchmoo Coisunsure ofhowtoaccount forthedifferent products andtheherdofcattle. Usingtheoptions provided, selectthecorrect accounting standard tovaluethevarious assetsofMuchmoo Co.Notethateachoption maybeusedmorethanonceornotatall. Dairycows Pasteurised milk,cheese, butter Rawmilkfromthecows Inventories (IAS2) Property, PlantandEquipment (IAS16) Agriculture (IAS41) Intangible Assets (IAS38) (2 marks) 356 Financial Reporting (FR) Page 379 of 405 H G q 6 Duringthe year ended 31December20X4,BloopCo incurredexpenditureon twoprojects: Project1costs relate to the evaluationof alternativesforimprovedproduction systemsto be implementedduring20X5and 20X6.Thecompanyspent $1mon related salariesand materialsand $2mon designequipment(whichhad an expectedlifeof fouryears). Project2 involvesthe testingof a newproductwhichwillbe introducedto the market in20X5and is expectedto generate profitsovera four-yearperiod.Thecompany spent $4mon salariesand materials.Thepolicyis to charge a fullyear’s depreciationon assets. What is the TOTALcharge to profitor lossfor the year ended 31December20X4? $5.5 million $3 million $1.5million $1million (2 marks) Q U E T IO N S S (ACCAExaminer'sreportDecember2019) 7 MillhouseCo receiveda governmentgrant on 1October20X8.Thegrant was to helpfund rentalcosts of a factory inan urban regenerationarea. Theconditionsof the grant were that the factory mustbe rented and used forat least one year. MillhouseCo rented a factory from1July 20X9and was confidentthat the conditionsof the grant wouldbe met. MillhouseCo ownsotherfactoriesindifferentareas. WhichTWOof the followingcorrectlyreflectthe accountingtreatment for the governmentgrant that couldbe adopted by MillhouseCo in its financialstatements for the year to 30 September20X9? Recognisethe grant infullas otherincomeinthe statement of profitor loss Deductthe fullamountof the grant fromthe cost of factoriesinthe statement of financialposition Recognisethree monthsof grant incomeas otherincomeinthe statement of profitor loss Deductthree monthsof grant incomefromthe factoryrentalexpenseinthe statement of profitor loss Deductthe fullamountof the grant fromthe factoryrentalexpenseinthe statement (2 marks) of profitor loss (ACCAExaminer'sreportJuly 2020) H Mockexam4: Questions 357 Page 380 of 405 Powered By Ù q 8 Whichof the followingmeet(s)the recognitioncriteriafor an asset and/or a liability? (1) GreenCo spent $100,000providinghealth and safety trainingto its staff (2) GreenCo has been toldby a brand consultancythat the valueof its internally created brands is $2,000,000 (3) GreenCo is suinga supplierfor$450,000 forlossesthat it suffereddue to faulty goods. GreenCo is likely,thoughnot certain,to winthe courtcase (4) GreenCo has soldgoodssubjectto a fiveyear warrantyon whichit expectssome claimswillbe made (1)and (2) (3)and (4) 9 (2)only (4)only (2 marks) (ACCAExaminer'sReportSeptember2018) Whichof the followingeventstaking place after the year end but beforethe financial statements wereauthorisedfor issuewouldrequireadjustmentin accordance withIAS10 EventsAfterthe ReportingPeriod? Threelinesof inventoryheldat the year-end weredestroyedby floodinginthe warehouse Thedirectorsannounceda majorrestructuring Twolinesof inventoryheldat the year-end werediscoveredto have faultsrendering themunsaleable Thevalueof the company'sinvestmentsfellsharply (2 marks) G H 10 RootCo acquired30%of the 100,000equityshares inBranchCo for$7.50per share on 1 January 20X7,whenBranchCo had retainedearningsof $460,000 and a balance on the revaluationsurplusof $50,000. Atthe year end date of 31December20X7,BranchCo had retainedearningsof $370,000and a balance of $70,000 on the revaluationsurplus.Root Co consideredthat its investmentinBranchCo had sufferedan impairmentlossof $40,000. Calculate the carryingamount of the investmentin Branch. 2 marks) $ (ACCAExaminer'sreportMarch2020) 11 TontonCo acquired9,000 shares inPogoCo on 1August20X3at a cost of $6.40 per share. TontonCo incurredtransactioncosts of $9,000 forthistransaction.TontonCo electedto holdthese shares at fairvaluethroughothercomprehensiveincome. At31December20X3,the fairvalueof the PogoCo shares was $7.25per share and selling costs wereexpectedto be 4%. What is the valueof the PogoCo shares in TontonCo’s individualfinancialstatements at 31December20X3? $65,250 $74,250 $62,640 $66,600 (2 marks) (ACCAExaminer'sReportMarch2019) 358 FinancialReporting(FR) Page 381 of 405 q 12 Tourmalet Cosoldanitemofplantfor$50million on1April20X4.Theplanthada carrying amount of$40million atthedateofsale,whichwascharged tocostofsales.Onthesame date,Tourmalet Coentered intoanagreement toleasebacktheplantforthenextfive years(beingtheestimated remaining lifeoftheplant)ata costof$14million perannum payable annually inarrears. Anarrangement ofthistypeisnormally deemed tohavea financing costof10%perannum. Tourmalet Coretained therightstodirecttheuseof,and retain substantially alltheremaining benefits from,theplant. Usingthepulldownlistprovided, selecttheamount whichwillbeshown asincome from thistransaction inthestatement ofprofitorlossfortheyearended30September 20X4? Q U E T IO N S S Pulldownlist: Nil $10million $40million $50million 13 (2 marks) Usingthedraganddropoptions below,complete thestatement toshowhowIAS8 Accounting policies, Changes inAccounting Estimates andErrors require accounting policies tobeadopted inthefinancial statements Eachstatement maybeusedmorethanonceornotatall. Acompany decides tochangetheaccounting policyofthevaluation ofnon-current assets. Thischangemustbeapplied Acompany discovers a fundamental errorinthe valuation ofinventories. Thecorrection should bemade G H prospectively retrospectively (2 marks) 14 Acompany’s statement offinancial position at31December 20X4included landata cost of$200,000anda deferred taxliability of$60,000.On1March20X5,thelandwas professionally valued at$250,000.Thisvaluation wasincorporated intothefinancial statements fortheyearto31December 20X5.Noothernon-current assetshavebeen revalued. Othertaxable temporary differences increased during theyearto31December 20X5by$40,000.Therelevant rateoftaxis20%. Whatarethebalances at31December 20X5ontherevaluation surplus andthedeferred taxliability? Revaluation surplus of$50,000anddeferred taxliability of$68,000 Revaluation surplus of$50,000anddeferred taxliability of$78,000 Revaluation surplus of$40,000anddeferred taxliability of$78,000 Revaluation surplus of$40,000anddeferred taxliability of$62,000 (2 marks) (ACCAExaminers Report December 2019) Mockexam4:Questions359 Page 382 of 405 Powered By Ù q 15 A60%owned subsidiary soldgoodstoitsparent for$150,000 ata mark-up of25%oncost during theyearended 30June20X5.Onefifthofthesegoodsremained unsold asat 30June20X5. Whatisthedebitadjustment tobemadetogroupretained earnings toreflectthe unrealised profitininventory at30June20X5? $6,000 $3,600 $2,400 $4,500 (2 marks) (ACCAExaminers Report September 2018) G H 360 Financial Reporting (FR) Page 383 of 405 G q Section B – ALL be attempted 15 questions are compulsory and MUST Eachquestion isworth 2 marks. Thefollowing scenariorelatestoquestions 16–20. Rainbird Codecided toreorganise a manufacturing facilityduring November 20X1and commissioned a consulting engineer tocarryouta feasibility study.Aprovision forthe reorganisation wascreated at31December 20X1. Stafffunctions willchangefollowing thereorganisation, soinDecember 20X1Rainbird Co contracted witha training company toprovide retraining totakeplaceinJanuary20X2.A provision forthisexpenditure wascreated at31December 20X1. Rainbird Cohopes thatreorganising itsmanufacturing facilitywillimprove quality control. It givesa one-year warranty withallproducts andtherateofreturns under warranty is12%.5%of thereturned items canberepaired ata costof$5(freeofchargetothecustomer). Theother95% arescrapped anda fullrefund of$30isgiven.Rainbird Cosold525,000unitsduring theyearto 31December 20X1. Q U E T IO N S S Infiveyears'timeRainbird Cowillhavetodismantle itsfactoryandreturn thesitetothelocal authority. Aprovision wassetupforthepresent valueofthedismantling costswhenthefactory wasfirstacquired. Theopening balance ontheprovision at1January20X1was$2.63million. Rainbird Cohasa costofcapitalof8%. 16 Rainbird Co'saccountant ispreparing thefinancial statements fortheyearto31December 20X1andisnottoosureabouttheprovisions setupforthereorganisation ofthefacility andthestafftraining. Whichoftheseisa correct provision under IAS37Provisions, Contingent Liabilities and Contingent Assets? Thereorganisation Thestafftraining 17 H Thereorganisation andthestafftraining Neither thereorganisation northestafftraining Rainbird Co'sfinance director ischecking someofthefinancial estimates involved. In accordance withIAS37,ifthereporting entityispresently obliged totransfer economic benefit toanother party,theoccurrence isprobable buttheamount cannot bemeasured withsufficient reliability. Usingthepulldownlistbelow,selectthecorrect option statingwhatthisshould giverise tointhefinancial statements Pulldownlist: Aprovision Acontingent liability Along-term liability Acontingent asset Mockexam4:Questions361 Page 384 of 405 Powered By Ù q 18 Whatistheamount oftheprovision thatshould becreated at31December 20X1for returns under warranty? $1,890,000 $1,811,250 $1,795,500 $1,575,000 19 Whatistheamount oftheprovision thatshould becarried forward at31December 20X1 forthedismantling ofthefactory? $2,630,000 $2,419,600 $2,435,185 $2,840,400 20 During January20X2,before thefinancial statements ofRainbird Cofortheyearended 31December 20X1hadbeenfinalised, a number ofevents tookplace. Whichoftheseevents wouldrequire anadjustment tothefinancial statements asat 31December 20X1inaccordance withIAS10Events AftertheReporting Period? Rainbird Co'sboardannounced a plantodiscontinue oneofitsoperations anddispose oftheplant.Thelossondisposal isestimated at$2million G Theemployees oftheoperation tobediscontinued commenced a case against Rainbird Coforconstructive dismissal. Thetotalcostcouldbe$3 million AlegalcaseforwhichRainbird Cohadprovided $1.7million at31December 20X1 tocoverpossible damages wasunexpectedly settled initsfavour OneofRainbird Co'swarehouses wasdestroyed byfireandhalfofthe inventory onhandat31December 20X1,valued at$2.5million, was destroyed (10marks) Thefollowing scenariorelatestoquestions 21-25. Thefollowing isanextract fromDiazCo’strialbalance asat31December 20X8: Debit Credit $m $m Inventory at31December 20X8 8.6 Tradereceivables 6.2 5%loannotes 9.0 Theinventory countwascompleted on31December 20X8,buttwoissues havebeennoted. First, products witha salesvalueof$0·6mhadbeenincorrectly excluded fromthecount.Second, items costing $0·2mwhichhadbeenincluded inthecountweredamaged andcouldonlybesold for50%ofthenormal selling price.DiazComakes a mark-up of50%onbothoftheseitems. DiazCo entered intoa factoring agreement withFinaidCo on31December 20X8.In accordance withtheagreement, DiazCosoldtradereceivables witha carrying amount of$6·2m toFinaidCofor$6m.Under theterms ofthefactoring agreement, aftersixmonths FinaidCowill return anyunpaid receivables toDiazCoforcollection. FinaidCowillalsochargeDiazCoa feeof 5%ofanyuncollected balances attheendofeachmonth. 362 Financial Reporting (FR) Page 385 of 405 H q The5%loannotes wereissued for$9mon1July20X8.DiazCoincurred issuecostsof$0·5m associated withthis,whichhavebeenexpensed within finance costs.Theloannoteinterest is payable each30Juneandtheloannoteisrepayable ata premium, givingthemaneffective interest rateof8%. 21 Inaccordance withIAS32Financial Instruments: Presentation, whichoftheitemsinthe trialbalance wouldbeclassified asfinancial instruments? 22 Whatis thecorrectcarryingamount of inventory to be recognised in DiazCo’s financialstatements as at31December 20X8? $8.95m $9.0m 23 Closinginventory andtradereceivables only 5%loannotesonly Trade receivables and5%loannotesonly Closinginventory, tradereceivables and5%loannotes Q U E T IO N S S $8.9m $9.15m Inanattempt toimprove reported profit, thedirectors ofDiazCowanttochange the valuation method ofinventory fromfirstinfirstout(FIFO)toanaverage costmethod. Which,ifany,ofthefollowing statements regarding thepotential changeininventory valuation is/arecorrect? (1) Thechangewillrepresent a changeinaccounting estimate (2) Thefinancial statements willbeadjusted prospectively 1only G 24 H 2 only Both1and2 Neither 1nor2 Whichofthefollowing statements regarding thefactoring arrangement isNOTtrue? $6mreceived should berecorded intheliabilities ofDiazCoat31December 20X8 $0.2mshould beexpensed inDiazCo’sstatement ofprofitorlossfortheyearended 31December 20X8 A totalofthe5%monthly feeshould beexpensed inDiazCo’sstatement ofprofit orlossfortheyearended 31December 20X9 Thereceivables willremain asanassetinthefinancial statements ofDiazCoat 31December 20X8 Mockexam4:Questions363 Page 386 of 405 Powered By Ù q 25 Inrespect of the 5%loan notes, howmuchshouldbe expensedwithinDiazCo’sstatement of profitor lossfor the year ended 31December20X8? $0.68m $0.45m $0.72m $0.34m (10marks) (ACCA,ExaminersReportMar/Jun2019) Informationrelevant to questions 26-30. Thedirectorsof HemlockCo are preparingthe financialstatements forthe year ended 30 September20X3.HemlockCo is a publiclylistedcompany. (i) Mostof HemlockCo's competitorsvaluetheirinventoryusingthe average cost (AVCO) basis, whereasHemlockCo uses the firstinfirstout (FIFO)basis. Thevalueof HemlockCo's inventoryat 30 September20X3on the FIFObasis, is $40 million,howeveron the AVCO basis it wouldbe valuedat $36 million.Byadoptingthe same method(AVCO)as its competitors,the assistant accountant says the companywouldimproveits profitforthe year ended 30 September20X3by $4 million.HemlockCo's inventoryat 30 September 20X2was reportedas $30 million,howeveron the AVCObasis it wouldhave been reported as $26.8million. (ii) HemlockCo solda machineto PoissonSA,a Frenchcompanywhichit agreed to invoicein €. Thesale was made on 1October20X6for€250,000. €155,000was receivedon 1November20X6and the balance is due on 1January 20X7. Theexchangerate movedas follows: 1October20X6– €0.85 to $1 1November20X6– €0.84 to $1 31December20X6– €0.79to $1 G 26 H Atwhat amount willthe receivableof €155,000be shownin the financialstatements at 31December20X6? $130,200 $196,203 $183,253 $184,524 27 Whichof the followingwouldbe treated as a change of accountingpolicy? HemlockCo is adoptingthe revaluationpolicyforthe firsttimeforits tangiblenoncurrentassets HemlockCo has changed the rate of depreciationused forits officeequipmentfrom 30%to 20%straight-linebasis HemlockCo has reclassifiedhead officeadministrationcosts fromcost of sales to otheroperatingexpenses HemlockCo has increasedits allowanceforirrecoverabledebts from10%to 12% 364 FinancialReporting(FR) Page 387 of 405 q 28 Inwhichofthefollowing situations isthenetrealisable valueofanitemofinventory likely tobelowerthanitscost? Theproduction costoftheitemhasbeenfalling Theselling priceoftheitemhasbeenrising Theitemisbecoming obsolete Demand fortheitemisincreasing Q U E T IO N S S 29 Whatwillbetheeffectofthechangein(i)onprofits fortheyearended30September 20X3? Increased by$800,000 Reduced by$800,000 Increased by$3,200,000 Reduced by$3,200,000 30 Theauditors ofHemlock Cohavediscovered a fundamental errorintheprioryearfinancial statements. Thedirectors ofHemlock Cohaveagreedtocorrect thepriorperiod error. Whichofthefollowing arethedisclosures whichthedirectors should present inthe financial statements? (1) Thenature oftheerror (2) Theamount ofthecorrection foreachitemofthefinancial statements affected by theerrorandcorrection G H Statement (1)only Statement (2)only Neither statement (1)or(2) Bothstatements (1)and(2) (10marks) Mockexam4:Questions365 Page 388 of 405 Powered By Ù G q Section C – BOTH be attempted Question questions are compulsory and MUST 31 Loudon Cohasprepared a draftstatement ofprofitorlossfortheyearended 30September 20X8(before anyadjustments required bynotes(1)to(4)below). Thedraftprofithasbeenadded toretained earnings andthesummarised trialbalance ofLoudon Coasat30September 20X8is: $'000 $'000 10,000 Equityshares of$1each Retained earnings asat30September 20X8(draft) 4,122 Officebuilding atcost 20,000 Factories cost1October 20X7(note(2)) 40,000 Officebuilding accumulated depreciation 1October 20X7 4,000 Factories accumulated depreciation 1October 20X7 11,100 Environmental provision 1October 20X7(note(3)) 1,228 Current liabilities 34,500 Current assets 14,700 Proceeds of5%loannote(note(1)) 5,000 Deferred Tax 1,500 Interest paid(note(1)) 250 Suspense account (note(2)) 3,500 74,950 74,950 Thefollowing notesarerelevant: (i) Loannote A5%loannotewasissued on1October 20X7atitsfacevalueof$5m.Directcostsofthe issueamounted to$0.125m andwerecharged toprofitorloss.Theloanwillberedeemed in fiveyearstimeata substantial premium whichgivesaneffective interest rateof8%.The annual repayments of$250,000($5mat5%)arepaidon30September eachyear. (ii) Non-current assets Loudon Coacquired anofficebuilding for$20mon1October 20X2withanestimated useful lifeof25years.Depreciation ischarged ona pro-rata basis.On1April20X8,the building wasdeemed tobeimpaired asitsfairvaluewasestimated tobe$12m. Atthat datetheestimated remaining lifewasrevised to12years.Ignore thedeferred tax consequences ofthisrevaluation. Loudon Cohadtenfactories. On1October 20X7Loudon Cosoldoneofitsfactories witha carrying amount of$3m(cost$5mandaccumulated depreciation $2m)for$3.5m.Theproceeds werecredited tothesuspense account. Nodepreciation hasyetbeencharged onanynon-current assetfortheyearended 30September 20X8.Thefactories aredepreciated at15%perannum usingthereducing balance method. provision (iii) Environmental Loudon Cohasanobligation toclean-up environmental damage caused atoneofits factorysitesduring 20X7.Theclean-up isduetotakeplaceattheendofthefactory's useful life.Theliability hasbeenaccounted forappropriately andthebalance at1October 20X7represents thecorrect present valueatthatdate.Loudon Cohasa costofcapitalof 5%. (iv) Deferred tax At30September 20X8,thetaxwritten downvalueofproperty, plantandequipment was $25m.Theincome taxrateapplicable toLoudon Cois20%. 366 Financial Reporting (FR) Page 389 of 405 H q Required (a) Prepare a schedule ofadjustments required totheretained earnings ofLoudon Coasat 30September 20X8asa result oftheinformation innotes(1)to(4). (8 marks) (b) Prepare thestatement offinancial position ofLoudon Coasat30September 20X8. Note.Thenotestothestatement offinancial position arenotrequired. Allcalculations should berounded tothenearest $'000. (12marks) (20marks) Question 32 Q U E T IO N S S At1January20X8,theKarlgroupconsisted oftheparent, KarlCo,andtwowholly-owned subsidiaries. There werenointra-group transactions during theyear. Thesaleofoneofthesubsidiaries, Sinker Co,wascompleted on31December 20X8whenKarlCo solditsentire holding for$20mcash.Sinker Cohadnetassetsof$29matthedateofdisposal. Thesaledoesnotmeetthedefinition ofa discontinued operation andhasbeencorrectly accounted forintheconsolidated financial statements. Thegain/loss ondisposal ofSinker Cois included inadministrative expenses. KarlCohadoriginally purchased Sinker Coon1January20X2for$35m.Thefairvalueand carrying amount ofnetassetsofSinker Coatthedateofacquisition were$28m.Goodwill was considered tobeimpaired by70%at31December 20X8. Extracts fromtheconsolidated financial statements fortheyearsended 31December 20X8and 20X7areshown below: Extractsfromthestatements ofprofitorlossfortheyearended31December: G Consolidated 20X8 $m 289 (165) 124 (45) (15) 64 Consolidated 20X7 $m 272 (140) 132 (23) (13) 96 Consolidated 20X8 $m 112 621 100 36 Consolidated 20X7 $m 125 578 150 161 Revenue Costofsales Grossprofit Administrative expenses Distribution costs Operating profit/ (loss) Extractsfromthestatements offinancialposition asat31December: Currentassets Equity Non-current liabilities Currentliabilities Thefollowing information isalsorelevant: (i) Themajority ofnon-current liabilities iscomprised ofbankloans. (ii) H SalesofSinker Corepresented 14%ofthetotalgroupsalesfor20X8,however, in March20X8,Sinker Colosta significant customer contract resulting ina number of redundancies. These redundancy costsamounted to$15m andareincluded in administrative expenses. Overall, Sinker Comadeanoperating lossof$17m. Mockexam4:Questions367 Page 390 of 405 Powered By Ù q (iii) TheKarlgroupmanufactures foodpackaging. Theinventory included intheabove consolidated statement offinancial position is: Groupinventory at: Inventory $m 31December 20X8 65 31December 20X7 78 (iv) At31December 20X8,Sinker Cohadinventory of$42m. Required (a) Calculate thegain/loss arising onthedisposal ofSinker Cointheconsolidated financial statements oftheKarlgroup. (4 marks) (b) Basedonthefinancial statements provided, calculate thefollowing ratiosandcomment on thefinancial performance andposition oftheKarlgroupfortheyearsended 31December 20X8and20X7: (i) Grossprofitmargin; (ii) Operating profitmargin; (iii) Return oncapitalemployed; (iv) Current ratio;and (v) Gearing ratio(debt/debt +equity)). Note.Amaximum of5 marks isavailable forthecalculation ofratios. (13marks) (c) Comment onhowthesaleofSinker Cowillaffectthecomparability oftheconsolidated financial statements fortheyearsended 31December 20X7and20X8. (3 marks) (20marks) G H 368 Financial Reporting (FR) Page 391 of 405 q Answers G H DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE MOCK EXAM Page 392 of 405 Powered By Ù q G H 370 Financial Reporting (FR) Page 393 of 405 G q A plan of attack Managing your nerves Asyoustartthismockexama number ofthoughts arelikelytocrossyourmind.Atbest, examinations causeanxiety soitisimportant tostayfocused onyourtaskfortheexamperiod! Developing anawareness ofwhatisgoingonemotionally within youmayhelpyoumanage your nerves. Remember, youareunlikely tobanish theflowofadrenaline, butthekeyistoharness itto helpyouworksteadily andquickly through youranswers. Working through thismockexamwillhelpyoudevelop theexamstamina youwillneedtokeep goingforthreehours. Managing your time Planning andtimemanagement aretwoofthekeyskillswhichcomplement thetechnical knowledge youneedtosucceed. Tokeepyourself ontime,donotbeafraidtojotdownyour targetcompletion times foreachquestion, perhaps nexttothetitleofthequestion ontheexam. Asallthequestions arecompulsory, youdonothavetospendtimewondering whichquestion to answer! Doing the exam Actually doingtheexamisa personal experience. There isnota singlerightway.Aslongasyou submit complete answers toallquestions afterthethreehours areup,thenyourapproach obviously works. Looking through the exam Section A has15OTQs.Thisisthesection oftheexamwhere theexamining teamcantest knowledge acrossthebreadth ofthesyllabus. Makesureyoureadthesequestions carefully. The distractors aredesigned topresent plausible, butincorrect, answers. Don'tletthemmislead you. Ifyoureallyhavenoidea– guess.Youmayevenberight. Section B has15OTQsintotal– questions 16–30.These arearranged asthreescenarios withfive questions each. Scenario 1isonprovisions andevents afterthereporting period Scenario 2 isonfinancial instruments andinventory Scenario 3 isonrevaluation andadjustments toprofit A N S W E R H S Section C hastwo20-mark questions. Question 31requires thepreparation ofsingle-entity financial statements. Question 32requires theinterpretation ofgroupfinancial statements, including a disposal. Allocating your time BPP'sadviceistoalwaysallocate yourtimeaccording tothemarksforthequestion. However, usecommon sense.Ifyou're doinga question buthaven't a cluehowtodopart(b),youmight bebetter offreallocating yourtimeandgetting moremarks onanother question, where youcan addsomething youdidn'thavetimeforearlier on.Makesureyouleavetimetorecheck theOTQs andmakesureyouhaveanswered themall. Mockexam4:Answers371 Page 394 of 405 Powered By Ù q Section A 1 A Option A istheonlyoption thatobjectively verifies theexistence ofcash. Allotheroptions verifytheassetagainst aninternal document; iea 'listof inventory', a 'boardminute' anda 'receivable statement'. 2 A Weighted average capitalisation rate= (9%30/78)+ (11% 48/78)= 3.5%+6.8%=10.3% Borrowing costs= + 3 $ 927,000 171,667 1,098,667 $12m 10.3%9/12 $4m10.3%5/12 A $m 600 500 1,100 B/f(500+100) Cashreceived (β) C/f (750+350) Thebonus issueisirrelevant asnocashisreceived. 4 Thecorrect answers are$71,250 and$1,500. Depreciation expense for Depreciation expense for theoriginal machine themotherboard $71,250 $1,500 G H Machine ((1,500,000 – 75,000)/10 6/12) Motherboard ((30,000/5)3/12) 5 6 Dairycows Pasteurised milk,cheese, butter Rawmilkfromthecows $'000 71,250 1,500 72,750 Agriculture (IAS41) Inventory (IAS2) Agriculture (IAS41) Dairycowsareclassified asbiological assetsandtherefore accounted forunder IAS41as theyarea livinganimal. Rawmilkfromthecowsisclassified asagricultural produce atthepointofharvest under IAS41asthisiseffectively the‘harvest’ fromthebiological assets(thecows).Itisnotsoldin thiscondition andmustgothrough a process priortobeingheldasinventory (IAS2)as pasteurised milk,butter orcheese. C Project 1expenditure onthe"evaluation ofalternatives" couldnever beclassified as anasset.Therefore thefull$1mrelating tosalaries andmaterials should becharged toprofitorloss.Also,thedepreciation forthedesign equipment should beexpensed ($2m/4); $1.5m intotal.Theproject 2 costsassociated withthetesting ofa new product whichwillbeintroduced tothemarket in20X5should becapitalised in20X4 andwritten offfrom20X5forthenextfouryears.Consequently, therewillbeno project 2 costscharged toprofitorlossduring 20X4.' Answer option A charges $1.5m forproject 1and$4mforproject 2. 372 Financial Reporting (FR) Page 395 of 405 q Answer option B writes offallcostsassociated withproject 1(including thedesign equipment). Answer option D charges the$1mforproject 1salaries andmaterials only. Fairvaluelesscostsofdisposal (6.3m– 150,000) Valueinuse $ 6,150,000 5,800,000 Recoverable amount istherefore: Impairment loss(β) Carrying amount 6,150,000 850,000 7,000,000 7 C andD IAS20Accounting forGovernment GrantsandDisclosure ofGovernment Assistance allows fortwoalternative presentations ofgrantsrelated toincome – either separately orunder a heading suchas‘Otherincome’ (option C) ortheycanbededucted fromtherelated expense (option D). Answer options AandE recognise thefullamount ofthegranthowever thequestion sets outtherequirements ofthegrantandthatincludes therequirement thatthefactorymust berented – thisonlyoccurred on1July20X9andtherefore requires tobepro-rated. Answer option B would havebeencorrect ifitwasa capitalgranthowever Millhouse Co wasrenting notpurchasing a factory. 8 D 4 only GreenCohassoldgoodssubject toa five-year warranty onwhichitexpects some claims willbemade. Thisisbecause a legalobligation (thewarranty) hasbeencreated asa result ofthe salescontract. G 9 10 The$100,000 expenditure onthehealth andsafetytraining doesnotmeetthe definition ofanassetbecause GreenCodoesnotcontrol theirstaff(ietheycould leavetheirjobsatanytime)anditisnotcertain thatthehealth andsafetytraining willproduce economic benefits. Asthebrandhasbeeninternally generated, itcannot bereliably measured andsoit doesnotmeetthedefinition ofanasset. Thecourtcaseagainst thesupplier cannot berecognised asanassetbecause the economic benefits arenotsufficiently certain. Itmayhowever, bea contingent asset anddisclosed inthenotestothefinancial statements. C Twolinesofinventory heldattheyear-end werediscovered tohavefaultsrendering themunsaleable. Wecanassume thatthesefaultsalsoexisted attheyearend,sothisistheonly option whichwould require adjustment. Theothers havealltakenplaceafterthe yearend. $164,000 Costofinvestment (30,000$7.50) Post-acquisition lossinretained earnings (($370,000 – $460,000)30%) Post-acquisition increase inrevaluation surplus (($70,000-$50,000) 30%) Impairment A N S W E R H S $ 225,000 (27,000) 6,000 (40,000) 164,000 Mockexam4:Answers373 Page 396 of 405 Powered By Ù q 11 A $65,250 9,000shares $7.25=$65,250 Question istesting theknowledge ofIFRS13whichstatesthat‘thefairvalueofan assetshallnotbeadjusted fortransaction costs’. 12 13 14 Nil Tourmalet Cocandirect theuseofandobtain substantially alloftheremaining benefits fromtheplant,sothisdoesnotmeettheIFRS15criteria toberecognised asa sale.Thisisinsubstance a secured loan,sotheassetwillcontinue toberecognised at itscarrying amount of$40manda leaseliability willbesetupfor$50m. Acompany decides tochangetheaccounting policyofthevaluation ofnon-current assets. Thischangemustbeapplied retrospectively Acompany discovers a fundamental errorin thevaluation ofinventories. Thecorrection should bemade retrospectively C Thegainonthelandrevaluation is$50,000andtheassociated deferred taxis $10,000(20%).Thejournal entries forthelandrevaluation anditsassociated deferred taxare: DebitLand $50,000 DebitRevaluation Surplus $10,000 CreditRevaluation Surplus $50,000 CreditDeferred tax $10,000 Theclosing balance ontherevaluation surplus should thenbe$40,000Theopening balance ondeferred taxis$60,000whichwillbeincreased bytheadjustment of $10,000(above) forthelandrevaluation and$8,000fortheincrease intaxable temporary differences ($40,00020%perquestion). Theclosing balance on deferred taxshould thenbe$78,000. Option A andBdonottakeaccount ofthedeferred taxonthelandrevaluation. Option D deducts thedeferred taxonthetaxable temporary differences instead of addingiton. G 15 B $3,600 $150,000 25/125 1/560%=$3,600 Option A calculates theadjustment asifthesalewasmadebytheparent $150,000 25/125 1/5=$6,000 Option C calculates usingtheNCIpercentage asopposed tothegroupshare $150,000 25/125 1/540%=$2,400 Option D calculates usinga margin asopposed toa mark-up $150,000 25%1/560%=$4,500 374 Financial Reporting (FR) Page 397 of 405 H G q Section 16 17 18 B D Neitherthe reorganisationnor the staff training Thereorganisationcannot be providedforbecause it has onlygone as far as a feasibilitystudy. Staff trainingisnot a validprovisionas IAS37paragraph 81specificallyforbidscosts relatingto retrainingor relocatingstaff to be providedforinrestrictingprovisions. Acontingentliability. Theoutcomeis probablebut cannot be reliablymeasured. B $1,811,250 Totalreturns=525,000 12%=63,000 Expectedcost: 63,000 95%30 63,000 5%5 $ 1,795,500 15,750 1,811,250 19 D $2,840,400 $2.63million108%=$2,840,400.Thisis the unwindingof the discount. 20 C Thisis a favourableeventafter the reportingperiodbecause it providesevidence regardingconditionsthat existedat the end of the reportingperiodie the legalcase that was ongoing. Theothereventshave alltaken place after the reportingperiod. Tradereceivableshave been factored,but DiazCo stillretainsthe risksand rewards of the receivables(as FinaidCo can seekredressfromDiazCo on the unpaid balances).Therefore,a financialliabilityunderIFRS9 shouldbe recognised. Theloannotes are an obligationto transfereconomicbenefiton the part of DiazCo. Thisisa debentureloan,whichis a financialinstrumentunderIAS32. Closinginventoryis classifiedas an asset of DiazCo and IAS32 does not recognise physicalassets as financialinstruments. $8.95m Thecorrectansweris $8·95m.Thisis the $8·6mplusthe $0·4mmissingitems($0.6m 100/150)lessthe writedownof $0·05m($200,000– $150,000NRV.Theitems wouldnormallybe soldfor$300,000 but actuallybeingsoldat $150,000). Change inthe basis of valuationof inventoryis a change of accountingpolicy(not accountingestimate).Thefinancialstatements willbe adjustedretrospectively. AsDiazCo stillretainsthe risksand rewardsof the receivables,thisis an exampleof factoringwithrecourse.Thereceivablesare stillan asset of the company(so statement Dis correctthat the receivablesremainas an asset inthe financial statements).DiazCo is requiredto pay amountsreceivedfromthe factor inrespect of any losses(statementAshowingthe liabilityof $6mremainingoutstanding).The financecost of the factoring(the monthlycharge)is to be expensedas incurred (statementC). The$6mreceivedfromFinaidis ineffect a loan,and willbe recordedas such. The receivableis not derecognisedand so there is no 'losson derecognition'expenseto be recordedinthe statement of profitor loss(StatementB). Thecorrectansweris $0.34m.Theloannotes shouldinitiallybe recordedat the net proceedsof $8.5m.Theeffectiveinterestrate of 8%wouldthen be expensedin relationto this,being$0.68m.Asthe loannotes wereonlyissuedon 1July 20X8,the expenseforthe year wouldbe $0.34m($0.68m6/12). 21 C 22 A 23 D 24 B 25 D A N S W E R H S Mockexam4: Answers 375 Page 398 of 405 Powered By Ù q 26 B 27 C 28 C 29 B 30 D $196,203 €155,000/0.79 Thedebtisrevalued attheyear-end rate. Hemlock Cohasreclassified headofficeadministration costsfromcostofsalesto otheroperating expenses. Thisisa changeinpresentation, soitisa changeofaccounting policy. Iftheitemisbecoming obsolete, customers areunlikely towanttobuytheitem unless itisdiscounted, whichmayleadtothenetrealisable valuefallinglower than thecost. Reduced by$800,000 If20X2closing stockislower, thatwould increase costofsalesandprofitwould be lower, so20X2profit, retained earnings andclosing stockwould bedecreased by $3.2m. In20X3,opening inventory is3.2mlower, andclosing inventory is$$0.8mhigher andprofitwillbedecreased by$0.8m.Theneteffectat30September 20X3ofthis proposal willbetoreduce current yearprofits by$800,000. Bothstatements (1)and(2) IAS8 statesthatthenature andtheamount oftheerrorshould bedisclosed, detailing eachofthelinesaffected bytheadjustment andtheerror. G H 376 Financial Reporting (FR) Page 399 of 405 q Section Question C 31 Marking scheme Marks Loudon Co (a) Adjust profit (b) SFP Totalmarks (a) 8 12 20 Schedule ofadjusted retained earnings ofLoudon asat30 September 20X8 Workings Retained earnings pertrialbalance Adjustments: Addbackissuecostsofloan Loanfinance costs(W1) Building depreciation (W2) Impairment (W2) Factorydepreciation (W2) Disposal gainonfactory(W2) Unwinding ofdiscount onenvironmental provision ($1,228 5%) Deferred taxadjustment (W3) Adjusted retained earnings G (b) Statement offinancialposition asat30 September 20X8 Assets Non-current assets Property, plantandequipment ($11,500 +$22,015) (W2) Currentassets(perTB) Totalassets Equityandliabilities Equity Equityshares $1each(perTB) Retained earnings (part(a)) Non-current liabilities 5%loannote(W1) Environmental provision ($1,228 + $61(part(a)) Deferred Taxation (W3) Currentliabilities (perTB) Totalequityandliabilities $'000 4,122 125 (390) (900) (3,600) (3,885) 500 (61) (203) (4,292) A N S W E R H S $'000 33,515 14,700 48,215 10,000 (4,292) 5,708 5,015 1,289 1,703 8,007 34,500 48,215 Mockexam4:Answers377 Page 400 of 405 Powered By Ù G q Workings 1 Loannote Theissuecostsshould bededucted fromtheproceeds oftheloannoteandnot charged asanexpense. Thisgivestheloannoteanopening carrying amount of $4,875,000 ($5,000,000- $125,000). Thefinance costoftheloannote,atthe effective interest rateof8%applied tothecarrying amount oftheloanis$390,000. Theactualinterest paidis$250,000(seeTB)whichleaves a closing carrying amount of$5,015,000 forinclusion asa non-current liability inthestatement offinancial position. Opening balance Finance costs Interest paid Closingbalance 1October 20X7 8%opening balance 5%principal 30 September 20X8 $'000 $'000 $'000 $'000 4,875 390 (250) 5,015 Non-current assets 2 $'000 OfficeBuilding Carrying amount at1September 20X7($20,000- $4,000) 16,000 Depreciation to1April20X8($20,000/25 years6/12months) (400) Carrying amount at1April20X8 15,600 Impairment (3,600) Fairvalueat1April20X8 12,000 Depreciation to30September 20X8($12,000/12 years6/12months) (500) 11,500 Factories Carrying amount at1September 20X7($40,000- $11,100) 28,900 Disposal atcarrying amount (3,000) Carrying amount at1September 20X8 25,900 Depreciation fortheyearto30September 20X8($25,90015%) (3,885) 22,015 Disposal offactory Proceeds 3,500 Carrying amount (3,000) Gainindisposal 500 3 Deferred Tax Taxwritten downvalueofPPEat30September 20X8 Carrying amount ofPPEat30September 20X8perSOFP Deferred taxprovision required at30September 20X8($8,515 20%) Deferred taxprovision at30September 20X7(perTB) Deferred taxchargeforyearended 30September 20X8 H $'000 25,000 (33,515) 8,515 1,703 (1,500) 203 378 Financial Reporting (FR) Page 401 of 405 Powered By Ù q Question 32 Marking scheme Marks KarlCo (a) Disposal loss (b) Ratiocalculations Analysis (c) Comparability Totalmarks (a) 4 5 8 Lossondisposal Thelossondisposal intheconsolidated financial statements is: Proceeds Less:netassets Less:carrying amount ofgoodwill (W1) Lossondisposal 13 3 20 $m 20 (29) (2.1) (11.1) Working Goodwill $m 35 (28) 7 (4.9) 2.1 FV/cost ofinvestment Lessnetassetsatacquisition Goodwill atacquisition Goodwill impairment (70%) Carrying amount ofgoodwill G (b) A N S W E R H S Ratiosandcommentary 20X8 Profitability ratios Grossprofitmargin 20X7 42.9% 48.5% ($124m / $289mx100) ($132m / $272m x100) 22.1% 35.3% Operating profitmargin ($64m/ $289mx100) ($96m/ $272m x100) ROCE 8.9% 13.2% (operating profit/ equity+ NCL) ($64m/ ($621m +$100m) ($96m/ ($578m +$150m) Liquidity ratios Current ratio 3.1:1 0.8:1 $112m / $36m $125m/$161m 13.9% 20.6% Gearing (debt/debt+ equity) 100/100+621 50/150+578 Financialperformance Consolidated revenue hasincreased from20X7to20X8,despite thelossofSinker Co’s significant customer contract threemonths intothefinancial year.Thismightsuggest that anincrease intherevenue ofKarl(oritsothersubsidiary, orboth)hasmorethan compensated forSinker Co’slostrevenue. However, eventhough thegrouprevenue has increased, thegrossprofitmargin hasfallenby5.6%andthegroupcostofsalesishigher than20X7.Thisislikelytohavebeenimpacted bythepoorfinancial performance ofSinker Co.Alternatively, itmaybethatthesalesmixofthegrouphaschanged. Mockexam4:Answers379 Page 402 of 405 Powered By Ù q Assales of SinkerCo represent14%of the total groupsales, thispoorperformancewillalso have impactedon the groupoperatingmargin.Operatingprofitmarginhas dropped significantlyfrom35.3%to 22.1%.Administrative expenseshave almostdoubledfrom$23m forthe year ended 31December20X7to $45mforthe year ended 31December20X8.Part of thisincreasewillbe due to the $11.1mlosson disposalof SinkerCo. Theadministrative expenseswillalso have increasedas a resultof the $15mstaff redundancycosts and impairmentof goodwill. ROCEhas fallenfrom13.2%to 8.9%,but thisfigureis hard to interpret,as the return includesthe resultsof SinkerCo (includingthe losson disposaland impairmentof goodwill) but the capital employeddoes not includethe capital of SinkerCo due to the disposalat the year end. Theoperatinglossmade by SinkerCo of $17m,plusthe losson disposalof $11.1mand impairmentof $4.9mwillhave reducedoperatingprofit.Althoughit is a simplification,removingthese balances wouldresultina groupROCEof 12.9%($64m+ ($17m+$11m+$4.9m))/ (($621m+$17m+$11.1m+$4.9m)+$100m)whichis moreinline withthe 20X7figure. Financialposition Thecurrentratio showsconsiderableimprovementforthe year ended 20X8,followingthe disposalof SinkerCo. Thegroupwas ina net currentliabilitypositionat the end of 20X7. Thiswouldsuggest that SinkerCo may have had a large bank overdraftbalance or high levelsof payables at 31December20X8.Itwouldappear that the sale of SinkerCo has improvedthe liquidityof the group. Itshouldbe noted that 20X8groupcurrentassets of $112mwillincludethe $20m considerationforSinkerCo. Thiscouldbe used to settlesomeof the long-termdebt. Bank loanshave already decreased by at least $50m.Thereis no informationabout the longtermloansof SinkerCo. Gearinghas been reducedduringthe year from20.6%to 13.9%but, withoutfurther informationon SinkerCo’snon-currentliabilities,it is verydifficultto tellifthisis a resultof the disposalor whetherKarlCo has simplyrepaid debt duringthe year. Conclusion G H Theinclusionof SinkerCo inthe consolidatedstatement of profitor lossdoes not appear to have had an adverseimpacton revenuegenerationbut, nowthat KarlCo has disposedof the poorlyperformingsubsidiary,it mightbe able to better controlcosts, thereby improvinggrossand operatingprofitmargins.SinkerCo appears to have been a drainon the liquidityof the group,and the positionof the groupappears to be muchhealthier followingthe disposalof SinkerCo. 380 FinancialReporting(FR) Page 403 of 405 Powered By Ù G q ReviewForm – Financial Reporting (FR)(02/21) Name: Address: HowhaveyouusedthisKit? (Tickoneboxonly) Onitsown(bookonly) Ona BPPin-centrecourse Ona BPPonlinecourse Ona coursewithanothercollege Other Duringthe past sixmonthsdo yourecall seeing/receiving any ofthe following? 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