ACCA
Revision
Question Bank
Financial Reporting
For Examinations from September 2017 to June 2018
F7
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ACCA
F7 FINANCIAL REPORTING
REVISION QUESTION BANK
For Examinations from September 2017 to June 2018
®
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
(i)
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Accountants and have been reproduced by kind permission.
(ii)
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
CONTENTS
Question
Page
Answer
Marks Date worked
1
2
5
7
9
12
16
18
19
20
21
1001
1001
1002
1003
1003
1004
1005
1006
1007
1007
1007
14
24
18
12
22
28
16
10
10
10
18
23
25
27
1008
1009
1010
12
14
12
29
31
33
34
37
39
43
46
48
50
52
53
57
1011
1011
1012
1013
1014
1014
1016
1017
1019
1019
1020
1021
1022
16
12
10
18
12
30
18
22
14
10
14
24
22
OBJECTIVE TEST QUESTIONS1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
International Financial Reporting Standards
Conceptual Framework
IAS 1 Presentation of Financial Statements
Accounting Policies
IFRS 15 Revenue from Contracts with Customers
Inventory and Biological Assets
IAS 16 Property, Plant and Equipment
IAS 23 Borrowing Costs
Government Grants
IAS 40 Investment Property
IAS 38 Intangible Assets
Non-current Assets Held for Sale and
Discontinued Operations
IAS 36 Impairment of Assets
IFRS 16 Leases
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
IAS 10 Events after the Reporting Period
IAS 12 Income Taxes
Financial Instruments
Conceptual Principles of Groups
Consolidated Statement of Financial Position
Consolidation Adjustments
Consolidated Statement of Comprehensive Income
Investments in Associates
Foreign Currency transactions
Analysis and Interpretation
IAS 7 Statement of Cash Flows
IAS 33 Earnings per Share
As shown by the Specimen Examination Section B will include “objective test case” questions of 10
marks each and Section C will include 20 mark constructed response (“long”) questions. Additional
useful question practice on examinable topics that is not exam style is indicated (*).
1
All OT questions are 2 marks each.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
(iii)
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question
Page
Answer
Marks Date worked
60
1024
10
61
63
64
66
67
1024
1026
1029
1032
1035
20
20
20
20
20
69
1037
10
70
71
1038
1038
10
15
72
74
1040
1040
10
10
75
76
1041
1041
10
15
78
1043
10
79
81
1044
1044
10
10
82
1045
10
83
1045
10
CONCEPTUAL FRAMEWORK
1
Wardle (ACCA J10 adapted **)
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
2
3
4
5
6
Dexon (ACCA J08 adapted)
Sandown (ACCA D09 adapted)
Cavern (ACCA D10 adapted)
Fresco (ACCA J12 adapted)
Atlas (ACCA J13 adapted)
ACCOUNTING POLICIES
7
Emerald (ACCA D07 adapted **)
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
8
9*
Derringdo (ACCA J03 adapted **)
Linnet (ACCA J04)
IAS 16 PROPERTY, PLANT AND EQUIPMENT
10
11
Dearing (ACCA D08 adapted **)
Shawler (ACCA D12 adapted **)
IAS 38 INTANGIBLE ASSETS
12
13
Dexterity (ACCA J04 adapted **)
Darby (ACCA D09)
IAS 36 IMPAIRMENT OF ASSETS
14
ESP (ACCA J12 adapted **)
IAS 37 PROVISIONS
15
16
Borough (ACCA D11 adapted **)
Radar (ACCA J13 adapted **)
IAS 10 EVENTS AFTER THE REPORTING PERIOD
17
Waxwork (ACCA J09 adapted **)
FINANCIAL INSTRUMENTS
18
Pingway (ACCA J08 adapted **)
** These are in the style of “OT-case” questions that now feature in Section B of the examination.
(iv)
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question
Page
Answer
Marks Date worked
85
86
87
89
90
92
93
1046
1048
1050
1052
1054
1055
1056
20
20
20
20
20
10
20
95
1058
10
96
98
101
103
105
107
1059
1061
1065
1067
1069
1071
20
20
20
20
20
10
110
112
114
116
1072
1074
1076
1079
20
20
20
20
118
119
1082
1082
10
10
121
122
124
126
128
1083
1084
1084
1085
1086
10
10
10
10
10
CONSOLIDATED FINANCIAL STATEMENTS
19
20
21
22
23
24
25
Patronic (ACCA J08 adapted)
Pedantic (ACCA D08)
Pandar (ACCA D09 adapted)
Prodigal (ACCA J11 adapted)
Viagem (ACCA D12 adapted)
Paradigm (ACCA J13 adapted **)
Polestar (ACCA D13 adapted)
FOREIGN CURRENCY TRANSACTIONS
26
Rangoon **
ANALYSIS AND INTERPRETATION
27
28
29
30
31
32
Witton Way
Iona
Harbin (ACCA D07 adapted)
Victular (ACCA D08 adapted)
Hardy (ACCA D10)
Quartile (ACCA D12 adapted **)
IAS 7 STATEMENT OF CASH FLOWS
33
34
35
36
Crosswire (ACCA D09 adapted)
Morocco (ACCA J12 adapted)
Monty (ACCA J13 adapted)
Kingdom (ACCA D13 adapted)
IAS 33 EARNINGS PER SHARE
37
38
Savoir (ACCA J06 adapted **)
Rebound (ACCA J11 adapted **)
COMPOSITE IFRS QUESTIONS
39
40
41
42
43
Errsea (ACCA J07 adapted **)
Skeptic (ACCA J14 adapted **)
Candy (ACCA J14 adapted **)
Moston (ACCA D15 adapted **)
Noston (ACCA D15 adapted **)
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
(v)
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question
Page
Answer
Marks Date worked
130
1087
30
135
137
138
1088
1088
1088
10
10
10
140
141
1090
1092
20
20
144
1095
30
149
150
152
1096
1096
1097
10
10
10
153
155
1097
1100
20
20
2
19
30
6
8
10
20
20
20
10
10
10
12
14
21
22
25
20
20
Specimen Exam (applicable from September 2016)
Section A
Section B
16-20
21-25
26-30
Section C
31
32
15 Objective Test (OT) Questions
“OT case” Questions
Telepath
Neutron
Speculate
“Constructed response” questions
Kandy
Tangier
September 2016 Exam
Section A
Section B
16-20
21-25
26-30
Section C
31
32
15 Objective Test (OT) Questions
“OT case” Questions
Aphrodite
Blocks (adapted)
Mighty IT
“Constructed response” questions
Triage
Gregory
December 2016 Exam
Section A 15 Objective Test (OT) Questions
Section B “OT case” Questions
16-20 Artem
21-25 Maykorn
26-30 Vitrion
Section C “Constructed response” questions
31
Laurel
32
Landing
Marking scheme
OBJECTIVE TEST QUESTION PRACTICE FOR COMPUTER BASED EXAMINATIONS
This section includes OT question types that will appear only in a computer-based exam, but
provides valuable practice for all students whichever version of the exam they are sitting.
(vi)
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
1
INTERNATIONAL FINANCIAL REPORTING STANDARDS
1.1
Which ONE of the following is NOT a function of the IASB?
A
B
C
D
1.2
Which ONE of the following is NOT part of the process of developing a new
International Financial Reporting Standard?
A
B
C
D
1.3
IASB
IFRS Foundation
IFRS IC
IFRS Advisory Council
According to the International Accounting Standards Board, in whose interests are
financial reporting standards issued?
A
B
C
D
1.6
Management of an entity
IASB
Primary users of financial statements
Local stock exchange
Which body develops International Financial Reporting Standards?
A
B
C
D
1.5
Issuing a discussion paper that sets out the possible options for a new standard
Publishing clarification of an IFRS where conflicting interpretations have developed
Drafting an IFRS for public comment
Analysing the feedback received on a discussion paper
Whose needs are general purpose financial statements intended to meet?
A
B
C
D
1.4
Responsibility for all IFRS technical matters
Publication of IFRSs
Overall supervisory body of the IFRS organisations
Final approval of interpretations by the IFRS Interpretations Committee
Company directors
The public
Company auditors
The government
The issue of a new IFRS means that:
(1)
(2)
(3)
(4)
An existing standard may be partially or completely withdrawn
Issues that are not covered by an existing standard are introduced
Issues raised by users of existing standards are explained and clarified
Current financial reporting practice is modified
Which combination of the above will most likely be the result of issuing a new IFRS?
A
B
C
D
1, 2 and 3
2, 3 and 4
1, 3 and 4
1, 2 and 4
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
1.7
IFRS requirements would be most relevant to the financial statements of which of the
following entities?
A
B
C
D
An association established by royal charter
A charitable trust
A community benefit society
A limited liability partnership
(14 marks)
2
CONCEPTUAL FRAMEWORK
2.1
Which ONE of the following is stated as an underlying assumption according to the
IASB’s Conceptual Framework for Financial Reporting?
A
B
C
D
2.2
Neutrality
Accruals
Relevance
Going concern
The IASB uses the Conceptual Framework for Financial Reporting (Framework) to assist in
developing new standards.
Which one of the following is NOT covered by the Framework?
A
B
C
D
2.3
The format of financial statements
The objective of financial statements
Concepts of capital maintenance
The elements of financial statements
An item meets the definition of an element in accordance with the Conceptual Framework for
Financial Reporting.
Which of the following criteria must be met for an item to be recognised in the financial
statements?
2.4**1
1
2
(1)
It is probable that any future economic benefit associated with the item will flow to
or from the entity
(2)
The item has a cost or value that can be measured with reliability
(3)
The rights or obligations associated with the item are controlled by the entity
A
B
C
D
1 only
2 only
1 and 2 only
1, 2 and 3
Which of the following statements regarding financial information are correct?
(1)
Faithful representation means that the legal form of a transaction must be reflected
in financial statements, regardless of the economic substance
(2)
Under the recognition concept only items capable of being measured in monetary
terms can be recognised in financial statements
(3)
It may sometimes be necessary to exclude information that is relevant and reliable
from financial statements because it is too difficult for some users to understand
Questions highlighted ** are also presented at the end of this Revision Question Bank in the OT Question
Practice for CBEs section.
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
2.5
2.6
1 only
2 only
1 and 2 only
1, 2 and 3
Which of the following statements are correct?
(1)
The money measurement concept requires all assets and liabilities to be accounted
for at original (historical) cost
(2)
Faithful representation means that the economic substance of a transaction should be
reflected in the financial statements, not necessarily its legal form
(3)
The realisation concept means that profits or gains cannot normally be recognised in
the statement of profit or loss until cash has been received
A
B
C
D
1 and 2 only
1 and 3 only
2 and 3 only
1, 2 and 3
IFRS 13 Fair Value Measurement sets out a fair value hierarchy that categorises inputs into
three levels.
Which of the following inputs would have the highest authority?
A
B
C
D
2.7
Unobservable inputs
Directly observable inputs other than quoted prices
Quoted prices in active markets at the measurement date
Market-corroborated inputs
The IASB’s Conceptual Framework for Financial Reporting identifies qualitative
characteristics of financial statements.
Which TWO of the following characteristics are fundamental qualitative characteristics
according to the IASB’s Framework?
2.8
(1)
(2)
(3)
(4)
Relevance
Understandability
Faithful representation
Comparability
A
B
C
D
1 and 2
1 and 3
2 and 4
3 and 4
Which of the following is the underlying assumption in the International Accounting
Standards Board’s Conceptual Framework for Financial Reporting?
A
B
C
D
Accruals
Reliability
Going concern
Relevance
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3
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
2.9**
On 31 December 20X3 Tenby sold $100,000 trade receivables to a debt factor, for $90,000.
If the factor has not collected the debt by 28 February 20X4 it can be returned to Tenby.
What is the current asset for the trade receivables in Tenby’s statement of financial
position as at 31 December 20X3?
A
B
C
D
2.10
$nil
$10,000
$90,000
$100,000
Although most items in financial statements are shown at their historical cost, increasingly the
IASB is requiring or allowing current cost to be used in many areas of financial reporting.
Drexler acquired an item of plant on 1 October 20X2 at a cost of $500,000. It has an
expected life of five years (straight-line depreciation) and an estimated residual value of 10%
of its historical cost or current cost as appropriate. As at 30 September 20X4, the
manufacturer of the plant still makes the same item of plant and its current price is $600,000.
What is the correct carrying amount to be shown in the statement of financial position
of Drexler as at 30 September 20X4 under historical cost and current cost?
A
B
C
D
2.11
Historical cost
$
320,000
320,000
300,000
300,000
Current cost
$
600,000
384,000
600,000
384,000
Recognition is the process of including within the financial statements items which meet the
definition of an element in the IASB’s Conceptual Framework for Financial Reporting.
Which of the following items should be recognised as an asset in the statement of
financial position of a company?
2.12
A
A skilled and efficient workforce which has been very expensive to train. Some of
these staff are still in the employment of the company
B
A highly lucrative contract signed during the year which is due to commence
shortly after the year end
C
A government grant relating to the purchase of an item of plant several years ago
which has a remaining life of four years
D
A receivable from a customer which has been sold (factored) to a finance company.
The finance company has full recourse to the company for any losses
Comparability is identified as an enhancing qualitative characteristic in the IASB’s
Conceptual framework for financial reporting.
Which of the following does NOT improve comparability?
4
A
Restating the financial statements of previous years when there has been a change
of accounting policy
B
Prohibiting changes of accounting policy unless required by an IFRS or to give
more relevant and reliable information
C
Disclosing discontinued operations in financial statements
D
Applying an entity’s current accounting policy to a transaction which an entity has
not engaged in before
(24 marks)
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
3
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
3.1
XYZ decided to change its reporting date which will result in a 15-month reporting period.
Which of the following two items must be disclosed in accordance with IAS 1
Presentation of Financial Statements?
3.2
3.3
(1)
The reason for the period being longer than 12 months
(2)
A statement that similar entities have also changed their accounting period
(3)
A statement that comparative amounts used in the financial statements are not
entirely comparable
(4)
Whether the change is just for the current period or for the foreseeable future
A
B
C
D
1 and 2
1 and 3
2 and 4
3 and 4
Which of the following disclosures are specifically required by IAS 1 Presentation of
Financial Statements?
(1)
(2)
(3)
(4)
The name of the reporting entity or other means of identification
The names of all major shareholders
The level of rounding used in presenting amounts in the financial statements
Whether the financial statements cover the individual entity or a group of entities
A
B
C
D
2, 3 and 4
1, 3 and 4
1, 2 and 4
1, 2 and 3
Which item must be shown as a line item in the statement of financial position?
A
B
C
D
3.4
Intangible assets
Work in progress
Trade receivables
Taxation
Balances under the following headings are extracted from the books of Ego:
(1)
(2)
(3)
Staff costs – wages and salaries
Raw materials and consumables
Own work capitalised
The accountant wishes to use a classification of expenses within profit by nature format.
Which of the above balances may be included without further analysis in the statement
of profit or loss?
A
B
C
D
1 and 2 only
1 and 3 only
2 and 3 only
1, 2 and 3
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5
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
3.5
During the year ended 31 March 20X7 Woolf sold a property for $1,550,000. The property
was purchased on 1 July 20W4 for $100,000, had an expected life of 20 years and had been
revalued to $1,900,000 on 31 March 20X4. Woolf depreciates properties on a straight-line
basis over the assets’ useful life, with a full year’s depreciation in the year of acquisition and
none in the year of disposal.
Woolf revalues another property to $2,000,000 on 31 March 20X7. Its historical cost was
$1,000,000 and accumulated depreciation on the property was $350,000.
How are these transactions reflected in other comprehensive income and profit or loss?
A
B
C
D
3.6**
Other comprehensive
income
$1,350,000 gain
$500,000 loss
$1,350,000 gain
$500,000 loss
Profit or loss
$1,510,000 profit
$1,510,000 profit
$30,000 profit
$30,000 profit
Bell made a profit of $183,000 for the year ended 30 June 20X7 and paid a dividend during
the year of $18,000. During the year the company wrote off development costs of $45,000
directly to retained earnings as a prior period adjustment and revalued a property with a
carrying amount of $60,000 to $135,000.
What was total comprehensive income for period ended 30 June 20X7?
A
B
C
D
3.7
$195,000
$240,000
$258,000
$318,000
IAS 1 Presentation of Financial Statements encourages an analysis of expenses to be
presented in the statement of profit or loss. This analysis must use a classification based on
either the nature of expense, or its function, such as:
(1)
(2)
(3)
(4)
(5)
Raw materials and consumables used
Distribution costs
Employee benefit costs
Cost of sales
Depreciation and amortisation expense
Which of the above should be disclosed in the statement profit or loss if a manufacturing
entity uses analysis based on function?
A
B
C
D
3.8**
1, 3 and 4
2 and 4
1 and 5
2, 3 and 5
DT’s final dividend for the year ended 31 October 20X5 of $150,000 was declared on 1
February 20X6 and paid in cash on 1 April 20X6. The financial statements were approved on
31 March 20X6.
Which of the following statements reflect the correct treatment of the dividend in the
financial statements of DT?
6
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
3.9
(1)
The payment settles an accrued liability in the statement of financial position as at
31 October 20X5
(2)
The dividend is shown as a deduction in the statement of profit or loss for the year
ended 31 October 20X6
(3)
The dividend is shown as an accrued liability in the statement of financial position
as at 31 October 20X6
(4)
The $150,000 dividend was shown in the notes to the financial statements at 31
October 20X5
(5)
The dividend is shown as a deduction in the statement of changes in equity for the
year ended 31 October 20X6.
A
B
C
D
1 and 2
1 and 4
3 and 5
4 and 5
Which of the following items must be disclosed in the notes to the financial statements?
(1)
(2)
(3)
(4)
Useful lives of assets or depreciation rates used
Increases in asset values as a result of revaluations in the period
Depreciation expense for the period
Reconciliation of carrying amounts of non-current assets at the beginning and end
of period
A
B
C
D
1, 2, 3 and 4
1 and 2 only
1 and 3 only
2, 3 and 4 only
(18 marks)
4
ACCOUNTING POLICIES
4.1
According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,
which of the following is a change in accounting policy that requires retrospective
application?
4.2
A
The depreciation of the production facility has been reclassified from administration
expenses to cost of sales in the current and future years
B
The depreciation method of vehicles was changed from straight line depreciation to
reducing balance
C
The provision for warranty claims was changed from 10% of sales revenue to 5%
D
Based on information that became available in the current period a provision was
made for an injury compensation claim relating to an incident in a previous year
Which of the following would require retrospective application in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors?
A
A change in method of depreciating machinery from straight line to reducing balance
B
Commencing capitalisation of borrowing costs in accordance with IAS 23
Borrowing Costs. Borrowing costs previously had been charged to profit or loss
C
A changes in method of calculating provisions for warranty claims on products sold
D
Making a provision in the current year for a legal claim that was disclosed as a
contingent liability in the previous year’s financial statements
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
7
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
4.3**
4.4
Which of the following would be classified as “a change in accounting policy” as
determined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
A
Increasing the loss allowance for trade receivables for 20X6 from 5% to 10% of
outstanding balances
B
Changing the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation
C
Changing the valuation method of inventory from first-in first-out to weighted
average
D
Changing the useful economic life of its motor vehicles from six years to four years
The draft 20X5 statement of financial position of Vale reported retained earnings of
$1,644,900 and net assets of $6,957,300. Following the completion of the draft 20X5
statement of financial position it was discovered that several items of inventory had been
valued at selling price at the 20X4 year end. This meant that the opening inventory value for
20X5 was overstated by $300,000. The closing inventory had been correctly valued in the
draft 20X5 statement of financial position.
If the error is corrected before the 20X5 financial statements are finalised, what
amounts will be reported for retained earnings and net assets in the statement of
financial position?
A
B
C
D
4.5**
Retained earnings
$1,644,900
$1,644,900
$1,944,900
$1,944,900
Net assets
$6,657,300
$6,957,300
$6,657,300
$6,957,300
In 20X3 Falkirk identified that a fraud had been perpetrated by an employee who had been
making payments to himself amounting to $6,200,000. $1,400,000 million were payments
made in 20X3, $1,800,000 in 20X2 and $3,000,000 prior to 20X2; the double entry to the
payments had created false assets.
What is the amount of fraud to be recognised as an expense in the statement of profit or
loss for 20X3?
A
B
C
D
4.6
$nil
$1,400,000
$3,200,000
$6,200,000
Which of the following is a change of accounting policy under IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors?
A
Classifying commission earned as revenue in the statement of profit or loss, having
previously classified it as other operating income
B
Switching to purchasing plant using leases from a previous policy of purchasing
plant for cash
C
Changing the value of a subsidiary’s inventory in line with the group policy for
inventory valuation when preparing the consolidated financial statements
D
Revising the remaining useful life of a depreciable asset
(12 marks)
8
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
5
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
5.1
IFRS 15 Revenue from Contracts with Customers identifies five steps in the core principle of
recognising revenue.
Which of the following is NOT a step in the recognition process?
A
B
C
D
5.2
Identify the performance obligations in a contract
Allocate the transaction price to the performance obligations in the contract
Identify the contract with a customer
Assess whether significant risks and rewards of ownership have been transferred to
the buyer
OC signed a contract to provide office cleaning services for a client for a period of one year
from 1 October 20X8 for a fee of $500 per month.
The contract required the client to make one payment to OC covering all 12 months’ service
in advance. The contract cost to OC was estimated at $300 per month for wages, materials
and administration costs.
OC received $6,000 on 1 October 20X8.
What profit or loss on the contract should OC recognise in its statement of profit or loss
for the year ended 31 March 20X9?
A
B
C
D
5.3
$600 loss
$1,200 profit
$2,400 profit
$4,200 profit
LP received an order to supply 10,000 units of product A every month for two years. The
customer had negotiated a low price of $200 per 1,000 units and agreed to pay $12,000 in
advance every 6 months.
The customer made the first payment on 1 July 20X2 and LP supplied the goods each month
from 1 July 20X2.
LP’s year end is 30 September.
In addition to recording the cash received, what entries should LP record, in its
financial statements for the year ended 30 September 20X2, in accordance with IFRS 15
Revenue from Contracts with Customers?
A
B
C
D
5.4
Include $6,000 in revenue for the year and create a trade receivable for $36,000
Include $6,000 in revenue for the year and create a current liability for $6,000
Include $12,000 in revenue for the year and create a trade receivable for $36,000
Include $12,000 in revenue for the year but do not create a trade receivable or
current liability
On 31 March, DT received an order from a new customer, XX, for products with a sales value
of $900,000. XX enclosed a deposit with the order of $90,000.
On 31 March, DT had not obtained credit references of XX and has not determined if it will
meet this order.
According to IFRS 15 Revenue from Contracts with Customers, how should DT record
this transaction in its financial statements for the year ended 31 March?
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9
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
5.5
5.6**
(1)
(2)
(3)
(4)
(5)
Include $900,000 as revenue for the year
Include $90,000 as revenue for the year
Do not include anything as revenue for the year
Create a trade receivable for $810,000
Create a trade payable for $90,000
A
B
C
D
1 and 4
2 and 5
3 and 4
3 and 5
Which of the following statements best describes a bill-and-hold arrangement?
A
The customer accepts the goods in advance of being billed by the seller
B
The seller bills the customer but retains possession of the goods until the customer
requires delivery
C
The customer pays for the goods in instalments and the goods are delivered to the
customer once the final instalment has been made
D
The customer has a specific period of time to inspect and approve the goods before
payment is required
Digger commenced contract X47 on 1 July 20X3. Performance obligations under the contract
are to be satisfied over time and the stage of completion is regularly assessed. Details for the
first year of the contract were as follows:
$
Amounts invoiced
2,400
Costs incurred at date of last assessment
1,800
Costs incurred since last assessment
200
Amounts received
2,100
Total contract price
4,200
Estimated costs to complete
1,200
Survey of performance completed
2,520
Digger invoices the customer immediately on receiving an assessment of the value of the
work done.
What amount should Digger include as cost of sales for the X47 contract for the year
ended 30 June 20X4, assuming revenue is based on performance completed?
A
B
C
D
5.7
$1,800,000
$1,828,000
$1,920,000
$2,000,000
Augustus is involved in a number of contracts at 30 September 20X3, which have been
assessed as contracts where the performance obligation is satisfied over a period of time. The
company calculates revenue on an output basis using the value of performance completed.
At that date the following information is available with respect to contract ZX45:
Contract price
Costs incurred to date
Estimated further costs to completion
Survey of performance completed
Amounts invoiced and paid by customer
10
$
225
115
65
125
145
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
This contract is with a new customer. Augustus required the customer to pay an up-front
deposit that is included in the amounts invoiced and paid.
What amount should be included in the statement of financial position of Augustus in
respect of contract ZX45 as at 30 September 20X3?
A
B
C
D
5.8
$nil
$5,000 liability
$5,000 asset
$20,000 liability
On 31 March 20X9 Dune entered into a contract to sell some machinery for $700,000. The
contract required Dune to buy back the goods in two-year’s time for $500,000.
How should the contract be accounted for in Dune’s financial statements?
5.9
A
Recognise $700,000 revenue and account for the costs of repurchase in two years’
time
B
Account for the transaction as a lease in accordance with IFRS 16 Leases
C
Recognise a financial liability for the repurchase price and recognise $700,000
revenue
D
Recognise a financial liability for $500,000 and recognise revenue for $200,000 for
the difference between the selling price and the repurchase price
Which of the following indicators is NOT considered when determining whether
performance obligations are satisfied at a point in time?
A
B
C
D
5.10
The customer is likely to reject delivery of the asset
The customer has the significant risks and rewards of ownership of the asset
The customer has legal title to the asset
The customer has an obligation to pay for the asset
During the month of March, Jolly Tar sells 10 units of a product for $200 each to
SandyBeach.
SandyBeach can claim a 5% prompt payment discount if the invoice is paid within 30 days.
SandyBeach has also been subject to bankruptcy rumours in the national press. Jolly Tar
estimates that there is a 20% probability that SandyBeach will not pay for the goods.
What amount of revenue will be included in Jolly Tar’s profit or loss in respect of this
transaction?
A
B
C
D
$nil
$1,600
$1,900
$2,000
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11
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
5.11
Repro, a company which sells photocopying equipment, has prepared its draft financial
statements for the year ended 30 September 20X4. It has included the following transactions
in revenue at the stated amounts below.
Which of these has been correctly included in revenue according to IFRS 15 Revenue
from Contracts with Customers?
A
Agency sales of $250,000 on which Repro is entitled to a commission
B
Sale proceeds of $20,000 for motor vehicles which were no longer required by
Repro
C
Sales of $150,000 on 30 September 20X1. The amount invoiced to and received
from the customer was $180,000, which includes $30,000 for ongoing servicing
work to be done by Repro over the next two years
D
Sales of $200,000 on 1 October 20X3 to an established customer which (with the
agreement of Repro) will be paid in full on 30 September 20X5. Repro has a cost of
capital of 10%
(22 marks)
6
INVENTORY AND BIOLOGICAL ASSETS
6.1**
At 30 September 20X1 the closing inventory of a company has been incorrectly stated at
$386,400. The following items were included in this total at cost:
(1)
1,000 items which had cost $18 each. These items were all sold in October 20X1
for $15 each, and the company incurred $800 of costs to sell the goods
(2)
Five items which had been purchased for $100 each eight years ago. These items
were sold in October 20X1 for $1,000 each, net of selling expenses
What is the carrying amount of inventory in the company’s statement of financial
position at 30 September 20X1?
A
B
C
D
6.2
$382,600
$384,200
$387,100
$400,600
The inventory value for the financial statements of Q for the year ended 31 December 20X1
was based on an inventory count on 4 January 20X2, which gave a total inventory value of
$836,200.
Between 31 December and 4 January 20X2, the following transactions were recorded:
Purchases of goods for resale
Sales revenue (gross profit margin 30%)
Faulty goods returned by Q to supplier
$
8,600
14,000
700
What is the carrying amount of inventory that should be included in the financial
statements as at 31 December 20X1?
A
B
C
D
12
$818,500
$834,300
$838,100
$853,900
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
6.3
6.4
According to IAS 2 Inventories, which of the following costs should be included in
valuing the inventories of a manufacturing company?
(1)
(2)
(3)
(4)
Carriage inwards
Carriage outwards
Depreciation of factory plant
General administrative overheads
A
B
C
D
1 and 3
1, 2 and 4
2 and 3 only
2, 3 and 4
IAS 2 Inventories defines the extent to which overheads are included in the cost of inventories
of finished goods.
Which of the following statements about the IAS 2 requirements relating to overheads
are TRUE?
6.5
6.6
(1)
Finished goods inventories may be valued on the basis of labour and materials cost
only, without including overheads
(2)
Factory management costs should be included in fixed overheads allocated to
inventories of finished goods
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Which of the following are TRUE in respect of the valuation of inventory?
(1)
The carrying amount should be as close as possible to net realisable value
(2)
The valuation of finished goods inventory must include production overheads
(3)
Production overheads included in valuing inventory should be calculated by
reference to the company’s normal level of production during the period
(4)
In assessing net realisable value, inventory items must be considered separately, or
in groups of similar items, not by taking the inventory value as a whole
A
B
C
D
1 and 2
1 and 3
2, 3 and 4
3 and 4 only
The net realisable value of inventory is defined as the actual or estimated selling price less all
costs to be incurred in marketing, selling and distribution.
Which of all the following additional items should be deducted in calculating the net
realisable value of inventory?
A
B
C
D
Trade
discounts
No
Yes
Yes
Yes
Settlement
discounts
Yes
No
Yes
Yes
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Costs to
completion
Yes
Yes
No
Yes
13
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
6.7**
6.8
Which of the following items should be included in the cost of inventory of a service
provider?
(1)
(2)
(3)
(4)
Salary of staff engaged in the service contract
Profit margin factored into the contract price
Depreciation of office computer used by staff engaged on contract
Salary of sales staff who negotiated the service contract
A
B
C
D
1 and 2
1 and 3
2 and 4
3 and 4
First-in first-out is one method allowed by IAS 2 Inventories for determining the purchase
price or cost of production of finished goods inventory.
Which of the following valuation methods is also allowed by IAS 2?
A
B
C
D
6.9
Both last-in first-out and weighted average
Only last-in first-out
Only weighted average
Neither last-in first-out nor weighted average
During the year ended 31 December 20X6 Grasmere purchased the following items for resale:
Date
March
June
Number of items
20
20
Cost price per item
$11
$13
This was a new product line and by 31 December 20X6 twenty items were left unsold. At
that date they were being sold at $12 an item and it would have cost Grasmere $10 an item to
buy further supplies. Grasmere determines cost of inventory under the first-in first-out
method.
At what amount should finished goods inventory be shown in the statement of financial
position as at 31 December 20X6?
A
B
C
D
6.10
$200
$220
$240
$260
Toulouse makes three different products. The following table shows the inventory valuation
for each of the products under different bases:
Product I
Product II
Product III
First-infirst-out
$
10
13
9
——
32
——
Last-infirst-out
$
11
15
5
——
31
——
Net realisable
value
$
12
14
7
——
33
——
At what amount should Toulouse’s inventory be stated in accordance with IAS 2
Inventories?
14
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
6.11
Which of the following is does NOT fall within the scope of IAS 41 Agriculture?
A
B
C
D
6.12
$28
$30
$31
$32
Sheep
Wool
Wine
Vines
XYZ Farm purchased 100 turkeys for $10,000 on 17 November 20X1. At the year end, 31
December 20X1, the estimated sales price of the 100 turkeys was measured at $10,500. The
following costs are expected to be incurred in respect to the sale of the turkeys:
Transportation cost
Finance cost
Income taxes related to this sale
$
700
300
1,000
What amount should be recognised for the biological assets in XYZ’s statement of
financial position as at 31 December 20X1?
A
B
C
D
6.13
Which of the following is NOT an example of agricultural activity, as defined in IAS 41
Agriculture?
A
B
C
D
6.14
$8,500
$9,800
$10,000
$10,500
Cultivating orchards
Floriculture
Fish farming
Sale of harvested crops
On 30 September 20X4, Razor’s closing inventory was counted and valued at its cost of $1
million. Some items of inventory which had cost $210,000 had been damaged in a flood (on
15 September 20X4) and are not expected to achieve their normal selling price which is
calculated to achieve a gross profit margin of 30%. The sale of these goods will be handled
by an agent who sells them at 80% of the normal selling price and charges Razor a
commission of 25%.
At what amount will the closing inventory of Razor be reported in its statement of
financial position as at 30 September 20X4?
A
B
C
D
$1 million
$790,000
$180,000
$970,000
(28 marks)
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15
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
7
IAS 16 PROPERTY, PLANT AND EQUIPMENT
7.1
On 1 January 20X1 a company purchased some plant. The invoice showed:
Cost of plant
Delivery to factory
One year warranty covering breakdown during 20X1
$
48,000
400
800
––––––
49,200
———
Modifications to the factory building costing $2,200 were necessary to install the plant.
What amount should be capitalised for the plant in the company’s records in
accordance with IAS 16 Property, Plant and Equipment?
A
B
C
D
7.2
$48,000
$48,400
$50,600
$51,400
At 31 December 20X6 Cutie owned a building that had cost $800,000 on 1 January 20W7. It
was being depreciated at 2% per year.
On 31 December 20X6 a revaluation to $1,000,000 was recognised. At this date the building
had a remaining useful life of 40 years.
Which of the following pairs of figures correctly reflects the effects of the revaluation?
A
B
C
D
7.3**
7.4
Depreciation charge for
year ending 31 December 20X7
$
25,000
25,000
20,000
20,000
Revaluation surplus
as at 31 December 20X6
$
200,000
360,000
200,000
360,000
Which of the following statements are correct?
(1)
All non-current assets must be depreciated
(2)
If goodwill is revalued, the surplus appears in the statement of changes in equity
(3)
If a tangible non-current asset is revalued, all tangible assets of the same class
should be revalued
(4)
In a company’s published statement of financial position, tangible assets and
intangible assets must be shown separately
A
B
C
D
1 and 2
1 and 4
2 and 3
3 and 4
ABC has revalued its property for the first time this year. Management proposes to expense
the depreciation based on the original historical cost to profit or loss and offset the additional
depreciation based on the revalued amount against the revaluation surplus.
Under IAS 16 Property, Plant and Equipment is this policy permitted?
16
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
7.5
Yes, it is required
Yes, it is allowed but not required
Yes, it is allowed only in prescribed circumstances
No it is not allowed
Thames depreciates non-current assets at 20% per annum on a reducing balance basis. All
non-current assets were purchased on 1 April 20X3. The carrying amount on 31 March 20X6
is $20,000.
What is the accumulated depreciation (to the nearest $000) as at 31 March 20X6?
A
B
C
D
7.6
$15,000
$19,000
$30,000
$39,000
The following information relates to the disposal of two machines by Halwell:
Cost
Selling price
Profit/(loss) on sale
Machine 1
$
120,000
90,000
30,000
Machine 2
$
100,000
40,000
(20,000)
What was the total accumulated depreciation on both machines sold?
A
B
C
D
7.7
$80,000
$100,000
$120,000
$140,000
Lydd purchased production machinery costing $100,000, having an estimated useful life of
twenty years and a residual value of $2,000. After being in use for six years the remaining
useful life of the machinery is revised and estimated to be twenty-five years, with an
unchanged residual value.
What is the annual depreciation charge on the machinery in year 7?
A
B
C
D
7.8
$3,226
$3,161
$2,824
$2,744
Upton makes up its financial statements to 31 December each year. On 1 January 20X0 it
bought a machine with a useful life of 10 years for $200,000 and started to depreciate it at
15% per annum on the reducing balance basis. On 31 December 20X3 the accumulated
depreciation was $95,600 and the carrying amount $104,400. During 20X4 the company
changed the basis of depreciation to straight line.
Which of the following is the correct accounting treatments in the financial statements
of Upton for the year ended 31 December 20X4?
A
B
C
D
Depreciation charge ($10,440)
Depreciation charge ($17,400)
Depreciation charge ($17,400)
Depreciation charge ($20,000)
No prior period adjustment
No prior period adjustment
Prior period adjustment $15,600
Extraordinary item $15,600
(16 marks)
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17
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
8
IAS 23 BORROWING COSTS
8.1
Under what conditions can an entity capitalise borrowing costs?
8.2
8.3
A
The borrowing costs are incurred for purchases of inventory items
B
The borrowing costs are directly attributable to the acquisition, construction, or
production of a qualifying asset
C
The borrowing costs are directly attributable to the acquisition, construction, or
production of routinely manufactured assets
D
The borrowing costs are incurred for purchases of property, plant and equipment
Which of the following would qualify as a borrowing cost as defined in IAS 23
Borrowing Costs?
(1)
(2)
(3)
(4)
Premium on redemption of preference share capital
Discount on the issue of convertible debt
Interest expense calculated using the effective interest rate
Finance charges related to right-of-use leases
A
B
C
D
1, 2 and 3 only
2, 3 and 4 only
1 and 4 only
1, 2, 3 and 4
For which of the following categories of funds used to construct a factory, that is a
qualifying asset, can borrowing costs NOT be capitalised?
A
B
C
D
8.4
Which qualitative characteristic is applied by IAS 23 Borrowing Costs to the
capitalisation of borrowing costs?
A
B
C
D
8.5
Funds borrowed specifically to construct the factory
Funds borrowed in advance of expenditure on the factory
General borrowed funds used to finance the building of the factory
Funds borrowed that have been applied to the construction of a new office
Consistency
Timeliness
Materiality
Understandability
QI is incurring expenditure on project 275 which meets the definition of a qualifying asset, in
accordance with IAS 23 Borrowing Costs. The company has the following debt components:
(1)
(2)
(3)
(4)
6% $100,000 debt used specifically to finance project 274
7% $500,000 preference share capital
10% $80,000 short-term loan
4% $200,000 convertible debt
What capitalisation rate would QI apply to expenditure incurred on project 275?
A
B
C
D
7%
6.75%
6.54%
4%
(10 marks)
18
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
9
GOVERNMENT GRANTS
9.1
Which of the following accounting policies for grants related to assets is allowed under
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance?
9.2
(1)
(2)
(3)
Deduct from the cost of related asset in the statement of financial position
Include in liabilities in the statement of financial position
Credit profit and loss immediately with cash received
A
B
C
D
1, 2 and 3
1 and 2 only
1 and 3 only
2 and 3 only
Under IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance, what is the correct term for a loan which the lender undertakes to waive
repayment of under certain conditions?
A
B
C
D
9.3
9.4
A forgivable loan
A non-payable loan
A non-recourse loan
A recourse loan
Under IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance, how are government grants related to depreciable assets treated in the profit
or loss?
A
The government grant is recognised over the period and in the proportions in which
depreciation expense on those assets is recognised
B
The government grant must be recognised in the year in which the depreciable asset
is received and the following year only
C
The government grant must be recognised over a period of five years
D
The government grant must be recognised over a period of no more than 10 years
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance defines
government assistance as an action by government designed to provide an economic benefit
specific to an entity qualifying under certain criteria.
Which of the following is an example of government assistance?
A
B
C
D
9.5
Free technical or marketing advice
Provision of infrastructure by improvement to the general transportation network
Supply of improved facilities such as irrigation
A cash grant to buy a new item of plant
On 1 January 20X1 Emex received a government grant of $100,000 to assist in the purchase
of new machinery costing $1,000,000 with a useful life of five years. The grant is repayable
on a sliding scale if the machine is sold within five years; that is the full amount if sold in the
first year, 80% if sold in the second year and so on. The management of Emex intends to use
the machine for five years.
The accounting policy is to offset the grant against the cost of the asset.
What will be the depreciation expense for the year ended 31 December 20X2 and what
provision will be required for the repayment of the grant as at 31 December 20X2?
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
19
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A
B
C
D
Depreciation charge
$000
180
180
200
200
Provision
$000
60
Nil
60
Nil
(10 marks)
10
IAS 40 INVESTMENT PROPERTY
10.1
Which of the following is investment property according to IAS 40 Investment Property?
A
B
C
D
10.2**
10.3
Which of the following are examples of investment property in accordance with IAS 40
Investment Property?
(1)
(2)
(3)
(4)
Property held for long-term capital appreciation
Owner-occupied property
Land held for an undetermined future use
Property occupied by employees
A
B
C
D
1 and 2
1 and 3
2 and 4
3 and 4
Which of the following is an investment property under IAS 40 Investment Property?
A
B
C
D
10.4
10.5**
A building that is vacant but held to be rented to third parties
Property under construction on behalf of third parties
Property that is available for sale in the ordinary course of business
Owner-occupied property
Under IAS 40 Investment Property, which of the following transfers would result in a
change from cost measurement to fair value measurement?
(1)
(2)
(3)
A transfer from investment property to owner-occupied property
A transfer from inventories to property available for rental
A transfer from investment property to inventories, when the property is intended
for sale
A
B
C
D
1 only
2 only
1 and 2 only
1, 2 and 3
There are many reasons why businesses acquire assets:
(1)
(2)
(3)
(4)
(5)
20
An investment in land and or buildings other than leased property
A property owned and occupied by an entity for its own purposes
A property which is held to earn rentals or for capital appreciation
An investment in land and or buildings whether let to third parties or occupied by an
entity within a group
For administrative purposes
For use in the supply of services
For use in the production of goods
To earn rental income
For capital appreciation
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
For what purpose is investment property held according to IAS 40 Investment Property?
A
B
C
D
1, 2 and 3
2, 3 and 4
1, 4 and 4
4 and 5 only
(10 marks)
11
IAS 38 INTANGIBLE ASSETS
11.1
Which of the following could be classified as deferred development expenditure in M’s
statement of financial position as at 31 March 20X1 according to IAS 38 Intangible Assets?
11.2
11.3
A
$120,000 spent on developing a prototype and testing a new type of propulsion
system for trains. The project needs further work on it as the propulsion system is
currently not viable
B
A payment of $50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques
C
$35,000 spent on consumer testing a new type of electric bicycle. The project is
near completion and the product will probably be launched in the next 12 months.
M is not yet certain that there is going to be a viable market for the finished product
D
$65,000 spent on developing a special type of new packaging for a new energy
efficient light bulb. The packaging is expected to be used by M for many years and
is expected to reduce M’s distribution costs by $35,000 a year
Which of the following would most likely result in the recognition of an asset in KJH’s
statement of financial position at 31 January 20X2?
A
KJH spent $50,000 on an advertising campaign in January 20X2. KJH expects the
advertising to generate additional sales of $100,000 over the period February to
April 20X2
B
KJH is taking legal action against a contractor for faulty work. Advice from its
legal team is that it is probable that KJH may receive $250,000 in settlement of its
claim within the next 12 months
C
KJH purchased the copyright and film rights to the next book to be written by a
famous author for $75,000 on 1 March 20X1. A first manuscript has already been
received and advance orders suggest that the book will be a best seller
D
KJH has developed a new brand name internally. The directors value the brand
name at $150,000
In accordance with IAS 38 Intangible Assets, which of the following statements is
correct?
A
Capitalised development expenditure must be amortised over a period not exceeding
five years
B
If all the conditions specified in IAS 38 are met, development expenditure may be
capitalised if the directors decide to do so
C
Capitalised development costs are shown in the statement of financial position
under the heading of Intangible Assets
D
Amortisation of capitalised development expenditure will appear as an item in a
company’s statement of changes in equity
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21
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
11.4
Which of the following is NOT an intangible asset?
A
B
C
D
11.5
Which of the following may be included in a company’s statement of financial position
as an intangible asset under IAS 38 Intangible Assets?
A
B
C
D
11.6
Patents
Development costs
Short leaseholds
Licences
Payment on account of patents
Expenditure on completed research
Start-up costs
Internally-generated goodwill
Henna was incorporated on 1 January 20X6. At 31 December 20X6 the following costs had
been incurred:
$
(1)
Legal fees incurred in establishing the entity
80,000
(2)
Customer lists purchased from a company that has gone out of business 100,000
(3)
Goodwill created by the company
80,000
(4)
Patents purchased for valuable consideration
70,000
(5)
Costs incurred by the company in developing patents
60,000
What is the total cost of intangible assets to be recognised in the statement of financial
position of Henna at 31 December 20X6 in accordance with IAS 38 Intangible Assets?
A
B
C
D
11.7
Which of the following conditions would preclude any part of the development
expenditure to which it relates from being capitalised?
A
B
C
D
11.8
$310,000
$250,000
$230,000
$170,000
The development is incomplete
The benefits flowing from the completed development are expected to exceed its cost
Funds are unlikely to be available to complete the development
The development is expected to give rise to more than one product
On 1 October 20X1 Hyena paid $500,000 deposit towards the cost of a laboratory for research
and development. On 31 December 20X1, Hyena’s financial year end, the laboratory had still
not been completed.
Where should the payment of $500,000 appear in Hyena’s statement of financial
position as at 31 December 20X1?
A
B
C
D
22
Development costs under intangible assets
Payments on account under intangible assets
Payments on account under tangible non-current assets
Payments on account under current assets
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
11.9
RD’s figures for research and development are as follows:
Research
Development expenditure in the year
Brought forward deferred development expenditure
Written off deferred expenditure in the year
$267,000
$215,000
$305,000
**
** To be calculated.
At 31 December 20X4 the balance carried forward for development expenditure was
$375,000.
What amount will RD charge to profit or loss for research and development for 20X4?
A
B
C
D
$267,000
$412,000
$482,000
$787,000
(18 marks)
12
NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
12.1
PQ has ceased operations overseas in the current accounting period. This resulted in the
closure of a number of small retail outlets.
Which of the following costs would be excluded from the loss on discontinued
operations?
A
B
C
D
12.2**
Loss on the disposal of the retail outlets
Redundancy costs for overseas staff
Cost of restructuring head office as a result of closing the overseas operations
Trading losses of the overseas retail outlets up to the date of closure
BN has an asset that was classified as held for sale at 31 March 20X2. The asset had a
carrying amount of $900 and a fair value of $800. The cost of disposal was estimated to be
$50.
In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, at what amount should the asset be stated in BN’s statement of financial
position as at 31 March 20X2?
A
B
C
D
12.3
$750
$800
$850
$900
During the year to 30 April 20X9 two companies carried out major re-organisations of their
activities. The re-organisations were as follows:
Maynard closed down its manufacturing division on 1 January 20X9. This division accounted
for 30% of Maynard’s revenue, Maynard will now focus all of their efforts on its retail division.
Grant purchased a group of companies in February 20X9. One of the subsidiaries within the
group, Lytton, did not meet the profile required by Grant and therefore the intention of Grant
is to sell this subsidiary as soon as possible, and no later than 30 September 20X9.
Which of these re-organisations would be classified as discontinued operations for the
year ended 30 April 20X9?
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23
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A
B
C
D
12.4
Maynard only
Lytton only
Both Maynard and Lytton
Neither Maynard or Lytton
On 1 January 20X0 Beech purchased an asset for $500,000, the asset had a useful life of eight
years and nil residual value.
On 1 July 20X3 the asset was classified as held for sale in accordance with IFRS 5 Noncurrent Assets Held for Sale and Discontinuing Activities. On that date the fair value less cost
of disposing of the asset were assessed as $254,000.
What is the total expense to be recognised in respect of this asset in the statement of
profit or loss for 20X3?
A
B
C
D
12.5
$31,250
$56,650
$58,500
$62,500
In order for an asset to be classified as held for sale in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinuing Activities the sale of the asset must be highly
probable.
Which TWO of the following are indicators that the sale of the asset is highly probable?
12.6
(1)
The asset has been advertised for sale in a trade journal
(2)
A contract with a buyer has been signed
(3)
The market value of similar assets is $50,000 and management hopes to sell the
asset for a profit of $30,000
(4)
Necessary repairs to the asset will be carried out when management has signed a
contract for the sale
A
B
C
D
1 and 2
2 and 3
3 and 4
1 and 4
As at 30 September 20X3 Dune’s property in its statement of financial position was:
Property at cost (useful life 15 years)
Accumulated depreciation
$45 million
$6 million
On 1 April 20X4, Dune decided to sell the property. The property is being marketed by a
property agent at a price of $42 million, which was considered a reasonably achievable price
at that date. The expected costs to sell have been agreed at $1 million. Recent market
transactions suggest that actual selling prices achieved for this type of property in the current
market conditions are 10% less than the price at which they are marketed.
At 30 September 20X4 the property has not been sold.
At what amount should the property be reported in Dune’s statement of financial
position as at 30 September 20X4?
24
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
$36 million
$37·5 million
$36·8 million
$42 million
(12 marks)
13
IAS 36 IMPAIRMENT OF ASSETS
13.1
The following information relates to three assets held by a company:
Asset
A
$000
100
80
90
Carrying amount
Fair value less costs of disposal
Value in use
B
$000
50
60
70
C
$000
40
35
30
What is the total impairment loss?
A
B
C
D
13.2
Nil
$10,000
$15,000
$20,000
Dodgy has a property which is currently stated at a revalued carrying amount of $253,000.
Due to a slump in property prices the value of the property is currently only $180,000. The
historical cost carrying amount of the property is $207,000.
How should the above impairment in value be reflected in the financial statements in
accordance with IAS 36 Impairment of Assets?
A
B
C
D
13.3
Profit or loss
account
Dr $73,000
Dr $27,000
Dr $73,000
–
Other comprehensive
income
Cr $46,000
Dr $46,000
–
Dr $73,000
Noddy has an item of equipment included in its statement of financial position at a carrying
amount of $2,750. The asset had been revalued several years ago. If the asset had not been
revalued its carrying amount would only have been $1,250.
An impairment review of the asset has been undertaken and it is estimated that the
recoverable amount of the asset is only $1,000.
Noddy has not made any annual transfers from the revaluation surplus to retained earnings.
How much of the impairment loss should be charged to other comprehensive income in
accordance with IAS 36 Impairment of Assets?
A
B
C
D
$1,750
$1,500
Nil
$250
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25
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
13.4**
In 20X3 Angry revalued at $360,000 a plot of land which had been purchased in 20X1 for
$300,000 and recognised a revaluation gain of $60,000.
In 20X4 Angry revalued to $130,000 a second plot of land which had been purchased for
$100,000 in 20X2 and recognised a further revaluation gain of $30,000.
In 20X5 Angry wishes to write down the value of the first plot of land from $360,000 to
$260,000 because of an impairment in its value due to changes in market prices.
There have been no other movements on the revaluation surplus.
What amounts should be recognised in the financial statements for 20X5 for the
impairment loss?
A
B
C
D
13.5
Profit or loss
$100,000
$40,000
$10,000
Nil
Other Comprehensive Income
Nil
$60,000
$90,000
$100,000
The following measures relate to a non-current asset:
(1)
(2)
(3)
(4)
Carrying amount
Net realisable value
Value in use
Replacement cost
$20,000
$18,000
$22,000
$50,000
What is the recoverable amount of the asset?
A
B
C
D
13.6
$18,000
$20,000
$22,000
$50,000
The net assets of Fyngle, a cash generating unit, are:
Property, plant and equipment
Allocated goodwill
Product patent
Net current assets (at net realisable value)
$
200,000
50,000
20,000
30,000
–––––––
300,000
–––––––
As a result of adverse publicity, Fyngle has a recoverable amount of only $200,000.
What would be the carrying amount of Fyngle’s property, plant and equipment after
the allocation of the impairment loss?
A
B
C
D
26
$154,545
$170,000
$160,000
$133,333
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
13.7
Which of the following is NOT an indicator of impairment under IAS 36 Impairment of
Assets?
A
Advances in the technological environment in which an asset is employed have an
adverse impact on its future use
B
An increase in interest rates which increases the discount rate an entity uses
C
The carrying amount of an entity’s net assets is lower than the entity’s number of
shares in issue multiplied by its share price
D
The estimated net realisable value of inventory has been reduced due to fire damage
although this value is greater than its carrying amount
(14 marks)
14
IFRS 16 LEASES
14.1
On 1 January 20X7 Melon leased an asset under the following terms:
Cash price
Deposit
Interest (9% for two years)
Balance
$
18,000
(6,000)
———
12,000
2,160
———
14,160
———
The balance is payable in two annual instalments commencing 31 December 20X7.
The rate of interest implicit in the contract is approximately 12%.
Applying the requirements of IFRS 16 Leases what is the finance charge to profit or loss
for the year ended 31 December 20X7?
A
B
C
D
14.2
$1,080
$1,440
$1,620
$2,160
IFRS 16 Leases requires a lessee to capitalise a right-of-use asset initially at cost.
Which of the following amounts will be included in the initial cost?
(1)
(2)
(3)
(4)
The amount of the lease liability
Total interest expense over the period of the lease
Initial direct costs incurred by the lessor
Estimated costs of dismantling the asset at the end of the lease term
A
B
C
D
1 and 2
1 and 4
2 and 3
3 and 4
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27
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
14.3
Alpha enters into a lease with Omega of an aircraft which had a fair value of $240,000 at the
inception of the lease. The lease terms require Alpha to pay 10 annual rentals of $36,000 in
arrears. Alpha is wholly responsible for the maintenance of the aircraft which has a useful
life of approximately 15 years.
The present value of the 10 annual rentals of $36,000 discounted at the interest rate implicit in
the lease is $220,000.
Applying the requirements of IFRS 16 Leases to this agreement what is the increase in
Alpha’s non-current assets?
A
B
C
D
14.4
Nil
$220,000
$240,000
$360,000
Acor leases a new machine. The interest rate implicit in the lease is 13% per annum. The
initial amount recognised for the right-of-use asset is $1,750,000. The lease is for four years
and Acor is required to make four annual payments of $520,000, with the first payment due
on commencement of the lease agreement.
Acor’s policy is to depreciate similar machinery over five years on the straight line basis.
What is the correct total charge to profit or loss for the first year of the lease?
A
B
C
D
14.5
$509,900
$577,500
$597,400
$665,000
Z entered into a lease agreement on 1 November 20X2. The lease was for five years, the
initial amount recognised for the asset was $45,000 and the interest rate implicit in the lease
was 7%. The annual payment was $10,975 in arrears.
What is the non-current lease liability as at 31 October 20X3?
A
B
C
D
14.6
$27,212
$28,802
$29,350
$37,175
During the year ended 30 September 20X4 Hyper entered into two lease transactions:
On 1 October 20X3, a payment of $90,000 being the first of five equal annual payments of a
lease for an item of plant. The lease has an implicit interest rate of 10% and the leased asset
was initially measured at $340,000.
On 1 January 20X4, a payment of $18,000 for an eight month lease of an item of excavation
equipment.
What amount in total would be charged to Hyper’s statement of profit or loss for the
year ended 30 September 20X4 in respect of the above transactions?
A
B
C
D
$108,000
$111,000
$106,500
$115,500
(12 marks)
28
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
15
IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
15.1
TY is the main contractor employing sub-contractors to assist it when required.
TY has recently completed a contract replacing a roof on the local school. Despite this, the
roof has been leaking and some sections are now unsafe. The school is suing TY for $20,000
to repair the roof.
TY used a sub-contractor to install the roof and regards the sub-contractor’s work as faulty.
TY has raised a court action against the sub-contractor claiming the cost of the school’s action
plus legal fees, a total of $22,000.
TY has been informed by legal advisers that it will probably lose the case brought against it
by the school and will probably win the case against the sub-contractor.
Which of the following is the correct treatment for the above events in TY’s financial
statements?
15.2
A
Provide for the $20,000 liability and disregard the case against the sub-contractor
B
Provide for the $20,000 liability and disclose the probable receipt of cash from the
case against the sub-contractor as a note
C
Make no provision but disclose the $20,000 liability as a note
D
Provide for the $20,000 liability and recognise the probable receipt of cash from the
case against the sub-contractor as a current asset
MN obtained a government licence to operate a mine from 1 April 20X1. The licence
requires that at the end of the mine’s useful life, all buildings must be removed from the site
and the site landscaped. MN estimates that the cost of this decommissioning work will be
$1,000,000 in 10 years’ time using a discount factor of 8%, a 10 year discount factor at 8% is
0.463.
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets what is the
provision which MN should recognise in its statement of financial position as at 31
March 20X2?
A
B
C
D
15.3
$100,000
$463,000
$500,000
$1,000,000
Which of the following statements about provisions, contingencies and events after the
reporting period is correct?
A
A company expecting future operating losses should make provision for those
losses as soon as it becomes probable that they will be incurred
B
Details of all adjusting events after the reporting period must be disclosed by note in
a company’s financial statements
C
A contingent asset must be recognised as an asset in the statement of financial
position if it is probable that it will arise
D
Contingent liabilities must be treated as actual liabilities and provided for when it is
probable that they will arise, if they can be measured with reliability
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29
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
15.4
15.5
Which of the following statements about contingent assets and contingent liabilities are
TRUE?
(1)
A contingent asset should be disclosed by note if an inflow of economic benefits is
probable
(2)
A contingent liability should be disclosed by note if it is probable that a transfer of
economic benefits to settle it will be required, with no provision being made
(3)
No disclosure is required for a contingent liability if it is less than probable that a
transfer of economic benefits to settle it will be required
A
B
C
D
1
2 only
3 only
2 and 3
IAS 37 Provisions, Contingent Liabilities and Contingent Assets deals with accounting for
contingencies. An entity has a present obligation that probably requires the outflow of
economic resources and a contingent asset where the inflow of economic benefits is probable.
How should the entity treat the present obligation and contingent asset?
A
B
C
D
15.6
Present obligation
Provided for
Provided for
Disclosed, but not provided for
Disclosed, but not provided for
Contingent asset
Disclosed
Not disclosed
Disclosed
Not disclosed
Porter is finalising its financial statements for the year ended 30 September 20X3.
A former employee of Porter has initiated legal action for damages against the company after
being summarily dismissed in October 20X3. Porter ’s legal advisors feel that the employee
will probably win the case and have given the company a reasonably accurate estimate of the
damages which would be awarded. Porter has not decided whether to contest the case.
What is the correct classification of the above event in the financial statements of Porter
for the year ended 30 September 20X3?
A
B
C
D
15.7**
30
A non-adjusting event
An adjusting event
A contingent liability disclosed by way of note
A provision
Tynan’s year end is 30 September 20X4 and the following potential liabilities have been
identified:
(1)
The signing of a non-cancellable contract in September 20X4 to supply goods in the
following year on which, due to a pricing error, a loss will be made
(2)
The cost of a reorganisation which was approved by the board in August 20X4 but
has not yet been implemented, communicated to interested parties or announced
publicly
(3)
An amount of deferred tax relating to the gain on the revaluation of a property
during the current year. Tynan has no intention of selling the property in the
foreseeable future
(4)
The balance on the warranty provision which relates to products for which there are
no outstanding claims and whose warranties had expired by 30 September 20X4
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Which of the above should Tynan recognise as liabilities as at 30 September 20X4?
A
B
C
D
15.8
2 and 4
1 and 2
1 and 3
3 and 4
On 1 October 20X3, Xplorer commenced drilling for oil from an undersea oilfield. The
extraction of oil causes damage to the seabed which has a restorative cost (ignore discounting)
of $10,000 per million barrels of oil extracted. Xplorer extracted 250 million barrels of oil in
the year ended 30 September 20X4.
Xplorer is also required to dismantle the drilling equipment at the end of its five-year licence.
This has an estimated cost of $30 million on 30 September 20X8. Xplorer’s cost of capital is
8% per annum and $1 has a present value of 68 cents in five years’ time.
What is the total provision (extraction plus dismantling) which Xplorer would report in
its statement of financial position as at 30 September 20X4 in respect of its oil
operations?
A
B
C
D
$34,900,000
$24,532,000
$22,900,000
$4,132,000
(16 marks)
16
IAS 10 EVENTS AFTER THE REPORTING PERIOD
16.1
WDC’s year end is 30 September 20X1.
Which of the following should be classified by WDC as a non-adjusting event according
to IAS 10 Events after the Reporting Period?
A
WDC was notified on 5 November 20X1 that one of its customers was insolvent
and was unlikely to repay any of its debts. The balance outstanding at 30
September 20X1 was $42,000
B
On 30 September WDC had an outstanding court action against it. WDC had made
a provision in its financial statements for the year ended 30 September 20X1 for
damages awarded against it of $22,000. On 29 October 20X1 the court awarded
damages of $18,000
C
On 5 October 20X1 a serious fire occurred in WDC’s main production centre and
severely damaged the production facility
D
The year end inventory balance included $50,000 of goods from a discontinued
product line. On 1 November 20X1 these goods were sold for a net total of $20,000
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31
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
16.2
IAS 10 Events after the Reporting Period distinguishes between adjusting and non-adjusting
events.
Which of the following gives rise to an adjusting event?
16.3
A
A dispute with workers caused all production to cease six weeks after the year end
B
A month after the year end the directors decided to cease production of one of three
product lines and to close the production facility
C
One month after the year end a court awarded damages of $50,000 to one of the
reporting entity’s customers. The entity had expected to lose the case and made a
provision of $30,000 at the year end
D
Three weeks after the year end a fire destroyed the reporting entity’s main
warehouse facility and most of its inventory
The draft financial statements of Think Co are under consideration. The accounting treatment
of the following material events after the reporting period needs to be determined:
(1)
The bankruptcy of a major customer, with a substantial debt outstanding at the end
of the reporting period
(2)
A fire destroying some of the company’s inventory (the company’s going concern
status is not affected)
(3)
An issue of shares to finance expansion
(4)
Sale for less than cost of some inventory held at the end of the reporting period
According to IAS 10 Events after the Reporting Period, which of the above events require
an adjustment to the figures in the draft financial statements?
A
B
C
D
16.4**
16.5
Which of the following events between the end of the reporting period and the date the
financial statements are authorised for issue must be adjusted in the financial
statements?
(1)
(2)
(3)
(4)
The sale of inventory with a carrying amount of $96,000 for $74,000
The discovery of a fraud affecting the previous three years’ financial statements
The announcement of changes in tax rates
The announcement of a restructuring involving closure of a major business segment
A
B
C
D
1 and 2
2 and 4
3 and 4
1 and 3
Which of the following events occurring after the year end is classified as a nonadjusting event in accordance with IAS 10 Events after the Reporting Period?
A
B
C
D
32
1 and 4
1, 2 and 3
2 and 3 only
2 and 4
A property valuation which provides evidence of a permanent diminution in value
The renegotiation of amounts owing by credit customers
The determination of the amount of bonus payments to be made to employees
Government announcing a change in tax rates
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
16.6
The financial statements of an entity for the year ended 31 March 20X4 were approved by the
directors on 31 August 20X4.
Which of the following would be classified as an adjusting event in accordance with IAS
10 Events after the Reporting Period/
A
A reorganisation of the entity proposed by a director on 31 January 20X4 was
agreed by the Board on 10 July 20X4
B
A strike by the workforce which started on 1 May 20X4 stopped all production for
10 weeks before working terms and conditions were settled
C
An insurance claim for damage caused by a fire in a warehouse on 1 January 20X4
for $2.5 million was settled with a receipt of $1.5 million on 1 June 20X4
D
On 3 September 20X4 the entity sold some inventory for $100,000 which had a
carrying amount at 31 March 20X4 of $122,000
(12 marks)
17
IAS 12 INCOME TAXES
17.1**
At 1 October 20X1 DX had the following balances in respect of property, plant and
equipment:
$
Cost
$220,000
Tax written down value
$82,500
Statement of financial position: Carrying amount
$132,000
DX depreciates all property, plant and equipment over five years using the straight line
method and no residual value. All assets were less than five years old at 1 October 20X1. No
assets were purchased or sold during the year ended 30 September 20X2.
The local tax regime allows tax depreciation of 50% on additions to property, plant and
equipment in the accounting period in which they are purchased. In subsequent accounting
periods, tax depreciation of 25% per year of the tax written down value is allowed. Income
tax on profits is at a rate of 25%.
What is the amount for deferred tax in DX’s statement of financial position as at 30
September 20X2 in accordance with IAS 12 Income Taxes?
A
B
C
D
17.2
$5,843
$6,531
$12,375
$23,375
DF purchased its only item of plant on 1 October 20X1 for $200,000.
depreciation on a straight line basis over five years.
DF charges
Tax depreciation is allowed as follows:

50% of additions to property, plant and equipment in the accounting period in which
they are recorded;

25% per year of the written down value in subsequent accounting periods except
that in which the asset is disposed of.
Income tax on profits is at a rate of 25%.
What is the amount for deferred tax in DM’s statement of financial position as at 30
September 20X3, in accordance with IAS 12 Income Taxes?
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33
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A
B
C
D
17.3
$3,750
$11,250
$18,750
$45,000
The following information relating to taxation appears in the records of Stapley:
Balance on income tax account on 1 January 20X2
Income tax paid in 20X2 in full settlement for the year
ended 31 December 20X1
Estimated income tax for the year ended 31 December 20X2
$
187,500
194,300
137,600
What is the current tax liability to be included in Stapley’s statement of financial
position as at 31 December 20X2?
A
B
C
D
17.4
$194,300
$144,400
$137,600
$130,800
DZ recognised a tax liability of $290,000 in its financial statements for the year ended 30
September 20X5. This was subsequently agreed with and paid to the tax authorities as
$280,000 on 1 March 20X6. The directors of DZ estimate that the tax due on the profits for
the year to 30 September 20X6 will be $320,000. DZ has no deferred tax liability.
What is DZ’s profit or loss tax charge for the year ended 30 September 20X6?
A
B
C
D
17.5
$310,000
$320,000
$330,000
$600,000
At 30 April 20X3 the non-current assets of Shades have a carrying amount of $365,700 and a
tax written down value of $220,000. The balance brought forward on the deferred tax
account at 1 May 20X2 was $33,000. The tax rate is 25%.
What is the balance on the deferred tax account at 30 April 20X3?
A
B
C
D
$33,000
$36,425
$55,000
$91,425
(10 marks)
18
FINANCIAL INSTRUMENTS
18.1
TS purchased 100,000 of its own equity shares in the market and classified them as treasury
shares. At the end of the accounting period TS still held the treasury shares.
Which of the following is the correct presentation of the treasury shares in TS’s closing
statement of financial position in accordance with IAS 32 Financial Instruments:
Presentation?
A
B
C
D
34
As a current asset investment
As a non-current liability
As a non-current asset
As a deduction from equity
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
18.2**
IAS 32 Financial Instruments: Presentation classifies issued shares as either equity
instruments or financial liabilities. An entity has the following categories of funding on its
statement of financial position:
(1)
A preference share that is redeemable for cash at a 10% premium in five years’ time
(2)
An equity share which is not redeemable and has no restrictions on receiving
dividends
(3)
A loan note that is redeemable at par in seven years’ time
(4)
An irredeemable loan note that pays interest at 7% a year
Applying IAS 32, how would each of the above be classified in the statement of financial
position?
A
B
C
D
18.3
18.4
18.5
As an equity
instrument
1 and 2 only
2 and 3 only
2 only
1, 2 and 3
As a financial
liability
3 and 4 only
1 and 4 only
1, 3 and 4
4 only
How should convertible debt be classified in accordance with IAS 32 Financial
Instruments: Presentation?
A
As either a liability or equity based on an evaluation of the substance of the
contractual arrangement
B
As separate liability and equity components , basing the liability element on the
present value of future cash flows
C
As equity in its entirety, on the presumption that all options to convert the debt into
equity will be exercised in the future
D
As a liability in its entirety, until it is converted into equity
How should the proceeds from issuing a compound instrument be allocated between
liability and equity components in accordance with IAS 32 Financial Instruments:
Presentation?
A
The liability component is measured at fair value and the remainder is allocated to
the equity component
B
The equity component is measured at fair value and the remainder is allocated to the
liability component
C
The fair values of both the components are estimated and the proceeds allocated
proportionately
D
The equity component is measured at its intrinsic value and the remainder is
allocated to the liability component
In the current financial year, Natamo has raised a loan for $3m. The loan is repayable in 10
equal half-yearly instalments. The first instalment is due six months after the loan was raised.
How should the loan be recognised in Natamo’s next financial statements?
A
B
C
D
As a current liability
As a non-current liability
As equity
As both a current and a non-current liability
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
35
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
18.6**
On 1 January 20X2 LMN issued $2,000,000 8% convertible debt at par. The debt is
repayable, or convertible, at a premium of 10% four years after issue. The effective interest
rate for the debt is 14%. The present values $1 receivable at the end of each year, based on
discount rates of 8%, 10% and 14% are:
8%
10%
14%
End of year 1
0.926
0.909
0.877
2
0.857
0.826
0.769
3
0.794
0.751
0.675
4
0.735
0.683
0.592
What is the finance charge to LMN’s profit or loss for the year ended 31 December
20X3?
A
B
C
D
18.7
$160,000
$248,000
$260,000
$274,000
On 1 March 20X2 PQR purchased a debt instrument from the market for $105,000, the par
value of the instrument was $100,000. At 31 December 20X2 the fair value of the instrument
is $112,000 and the amortised cost has been calculated to be $104,000.
PQR does not hold this type of asset for contractual cash flows.
At what amount should the investment be included in PQR’s statement of financial
position as at 31 December 20X2?
A
B
C
D
18.8
$100,000
$104,000
$105,000
$112,000
On 1 January 20X2 XYZ issued $1,000,000 4% convertible loan notes, at a discount of 95.
The loan notes are redeemable in five years at a premium of 10%.
What are the total finance costs that should be charged to profit or loss over the fiveyear term of the convertible loan notes?
A
B
C
D
18.9**
$350,000
$345,000
$250,000
$200,000
On 1 October 20X3, Bertrand issued $10 million convertible loan notes which carry a
nominal interest (coupon) rate of 5% per annum. The loan notes are redeemable on 30
September 20X6 at par for cash or can be exchanged for equity shares. A similar loan note,
without the conversion option, would have required Bertrand to pay an interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 5% and
8%, can be taken as:
End of year
36
1
2
3
5%
0·95
0·91
0·86
8%
0·93
0·86
0·79
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Which of the following correctly recognises the convertible loan in Bertrand’s statement
of financial position on initial recognition (1 October 20X3)?
A
B
C
D
Equity
$000
810
nil
10,000
40
Non-current liability
$000
9,190
10,000
nil
9,960
(18 marks)
19
CONCEPTUAL PRINCIPLES OF GROUP ACCOUNTING
19.1
Harwich holds 70,000 $1 “B” shares in Sall. These shares carry one vote each.
Felixstowe holds 18,000 $1 “A” shares in Sall. These shares carry 10 votes each.
The share capital of Sall is made up of the following:
100,000 “B” shares of $1 each
20,000 “A” shares of $1 each
$
100,000
20,000
————
120,000
————
Of which of the following reporting entities is Sall a subsidiary undertaking?
A
B
C
D
19.2
Both Harwich and Felixstowe
Harwich only
Felixstowe only
Neither Harwich nor Felixstowe
Sam has share capital of $10,000 split into 2,000 A ordinary shares of $1 each and 8,000 B
ordinary shares of $1 each. Each A ordinary share has 10 votes and each B ordinary share has
one vote. Both classes of shares have the same rights to dividends and on liquidations. Tom
owns 1,500 A ordinary shares in Sam. Dick owns 6,000 B ordinary shares in Sam.
All three companies conduct similar activities and there is no special relationship between the
companies other than that already stated. The shareholdings in Sam are held as long-term
investments and are the only shareholdings of Tom and Dick.
Which companies must prepare consolidated financial statements?
A
B
C
D
19.3
Neither Tom nor Dick
Tom only
Dick only
Both Tom and Dick
During the last three years Harvert had held 400,000 equity shares in Jamee. The issued share
capital of Jamee is $500,000 (shares of 50 cents each). The finance director of Harvert is a
director of Jamee.
What is the correct treatment of the investment in Jamee in the consolidated financial
statements of Harvert?
A
B
C
D
As a non-current asset investment
As a current asset investment
As an associated undertaking
As a subsidiary
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
37
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
19.4**
19.5**
Which of the following statements regarding consolidated financial statements are
correct?
(1)
Only the group’s share of the assets of a subsidiary is reflected on the consolidated
statement of financial position
(2)
Under equity accounting only the group’s share of the net assets of an associate is
reflected on the consolidated statement of financial position
(3)
The value of share capital on a consolidated statement of financial position will
include the share capital of both the investor and the investee
A
B
C
D
1 only
2 only
3
1 and 2
Which of the following situations would indicate that a parent has control over a
subsidiary?
(1)
The company has a 50% shareholding with the other 50% owned by another
company. Both owners must agree on future actions
(2)
The company owns 100% of preference shares and 10% of the equity shares
(3)
The company owns 40% of the ordinary shares and also has an agreement with
another 40% of the owners of ordinary shares that they will always vote with the
company
(4)
The company owns 30% of the ordinary shares and has the ability to control the
board of directors
1 and 2
2 and 3
3 and 4
1 and 4
A
B
C
D
19.6
Petre owns 100% of the share capital of the following companies. The directors are unsure of
whether the investments should be consolidated.
In which of the following circumstances would the investment NOT be consolidated?
38
A
Petre has decided to sell its investment in Alpha as it is loss-making; the directors
believe its exclusion from consolidation would assist users in predicting the group’s
future profits
B
Beta is a bank and its activity is so different from the engineering activities of the
rest of the group that it would be meaningless to consolidate it
C
Delta is located in a country where local accounting standards are compulsory and
these are not compatible with IFRS used by the rest of the group
D
Gamma is located in a country where a military coup has taken place and Petre has
lost control of the investment for the foreseeable future
(12 marks)
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
20
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
20.1
HX acquired 80% of SA’s 100,000 equity shares on 1 July 20X0 for $140,000. On 1 July
20X0 the fair value of SA’s identifiable net assets was $126,000. The fair value of noncontrolling interest on acquisition is based on SA’s share price, which was $1.70.
The trainee accountant has suggested three possible values for goodwill on acquisition:
(1)
(2)
(3)
$14,000
$39,200
$48,000
Which of the above values for goodwill is an acceptable valuation in accordance with
IFRS 3 Business Combinations?
A
B
C
D
20.2
1 and 2 only
1 and 3 only
2 and 3 only
1, 2, and 3
At 1 January 20X1 Barley acquired 100% of the share capital of Corn for $1,400,000. At that
date the share capital of Corn consisted of 600,000 ordinary shares of 50 cents each and its
retained earnings were $50,000.
On acquisition Corn had some assets whose carrying amount was $230,000 but the fair value
was $250,000.
What was goodwill on acquisition?
A
B
C
D
20.3
$730,000
$750,000
$1,030,000
$1,050,000
On 1 January 20X1, Jarndyce acquired 80% of the ordinary share capital of Skimpole for
$576,000. The statements of financial position of the two companies at 31 December 20X1
were as follows:
Jarndyce
Skimpole
$000
$000
Net assets
468
432
Investment in Skimpole
576
–
–––––
––––
1,044
432
–––––
––––
Issued share capital
720
180
Retained earnings
At 31 December 20X0
144
108
Profit for 20X1
180
144
–––––
––––
1,044
432
–––––
––––
Non-controlling interest is valued at fair value on acquisition, which was $140,000. There
has been no impairment of goodwill since the acquisition took place.
What amount of goodwill should be included in the consolidated statement of financial
position of Jarndyce as at 31 December 20X1?
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39
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A
B
C
D
20.4
$144,000
$230,400
$345,600
$428,000
Vaynor acquired 80,000 ordinary shares in Weeton some years ago. Extracts from the
statements of financial position of the two companies as at 30 September 20X7 are as follows:
Ordinary shares of $1 each
Retained earnings
Vaynor
$000
500
90
Weeton
$000
100
40
On acquisition the retained earnings of Weeton showed a deficit of $10,000.
Goodwill has been impaired by $15,000 since acquisition.
measured at fair value on acquisition.
Non-controlling interest is
What were the consolidated retained earnings of Vaynor on 30 September 20X7?
A
B
C
D
20.5
$102,000
$115,000
$118,000
$125,000
Gonzo acquired 80% of the share capital of Bamboo a number of years ago. Bamboo has
issued 200,000 $1 shares which had a market price of $3.10 on acquisition. The carrying
amount of Bamboo’s net assets as at 31 December 20X6 is $650,000, which is $50,000 higher
than it was on acquisition.
Non-controlling interest was measured at fair value on acquisition.
At what amount should the non-controlling interest in Bamboo be included in the
consolidated statement of financial position of Gonzo as at 31 December 20X6?
A
B
C
D
20.6
$120,000
$124,000
$130,000
$134,000
HW sold goods to SD, its 100% owned subsidiary on 1 February 20X1. The goods were sold
to SD for $48,000. HW made a profit of 33.33% on the original cost of the goods.
At the year-end, 30 June 20X1, 40% of the goods had been sold by SD; the remainder was
still in SD’s inventory and SD had not paid for any of the goods.
Which of the following states the correct adjustments required in the HW group’s
consolidated statement of financial position at 30 June 20X1?
40
A
Reduce inventory and retained earnings by $7,200
Reduce payables and receivables by $7,200
B
Reduce inventory and retained earnings by $9,600
Reduce payables and receivables by $9,600
C
Reduce inventory and retained earnings by $7,200
Reduce payables and receivables by $48,000
D
Reduce inventory and retained earnings by $9,600
Reduce payables and receivables by $48,000
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
20.7**
Salt owns 100% of Pepper. During the year Salt sold goods to Pepper for a sales price of
$1,044,000, generating a margin of 25%. 40% of these goods had been sold on by Pepper to
external parties at the end of the reporting period.
What adjustment for unrealised profit should be made in preparing Salt’s consolidated
financial statements?
A
B
C
D
20.8
$83,520
$104,400
$125,280
$156,600
On 1 April 20X6, Woolwich paid $816,000 for 80% of Malta’s $408,000 share capital.
Malta’s retained earnings at that date were $476,000. At 31 March 20X1 the retained
earnings of the companies are:
$000
Woolwich
1,224
Malta
680
Woolwich’s inventory includes goods purchased from Malta for $18,000. Malta makes a
profit at 20% on the cost of all goods sold to Woolwich.
What is the amount of retained earnings in the consolidated statement of financial
position of Woolwich as at 31 March 20X1?
A
B
C
D
20.9
$1,384,320
$1,384,800
$1,387,200
$1,439,200
During the year Subway invoiced $200,000 to its parent company for transfers of goods in
inventory. Transfers were made at a 25% mark-up. At the end of the year the parent still held
60% of the goods in inventory.
What adjustment should be made for unrealised profit in preparing the consolidated
financial statements for the year?
A
B
C
D
20.10
$16,000
$24,000
$30,000
$40,000
Which of the following statements apply when producing a consolidated statement of
financial position?
(1)
(2)
(3)
All intra-group balances should be eliminated
Intra-group profit in year-end inventory should be eliminated
Closing inventory held by subsidiaries needs to be included at fair value
A
B
C
D
1 only
1 and 2
2 and 3
3 only
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41
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
20.11
Milton owns all the share capital of Keynes. The following information is extracted from the
individual company statements of financial position as at 31 December 20X1:
Current assets
Current liabilities
Milton
$
500,000
220,000
Keynes
$
200,000
90,000
Included in Milton purchase ledger is a balance in respect of Keynes of $20,000. The balance
on Milton account in the sales ledger of Keynes is $22,000. The difference between those
figures is accounted for by cash in transit.
If there are no other intra-group balances, what is the carrying amount of the net
current assets in the consolidated statement of financial position of Milton?
A
B
C
D
20.12
$368,000
$370,000
$388,000
$390,000
A parent company sold goods to its wholly owned subsidiary for $1,800 representing cost
plus 20%. At the year-end two-thirds of the goods were still in inventory.
What is the amount of unrealised profit at the year end?
A
B
C
D
20.13
$360
$300
$240
$200
Bass acquired its 70% holding in Miller many years ago. At 31 December 20X7 Miller had
inventory with a book value of $15,000 purchased from Bass at cost plus 25%.
What are the effects on non-controlling interest and retained earnings in the consolidated
statement of financial position after dealing with the consolidation adjustment required
for inventory?
A
B
C
D
20.14
Non-controlling interest
No effect
No effect
Reduce by $900
Reduce by $1,125
Retained earnings
Reduce by $3,000
Reduce by $3,750
Reduce by $2,100
Reduce by $2,625
Rugby has a 75% subsidiary, Stafford, and is preparing its consolidated statement of financial
position as at 31 December 20X6. The carrying amount of non-current assets in the two
companies at that date is as follows:
$
Rugby
260,000
Stafford
80,000
On 1 January 20X6 Stafford had transferred an item of equipment to Rugby for $40,000. At
the date of transfer the equipment, which had cost $42,000, had a carrying amount of $30,000
and a remaining useful economic life of five years. The group accounting policy is to
depreciate non-current assets on a straight-line basis down to a nil residual value. It is also
group policy not to revalue non-current assets.
42
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
What is the carrying amount of non-current assets in the consolidated statement of
financial position of Rugby as at 31 December 20X6?
A
B
C
D
20.15
$340,000
$332,000
$330,000
$312,000
Tazer, a parent company, acquired Lowdown, an unincorporated entity, for $2·8 million. A
fair value exercise performed on Lowdown’s net assets at the date of purchase showed:
Property, plant and equipment
Identifiable intangible asset
Inventory
Trade receivables less payables
$000
3,000
500
300
200
––––––
4,000
––––––
How should the purchase of Lowdown be reflected in Tazer’s consolidated statement of
financial position?
A
Record the net assets at their values shown above and credit profit or loss with $1·2
million
B
Record the net assets at their values shown above and credit Tazer’s consolidated
goodwill with $1·2 million
C
Write off the intangible asset ($500,000), record the remaining net assets at their
values shown above and credit profit or loss with $700,000
D
Record the purchase as a financial asset investment at $2·8 million
(30 marks)
21
CONSOLIDATION ADJUSTMENTS
21.1
Huge acquired 60% of Small’s 500,000 shares on 1 January 20X2. The purchase
consideration consisted of an immediate cash payment of $3.45 per share plus a share
exchange of three shares in Huge for every two shares in Small. At the acquisition date the
market prices of each share in Huge and each share in small were $6.50 and $4.20,
respectively.
What purchase consideration should be included in Huge’s statement of financial
position in respect of its investment in Small?
A
B
C
D
21.2
$3,960,000
$2,925,000
$2,335,000
$1,875,000
In relation to accounting for positive purchased goodwill, what is the correct accounting
treatment in accordance with IFRS 3 Business Combinations?
A
B
C
D
Carry as an asset and amortise goodwill over its useful economic life
Carry as an asset and test annually for impairment
Value each year to fair value
Write off immediately against consolidated retained earnings
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
43
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
21.3
Tom has purchased all the share capital of Jerry during the year.
Which of the following items would Tom take into account when calculating the fair
value of the net assets acquired in accordance with IFRS 3 Business Combinations?
21.4
(1)
A contingent liability dependent on the outcome of a legal case which has been
provided for in Jerry’s books
(2)
A provision required to cover costs of reorganising Jerry’s departments to fit in with
Tom’s structure
(3)
A warranty provision in Jerry’s books to cover costs of commitments made to
customers
A
B
C
D
3 only
2 and 3
1 and 3
1 only
The books of Tiny contain a provision for reorganisation. The reorganisation is under way
and the provision is to cover costs to be incurred in the next six months to complete the
reorganisation. Huge is considering acquiring Tiny. If it does so, the reorganisation of Tiny
will continue.
In assessing the fair value of net assets the directors of Huge wish to make a provision for
future trading losses, and include the existing provision for reorganisation costs.
In accordance with IFRS 3 Business Combinations which provisions may be included?
A
B
C
D
21.5
21.6
Provision for trading losses
Include
Exclude
Include
Exclude
Provision for reorganisation costs
Include
Include
Exclude
Exclude
Which of the following are required when assessing fair values on acquisition in
accordance with IFRS 3 Business Combinations?
(1)
Valuation of non-current assets at market value where this exceeds carrying amount
(2)
Discounting trade receivables to present values where debt is not due to be
recovered for two years
(3)
Inclusion of a contingent liability which is a present obligation of the acquired
company
A
B
C
D
1 only
2 only
1 and 2 only
1, 2 and 3
Leeds acquired the whole of the issued share capital of Cardiff for $12 million in cash. In
arriving at the purchase price Leeds had taken into account in respect of Cardiff future reorganisation costs of $1 million and anticipated future losses of $2 million. The fair value of
the net assets of Cardiff before taking into account these matters was $7 million.
In accordance with IFRS 3 Business Combinations, what is the amount of goodwill on
the acquisition?
44
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
21.7
$8 million
$7 million
$6 million
$5 million
On 1 January 20X2 Harry purchased 75% of the equity shares of Sally. The purchase
consideration consisted of an immediate cash payment of $2 per share plus an additional
payment of $3 per share on 1 January 20X4.
Harry’s cost of capital is 6% and Sally’s equity shares consist of $100,000 (shares of 50 cents
each).
What is the cost of investment in Harry’s statement of financial position at 31 December
20X2 and how should the deferred consideration be presented?
A
B
C
D
21.8
Cost of investment
$700,000
$724,000
$700,000
$724,000
Presented as
Current liability
Current liability
Non-current liability
Non-current liability
Mungo acquired 80% of the equity share capital of Jerry on 1 January 20X2, paying cash of
$1,200,000. Mungo has agreed to make a further cash payment of $600,000 if Jerry’s share
price increases by at least 10% each year for the next three years. The fair value of this
contingent consideration on 1 January 20X2 was measured at $320,000.
At 31 December 20X2 the fair value of the contingent consideration was remeasured to
$345,000, but market expectations for the next 12 months are very poor and the market as a
whole is expected to fall by 15%. If the market reacts as expected then the estimated fair
value of the contingent consideration on 31 December 20X3 would be $180,000.
At what amount will Mungo include the contingent consideration in its statement of
financial position as at 31 December 20X2?
A
B
C
D
21.9
$600,000
$345,000
$320,000
$180,000
Debbie incurred $1,000,000 of transaction costs in respect of the recent purchase of a
controlling stake in Harry. These costs consist of $800,000 legal fees associated with the
acquisition and $200,000 of issue costs relating to the equity shares issued by Debbie as part
of the purchase consideration.
Which of the following is the correct treatment of these transaction costs in Debbie’s
financial statements?
A
Expense $800,000 legal fees immediately and off-set the share issue costs of
$200,000 against share premium
B
Expense the full amount of $1,000,000 immediately
C
Include the full amount of $1,000,000 in the cost of investment in Harry
D
Expense $800,000 legal fees immediately and add the share issue costs of $200,000
to the cost of investment
(18 marks)
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45
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
22
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
22.1
Constable owns 40% of Turner which it treats as an associated undertaking. Constable also
owns 60% of Whistler. Constable has held both of these shareholdings for more than one
year. Revenue of each company for the year ended 30 June 20X2 was as follows:
$m
400
200
100
Constable
Turner
Whistler
What is the revenue which will be reported in Constable’s CONSOLIDATED statement
of profit or loss for the year ended 30 June 20X2?
A
B
C
D
22.2
$460 million
$500 million
$580 million
$700 million
Barley has owned 100% of the issued share capital of Oats for many years. Barley sells
goods to Oats at cost plus 20%. The companies’ revenues for the year were:
Barley
Oats
$460,000
$120,000
During the year Barley sold goods to Oats for $60,000, of which $18,000 were still held in
inventory by Oats at the year end.
What is the amount of revenue to appear in the consolidated statement of profit or loss?
A
B
C
D
22.3
$520,000
$530,000
$538,000
$562,000
Ufton is the sole subsidiary of Walcot. The cost of sales figures for 20X1 for Walcot and
Ufton were $11 million and $10 million respectively. During 20X1 Walcot sold goods which
had cost $2 million to Ufton for $3 million. Ufton has not yet sold any of these goods.
What is the consolidated cost of sales figure for 20X1?
A
B
C
D
22.4
$16 million
$18 million
$19 million
$20 million
Patience has a wholly owned subsidiary, Bunthorne. During 20X1 Bunthorne sold goods to
Patience for $40,000 which was cost plus 25%. At 31 December 20X1 $20,000 of these
goods remained unsold.
By what amount will revenue be reduced in the consolidated statement of profit and loss
for the year ended 31 December 20X1?
A
B
C
D
46
$20,000
$30,000
$32,000
$40,000
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
22.5
Patience has a wholly owned subsidiary, Bunthorne. During 20X1 Bunthorne sold goods to
Patience for $40,000 which was cost plus 25%. At 31 December 20X1 $20,000 of these
goods remained unsold.
By what amount will profit be reduced in the consolidated statement of profit or loss for
the year ended 31 December 20X1?
A
B
C
D
22.6
$4,000
$6,000
$8,000
$10,000
The following figures related to Sanderstead and its subsidiary Croydon for the year ended 31
December 20X9:
Sanderstead
Croydon
$
$
Revenue
600,000
300,000
Cost of sales
(400,000)
(200,000)
Gross profit
200,000
100,000
During the year Sanderstead sold goods to Croydon for $20,000, making a profit of $5,000.
These goods were all sold by Croydon before the year end.
What are the amounts for revenue and gross profit in the consolidated statement of
profit and loss of Sanderstead for the year ended 31 December 20X9?
A
B
C
D
22.7
Revenue
$900,000
$900,000
$880,000
$880,000
Gross profit
$300,000
$295,000
$300,000
$295,000
Chicken owns 80% of Egg. Egg sells goods to Chicken at cost plus 50%. The total invoiced
sales to Chicken by Egg in the year ended 31 December 20X1 were $900,000 and, of these
sales, goods which had been invoiced at $60,000 were held in inventory by Chicken at 31
December 20X1.
What is the adjustment for unrealised profit in the consolidated profit or loss for the
year ended 31 December 20X1?
A
B
C
D
22.8
$20,000
$24,000
$30,000
$40,000
Fosters in 20X7 invoiced $120,000 of goods to its 75% subsidiary, Stella, at cost plus 30%.
Stella had 25% of these in goods in inventory at the year end. At the start of the year Stella
had $15,000 worth of inventory invoiced from Fosters, all of which was sold in 20X7.
What is the amount of unrealised profit adjustment to consolidated gross profit?
A
B
C
D
$3,461
$4,500
$6,923
$9,000
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47
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
22.9**
Cherry owned 75% of Plum. For the year ended 31 December 20X1 Plum reported a net
profit of $118,000. During 20X1 Plum sold goods to Cherry for $36,000 at cost plus 50%.
At the year-end these goods are still held by Cherry.
What is the non-controlling interest in the consolidated statement of profit or loss for
the year ended 31 December 20X1?
A
B
C
D
22.10
$25,000
$26,500
$27,250
$29,500
Hot owns 80% of the issued share capital of Warm and 40% of the issued share capital of
Cold. In the individual company financial statements the tax charges for the year are:
$
40,000
36,000
20,000
Hot
Warm
Cold
What is the tax charge in the consolidated statement of profit or loss?
A
B
C
D
22.11
$68,800
$76,000
$76,800
$84,000
Cornish Co purchased 80% of Pasty Co a number of years ago for $164,000. During the year
ended 31 December 20X6 Cornish Co disposed of its entire investment in Pasty Co for
$275,000. On disposal, the net assets of Pasty Co were valued at $186,000 and noncontrolling interest amounted to $37,000. Goodwill remaining at the disposal date, in respect
of the purchase, was $29,000.
What is the profit on disposal which will be recorded in Cornish Co’s CONSOLIDATED
statement of profit or loss for the year ended 31 December 20X6?
A
B
C
D
$111,000
$97,000
$23,000
$89,000
(22 marks)
23
INVESTMENTS IN ASSOCIATES
23.1
The HC group acquired 30% of the equity share capital of AF on 1 July 20X0 paying
$25,000.
AF made a profit for the year to 31 March 20X1 (prior to dividend distribution) of $6,500 and
paid a dividend of $3,500 to its equity shareholders. Profits accrue evenly throughout the
year.
What is the amount of income from associate to be included in the consolidated
statement of profit or loss for the year ended 31 March 20X1 (to the nearest $)?
A
B
C
D
48
$675
$900
$1,463
$1,950
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
23.2**
The HY group acquired 35% of the equity share capital of SX on 1 July 20X0 paying
$70,000. This shareholding enabled HY group to exercise significant influence over SX.
SX made a profit for the year ended 30 June 20X1 (prior to dividend distribution) of $130,000
and paid a dividend of $80,000 to its equity shareholders.
What is the amount for the investment in associate recognised in HY’s consolidated
statement of financial position at 30 June 20X1?
A
B
C
D
23.3
23.4**
23.5
$115,500
$98,000
$87,500
$70,000
Which of the following statements regarding the equity method of accounting are TRUE?
(1)
(2)
An investment in an associate is always carried at cost
An investor recognises its share of the associate’s profit or loss in consolidated
profit or loss
A
B
C
D
Neither statement
Statement 1 only
Statement 2 only
Both statements
Which of the following could provide evidence of “significant influence”?
(1)
(2)
(3)
(4)
51% of the voting power of the investee
Interchange of management personnel
Participation in decisions about dividends
Provision of essential technical information
A
B
C
D
1, 2 and 3
1, 2 and 4
1, 3 and 4
2, 3 and 4
Inveresk has equity shareholdings in three other companies, as shown below, and has a seat
on the board of each:
Raby
Inveresk
40%
Other shareholders
No other holdings larger than 10%
Seal
30%
Another company holds 60% of Seal’s equity
Toft
15%
Two other companies hold respectively 50% and 35% of Toft’s
equity, and each has a seat on its board. Inveresk exerts
significant influence over Toft
Which of the above shareholdings are associated undertakings of Inversk?
A
B
C
D
Raby only
Raby and Seal only
Raby and Toft only
Raby, Seal and Toft
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49
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
23.6
Holly has a 30% holding in Johnson which allows Holly to exert significant influence over
Johnson. During the current year Holly sold goods to Johnson for $15,000; Holly applies a
mark-up of 25% on cost. Johnson still held half of these goods in inventory at the year end.
What is the amount of unrealised profit that will be reflected in Holly’s consolidated
financial statements for the current year (to the nearest $)?
A
B
C
D
23.7**
$450
$562
$1,500
$3,000
Vaynor acquired 100,000 ordinary shares in Weeton and 20,000 ordinary shares in Yarlet
some years ago. The investment in Yarlet gives Vaynor significant influence.
Extracts from the statements of financial position of the three companies as at 30 September
20X7 are as follows:
Vaynor
Weeton
Yarlet
$000
$000
$000
Ordinary shares of $1 each
500
100
50
Retained earnings
90
40
70
At acquisition the retained earnings of Weeton showed a deficit of $10,000 and of Yarlet a
surplus of $30,000.
What were the consolidated retained earnings of Vaynor on 30 September 20X7?
A
B
C
D
$136,000
$156,000
$200,000
$210,000
(14 marks)
24
FOREIGN CURRENCY TRANSACTIONS
24.1**
Which of the following may be classified as a monetary item in accordance with IAS 21
The Effects of Changes in Foreign Exchange Rates?
24.2
(1)
(2)
(3)
(4)
Inventory due to be exported in the following period
A foreign currency denominated payable
A dividend due from the holding of a foreign equity investment
A provision for the settlement of a foreign currency debt that is to be settled with the
delivery of an item of machinery
A
B
C
D
1 and 2
2 and 3
1 and 4
3 and 4
Fargone currently uses the Krown as its functional currency. Fargone has grown substantially
and for the last two years ending 31 December 20X6 has exported most of its goods, with a
large growth in dollar sales, more than 90% of its trade being denominated in dollars.
In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates which of
the following applies to the functional currency of Fargone as at 31 December 20X6?
50
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
24.3
It should be changed to the dollar if underlying business conditions have changed
It should be changed, retrospectively, to the dollar as at 1 January 20X5
It remains the Krown because a functional currency does not change
It remains the Krown but the presentation currency should be the dollar
On 28 November Patter purchased some goods for Krown 220,000. On 17 December Patter
made a payment of Krown 110,000. At 31 December, Patter’s year end, all of the goods
remain in inventory and Krown 110,000 is still outstanding. Exchange rates are as follows:
28 November
17 December
31 December
$1 = Krown 5.50
$1 = Krown 5.30
$1 = Krown 5.60
What is the exchange gain or loss to be included in Patter’s profit or loss for the current
year?
A
B
C
D
24.4
$11,000 gain
$398 loss
$11,000 loss
$398 gain
Belltop has received Krown 2,300,000 as a prepayment on an item of machinery which is to
be delivered to the customer in the following period. The prepayment is a non-monetary
item. Belltop’s functional currency is the dollar. The exchange rate on receipt of the cash
was $1 = Krown 4.8 and at the year-end $1 = Krown 5.1.
What is the exchange gain or loss to be included in Belltop’s profit or loss for the
current year?
A
B
C
D
24.5
$28,187 gain
$28,187 loss
No gain or loss is recognised
$690,000 gain
On 1 January 20X6 Dodge took out a loan of Krown 1 million. Dodge’s functional currency
is the dollar. The loan is to be repaid in 10 equal instalments of Krown 100,000 on 31
December each year. Exchange rates are as follows:
1 January 20X6
31 December 20X6
Krown 1 = $2.42
Krown 1 = $2.46
What is the carrying amount of the non-current liability in Dodge’s statement of
financial position as at 31 December 20X6 in respect of the loan?
A
B
C
D
$2,178,000
$2,214,000
$1,936,000
$1,968,000
(10 marks)
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51
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
25
ANALYSIS AND INTERPRETATION
25.1
An entity that fixes prices by adding 50% to cost actually achieved a mark-up of 45%.
Which of the following factors could account for the shortfall?
A
B
C
D
25.2
25.3
Sales were lower than expected
Opening inventories had been overstated
Closing inventories were higher than opening inventories
Purchases were higher than expected
Which of the following factors could cause a company’s gross profit percentage on sales
to fall below the expected level?
A
Overstatement of closing inventories
B
The incorrect inclusion in purchases of invoices relating to goods supplied in the
following period
C
The inclusion in sales of the proceeds of sale of non-current assets
D
Trade discounts offered to customers were lower than expected
Gormenghast’s current ratio has been calculated as 1.2:1. However, it has now been
discovered that closing inventory has been understated by $24,000 and opening inventory has
been overstated by $24,000.
How did these misstatements affect the calculations of Gormenghast’s current ratio and
inventory days?
A
B
C
D
25.4
Current ratio
Too high
Too high
Too low
Too low
Inventory days
Too high
Too low
Too high
Too low
The following are extracts from the financial statements of Lamas for the year ended
31 December 20X2:
Statement of financial position
Issued share capital
Retained earnings
12% Loan notes 20X8
Statement of profit or loss
$
2,000
1,000
———
3,000
1,000
———
4,000
———
Operating profit
Loan note interest
$
795
(120)
——
675
——
What is the return on capital employed at the end of the year?
A
B
C
D
52
22.5%
19.9%
16.9%
16.6%
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
25.5
Welwyn buys and sells a single product. The following is an extract from its statement of
financial position at 31 December 20X7:
20X7
20X6
$
$
Inventories
50
40
Trade receivables
16
24
Sales and purchases during 20X7 were $200,000 and $120,000 respectively. 20% of sales
were for cash.
What were the average receivables collection period and gross profit percentage for the
year ended 31 December 20X7?
A
B
C
D
25.6
Average receivables collection period
37 days
37 days
46 days
46 days
Gross profit percentage
35%
45%
35%
45%
Marple has a current ratio of 2:1.
Which of the following transactions will cause the current ratio to decrease?
A
B
C
D
25.7
Receives cash in respect of a long-term loan
Receives cash in respect of a short-term loan
Pays an existing creditor
Writes off an existing trade receivable against the loss allowance for trade
receivables
Which of the following statements about a not-for-profit entity is valid?
A
There is no requirement to calculate an earnings per share figure as it is not likely to
have shareholders who need to assess its earnings performance
B
The current value of its property, plant and equipment is not relevant as it is not a
commercial entity
C
Interpretation of its financial performance using ratio analysis is meaningless
D
Its financial statements will not be closely scrutinised as it does not have any
investors
(14 marks)
26
IAS 7 STATEMENT OF CASH FLOWS
26.1
IAS 7 Statement of Cash Flows sets out the three main headings to be used in a statement of
cash flows. Items that may appear on a statement of cash flows include:
(1)
(2)
(3)
(4)
Tax paid
Purchase of investments
Loss on disposal of machinery
Purchase of equipment
Which of the above items would be included under the heading “Cash flows from
operating activities” according to IAS 7?
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53
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A
B
C
D
26.2
Which of the following would be shown in a statement of cash flow using the direct
method but not in a statement of cash flow using the indirect method of calculating cash
generated from operations?
A
B
C
D
26.3**
1 and 2
1 and 3
2 and 4
3 and 4
Cash payments to employees
Increase/(decrease) in receivables
Depreciation
Finance costs
An extract from a statement of cash flows prepared by a trainee accountant is shown below:
$m
28
Profit before taxation
Adjustments for:
Depreciation
Operating profit before working capital changes
Decrease in inventories
Increase in receivables
Increase in payables
Cash generated from operations
(9)
––
19
3
(4)
(8)
––
10
—
Which of the following criticisms of this extract are correct?
26.4
(1)
(2)
(3)
(4)
Depreciation charges should have been added, not deducted
Decrease in inventories should have been deducted, not added
Increase in receivables should have been added, not deducted
Increase in payables should have been added, not deducted
A
B
C
D
1 and 3
1 and 4
2 and 3
2 and 4
At 1 January 20X0 Casey had property, plant and equipment with a carrying amount of
$250,000. In the year ended 31 December 20X0 the company disposed of assets with a
carrying amount of $45,000 for $50,000. The company revalued a building from $75,000 to
$100,000 and charged depreciation for the year of $20,000. At the end of the year the
carrying amount of property, plant and equipment was $270,000.
What amount will be reported in the statement of cash flows for the year ended 31
December 20X0 under the heading “cash flows from investing activities”?
A
B
C
D
54
$10,000 outflow
$10,000 inflow
$35,000 outflow
$50,000 inflow
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
26.5
A company sold a building at a profit.
How should this transaction be treated in the company’s statement of cash flows?
Proceeds of sale
Cash inflow under
Financing activities
Profit on sale
Added to profit in calculating cash flow
from operating activities
B
Cash inflow under
Investing activities
Deducted from profit in calculating cash flow
from operating activities
C
Cash inflow under
Investing activities
Added to profit in calculating cash flow
from operating activities
D
Cash inflow under
Financing activities
Deducted from profit in calculating cash flow
from operating activities
A
26.6**
The non-current assets of Ealing were as follows:
Cost
Aggregate depreciation
Carrying amount
Start of year
$
180,000
(120,000)
–––––––
60,000
–––––––
End of year
$
240,000
(140,000)
–––––––
100,000
–––––––
During the year non-current assets which had cost $80,000 and had a carrying amount of
$30,000 were sold for $20,000.
What is the net cash flow in respect of non-current assets for the year?
A
B
C
D
26.7
$60,000
$40,000
$120,000
$140,000
On comparing the components of net assets of Deep on 31 December 20X2 and 31 December
20X1 the following movements were noted:
(1)
(2)
A decrease in the warranty provision of $12,000 due to a change in estimate
An increase in tangible non-current assets of $98,000 due to a revaluation in the year
Which movements should be included in the notes to the cash flow statement of Deep as
part of the reconciliation of operating profit to net cash flow from operating activities?
A
B
C
D
26.8
Neither 1 nor 2
1 only
2 only
Both 1 and 2
A company incurs expenditure on development during the year which is capitalised.
What is the correct treatment of this expenditure in the statement of cash flows?
A
As an operating cash flow
B
As an investing cash flow
C
As an item in the reconciliation of operating profit and net cash inflow from
operating activities
D
It will not appear at all
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55
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
26.9
The following items have been extracted from the statement of cash flows of Gresham for the
year ended 31 December 20X1:
$
Depreciation
30,000
Profit on sale of non-current assets
5,000
Proceeds from sale of non-current assets
20,000
Purchase of non-current assets
25,000
If the carrying amount of non-current assets was $110,000 on 31 December 20X0, what
was it on 31 December 20X1?
A
B
C
D
26.10
$70,000
$80,000
$85,000
$90,000
Waterloo acquired a building by issuing $400,000 8% loan notes at par. The market rate of
interest at the time of the issue was also 8%.
How should the acquisition be presented in the statement of cash flows for the period?
A
B
C
D
26.11
Investing activities
$(400,000)
$(400,000)
Nil
Nil
Financing activities
$400,000
Nil
$400,000
Nil
At 1 October 20X0, BK had an accrued interest payable balance of $12,000 in its statement of
financial position. During the year ended 30 September 20X1, BK charged interest payable
of $41,000 to its statement of profit or loss. Accrued interest payable at 30 September20X1
was $15,000.
Included in the interest charged to profit or loss for the year was an unwinding of the discount
on a decommissioning provision of $5,000 and lease interest of $3,000. The lease rental is
paid in cash annually in arrears.
What is the cash flow in respect of interest paid that will appear in BK’s statement of
cash flows for the year ended 30 September 20X1?
A
B
C
D
26.12
$30,000
$33,000
$36,000
$38,000
The following information is available for the property, plant and equipment of Fry as at 30
September:
20X4
20X3
$000
$000
Carrying amounts
23,400
14,400
The following items were recorded during the year ended 30 September 20X4:
(i)
(ii)
(iii)
(iv)
56
Depreciation charge of $2·5 million
An item of plant, with a carrying amount of $3 million, was sold for $1·8 million
A property was revalued upwards by $2 million
Environmental provisions of $4 million relating to property, plant and equipment
were capitalised during the year
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
What amount would be shown in Fry’s statement of cash flows for purchase of property,
plant and equipment for the year ended 30 September 20X4?
A
B
C
D
$8·5 million
$12·5 million
$7·3 million
$10·5 million
(24 marks)
27
IAS 33 EARNINGS PER SHARE
27.1
A company currently has 10 million $1 shares in issue with a market value of $3 per share.
The company wishes to raise new funds using a 1-for-4 rights issue. The theoretical ex rights
price per share is $2·80.
How much new finance was raised by the rights issue?
A
B
C
D
27.2
$2,500,000
$4,000,000
$5,000,000
$7,000,000
A company makes a 2-for-3 rights issue at an issue price of $2. The cum-rights price is $4.
What is the theoretical ex rights price?
A
B
C
D
27.3**
$2·50
$2·80
$3·00
$3·20
Chartwell has in issue $120,000 of equity share capital (shares of 50 cents each) and 10,000
6% Preference shares of $3 each.
Extracts from the financial statements for the year to 31 March 20X3 are shown below:
Profit before interest and tax
Interest paid
Preference dividend
Taxation
Ordinary dividend
$
528,934
6,578
1,800
125,860
10,800
In accordance with IAS 33 Earnings per Share, what is Chartwell’s basic earnings per
share for the year ended 31 March 20X3?
A
B
C
D
27.4
$1.60
$1.64
$3.20
$3.29
In the year to 30 September 20X3, Wexam reported a retained profit of $4·8m after paying
preference dividends of $200,000 and dividends of $800,000 to the holders of the ordinary
shares in issue at the year end. On 1 October 20X2 Wexam had three million shares in issue.
On 1 April 20X3 the company had made a bonus issue of one share for every three held.
In accordance with IAS 33 Earnings per Share, what is Wexam’s basic earnings per
share for the year ended 30 September 20X3?
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57
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A
B
C
D
27.5
$1.20
$1.40
$1.45
$1.60
In the year to 30 November the retained profit of Dale was $3,640,500. This was after paying
dividends as follows:
Ordinary:
Preference:
$0.05 per share on 1·5 million shares
$0.07 per share on 600,000 shares
In accordance with IAS 33 Earnings per Share, what is Dale’s basic earnings per share?
A
B
C
D
27.6
$1.73
$1.77
$2.43
$2.48
Reploy has reported a profit before interest and tax of $728,654 for the last financial year.
The company’s profit or loss statement reports an interest charge of $45,860, a tax charge of
$158,740 whilst the statement of changes in equity shows that an ordinary dividend of
$50,000 was paid. The company’s issued ordinary share capital is $500,000 in $1 shares.
In accordance with IAS 33 Earnings per Share, what is Reploy’s basic earnings per
share?
A
B
C
D
27.7
$0.95
$1.05
$1.37
$1.46
The financial statements of Epic showed that retained earnings had increased in the year by
$689,424. The following items were presented by Epic in either the statement of profit or loss
for the year or in the statement of changes in equity:
Interest
Taxation
Non-controlling interest
Ordinary dividend ($0.10 per share)
$
84,441
227,553
47,338
65,000
In accordance with IAS 33 Earnings per Share, what is Epic’s basic earnings per share?
A
B
C
D
27.8
$0.10
$1.13
$1.16
$1.23
The most recent statement of profit or loss of Waylor reported a profit before tax of
$1,258,000 and a tax expense of $224,000. Half way through the year the company had
issued 40,000 bonus shares which brought the total number of shares in issue to 440,000.
In accordance with IAS 33 Earnings per Share, what is Waylor’s basic earnings per
share?
58
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
27.9
$2.35
$2.47
$2.86
$2.99
Jubilee reported profit after tax for the period of $1,600,000 and it had 1,000,000 ordinary
shares in issue for the whole year.
Jubilee had a number of exercisable share options outstanding at the year end. Holders of the
options were entitled to buy 50,000 new shares for $1.60. The average market price of
Jubilee’s shares for the previous 12 months was $2.
In accordance with IAS 33 Earnings per Share, what is Jubilee’s diluted earnings per
share?
A
B
C
D
27.10
$1.52
$1.54
$1.58
$1.60
Mork has disclosed basic EPS figure for the year of $0.32, this is based on 500,000 ordinary
shares being in issue for the whole year.
Mork also has $100,000 8% convertible debt in issue at the year end. The conversion rights
allow the holders to convert their debt into equity on a basis of 5 shares for every $4 of debt.
Mork pays income tax at a rate of 30%.
In accordance with IAS 33 Earnings per Share, what is Mork’s diluted earnings per
share?
A
B
C
D
$0.265
$0.269
$0.285
$0.289
27.11** Aqua has correctly calculated its basic earnings per share (EPS) for the current year.
Which of the following items need to be additionally considered when calculating
Aqua’s diluted EPS for the year?
(1)
A 1 for 5 rights issue of equity shares during the year at $1·20 when the market
price of the equity shares was $2·00
(2)
The issue during the year of a convertible (to equity shares) loan note
(3)
The granting during the year of directors’ share options exercisable in three years’
time
(4)
Equity shares issued during the year as the purchase consideration for the
acquisition of a new subsidiary company
A
B
C
D
1, 2, 3 and 4
1 and 2 only
2 and 3 only
3 and 4 only
(22 marks)
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59
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question 1 WARDLE
The following scenario relates to questions 1–5.
Wardle’s activities include the production of maturing products which take a long time before they are
ready to retail. Details of one such product are that on 1 April 20X5 it had a cost of $5 million and a
fair value of $7 million. The product would not be ready for retail sale until 31 March 20X8.
On 1 April 20X5 Wardle entered into an agreement to sell this product to Easyfinance for $6 million.
The agreement gave Wardle the right to repurchase the product at any time up to 31 March 20X8 at a
fixed price of $7,986,000, at which date Wardle expected the product to retail for $10 million. The
compound interest Wardle would have to pay on a three-year loan of $6 million would be:
$000
600
660
726
Year 1
Year 2
Year 3
This interest is equivalent to the return required by Easyfinance.
1
Based on the substance of the transaction what will be the outstanding liability at the
end of year 2?
A
B
C
D
2
If Wardle accounted for the legal form of the transaction what would be the finance
costs charged to profit or loss in year 3?
A
B
C
D
3
60
Nil
$1,986,000
$726,000
$7,986,000
What will be the effect on Wardle’s return on capital employed (ROCE) and gearing if
the transaction is accounted for based on its substance rather than its legal form?
A
B
C
D
4
Nil
$6,600,000
$7,260,000
$7,986,000
ROCE
Higher
Higher
Lower
Lower
Gearing
Higher
Lower
Lower
Higher
Which of the following are examples of transactions which could be used to create “offbalance sheet finance”?
(1)
(2)
(3)
(4)
Sale and repurchase arrangements
Factoring of debts
Warranty provisions
Consignment inventories
A
B
C
D
1, 2 and 3
2, 3 and 4
1, 3 and 4
1, 2 and 4
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
5
Wardle has received a request from a customer to buy 1,000 units of MGA; the customer has
asked Wardle to hold the product and also to be billed for the sale.
Which of the following criteria must be met before Wardle can recognise revenue in
respect of this bill-and-hold transaction?
(1)
Wardle plans to manufacture the product two weeks before delivery is due to the
customer
(2)
The customer has requested that the goods be held until they are ready to take
delivery
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 or 2
(10 marks)
Question 2 DEXON
Below is the summarised draft statement of financial position of Dexon, a publicly listed company, as
at 31 March 20X7:
$000
$000
Assets
Non-current assets
Property at valuation
(land $20,000; buildings $165,000 (note (ii))
Plant (note (ii))
Investments at fair value through profit
or loss at 1 April 20X6 (note (iii))
185,000
180,500
12,500
–––––––
378,000
Current assets
Inventory
Trade receivables (note (iv))
Bank
84,000
52,200
3,800
–––––––
Total assets
Equity and liabilities
Equity
Ordinary shares of $1 each
Share premium
Revaluation surplus
Retained earnings – at 1 April 20X6
– for the year ended
31 March 20X7
Non-current liabilities
Deferred tax – at 1 April 20X6 (note (v))
Current liabilities
Total equity and liabilities
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$000
140,000
–––––––
518,000
–––––––
250,000
40,000
18,000
12,300
96,700
–––––––
109,000
–––––––
167,000
–––––––
417,000
19,200
81,800
–––––––
518,000
–––––––
61
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
The following information is relevant:
(i)
Dexon’s profit or loss includes $7.8 million of revenue for credit sales made in March. Dexon
applied a mark-up on cost of 30% on all sales. In April the auditors stated that the contract
does not have commercial substance and revenue should not be recognised for this contract.
(ii)
The non-current assets have not been depreciated for the year ended 31 March 20X7.
Dexon has a policy of revaluing its land and buildings at the end of each accounting year.
The values in the above statement of financial position are as at 1 April 20X6 when the
buildings had a remaining life of 15 years. A qualified surveyor has valued the land and
buildings at 31 March 20X7 at $180 million.
Plant is depreciated at 20% on the reducing balance basis.
(iii)
The investments at fair value through profit or loss are held in a fund whose value changes
directly in proportion to a specified market index. At 1 April 20X6 the relevant index was
1,200 and at 31 March 20X7 it was 1,296.
(iv)
In late March 20X7 the directors of Dexon discovered a material fraud perpetrated by the
company’s credit controller that had been continuing for some time. Investigations revealed
that a total of $4 million of the trade receivables as shown in the statement of financial
position at 31 March 20X7 had in fact been paid and the money had been stolen by the credit
controller. An analysis revealed that $1·5 million had been stolen in the year to 31 March
20X6 with the rest being stolen in the current year. Dexon is not insured for this loss and it
cannot be recovered from the credit controller, nor is it deductible for tax purposes.
(v)
During the year the company’s taxable temporary differences increased by $10 million of
which $6 million related to the revaluation of the property. The deferred tax relating to the
remainder of the increase in the temporary differences should be taken to the profit or loss.
The applicable income tax rate is 20%.
(vi)
The above figures do not include the estimated provision for income tax on the profit for the
year ended 31 March 20X7. After allowing for any adjustments required in items (i) to (iv),
the directors have estimated the provision at $11·4 million (this is in addition to the deferred
tax effects of item (v)).
(vii)
On 1 September 20X6 there was a fully subscribed rights issue of one new share for every
four held at a price of $1·20 each. The proceeds of the issue have been received and the issue
of the shares has been correctly accounted for in the above statement of financial position.
(viii)
In May 20X6 a dividend of $0.04 per share was paid. In November 20X6 (after the rights
issue in item (vii) above) a further dividend of $0.03 per share was paid. Both dividends have
been correctly accounted for in the above statement of financial position.
Required:
Taking into account any adjustments required by items (i) to (viii) above:
(a)
Prepare a statement showing the recalculation of Dexon’s profit for the year ended 31
March 20X7.
(8 marks)
(b)
Prepare the statement of changes in equity of Dexon for the year ended 31 March 20X7.
(4 marks)
(c)
Redraft the statement of financial position of Dexon as at 31 March 20X7.
(8 marks)
Note: Notes to the financial statements are NOT required.
(20 marks)
62
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 3 SANDOWN
The following trial balance relates to Sandown at 30 September 20X6:
$000
Revenue (note (i))
Cost of sales
Distribution costs
Administrative expenses (note (ii))
Loan interest paid (note (iii))
Investment income
Profit on sale of investments (note (iv))
Current tax (note (v))
Property – at cost 1 October 20W6 (note (vi))
– accumulated depreciation – 1 October 20X5
Plant and equipment – at cost (note (vi))
– accumulated depreciation – 1 October 20X5
Brand – at cost 1 October 20X1 (note (vi))
– accumulated amortisation – 1 October 20X5
Financial asset investments (note (iv))
Inventory at 30 September 20X6
Trade receivables
Bank
Trade payables
Equity shares of 20 cents each
Equity option
Other reserve (note (iv))
5% Convertible loan note 20X9 (note (iii))
Retained earnings at 1 October 20X5
Deferred tax (note (v))
$000
380,000
246,800
17,400
50,500
1,000
1,300
2,200
2,100
63,000
8,000
42,200
19,700
30,000
9,000
26,500
38,000
44,500
8,000
–––––––
570,000
–––––––
42,900
50,000
2,000
5,000
18,440
26,060
5,400
–––––––
570,000
–––––––
The following notes are relevant:
(i)
Sandown’s revenue includes $16 million for goods sold to Pending on 1 October 20X5. The
terms of the sale are that Sandown will incur on-going service and support costs of $1·2
million per annum for three years after the sale. Sandown normally makes a gross profit of
40% on such servicing and support work. Ignore the time value of money.
(ii)
Administrative expenses include an equity dividend of 4·8 cents per share paid during the year.
(iii)
The 5% convertible loan note was issued for proceeds of $20 million on 1 October 20X4. It
has an effective interest rate of 8% due to the value of its conversion option.
(iv)
The financial asset investments included in the trial balance are equity investments and have
been classified as “Fair value through other comprehensive income” by Sandown. During the
year Sandown sold an investment for $11 million. At the date of sale it had a carrying
amount of $8·8 million and had originally cost $7 million. Sandown has recorded the
disposal of the investment. The remaining investments (the $26·5 million in the trial balance)
have a fair value of $29 million at 30 September 20X6. The other reserve in the trial balance
represents the net increase in the value of the investments as at 1 October 20X5. Ignore
deferred tax on these transactions.
(v)
The balance on current tax represents the under/over provision of the tax liability for the year
ended 30 September 20X5. The directors have estimated the provision for income tax for the
year ended 30 September 20X6 at $16·2 million. At 30 September 20X6 the carrying
amounts of Sandown’s net assets were $13 million in excess of their tax base. The income
tax rate of Sandown is 30%.
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63
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(vi)
Non-current assets:
The property has a land element of $13 million. The building element is being depreciated on
a straight-line basis.
Plant and equipment is depreciated at 40% per annum using the reducing balance method.
The brand is being depreciated using the straight-line method over a 10-year life. No
depreciation/amortisation has yet been charged on any non-current asset for the year ended 30
September 20X6. Depreciation and amortisation are charged to cost of sales.
Required:
(a)
Prepare the statement of profit or loss and other comprehensive income for Sandown
for the year ended 30 September 20X6.
(11 marks)
(b)
Prepare the statement of financial position of Sandown as at 30 September 20X6.
(9 marks)
Note: Notes to the financial statements are not required.
(20 marks)
Question 4 CAVERN
The following trial balance relates to Cavern as at 30 September 20X6:
$000
Equity shares of 20 cents each (note (i))
8% Loan note (note (ii))
Retained earnings – 30 September 20X5
Other equity reserve
Revaluation surplus
Share premium
Land and buildings at valuation – 30 September 20X5:
Land ($7 million) and building ($36 million) (note (iii)) 43,000
Plant and equipment at cost (note (iii))
67,400
Accumulated depreciation plant and equipment
– 30 September 20X5
Fair value through other comprehensive income
investments (note (iv))
15,800
Inventory at 30 September 20X6
19,800
Trade receivables
29,000
Bank
Deferred tax (note (v))
Trade payables
Revenue
Cost of sales
128,500
Administrative expenses (note (i))
25,000
Distribution costs
8,500
Loan note interest paid
2,400
Bank interest
300
Investment income
Current tax (note (v))
900
–––––––
340,600
–––––––
64
$000
50,000
30,600
12,100
3,000
7,000
11,000
13,400
4,600
4,000
21,700
182,500
700
–––––––
340,600
–––––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
The following notes are relevant:
(i)
Cavern has accounted for a fully subscribed rights issue of equity shares made on 1 April
20X6 of one new share for every four in issue at $0.42 each. The company paid ordinary
dividends of $0.03 per share on 30 November 20X5 and $0.05 per share on 31 May 20X6.
The dividend payments are included in administrative expenses in the trial balance.
(ii)
The 8% loan note was issued on 1 October 20X4 at its nominal (face) value of $30 million.
The loan note will be redeemed on 30 September 20X8 at a premium which gives the loan
note an effective finance cost of 10% per annum.
(iii)
Non-current assets:
Cavern revalues land and building at the end of each accounting year. At 30 September 20X6
the value to be incorporated into the financial statements is $41·8 million. The building’s
remaining life at the beginning of the current year (1 October 20X5) was 18 years. Cavern
does not make an annual transfer from the revaluation surplus to retained earnings in respect
of the realisation of the revaluation surplus. Ignore deferred tax on the revaluation surplus.
Plant and equipment includes an item of plant bought for $10 million on 1 October 20X5 that
will have a 10-year life (using straight-line depreciation with no residual value). Production
with this plant uses toxic chemicals which will cause decontamination costs to be incurred at the
end of its life. The present value of these costs at a discount rate of 10% at 1 October 20X5
was $4 million. Cavern has not provided any amount for the decontamination cost. All other
plant and equipment is depreciated at 12·5% per annum using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30
September 20X6. All depreciation is charged to cost of sales.
(iv)
The fair value through other comprehensive income investments are equity investments.
Their fair value at 30 September 20X6 was $13·5 million. There were no acquisitions or
disposals of these investments during the year ended 30 September 20X6.
(v)
A provision for income tax for the year ended 30 September 20X6 of $5·6 million is required.
The balance on current tax represents the under/over provision of the tax liability for the year
ended 30 September 20X5. At 30 September 20X6 the tax base of Cavern’s net assets was
$15 million less than their carrying amounts. The movement on deferred tax should be taken
to profit or loss. The income tax rate of Cavern is 25%.
Required:
(a)
Prepare the statement of profit or loss and other comprehensive income for Cavern for
the year ended 30 September 20X6.
(11 marks)
(b)
Prepare the statement of financial position of Cavern as at 30 September 20X6. (9 marks)
(20 marks)
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65
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question 5 FRESCO
The following trial balance relates to Fresco at 31 March 20X7:
$000
Equity shares of 50 cents each (note (i))
Share premium (note (i))
Retained earnings at 1 April 20X6
Property – at cost (note (ii))
Plant and equipment – at cost (note (ii))
Accumulated depreciation of property at 1 April 20X6
Accumulated depreciation of plant and equipment
at 1 April 20X6
Inventory at 31 March 20X7
Trade receivables (note (iii))
Bank
Deferred tax (note (iv))
Trade payables
Revenue
Cost of sales
Lease payments (note (ii))
Distribution costs
Administrative expenses
Bank interest
Current tax (note (iv))
Suspense account (note (i))
$000
45,000
5,000
5,100
48,000
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
–––––––
The following notes are relevant:
(i)
The suspense account represents the corresponding credit for cash received for a fully
subscribed rights issue of equity shares made on 1 January 20X7. The terms of the share
issue were one new share for every five held at a price of $0.75 each. The price of the
company’s equity shares immediately before the issue was $1·20 each.
(ii)
Non-current assets:
Property had a 12-year useful life on acquisition. To reflect a marked increase in property
prices, Fresco decided to revalue it on 1 April 20X6. The directors accepted an independent
surveyor’s report which valued the property at $36 million on that date. Fresco has not yet
recorded the revaluation. The remaining life of the property is eight years at the date of the
revaluation. Fresco makes an annual transfer to retained profits to reflect the realisation of the
revaluation surplus. In Fresco’s tax jurisdiction the revaluation does not give rise to a
deferred tax liability.
On 1 April 20X6, Fresco acquired an item of plant under a lease agreement that had an
implicit finance cost of 10% per annum. The lease payments in the trial balance represent an
initial deposit of $2 million paid on 1 April 20X6 and the first annual rental of $6 million paid
on 31 March 20X7. The lease agreement requires further annual payments of $6 million on
31 March each year for the next four years. The plant was initially measured at $25 million
on 1 April 20X6.
Plant and equipment (other than the leased plant) is depreciated at 20% per annum using the
reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 31 March
20X7. Depreciation is expensed to cost of sales.
66
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(iii)
In March 20X7, Fresco’s internal audit department discovered a fraud committed by the
company’s credit controller who did not return from a foreign business trip. The outcome of
the fraud is that $4 million of the company’s trade receivables have been stolen by the credit
controller and are not recoverable. Of this amount, $1 million relates to the year ended 31
March 20X6 and the remainder to the current year. Fresco is not insured against this fraud.
(iv)
Fresco’s income tax calculation for the year ended 31 March 20X7 shows a tax refund of $2·4
million. The balance on current tax in the trial balance represents the under/over provision of
the tax liability for the year ended 31 March 20X6. At 31 March 20X7, Fresco had taxable
temporary differences of $12 million (requiring a deferred tax liability). The income tax rate
of Fresco is 25%.
Required:
(a)
Prepare the statement of profit or loss and other comprehensive income for Fresco for
the year ended 31 March 20X7.
(9 marks)
(b)
Prepare the statement of changes in equity for Fresco for the year ended 31 March
20X7.
(4 marks)
(c)
Prepare the statement of financial position of Fresco as at 31 March 20X7.
(7 marks)
Notes to the financial statements are not required.
(20 marks)
Question 6 ATLAS
The following trial balance relates to Atlas at 31 March 20X7:
$000
Equity shares of 50 cents each (note (v))
Share premium
Retained earnings at 1 April 20X6
Land and buildings – at cost (land $10 million) (note (ii)) 60,000
Plant and equipment – at cost (note (ii))
94,500
Accumulated depreciation at 1 April 20X6:
– buildings
– plant and equipment
Inventory at 31 March 20X7
43,700
Trade receivables
42,200
Bank
Deferred tax (note (iv))
Trade payables
Revenue (note (i))
Cost of sales
411,500
Distribution costs
21,500
Administrative expenses
30,900
Dividends paid
20,000
Bank interest
700
Current tax (note (iv))
–––––––
725,000
–––––––
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$000
50,000
20,000
11,200
20,000
24,500
6,800
6,200
35,100
550,000
1,200
–––––––
725,000
–––––––
67
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
The following notes are relevant:
(i)
Revenue includes the sale of $10 million of maturing inventory made to Xpede on 1 October
20X6. The cost of the goods at the date of sale was $7 million and Atlas has an option to
repurchase these goods at any time within three years of the sale at a price of $10 million plus
accrued interest from the date of sale at 10% per annum. At 31 March 20X7 the option had
not been exercised, but it is highly likely that it will be before the time period lapses.
(ii)
Non-current assets:
On 1 October 20X6, Atlas terminated the production of one of its product lines. From this
date, the plant used to manufacture the product has been actively marketed at an advertised
price of $4·2 million which is considered realistic. It is included in the trial balance at a cost
of $9 million with accumulated depreciation (at 1 April 20X6) of $5 million.
On 1 April 20X6, the directors of Atlas decided that the financial statements would show an
improved position if the land and buildings were revalued to market value. At that date, an
independent valuer valued the land at $12 million and the buildings at $35 million and these
valuations were accepted by the directors. The remaining life of the buildings at that date was
14 years. Atlas does not make a transfer to retained earnings for excess depreciation. Ignore
deferred tax on the revaluation surplus.
Plant and equipment is depreciated at 20% per annum using the reducing balance method and
time apportioned as appropriate.
All depreciation is charged to cost of sales, but none has yet been charged on any non-current
asset for the year ended 31 March 20X7.
(iii)
At 31 March 20X7, a provision is required for directors’ bonuses equal to 1% of revenue for
the year.
(iv)
Atlas estimates that an income tax provision of $27·2 million is required for the year ended 31
March 20X7 and at that date the liability to deferred tax is $9·4 million. The movement on
deferred tax should be taken to profit or loss. The balance on current tax in the trial balance
represents the under/over provision of the tax liability for the year ended 31 March 20X6.
(v)
On 1 July 20X6, Atlas made and recorded a fully subscribed rights issue of 1 for 4 at $1·20
each. Immediately before this issue, the stock market value of Atlas’s shares was $2 each.
Required:
(a)
Prepare the statement of profit or loss and other comprehensive income for Atlas for the
year ended 31 March 20X7.
(8 marks)
(b)
Prepare the statement of changes in equity for Atlas for the year ended 31 March 20X7.
(4 marks)
(c)
Prepare the statement of financial position of Atlas as at 31 March 20X7.
(8 marks)
Note: Notes to the financial statements are not required.
(20 marks)
68
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 7 EMERALD
The following scenario relates to questions 1–5.
Emerald Co is preparing financial statements for the year ended 31 March 20X7. The following issues
are relevant:
1.
Development expenditure
Below is the qualifying development expenditure for Emerald:
Year ended 31 March 20X6
Year ended 31 March 20X7
$000
1,000
400
All capitalised development expenditure is deemed to have a four year life. Assume
amortisation commences at the beginning of the accounting period following capitalisation.
2.
Properties
Emerald owned the following properties at 1 April 20X6:
Property A: An office building used by Emerald for administrative purposes with a
depreciated historical cost of $2 million. At 1 April 20X6 it had a remaining life of 20 years.
After a reorganisation on 1 October 20X6, the property was let to a third party and
reclassified as an investment property applying Emerald’s policy of the fair value model. An
independent valuer assessed the property to have a fair value of $2·3 million at 1 October
20X6, which had risen to $2·34 million at 31 March 20X7.
Property B: Another office building let to a subsidiary of Emerald. At 1 April 20X6, it had a
fair value of $1·5 million which had risen to $1·65 million at 31 March 20X7. At 1 April
20X6 the office building had a remaining useful life of 30 years.
1
At what amount should development expenditure be valued in Emerald’s statement of
financial position as at 31 March 20X7?
A
B
C
D
2
What is the net gain/loss which will be recorded in Emerald’s profit or loss for the year
ended 31 March 20X7 in respect of property A?
A
B
C
D
3
$1,150,000
$1,400,000
$1,300,000
$1,050,000
$340,000 net gain
$390,000 net gain
$50,000 net loss
$10,000 net loss
What is the carrying amount of Property B in Emerald’s CONSOLIDATED statement
of financial position as at 31 March 20X7?
A
B
C
D
$1,450,000
$1,500,000
$1,595,000
$1,650,000
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69
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
4
IAS 8 Accounting Policies, Changes in Accounting Estimate and Errors specifies the
definition and treatment of a number of different items.
Which of the following is outside the scope of IAS 8?
A
B
C
D
5
Notification that a credit customer has just gone bankrupt owing debts of $250,000
Identification of fraud relating to the current and prior years
Moving from first-in first-out to weighted average inventory valuation model
Recognition of a decommissioning provision
Which of the following should be treated as development expenditure in accordance
with IAS 38 Intangible Assets?
(1)
(2)
The construction of a scale model of a pilot plant
The search for alternative uses of products that are already manufactured
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 or 2
(10 marks)
Question 8 DERRINGDO
The following scenario relates to questions 1–5.
Derringdo sells goods supplied by Gungho. Goods are classed as A-grade (perfect quality) or B-grade
(having slight faults). Derringdo sells A-grade goods as an agent for Gungho at a price that gives a
gross profit margin of 50%. Derringdo receives a commission of 12·5% on these sales. Derringdo sells
B-grade goods as a principal at a gross profit margin of 25%. Derringdo provides the following
information:
$000
Inventory held on premises 1 April 20X6
– A grade
2,400
– B grade
1,000
Goods from Gungho year to 31 March 20X7 – A grade
18,000
– B grade
8,800
Inventory held on premises 31 March 20X7
– A grade
2,000
– B grade
1,250
Derringdo also sells carpets through several retail outlets, only recognising revenue once the carpets
had been fitted. Customers pay for the carpets at the time they are ordered. From 1 April 20X6
Derringdo changed its method of trading by sub-contracting the fitting to approved contractors. Under
this policy the sub-contractors are paid by Derringdo and the sub-contractors are liable for any errors
made in the fitting.
Details of the relevant sales figures are:
Sales made in retail outlets for the year to 31 March 20X7
Sales value of carpets fitted in the 14 days to 14 April 20X6
Sales value of carpets fitted in the 14 days to 14 April 20X7
$000
23,000
1,200
1,600
The sales value of carpets fitted in the 14 days to 14 April 20X6 are not included in the annual sales
figure of $23 million, but those for the 14 days to 14 April 20X7 are included.
During the current year Derringdo also changed the method of depreciating plant from straight line to
reducing balance.
70
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
1
What will be the value of inventory included in Derringdo’s statement of financial
position as at 31 March 20X7 in respect of the grade A and B goods?
A
B
C
D
2
What is the amount of revenue which Derringdo should recognise in its statement of
profit or loss for the year ended 31 March 20X7 relating to the supply of A grade goods?
A
B
C
D
3
$36,800
$4,600
$18,400
$3,067
What is the amount of revenue which Derringdo should recognise in its statement of
profit or loss for the year ended 31 March 20X7 relating to the sale of carpets?
A
B
C
D
4
$1,250
$3,250
$1,667
$4,333
$23.0 million
$22.6 million
$24.2 million
$25.8 million
IAS 8 Accounting Policies, Changes in Accounting Estimate and Errors states that any
change in accounting policy should be accounted for by a retrospective adjustment to the
financial statements whilst a change in estimate is accounted for prospectively.
How will Derringdo treat the new method for selling carpets and the change in method
of depreciation?
A
B
C
D
5
Carpet
Prospective
Prospective
Retrospective
Retrospective
Depreciation
Prospective
Retrospective
Prospective
Retrospective
Which of the following factors would indicate that Derringdo has transferred carpets to
another party as part of a consignment arrangement in accordance with IFRS 15
Revenue from Contracts with Customers?
(1)
(2)
Derringdo can require the other party to transfer the carpets to a third party
The carpets are controlled by Derringdo until the other party sells them or six
months have passed, whichever is earlier
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 or 2
(10 marks)
Question 9 LINNET
Linnet is a large public listed company involved in the construction industry. IFRS 15 Revenue from
Contracts with Customers requires that contracts of this nature are assessed to determine whether the
performance obligations are satisfied at a point in time or over a period of time. This could lead to
revenue being recognised on completion of the contract or as the contract progresses.
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71
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Required:
(a)
Discuss how the performance obligations of Linnet may be satisfied over time or at a
point in time.
(7 marks)
(b)
Linnet is part way through a contract to build a new football stadium at a contract price of
$300 million. The performance obligations under the contract will be satisfied over time.
Details of the progress of this contract at 1 April 20X6 are shown below:
$m
150
112
38
Cumulative sales revenue invoiced
Cumulative cost incurred to date
Profit to date
The following information has been extracted from the accounting records at 31 March 20X7:
$m
Total progress payment received
for work certified at 28 February 20X7
Total costs incurred to date
(excluding rectification costs below)
Rectification costs
180
195
17
Linnet has received progress payments of 90% of the work certified at 28 February 20X7.
Linnet’s surveyor has estimated that the sales value of the further work completed during
March 20X7 was $20 million.
At 31 March 20X7 the estimated remaining costs to complete the contract were $45 million.
The rectification costs are the costs incurred in widening access roads to the stadium. This
was the result of an error by Linnet’s architect when he made his initial drawings.
Linnet calculates the percentage of completion of its contracts as the proportion of sales value
earned to date compared to the contract price.
All estimates can be taken as being reliable.
Required:
Prepare extracts of the financial statements for Linnet for the above contract for the
year to 31 March 20X7.
(8 marks)
(15 marks)
Question 10 DEARING
The following scenario relates to questions 1–5.
On 1 October 20X5 Dearing acquired a machine under the following terms:
Manufacturer’s base price
Trade discount (applying to base price only)
Freight charges
Electrical installation cost
Staff training in use of machine
Pre-production testing
Purchase of a three-year maintenance contract
Estimated residual value
72
$000
1,050
20%
30
28
40
22
60
20
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
On the same date Dearing purchased an excavator for $1,260,000 with an estimated residual value of
$60,000; details relating to the excavator are as follows:
Estimated life in machine hours
Hours used – year ended 30 September 20X6
– year ended 30 September 20X7
– year ended 30 September 20X8
Hours
6,000
1,200
1,800
850
Dearing held a property that at 1 October 20X5 had a carrying amount of $2,620,000 and a remaining
useful life of 40 years. At 30 September 20X6 the property was revalued to $2,800,000. This property
had previously suffered a fall in value of $125,000 which had been expensed to profit or loss.
1
In accordance with IAS 16 Property, Plant and Equipment, what is the cost of the
machine purchased on 1 October 20X5?
A
B
C
D
2
In respect of the excavator, what amount of depreciation should be charged to profit or
loss for the year ending 30 September 20X7?
A
B
C
D
3
$252,000
$240,000
$360,000
$600,000
In respect of the property, what amount should be credited to revaluation surplus at 30
September 20X6?
A
B
C
D
4
$840,000
$920,000
$960,000
$1,020,000
$245,500
$120,500
$180,000
$55,000
Which of the following items of subsequent expenditure on a non-current asset should
Dearing capitalise in accordance with IAS 16 Property, Plant and Equipment?
A
When Dearing purchased a furnace five years ago, the furnace lining was separately
identified in the accounting records. The furnace now requires relining at a cost of
$200,000. Once relined the furnace will be usable for a further five years
B
Dearing’s office building has been badly damaged by a fire. Dearing intends to
restore the building to its original condition at a cost of $250,000
C
Dearing’s delivery vehicle broke down. When it was inspected by the garage it was
found to be in need of a new engine. The engine and associated labour costs are
estimated to be $5,000
D
Dearing closes its factory for two weeks every year. During this time, all plant and
equipment has an annual maintenance check and any necessary repairs are carried
out. The cost of the current year’s maintenance check and repairs was $75,000
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73
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
5
How will a bearer plant, such as an apple tree, be accounted for in an entity’s statement
of financial position?
A
B
C
D
At cost in accordance with IAS 16 Property, Plant and equipment
At fair value less costs to sell in accordance with IAS 41 Agriculture
At cost in accordance with IAS 2 Inventories
At fair value in accordance with IAS 40 Investment Property
(10 marks)
Question 11 SHAWLER
The following scenario relates to questions 1–5.
Shawler is a small manufacturing company specialising in making alloy castings. Its main item of plant
is a furnace which was purchased on 1 October 20X3. The furnace has two components: the main body
(cost $60,000 including an environmental provision – see below) which has a 10-year life, and a
replaceable lining (cost $10,000) with a five-year life. Shawler received a government grant of $12,000
relating to the cost of the main body of the furnace only.
The manufacturing process produces toxic chemicals which pollute the nearby environment.
Legislation requires that a clean-up operation must be undertaken by Shawler on 30 September 20Y3 at
the latest.
The following carrying amounts have been extracted from Shawler’s statement of financial position as
at 30 September 20X5 (two years after the acquisition of the furnace):
Non-current assets
Furnace: main body
replaceable lining
Current liabilities
Government grant
Non-current liabilities
Government grant
Environmental provision
1
(present value discounted at 8% per annum)
$18,000
$16,667
$15,432
$19,440
$9,600
$7,200
$1,200
$8,400
What is the depreciation expense which should be charged to profit or loss in the year
ended 30 September 20X6?
A
B
C
D
74
8,400
18,000
What is the carrying amount of the government grant in the statement of financial
position as at 30 September 20X6?
A
B
C
D
3
1,200
What was the original amount of the environmental provision on 1 October 20X3?
A
B
C
D
2
$
48,000
6,000
$6,000
$8,000
$5,400
$6,800
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
4
5
Which of the following disclosures for government grants is required under IAS 20
Accounting for Government Grants and Disclosure of Government Assistance?
(1)
(2)
(3)
The accounting policy adopted for government grants
The nature and extent of government grants recognised in the financial statements
Unfulfilled conditions and other contingencies attached to government assistance
that have been recognised
A
B
C
D
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
On 1 April 20X6, the government introduced further environmental legislation which requires
Shawler to fit anti-pollution filters to its furnace within two years. An environmental
consultant has calculated that fitting the filters will reduce Shawler’s environmental costs for
which provision has been made by 33%. At 30 September 20X6 Shawler had not yet fitted
the filters.
Which of the following explains the effect of the new environmental legislation?
A
B
C
D
A provision should be made immediately
A provision should be made within the next two years
A provision should be made immediately and current environmental costs reduced
There is no effect
(10 marks)
Question 12 DEXTERITY
The following scenario relates to questions 1–5.
On 1 October 20X6 Dexterity acquired Temerity, a small company that specialises in pharmaceutical
drug research and development. The purchase consideration was by way of a share exchange and
valued at $35 million. The fair value of Temerity’s net assets was $15 million excluding the following:
(a)
Temerity owns a patent for an established successful drug that has a remaining life of eight
years. A firm of specialist advisors, Leadbrand, has estimated the current value of this patent
to be $10 million; however the company is awaiting the outcome of clinical trials where the
drug has been tested to treat a different illness. If the trials are successful, the value of the
drug is then estimated to be $15 million.
(b)
Temerity’s statement of financial position includes $2 million for medical research that has
been conducted on behalf of a client.
Dexterity has developed and patented a new drug which has been approved for clinical use. The costs
of developing the drug were $12 million. Based on early assessments of its sales success, Leadbrand
have estimated its market value at $20 million. Dexterity had previously expensed research costs of $3
million in respect of the new drug.
In the current accounting period, Dexterity has spent $3 million sending its staff on specialist training
courses. Whilst these courses have been expensive, they have led to a marked improvement in
production quality and staff now need less supervision. This in turn has led to an increase in revenue
and cost reductions. The directors of Dexterity believe these benefits will continue for at least three
years.
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75
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
1
What is the goodwill arising on the acquisition of Temerity?
A
B
C
D
2
In accordance with IAS 38 Intangible Assets what is the cost of the patented new drug?
A
B
C
D
3
$8 million
$10 million
$20 million
$18 million
$Nil
$12 million
$15 million
$20 million
Which of the following treatments of the training costs is correct?
A
B
C
D
4
5
Capitalise $3 million and test annually for impairment
Capitalise $3 million and amortise over three years
Expense $3 million as incurred
Capitalise $3 million and amortise to profit or loss based on cost savings and
increased revenue
Which of the following types of expenditure must be recognised in the statement of
profit or loss when it is incurred?
A
Tangible non-current assets acquired in order to provide facilities for research and
development activities
B
Legal costs in connection with registration of a patent
C
Costs of searching for possible alternative products
D
Costs of research work which are to be reimbursed by a customer
Which of the following intangible assets could be revalued in accordance with IAS 38
Intangible Assets?
(1)
(2)
An intangible asset that has not previously been recognised
An intangible asset for which there is no active market
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 or 2
(10 marks)
Question 13 DARBY
(a)
An assistant of yours has been criticised over a piece of assessed work that he produced for
his study course for giving the definition of a non-current asset as “a physical asset of
substantial cost, owned by the company, which will last longer than one year”.
Required:
Provide an explanation to your assistant of the weaknesses in his definition of noncurrent assets when compared to the International Accounting Standards Board’s
(IASB) view of assets.
(4 marks)
76
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(b)
The same assistant has encountered the following matters during the preparation of the draft
financial statements of Darby for the year ending 30 September 20X6. He has given an
explanation of his treatment of them.
(i)
Darby spent $200,000 sending its staff on training courses during the year. This has
already led to an improvement in the company’s efficiency and resulted in cost
savings. The organiser of the course has stated that the benefits from the training
should last for a minimum of four years. The assistant has therefore treated the cost
of the training as an intangible asset and charged six months’ amortisation based on
the average date during the year on which the training courses were completed.
(3 marks)
(ii)
During the year the company started research work with a view to the eventual
development of a new processor chip. By 30 September 20X6 it had spent $1·6
million on this project. Darby has a past history of being particularly successful in
bringing similar projects to a profitable conclusion. As a consequence the assistant
has treated the expenditure to date on this project as an asset in the statement of
financial position.
Darby was also commissioned by a customer to research and, if feasible, produce a
computer system to install in motor vehicles that can automatically stop the vehicle
if it is about to be involved in a collision. At 30 September 20X6, Darby had spent
$2·4 million on this project, but at this date it was uncertain as to whether the
project would be successful. As a consequence the assistant has treated the $2·4
million as an expense in the statement of profit or loss.
(4 marks)
(iii)
Darby signed a contract, for an initial three years, in August 20X6 with Media
Today to install a satellite dish and cabling system to a newly-built group of
residential apartments. Media Today will provide telephone and television services
to the residents via the satellite system and pay Darby $50,000 per annum
commencing in December 20X6. Work on the installation commenced on 1
September 20X6 and the expenditure to 30 September 20X6 was $58,000. The
installation is expected to be completed by 31 October 20X6. Previous experience
with similar contracts indicates that Darby will make a total profit of $40,000 over
the three years. The assistant correctly recorded the costs to 30 September 20X6 of
$58,000 as a non-current asset, but then wrote this amount down to $40,000 (the
expected total profit) because he believed the asset to be impaired.
Note: Ignore discounting.
(4 marks)
Required:
For each of the above items (i) to (iii) comment on the assistant’s treatment of them in
the financial statements for the year ended 30 September 20X6 and advise him how they
should be treated under International Financial Reporting Standards.
Note: the mark allocation is shown against each of the three items above.
(15 marks)
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77
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question 14 ESP
The following scenario relates to questions 1–5.
ESP acquired an item of equipment at a cost of $800,000 on 1 April 20X5 that is used to produce and
package medicines. The equipment had an estimated residual value of $50,000 and an estimated life of
five years, neither of which has changed. ESP uses straight-line depreciation. On 31 March 20X7, ESP
was informed by a major customer (who buys products produced by the equipment) that it would no
longer be placing orders with ESP. Even before this information was known, ESP had been having
difficulty finding work for this equipment. It now estimates that net cash inflows earned from the
equipment for the next three years will be:
Year ended:
31 March 20X8
31 March 20X9
31 March 20Y0
$000
220
180
170
On 31 March 20Y0, the equipment is still expected to be sold for its estimated residual value.
ESP has confirmed that there is no market in which to sell the equipment at 31 March 20X7.
ESP’s cost of capital is 10% and the following values should be used:
1
Value of $1 at:
End of year 1
End of year 2
End of year 3
What is the value in use of the item of equipment as at 31 March 20X7?
A
B
C
D
2
$620,000
$570,000
$514,600
$477,100
What is the carrying amount of the equipment in ESP’s statement of financial position
immediately prior to the impairment test at 31 March 20X7?
A
B
C
D
3
$
0·91
0·83
0·75
$480,000
$500,000
$450,000
$650,000
ESP has a wholly-owned subsidiary, Tilda, which is a cash generating unit. On 31 March
20X7, an explosion damaged some of Tilda’s plant. Tilda’s assets immediately before the
explosion were:
$000
Goodwill
1,800
Factory building
4,000
Plant
3,500
Trade receivables and cash
1,500
––––––
10,800
––––––
As a result of the explosion, the recoverable amount of Tilda is $5.5 million.
The explosion completely destroyed an item of plant that had a carrying amount of $500,000.
78
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
What is the carrying amount (to the nearest $000) of Tilda’s plant after accounting for
the impairment loss?
A
B
C
D
4
5
$1,714,000
$1,786,000
$3,000,000
$1,867,000
Which of the following assets must be tested annually for impairment in accordance
with IAS 36 Impairment of Assets?
(1)
A footballer acquired by a football club on an initial contract of four years
(2)
Software that has met the capitalisation criteria but has yet to be fully completed
(3)
An operating license for an international air route granted by government which is
stated to have an indefinite life while the current government is in power
(4)
A patent registered in a jurisdiction under which all patents are granted for five years
A
B
C
D
1 and 2
2 and 3
3 and 4
1 and 4
Which of the following cash flows will not be included in the calculation of an asset’s
value in use in accordance with IAS 36 Impairment of Assets?
(1)
(2)
The cost of adding solar panels to the factory roof to reduce heating and power costs
The annual maintenance costs relating to the machinery located in the factory
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 or 2
(10 marks)
Question 15 BOROUGH
The following scenario relates to questions 1–5.
The following items have arisen during the preparation of Borough’s draft financial statements for the
year ended 30 September 20X6:
(i)
On 1 October 20X5, Borough commenced the extraction of crude oil from a new well on the
seabed. The cost of a 10-year licence to extract the oil was $50 million. At the end of the
extraction, Borough intends to make good the damage the extraction has caused to the seabed.
The cost of this will be a fixed amount of $20 million and a variable amount of $0.02 per
barrel extracted. Both amounts are present values as at 1 October 20X5 (discounted at 8%) of
the estimated costs in 10 years’ time. In the year to 30 September 20X6 Borough extracted
150 million barrels of oil.
(ii)
Borough owns the whole of the equity share capital of its subsidiary Hamlet. Hamlet’s
statement of financial position includes a loan of $25 million that is repayable in five years’
time. $15 million of this loan is secured on Hamlet’s property and the remaining $10 million
is guaranteed by Borough in the event of a default by Hamlet. The current value of its
property is estimated at $12 million and there are concerns over whether Hamlet can survive
the recession and therefore repay the loan.
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79
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
1
What is the carrying amount of the licence in the statement of financial position as at 30
September 20X6?
A
B
C
D
2
What is the carrying amount of the environmental provision in the statement of
financial position as at 30 September 20X6?
A
B
C
D
3
5
$24.84 million
$20 million
$23 million
$21.6 million
How should the loan of $25 million be treated in Borough’s single entity financial
statements?
A
B
C
D
4
$70 million
$63 million
$50 million
$65.7 million
Disclosed as a contingent liability of $10 million
Recognised as a provision of $10 million
Disclosed as a contingent liability of $25 million
Recognised as a provision of $25 million
Which of the following would require a provision to be recognised by Borough as at 30
September 20X6?
A
New data protection laws come into force on 1 December 20X6 that will require a
large number of staff to be retrained. The training costs have not yet been finalised
B
Borough is negotiating with its insurance provider about the amount of an insurance
claim. On 20 October 20X6, the insurance provider agreed to pay $200,000
C
Borough makes refunds to customers for any goods returned within 30 days of sale,
and has done so for many years
D
A customer is suing Borough for damages. Borough is contesting the claim and
legal advisers consider that Borough is very unlikely to lose the case
Borough entered into a “take or pay” contract to purchase goods for $400 or pay $50 not to
take the goods. The fair value of the goods has now fallen to $320 and the contract has
become onerous.
How should an onerous contract be accounted for in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets?
A
B
C
D
80
Recognise all future payments as a liability immediately
Account for any costs associated with the contract only when, and as, they fall due
Recognise the least net cost option of exiting the contract
Disclose the full costs associated with the rental contract as a note to the financial
statements
(10 marks)
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 16 RADAR
The following scenario relates to questions 1–5.
At a board meeting on 1 July 20X5, Radar’s directors made the decision to close down one of its
factories on 31 March 20X6. The factory and its related plant would then be sold.
On 1 January 20X6, a formal plan was formulated and the factory’s 250 employees were given three
months’ notice of redundancy. Customers and suppliers were also informed of the closure at this date.
The directors of Radar have provided the following information:
Fifty of the employees would be retrained and deployed to other subsidiaries within the group at a cost
of $125,000; the remainder will accept redundancy and be paid an average of $5,000 each.
Factory plant has a carrying amount of $2·2 million, but is only expected to sell for $500,000 incurring
$50,000 of selling costs; however, the factory itself is expected to sell for a profit of $1·2 million.
The company rents a number of machines that are classified as short-term rentals under IFRS 16
Leases. The terms of the leases are as follows:
Machine 1
Machine 2
Machine 3
1
$1,250,000
$nil
$1,125,000
$1,000,000
$500,000
$1,750,000
$1,700,000
$550,000
What is the lease rental expense which Radar would report in its statement of profit or
loss for the year ended 31 March 20X6 in respect of the leased machines?
A
B
C
D
4
Monthly rent
$500
$1,400
$800
What is the loss that will be recognised in Radar’s profit or loss for the year ended 31
March 20X6 in respect of the plant?
A
B
C
D
3
Term
5 months
6 months
8 months
What is the provision which Radar would report in its statement of financial position as
at 31 March 20X6 in respect of the redundancy?
A
B
C
D
2
Commencement date
1 June 20X5
1 December 20X5
31 January 20X6
$nil
$12,500
$9,700
$10,500
The following describe potential provisions:
(1)
A provision to cover refunds. The company is in the retail sector and has a
reputation for a “no questions asked” policy on refunds
(2)
An obligation to restore damage caused by oil spills due to drilling activities. The
oil rig has been sited but drilling for oil has not yet commenced
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81
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets in
which of the above situations would a company be required to recognise a provision in
its financial statements?
A
B
C
D
5
Neither situation
Both situations
Situation 1 only
Situation 2 only
Which of the following give rise to constructive obligations in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets?
(1)
An oil spillage; there is no legislation requiring clean up but the entity has always
cleaned up any pollutants in the past
(2)
An entity has published a statement that it will refund the cost of any faulty products
returned, even after the product warranty has expired
(3)
Repairs of faulty goods free of charge if returned within six months of sale in
accordance with the sale contract
A
B
C
D
1 and 2 only
1 and 3 only
2 and 3 only
1, 2 and 3
(10 marks)
Question 17 WAXWORK
The following scenario relates to questions 1–5.
Waxwork’s current year end is 31 March 20X7. Its financial statements were authorised for issue by its
directors on 6 May 20X7 and the annual general meeting (AGM) will be held on 3 June 20X7. The
following matters have been brought to your attention:
(i)
On 12 April 20X7 a fire completely destroyed the company’s largest warehouse and the
inventory it contained. The carrying amounts of the warehouse and the inventory were $10
million and $6 million respectively. It appears that the company has not updated the value of
its insurance cover and only expects to be able to recover a maximum of $9 million from its
insurers.
(ii)
A product PeBo held at another warehouse was valued at its cost of $460,000 at 31 March
20X7. In April 20X7, 70% of this inventory was sold for $280,000 on which Waxworks’
sales staff earned a commission of 15% of the selling price.
(iii)
At 31 March 20X7, the carrying amount of the non-current assets of Waxwork was $80,000
greater than the tax written down value, and the balance brought forward on the deferred tax
account was $24,800. The company accountant calculated that the corporation tax charge on
the reported profit for the year to 31 March 20X7 would be $53,960, based on the tax rate of
24%. On 18 May 20X7 the government announced tax changes which have the effect of
increasing Waxwork’s deferred tax liability to $65,000 as at 31 March 20X7.
82
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
1
Which of the following is the correct accounting treatment in respect of the fire in the
financial statements for the year ended 31 March 20X7?
A
B
C
D
2
What is the carrying amount of the inventory of PeBo in the statement of financial
position as at 31 March 20X7?
A
B
C
D
3
Adjust the tax liability and expense only
Adjust the tax liability and expense and disclose the future financial effects
Neither adjust the financial statements nor disclose the financial effects
Disclose the financial effects on the current and future tax expense and liability
What is the total charge for taxation in the statement of profit and loss for the year to 31
March 20X7, prior to notification of the change in tax rates?
A
B
C
D
5
$376,000
$340,000
$460,000
$400,000
How should the change in tax rates announced by the government be accounted for in
the financial statements for the year ended 31 March 20X7?
A
B
C
D
4
Recognise a provision of $16 million and disclose a contingent asset of $9 million
Do not include any reference to the fire, as it was in the next period
Disclose as a non-adjusting event
Recognise a provision of $16 million and an asset of $9 million
$48,360
$59,560
$73,160
$78,760
Which of the following items does IAS 41 Agriculture NOT apply to?
A
B
C
D
Biological assets
Land related to agricultural activity
Agricultural produce at the point of harvest
Government grants related to agricultural activity
(10 marks)
Question 18 PINGWAY
The following scenario relates to questions 1–5.
Pingway issued a $10 million 3% convertible loan note at par on 1 April 20X5 with interest payable
annually in arrears. On 31 March 20X8 the loan note holder can choose between conversion into 20
equity shares for each $100 of loan note or redemption at par in cash. The nominal value of an equity
share is $0.50. The effective rate of interest for this loan is 8%.
The present value of $1 receivable at the end of the year, based on discount rates of 3% and 8% can be
taken as:
3%
8%
$
$
End of year 1
0·97
0·93
2
0·94
0·86
3
0·92
0·79
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83
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
1
How many equity shares will be issued if all of the convertible loan note holders convert
the notes into equity on the conversion date?
A
B
C
D
2
At what amount will the convertible loan notes be recognised in the statement of
financial position as at 1 April 20X5?
A
B
C
D
3
$8.674 million
$10 million
$9.368 million
$7.9 million
Which of the following cost behaviour patterns best describes how the finance costs will
be expensed to profit or loss over the three year term of the convertible loan notes?
A
B
C
D
4
100,000
2,000,000
1,000,000
4,000,000
Low in year one, increasing in years two and three
High in year one, decreasing in years two and three
On a straight line basis over the three years
Only charge profit or loss on conversion of the loan notes
Pingway has a number of loan assets classified as at fair value through other comprehensive
income. It intends to sell these assets in the next financial year and hopes to make a gain on
the sale of the investments.
How should any gain on the disposal of the equity investments be accounted for when
they are sold?
5
A
Recognise any gain immediately in profit or loss
B
Recognise any gain in other comprehensive income and reclassify any cumulative
gain to profit or loss
C
Recognise any gain in other comprehensive income but do not reclassify any
cumulative gain to profit or loss
D
Recognise any gain directly in equity
In accordance with IFRS 9 Financial Instruments, under what circumstances must a
loan asset be classified at fair value through other comprehensive income?
A
B
C
D
The entity’s business model is to hold the asset to collect contractual cash flows
To eliminate an accounting mismatch using the “fair value option”
The asset is expected to be held until its maturity
The entity’s business model is to hold the asset to collect contractual cash flows and
sell the asset
(10 marks)
84
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 19 PATRONIC
On 1 August 20X5 Patronic purchased 18 million of a total of 24 million equity shares in Sardonic.
The acquisition was through a share exchange of two shares in Patronic for every three shares in
Sardonic. Both companies have shares with a par value of $1 each. The market price of Patronic’s
shares at 1 August 20X5 was $5·75 per share. Patronic will also pay in cash on 31 July 20X7 (two
years after acquisition) of $2·42 per acquired share of Sardonic. Patronic’s cost of capital is 10% per
annum. The reserves of Sardonic on 1 April 20X5 were $69 million.
Patronic has held an investment of 30% of the equity shares in Acerbic for many years.
The summarised statements of profit or loss for the three companies for the year ended 31 March 20X6
are:
Patronic
Sardonic
Acerbic
$000
$000
$000
Revenue
150,000
78,000
80,000
Cost of sales
(94,000)
(51,000)
(60,000)
–––––––
–––––––
–––––––
Gross profit
56,000
27,000
20,000
Distribution costs
(7,400)
(3,000)
(3,500)
Administrative expenses
(12,500)
(6,000)
(6,500)
Finance costs (note (ii))
(2,000)
(900)
nil
–––––––
–––––––
–––––––
Profit before tax
34,100
17,100
10,000
Income tax expense
(10,400)
(3,600)
(4,000)
–––––––
–––––––
–––––––
Profit for the period
23,700
13,500
6,000
–––––––
–––––––
–––––––
The following information is relevant:
(i)
The fair values of the net assets of Sardonic at the date of acquisition were equal to their
carrying amounts with the exception of property and plant. Property and plant had fair values
of $4·1 million and $2·4 million respectively in excess of their carrying amounts. The
increase in the fair value of the property would create additional depreciation of $200,000 in
the consolidated financial statements in the post-acquisition period to 31 March 20X6 and the
plant had a remaining life of four years (straight-line depreciation) at the date of acquisition of
Sardonic. All depreciation is treated as part of cost of sales.
The fair values have not been reflected in Sardonic’s financial statements.
No fair value adjustments were required on the acquisition of Acerbic.
(ii)
The finance costs of Patronic do not include the finance cost on the deferred consideration.
(iii)
Prior to its acquisition, Sardonic had been a good customer of Patronic. In the year to 31
March 20X6, Patronic sold goods at a selling price of $1·25 million per month to Sardonic
both before and after its acquisition. Patronic made a profit of 20% on the cost of these sales.
At 31 March 20X6 Sardonic still held inventory of $3 million (at cost to Sardonic) of goods
purchased in the post-acquisition period from Patronic.
(iv)
Non-controlling interest are valued at fair value on acquisition, the fair value of noncontrolling interest on 1 August 20X5 was $34 million. An impairment test on the goodwill
of Sardonic conducted on 31 March 20X6 concluded that it should be written down by $2
million. The value of the investment in Acerbic was not impaired.
(v)
All items in the above statements of profit or loss are deemed to accrue evenly over the year.
(vi)
Ignore deferred tax.
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85
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Required:
(a)
Prepare the consolidated statement of profit or loss for the Patronic Group for the year
ended 31 March 20X6.
Note: Assume that the investment in Acerbic has been accounted for using the equity method
since its acquisition.
(15 marks)
(b)
At 31 March 20X6 the other equity shares (70%) in Acerbic were owned by many separate
investors. Shortly after this date Spekulate (a company unrelated to Patronic) accumulated a
60% interest in Acerbic by buying shares from the other shareholders. In May 20X6 a
meeting of the board of directors of Acerbic was held at which Patronic lost its seat on
Acerbic’s board.
Required:
Explain, with reasons, the accounting treatment Patronic should adopt for its
investment in Acerbic when it prepares its financial statements for the year ending 31
March 20X6.
(5 marks)
(20 marks)
Question 20 PEDANTIC
On 1 April 20X6, Pedantic acquired 60% of the equity share capital of Sophistic in a share exchange of
two shares in Pedantic for three shares in Sophistic. The issue of shares has not yet been recorded by
Pedantic. At the date of acquisition shares in Pedantic had a market value of $6 each. Below are the
summarised draft financial statements of both companies. Sophistic made profit for the year of
$3,000,000, this profit accrued evenly throughout the year.
Statements of financial position as at 30 September 20X6
Assets
Non-current assets
Property, plant and equipment
40,600
Current assets
16,000
––––––
Total assets
56,600
––––––
Equity and liabilities
Equity shares of $1 each
10,000
Retained earnings
35,400
––––––
45,400
Non-current liabilities
10% Loan notes
3,000
Current liabilities
8,200
––––––
Total equity and liabilities
56,600
––––––
12,600
6,600
––––––
19,200
––––––
4,000
6,500
––––––
10,500
4,000
4,700
––––––
19,200
––––––
The following information is relevant:
(i)
86
At the date of acquisition, the fair values of Sophistic’s assets were equal to their carrying
amounts with the exception of an item of plant, which had a fair value of $2 million in excess
of its carrying amount. It had a remaining life of five years at that date [straight-line
depreciation is used]. Sophistic has not adjusted the carrying amount of its plant as a result of
the fair value exercise.
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(ii)
Sales from Sophistic to Pedantic in the post-acquisition period were $8 million. Sophistic
made a mark-up on cost of 40% on these sales. Pedantic had sold $5·2 million (at cost to
Pedantic) of these goods by 30 September 20X6.
(iii)
Other than where indicated, profit or loss items are deemed to accrue evenly on a time basis.
(iv)
Sophistic’s trade receivables at 30 September 20X6 include $600,000 due from Pedantic
which did not agree with Pedantic’s corresponding trade payable. This was due to cash in
transit of $200,000 from Pedantic to Sophistic. Both companies have positive bank balances.
(v)
Pedantic has a policy of accounting for any non-controlling interest at fair value. For this
purpose the fair value of the goodwill attributable to the non-controlling interest in Sophistic
is $1·5 million. Consolidated goodwill was not impaired at 30 September 20X6.
Required:
(a)
Prepare the consolidated statement of financial position for Pedantic as at 30 September
20X6.
(16 marks)
(b)
Pedantic is considering purchasing a 30% stake in Arkright. This shareholding would give
Pedantic significant influence over the strategic and operational decision making processes in
Arkright.
Required:
Explain the method that Pedantic would use to account for the shareholding in Arkright
and compare and contrast this with the method used to account for Sophistic. (4 marks)
(20 marks)
Question 21 PANDAR
On 1 April 20X6 Pandar purchased 80% of the equity shares in Salva. The acquisition was through a
share exchange of three shares in Pandar for every five shares in Salva. The market prices of Pandar’s
and Salva’s shares at 1 April 20X6 were $6 per share and $3.20 respectively.
On the same date Pandar acquired 40% of the equity shares in Ambra paying $2 per share.
The summarised statements of profit or loss for the three companies for the year ended 30 September
20X6 are:
Pandar
Salva
Ambra
$000
$000
$000
Revenue
210,000
150,000
50,000
Cost of sales
(126,000)
(100,000)
(40,000)
–––––––
–––––––
–––––––
Gross profit
84,000
50,000
10,000
Distribution costs
(11,200)
(7,000)
(5,000)
Administrative expenses
(18,300)
(9,000)
(11,000)
Investment income (interest and dividends)
9,500
Finance costs
(1,800)
(3,000)
nil
–––––––
–––––––
–––––––
Profit (loss) before tax
62,200
31,000
(6,000)
Income tax (expense) relief
(15,000)
(10,000)
1,000
–––––––
–––––––
–––––––
Profit (loss) for the year
47,200
21,000
(5,000)
–––––––
–––––––
–––––––
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87
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
The following information for the equity of the companies at 30 September 20X6 is available:
Equity shares of $1 each
Share premium
Retained earnings 1 October 20X5
Profit (loss) for the year ended
30 September 20X6
Dividends paid (26 September 20X6)
200,000
300,000
40,000
47,200
nil
120,000
nil
152,000
21,000
(8,000)
40,000
nil
15,000
(5,000)
nil
The following information is relevant:
(i)
The fair values of the net assets of Salva at the date of acquisition were equal to their carrying
amounts with the exception of an item of plant which had a carrying amount of $12 million
and a fair value of $17 million. This plant had a remaining life of five years (straight-line
depreciation) at the date of acquisition of Salva. All depreciation is charged to cost of sales.
In addition Salva owns the registration of a popular internet domain name. The registration,
which had a negligible cost, has a five year remaining life (at the date of acquisition);
however, it is renewable indefinitely at a nominal cost. At the date of acquisition the domain
name was valued by a specialist company at $20 million.
The fair values of the plant and the domain name have not been reflected in Salva’s financial
statements.
No fair value adjustments were required on the acquisition of the investment in Ambra.
(ii)
Immediately after its acquisition of Salva, Pandar invested $50 million in an 8% loan note
from Salva. All interest accruing to 30 September 20X6 had been accounted for by both
companies. Salva also has other loans in issue at 30 September 20X6.
(iii)
Pandar has credited the whole of the dividend it received from Salva to investment income.
(iv)
After the acquisition, Pandar sold goods to Salva for $15 million on which Pandar made a
gross profit of 20%. Salva had one third of these goods still in its inventory at 30 September
20X6. There are no intra-group current account balances at 30 September 20X6.
(v)
The non-controlling interest in Salva is to be valued at its (full) fair value at the date of
acquisition. For this purpose Salva’s share price at that date can be taken to be indicative of
the fair value of the shareholding of the non-controlling interest.
(vi)
The goodwill of Salva has not suffered any impairment; however, due to its losses, the value
of Pandar’s investment in Ambra has been impaired by $3 million at 30 September 20X6.
(vii)
All items in the above statements of profit or loss are deemed to accrue evenly over the year
unless otherwise indicated.
Required:
(a)
Calculate the goodwill arising on the acquisition of Salva at 1 April 20X6.
(5 marks)
(b)
Prepare the consolidated statement of profit or loss for the Pandar Group for the year
ended 30 September 20X6.
(15 marks)
(20 marks)
88
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 22 PRODIGAL
On 1 October 20X5 Prodigal purchased 75% of the equity shares in Sentinel. The acquisition was
through a share exchange of two shares in Prodigal for every three shares in Sentinel. The stock market
price of Prodigal’s shares at 1 October 20X5 was $4 per share.
The summarised statements of profit or loss and other comprehensive income for the two companies for
the year ended 31 March 20X6 are:
Prodigal
Sentinel
$000
$000
Revenue
450,000
240,000
Cost of sales
(260,000)
(110,000)
–––––––
–––––––
Gross profit
190,000
130,000
Distribution costs
(23,600)
(12,000)
Administrative expenses
(27,000)
(23,000)
Finance costs
(1,500)
(1,200)
–––––––
–––––––
Profit before tax
137,900
93,800
Income tax expense
(48,000)
(27,800)
–––––––
–––––––
Profit for the year
89,900
66,000
–––––––
–––––––
Other comprehensive income
Gain on revaluation of land (note (i))
2,500
1,000
Loss on fair value of equity financial asset investment
(700)
(400)
–––––––
–––––––
1,800
600
–––––––
–––––––
Total comprehensive income
91,700
66,600
–––––––
–––––––
The following information for the equity of the companies at 1 April 20X5 (i.e. before the share
exchange took place) is available:
$000
Equity shares of $1 each
250,000
Share premium
100,000
Revaluation surplus (land)
8,400
Other equity surplus (re equity financial asset investment)
3,200
Retained earnings
90,000
$000
160,000
nil
nil
2,200
125,000
The following information is relevant:
(i)
Prodigal’s policy is to revalue the group’s land to market value at the end of each accounting
period. Prior to its acquisition Sentinel’s land had been valued at historical cost. During the
post-acquisition period Sentinel’s land had increased in value over its value at the date of
acquisition by $1 million. Sentinel has recognised the revaluation within its own financial
statements.
(ii)
Immediately after the acquisition of Sentinel on 1 October 20X5, Prodigal transferred an item
of plant with a carrying amount of $4 million to Sentinel at an agreed value of $5 million. At
this date the plant had a remaining life of two and half years. Prodigal had included the profit
on this transfer as a reduction in its depreciation costs. All depreciation is charged to cost of
sales.
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89
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(iii)
After the acquisition Sentinel sold goods to Prodigal for $40 million. These goods had cost
Sentinel $30 million. $12 million of the goods sold remained in Prodigal’s closing inventory.
(iv)
Prodigal’s policy is to value the non-controlling interest of Sentinel at the date of acquisition
at its fair value which the directors determined to be $100 million.
(v)
The goodwill of Sentinel has not suffered any impairment.
(vi)
All items in the above statements of profit or loss and other comprehensive income are
deemed to accrue evenly over the year unless otherwise indicated.
Required:
(a)
Prepare the consolidated statement of profit or loss and other comprehensive income of
Prodigal for the year ended 31 March 20X6.
(14 marks)
(b)
Prepare the equity section (including the non-controlling interest) of the consolidated
statement of financial position of Prodigal as at 31 March 20X6.
(6 marks)
Note: You are not required to calculate consolidated goodwill or produce the statement of
changes in equity.
(20 marks)
Question 23 VIAGEM
On 1 January 20X6, Viagem acquired 90% of the equity share capital of Greca in a share exchange in
which Viagem issued two new shares for every three shares it acquired in Greca
At the date of acquisition, shares in Viagem and Greca had a stock market value of $8·50 and $2·50
each, respectively.
Statements of profit or loss for the year ended 30 September 20X6
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Investment income
Finance costs
Profit before tax
Income tax expense
Profit for the year
Equity as at 1 October 20X5
Equity shares of $1 each
Retained earnings
90
Viagem
$000
64,600
(51,200)
–––––––
13,400
(1,600)
(3,800)
500
(420)
–––––––
8,080
(2,800)
–––––––
5,280
–––––––
Greca
$000
38,000
(26,000)
–––––––
12,000
(1,800)
(2,400)
nil
nil
–––––––
7,800
(1,600)
–––––––
6,200
–––––––
30,000
54,000
10,000
35,000
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
The following information is relevant:
(i)
At the date of acquisition, the fair values of Greca’s assets were equal to their carrying
amounts with the exception of an item of plant had a fair value of $1·8 million above its
carrying amount. The remaining life of the plant at the date of acquisition was three years.
Depreciation is charged to cost of sales.
Greca has not incorporated the related fair value changes into its financial statements.
(ii)
Viagem’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, Greca’s share price at that date can be deemed to be representative of the
fair value of the shares held by the non-controlling interest.
(iii)
Viagem’s investment income is a dividend received from its investment in a 40% owned
associate which it has held for several years. The underlying earnings for the associate for the
year ended 30 September 20X6 were $2 million.
(iv)
Although Greca has been profitable since its acquisition by Viagem, the market for Greca’s
products has been badly hit in recent months and Viagem has calculated that the goodwill has
been impaired by $2 million as at 30 September 20X6.
Required:
(a)
Calculate the consolidated goodwill at the date of acquisition of Greca.
(5 marks)
(b)
Prepare the consolidated statement of profit or loss for Viagem for the year ended 30
September 20X6.
(10 marks)
(c)
Due to the market for Greca’s products falling Viagem is considering disposing of its
shareholding in Greca on 1 October 20X6. Viagem would hope to sell the investment for $55
million; the fair value of Greca’s net assets on that date would be $52.550 million and fair
value of non-controlling interest would be $2.720 million.
Required:
Briefly explain how the disposal should be accounted for in the consolidated financial
statements. Your answer should include the profit on disposal that should be recognised
in Viagem’s profit or loss and the profit to be recognised in the consolidated profit or
loss for the year ended 30 September 20X7.
(5 marks)
(20 marks)
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91
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question 24 PARADIGM
The following scenario relates to questions 1–5.
On 1 October 20X5, Paradigm acquired 75% of Strata’s equity shares by means of a share exchange of
two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to
the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata.
The market value of Paradigm’s shares at 1 October 20X5 was $2 each share, and the market value of
Strata’s share on the same date was $1.20 each share.
Extracts of the statements of financial position of the two companies as at 31 March 20X6 are:
Non-current assets
Property, plant and equipment
Paradigm
$000
Strata
$000
47,400
––––––
25,500
––––––
Equity
Equity shares of $1 each
40,000
Retained earnings/(losses) – at 1 April 20X5
19,200
– for year ended 31 March 20X6 7,400
––––––
66,600
––––––
20,000
(4,000)
8,000
––––––
24,000
––––––
At the date of acquisition, Strata produced a draft statement of profit or loss which showed it had made
a net loss after tax of $2 million at that date. Paradigm conducted a fair value exercise on Strata’s net
assets which showed that they were equal to their carrying amounts with the exception of an item of
plant which had a fair value of $3 million below its carrying amount. The plant had a remaining
economic life of three years at 1 October 20X5.
Paradigm’s policy is to value the non-controlling interest at fair value at the date of acquisition, using
Stata’s market price per share as an indicator of fair value.
1
What is the cost of investment to be included in Paradigm’s statement of financial
position as at 1 October 20X5?
A
B
C
D
2
What is the value of non-controlling interest as at 1 October 20X5?
A
B
C
D
3
$2,750,000
$10,000,000
$3,500,000
$6,000,000
What is the carrying amount of property, plant and equipment in Paradigm’s statement
of financial position as at 31 March 20X6?
A
B
C
D
92
$13.5 million
$12 million
$14 million
$8.2 million
$72,900,000
$70,400,000
$75,500,000
$70,900,000
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
4
On acquisition of an 80% subsidiary a bargain purchase (“negative goodwill”) of $200,000 is
calculated.
What adjustment is required to the non-controlling interest in the consolidated financial
statements?
A
B
C
D
5
Credit non-controlling interest with $40,000
Debit non-controlling interest with $40,000
No adjustment as a non-controlling interest does not share in a bargain purchase
It depends on the choice of basis for measuring non-controlling interest
Which of the following formulae will give the correct calculation of the profit or loss on
disposal of a subsidiary to be included in consolidated profit or loss?
A
Proceeds on disposal – Original cost of shares
B
Proceeds on disposal – Net assets of subsidiary on disposal – Any remaining
goodwill – Non-controlling interest
C
Net assets of subsidiary on disposal + Remaining goodwill – Proceeds on disposal –
Non-controlling interest
D
Non-controlling interest + Proceeds on disposal + Remaining goodwill – Net asset
of subsidiary
(10 marks)
Question 25 POLESTAR
On 1 April 20X6, Polestar acquired 75% of the equity share capital of Southstar. Southstar had been
experiencing difficult trading conditions and making significant losses. In allowing for Southstar’s
difficulties, Polestar made an immediate cash payment of only $1·50 per share. In addition, Polestar
will pay a further amount in cash on 30 September 20X7 if Southstar returns to profitability by that
date. The value of this contingent consideration at the date of acquisition was estimated to be $1·8
million, but at 30 September 20X6 in the light of continuing losses, its value was estimated at only $1·5
million. The contingent consideration has not been recorded by Polestar. Overall, the directors of
Polestar expect the acquisition to be a bargain purchase leading to negative goodwill.
At the date of acquisition shares in Southstar had a listed market price of $1·20 each.
Below are the summarised draft financial statements of both companies.
Statements of profit or loss for the year ended 30 September 20X6
Revenue
Cost of sales
Gross profit (loss)
Distribution costs
Administrative expenses
Finance costs
Profit (loss) before tax
Income tax (expense)/relief
Profit (loss) for the year
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Polestar
$000
110,000
(88,000)
–––––––
22,000
(3,000)
(5,250)
(250)
–––––––
13,500
(3,500)
–––––––
10,000
–––––––
Southstar
$000
66,000
(67,200)
–––––––
(1,200)
(2,000)
(2,400)
nil
–––––––
(5,600)
1,000
–––––––
(4,600)
–––––––
93
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Statements of financial position as at 30 September 20X6
Assets
Non-current assets
Property, plant and equipment
Financial asset: equity investments (note (ii))
Current assets
Total assets
Equity and liabilities
Equity
Equity shares of 50 cents each
Retained earnings
Current liabilities
Total equity and liabilities
41,000
16,000
–––––––
57,000
16,500
–––––––
73,500
–––––––
21,000
nil
–––––––
21,000
4,800
–––––––
25,800
–––––––
30,000
28,500
–––––––
58,500
15,000
–––––––
73,500
–––––––
6,000
12,000
–––––––
18,000
7,800
–––––––
25,800
–––––––
The following information is relevant:
(i)
At the date of acquisition, the fair values of Southstar’s assets were equal to their carrying
amounts with the exception of a property. This had a fair value of $2 million above its
carrying amount and a remaining useful life of 10 years at that date. All depreciation is
included in cost of sales.
(ii)
Polestar has recorded its investment in Southstar at the cost of the immediate cash payment;
other equity investments are carried at fair value through profit or loss as at 1 October 20X5.
The other equity investments have fallen in value by $200,000 during the year ended 30
September 20X6.
(iii)
Polestar’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose, Southstar’s share price at that date can be deemed to be representative of the
fair value of the shares held by the non-controlling interest.
(iv)
All items in the above statements of profit or loss are deemed to accrue evenly over the year
unless otherwise indicated.
Required:
(a)
Prepare the consolidated statement of profit or loss for Polestar for the year ended 30
September 20X6.
(b)
Prepare the consolidated statement of financial position for Polestar as at 30 September
20X6.
Note: Ignore taxation.
The following mark allocation is provided as guidance for this question:
(a)
(b)
11 marks
9 marks
(20 marks)
94
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 26 RANGOON
The following scenario relates to questions 1–5.
Rangoon has a financial year end of 31 December. Rangoon has entered into a number of foreign
currency transactions during the last two years, including the following:
Transaction 1
On 1 January 20X5 Rangoon purchased a financial asset for Krown 7,650,000 which is classified as at
fair value through profit or loss. Its fair value at 31 December 20X5 had fallen to Krown 7,430,000 and
at 31 December 20X6 it had increased to Krown 8,100,000.
Transaction 2
On 28 November 20X6 Rangoon purchased raw materials from a foreign company for Krown 528,000.
The materials were to be used in the construction of an asset for Rangoon’s own use. At 31 December
20X6 Rangoon had not paid for these raw materials.
Exchange rates are as follows:
1 January 20X5
31 December 20X5
28 November 20X6
31 December 20X6
Average for 20X6
1
2
In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates which of
the following factors will determine an entity’s functional currency?
(1)
(2)
(3)
(4)
The currency that mainly influences the selling price of goods and services
The currency of the country in which the head office of the entity is located
The currency that the majority of an entity’s input costs are denominated in
The currency that is voted on by shareholders at an entity’s annual general meeting
A
B
C
D
1 and 2
1 and 3
2 and 4
3 and 4
What gain or loss will be recognised in Rangoon’s statement of profit or loss and other
comprehensive income for the year ended 31 December 20X6 in respect of the financial
asset?
A
B
C
D
3
$1 = Krown 5.12
$1 = Krown 4.99
$1 = Krown 5.88
$1 = Krown 6.02
$1 = Krown 5.66
$143,463 gain
$5,163 gain
$5,163 loss
$143,463 loss
What is Rangoon’s trade payable as at 31 December 20X6 in respect of the purchase of
raw materials?
A
B
C
D
$89,796
$87,708
$93,283
$3,178,560
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95
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
4
Where in the statement of profit or loss and other comprehensive income will gains of
losses for the two transactions be recognised?
A
B
C
D
5
Transaction 1
Profit or loss
Profit or loss
Other comprehensive income
Other comprehensive income
Transaction 2
Profit or loss
Other comprehensive income
Profit or loss
Other comprehensive income
When must an entity change its functional currency?
A
B
C
D
When shareholders vote for a change at annual general meeting
The functional currency can never be changed
When the underlying conditions that led to the original classification change
When the currency suffers from a devaluation
(10 marks)
Question 27 WITTON WAY
The following information has been extracted from the draft consolidated financial statements of
Witton Way Co:
Statements of profit or loss for the year to 30 April
Revenue
Cost of sales
Gross profit
Other expenses
Profit on disposal of subsidiary
Finance costs
Profit before taxation
Income tax expense
Profit for the year
Non-controlling interest’s share of consolidated profit
96
20X7
$000
25,060
(16,190)
––––––
8,870
(2,780)
1,400
(400)
––––––
7,090
(1,810)
––––––
5,280
––––––
96
20X6
$000
26,140
(18,730)
––––––
7,410
(2,810)
–
(260)
––––––
4,340
(2,060)
––––––
2,280
––––––
150
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Statements of financial position at 30 April
Assets
Non-current assets
Tangible assets
Current assets
Inventories
Trade receivables
Cash
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Retained earnings
Non-controlling interest
Total equity
Non-current liabilities
Current liabilities
Trade payables
Other
Total equity and liabilities
20X7
$000
20X6
$000
34,060
––––––
39,800
––––––
8,420
5,470
40
––––––
13,930
––––––
47,990
––––––
5,270
3,900
1,600
––––––
10,770
––––––
50,570
––––––
12,000
25,820
––––––
37,820
–
––––––
37,820
12,000
25,690
––––––
37,690
1,260
––––––
38,980
4,600
7,100
3,760
1,810
––––––
5,570
––––––
47,990
––––––
2,460
2,060
––––––
4,520
––––––
50,570
––––––
Additional information
On 31 October 20X6 Witton Way Co sold its only subsidiary, Brew4Two Co. The results of
Brew4Two Co for the six months to 31 October 20X6, included in the consolidated profit or loss for
year ended 30 April 20X7, are as follows:
$000
Revenue
4,110
Cost of sales
(2,800)
––––––
Gross profit
1,310
Other expenses
(520)
Income tax expense
(310)
––––––
Profit for the year
480
––––––
At the disposal date, the assets and liabilities of Brew4Two Co amount to $7,620,000 and $1,850,000,
respectively. Brew4Two Co conducts business independently from Witton Way Co.
The CEO of Witton Way Co was extremely happy with the results for the current year, commenting on
the fact that profits had more than doubled during the year and it is hoped that this trend can continue
into the foreseeable future.
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97
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Required:
(a)
Comment on how the disposal of Brew4Two would be presented in the consolidated
financial statements for the year ended 30 April 20X7.
(4 marks)
(b)
Calculate appropriate ratios and comment on the results of the Witton Way group,
making reference to the CEO’s comments regarding the profitability for the current
period. Note: Six marks are available for the ratio calculations.
(16 marks)
Note: Ignore taxation on profit on disposal of Brew4Two.
(20 marks)
Question 28 IONA
Iona is the listed parent of a group of companies which operate in the engineering industry. The Chief
Executive Officer of Iona has initiated an aggressive growth strategy to increase market share. During
the current year this has included the acquisition of Arran, another engineering company.
The following is an extract from a recent press release of Iona:
“Iona announces strong results.
The group has produced excellent results for the year ended 31 March 20X7. Revenue grew
by 19% and profit before taxation and goodwill impairment charges increased by 33%. We
are now delivering our growth strategy.”
You are the finance director of Lundy, a company operating in the same business sector as Iona. Your
fellow directors have asked you to review the financial performance, financial position and liquidity of
Iona as part of the annual review of companies operating within the same business sector.
The following information has been provided:
Statements of profit or loss for year ended 31 March
Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Finance costs
Profit before tax
Tax
Profit for period
98
20X7
$000
23,460
(16,780)
––––––
6,680
(3,410)
––––––
3,270
(1,110)
––––––
2,160
(810)
––––––
1,350
––––––
20X6
$000
19,710
(14,200)
––––––
5,510
(2,530)
––––––
2,980
(1,210)
––––––
1,770
(590)
––––––
1,180
––––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Extract from statement of changes in equity for year ended 31 March 20X7
Retained earnings
$000
Balance at 1 April 20X6
6,650
Total comprehensive income
1,350
Final 20X6 dividend on ordinary shares ($0.08 per ordinary share)
(800)
––––––
Balance at 31 March 20X7
7,200
––––––
A final dividend in respect of the year ended 31 March 20X7 of $960,000 ($.08 per share)
was declared in April 20X7.
Statements of financial position at 31 March
20X7
$000
ASSETS
Non-current assets
Property, plant and equipment
Intangibles (including customer base)
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
20X6
$000
22,010
2,570
––––––
24,580
4,340
2,350
100
––––––
Total assets
EQUITY AND LIABILITIES
Equity
Equity shares of $1 each
Share premium
Retained earnings
Non-current liabilities
Borrowings
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$000
22,190
1,200
––––––
23,390
3,250
2,210
20
––––––
6,790
––––––
31,370
––––––
5,480
––––––
28,870
––––––
12,000
4,020
7,200
––––––
23,220
10,000
2,000
6,650
––––––
18,650
5,500
8,000
Current liabilities
Trade payables and other liabilities 1,900
Taxation
750
––––––
Total equity and liabilities
$000
1,640
580
––––––
2,650
––––––
31,370
––––––
2,220
––––––
28,870
––––––
99
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Extract from notes to the financial statements
Acquisition during the year
Two million $1 ordinary shares were issued on 1 January 20X7 to acquire 100% of the share capital of
Arran. Details of the consideration and net assets acquired were as follows:
$000
Fair value of assets acquired:
Property, plant and equipment
Customer base
Inventories
Other net current assets
1,480
720
570
400
––––––
3,170
Goodwill
850
––––––
Fair value of consideration
4,020
––––––
The statement of profit or loss includes revenue of $1,550,000 and profit from operations of $380,000
in relation to Arran since the date of acquisition. If the acquisition had been made on 1 April 20X6, the
statement of profit or loss would have included revenue of $5,840,000 and profit from operations of
$1,280,000.
Additional information
Gearing (net debt/equity)
Operating margin
Inventory turnover
Trade receivables collection period
Trade payables payment period
Return on capital employed (ROCE)
Average number of employees
Market average ROCE
Market revenue growth rate (industry estimate)
20X7
23.7%
13.9%
3.9 times
36.6 days
41.3 days
11.6%
1,250
10.1%
12.0%
20X6
42.8%
15.1%
4.4 times
40.9 days
42.2 days
11.2%
1,300
8.2%
9.0%
Required:
(a)
Comment on the performance, financial position and liquidity of Iona, calculating five
additional relevant ratios to assist in your analysis.
(17 marks)
(b)
Comment on the usefulness to investors of the disclosure information in respect of
acquisitions required by IFRS 3 Business Combinations.
(3 marks)
(20 marks)
100
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 29 HARBIN
Shown below are the recently issued (summarised) financial statements of Harbin, a listed company, for
the year ended 30 September 20X6, together with comparatives for 20X5 and extracts from the Chief
Executive’s report that accompanied their issue.
Statement of profit or loss
Revenue
Cost of sales
Gross profit
Operating expenses
Finance costs
Profit before tax
Income tax expense (at 25%)
Profit for the period
Statement of financial position
Non-current assets
Property, plant and equipment
Goodwill
Current assets
Inventory
Trade receivables
Bank
Total assets
Equity and liabilities
Equity shares of $1 each
Retained earnings
Non-current liabilities
8% Loan notes
Current liabilities
Bank overdraft
Trade payables
Current tax payable
Total equity and liabilities
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20X6
$000
250,000
(200,000)
–––––––
50,000
(26,000)
(8,000)
–––––––
16,000
(4,000)
–––––––
12,000
–––––––
20X5
$000
180,000
(150,000)
–––––––
30,000
(22,000)
nil
–––––––
8,000
(2,000)
–––––––
6,000
–––––––
20X6
$000
210,000
10,000
–––––––
220,000
–––––––
20X5
$000
90,000
nil
–––––––
90,000
–––––––
25,000
13,000
nil
–––––––
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
–––––––
nil
–––––––
17,000
23,000
4,000
–––––––
44,000
–––––––
258,000
–––––––
nil
13,000
2,000
–––––––
15,000
–––––––
127,000
–––––––
101
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Extracts from the Chief Executive’s report:
“Highlights of Harbin’s performance for the year ended 30 September 20X6:
an increase in sales revenue of 39%
gross profit margin up from 16·7% to 20%
a doubling of the profit for the period.
“In response to the improved position the Board paid a dividend of $0.10 per share in September 20X6
an increase of 25% on the previous year.”
You have also been provided with the following further information.
On 1 October 20X5 Harbin purchased the whole of the net assets of Fatima (previously a privately
owned entity) for $100 million. The contribution of the purchase to Harbin’s results for the year ended
30 September 20X6 was:
$000
Revenue
70,000
Cost of sales
(40,000)
––––––
Gross profit
30,000
Operating expenses
(8,000)
––––––
Profit before tax
22,000
––––––
There were no disposals of non-current assets during the year.
The following ratios have been calculated for Harbin for the year ended 30 September 20X5:
Return on year-end capital employed
(profit before interest and tax over total assets less current liabilities)
Net asset (equal to capital employed) turnover
Net profit (before tax) margin
Current ratio
Closing inventory holding period (in days)
Trade receivables’ collection period (in days)
Gearing (debt over debt plus equity)
7·1%
1·6
4·4%
2·5
37
16
nil
Required:
(a)
Calculate ratios for Harbin for the year ended 30 September 20X6 equivalent to those
calculated for the year ended 30 September 20X6 (showing your workings).
(7 marks)
(b)
Assess the financial performance and position of Harbin for the year ended 30
September 20X6 compared to the previous year. Your answer should refer to the
information in the Chief Executive’s report and the impact of the purchase of the net
assets of Fatima.
(13 marks)
(20 marks)
102
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 30 VICTULAR
Victular is a public company that would like to acquire (100% of) a suitable private company. It has
obtained the following draft financial statements for two companies, Grappa and Merlot. They operate
in the same industry and their managements have indicated that they would be receptive to a takeover.
Statements of profit or loss for the year ended 30 September 20X6
Revenue
Cost of sales
Gross profit
Operating expenses
Finance costs – loan
– overdraft
– lease interest
Profit before tax
Income tax expense
Profit for the year
Grappa
$000
12,000
(10,500)
––––––
1,500
(240)
(210)
nil
nil
–––––
1,050
(150)
–––––
900
–––––
Merlot
$000
20,500
(18,000)
––––––
2,500
(500)
(300)
(10)
(290)
–––––
1,400
(400)
–––––
1,000
–––––
Extract from the statement of changes in equity:
Dividends paid during the year
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250
––––
700
––––
103
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Statements of financial position as at 30 September 20X6
$000
Grappa
$000
Assets
Non-current assets
Factory (note (i))
Owned plant (note (ii))
Leased plant (note (ii))
Current assets
Inventory
Trade receivables
Bank
4,400
5,000
nil
–––––
9,400
2,000
2,400
600
–––––
Total assets
Equity and liabilities
Equity shares of $1 each
Property revaluation surplus
Retained earnings
Non-current liabilities
Lease liability (note (iii))
7% Loan notes
10% Loan notes
Deferred tax
Government grants
Current liabilities
Bank overdraft
Trade payables
Government grants
Lease liability (note (iii))
Taxation
$000
5,000
––––––
14,400
––––––
nil
2,200
5,300
–––––
7,500
3,600
3,700
nil
–––––
2,000
900
2,600
–––––
3,500
–––––
5,500
nil
3,000
nil
600
1,200
–––––
nil
3,100
400
nil
600
–––––
Total equity and liabilities
4,800
4,100
–––––
14,400
–––––
Merlot
$000
7,300
–––––
14,800
–––––
2,000
nil
800
–––––
3,200
nil
3,000
100
nil
–––––
1,200
3,800
nil
500
200
–––––
800
–––––
2,800
6,300
5,700
–––––
14,800
–––––
Notes
(i)
Both companies operate from similar premises.
(ii)
Additional details of the two companies’ plant are:
Owned plant – cost
Leased plant – original fair value
Grappa
$000
8,000
nil
Merlot
$000
10,000
7,500
There were no disposals of plant during the year by either company.
104
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(iii)
The interest rate implicit in Merlot’s leases is 7·5% per annum. For the purpose of
calculating return on capital employed (ROCE) and gearing, all lease obligations are treated
as long-term interest bearing borrowings.
(iv)
The following ratios have been calculated for Grappa and can be taken to be correct:
ROCE (see note (iii) above)
Pre-tax return on equity (ROE)
Net asset (total assets less current liabilities) turnover
Gross profit margin
Operating profit margin
Current ratio
Closing inventory holding period
Trade receivables’ collection period
Trade payables’ payment period (using cost of sales)
Gearing (see note (iii) above)
Interest cover
Dividend cover
14·8%
19·1%
1·2 times
12·5%
10·5%
1·2:1
70 days
73 days
108 days
35·3%
6 times
3·6 times
Required:
(a)
Calculate for Merlot the ratios equivalent to all those given for Grappa above. (8 marks)
(b)
Assess the relative performance and financial position of Grappa and Merlot for the
year ended 30 September 20X6 to inform the directors of Victular in their acquisition
decision.
(12 marks)
(20 marks)
Question 31 HARDY
Hardy is a public listed manufacturing company. Its summarised financial statements for the year
ended 30 September 20X6 (and 20X5 comparatives) are as follows:
Statements of profit or loss for the year ended 30 September
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Investment income
Finance costs
Profit (loss) before taxation
Income tax (expense) relief
Profit (loss) for the year
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
20X6
$000
29,500
(25,500)
–––––––
4,000
(1,050)
(4,900)
50
(600)
–––––––
(2,500)
400
–––––––
(2,100)
–––––––
20X5
$000
36,000
(26,000)
–––––––
10,000
(800)
(3,900)
200
(500)
–––––––
5,000
(1,500)
–––––––
3,500
–––––––
105
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Statements of financial position as at 30 September
$000
Assets
Non-current assets
Property, plant and equipment
Investments at fair value
through profit or loss
Current assets
Inventory and work-in-progress 2,200
Trade receivables
2,200
Tax asset
600
Bank
1,200
–––––
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Share premium
Revaluation surplus
Retained earnings
Non-current liabilities
Bank loan
Deferred tax
Current liabilities
Trade payables
Current tax payable
Total equity and liabilities
3,400
nil
–––––
20X6
$000
$000
20X5
$000
17,600
24,500
2,400
––––––
20,000
4,000
––––––
28,500
6,200
––––––
26,200
––––––
1,900
2,800
nil
100
–––––
4,800
––––––
33,300
––––––
13,000
1,000
nil
3,600
––––––
17,600
12,000
nil
4,500
6,500
––––––
23,000
4,000
1,200
5,000
700
3,400
––––––
26,200
––––––
2,800
1,800
–––––
4,600
––––––
33,300
––––––
The following information has been obtained from the Chairman’s Statement and the notes to the
financial statements:
“Market conditions during the year ended 30 September 20X6 proved very challenging due largely to
difficulties in the global economy as a result of a sharp recession which has led to steep falls in share
prices and property values.
Hardy has not been immune from these effects and our properties have suffered impairment losses of
$6 million in the year.”
The excess of these losses over previous surpluses has led to a charge to cost of sales of $1·5 million in
addition to the normal depreciation charge.
“Our portfolio of investments at fair value through profit or loss has been “marked to market” (fair
valued) resulting in a loss of $1·6 million (included in administrative expenses).”
There were no additions to or disposals of non-current assets during the year.
106
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
“In response to the downturn the company has unfortunately had to make a number of employees
redundant incurring severance costs of $1·3 million (included in cost of sales) and undertaken cost
savings in advertising and other administrative expenses.”
“The difficulty in the credit markets has meant that the finance cost of our variable rate bank loan has
increased from 4·5% to 8%. In order to help cash flows, the company made a rights issue during the
year and reduced the dividend per share by 50%.”
“Despite the above events and associated costs, the Board believes the company’s underlying
performance has been quite resilient in these difficult times.”
Required:
Analyse and discuss the financial performance and position of Hardy as portrayed by the above
financial statements and the additional information provided.
Your analysis should be supported by profitability, liquidity and gearing and other appropriate ratios
(up to 8 marks available).
(20 marks)
Question 32 QUARTILE
The following scenario relates to questions 1–5.
The financial statements of Quartile for the year ended 30 September 20X6 are:
Statement of profit or loss
$000
Revenue
Opening inventory
Purchases
Closing inventory
Gross profit
Operating costs
Finance costs
Profit before tax
Income tax expense
Profit for the year
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8,300
43,900
(10,200)
–––––––
$000
56,000
(42,000)
––––––
14,000
(9,800)
(800)
––––––
3,400
(1,000)
––––––
2,400
––––––
107
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Statement of financial position
$000
Assets
Non-current assets
Property and shop fittings
Current assets
Inventory
Bank
30,600
10,200
1,000
––––––
Total assets
Equity and liabilities
Equity shares of $1 each
Retained earnings
Non-current liabilities
10% Loan notes
Current liabilities
Trade payables
Current tax payable
8,000
5,400
1,800
–––––––
0.14
1.56
0.74
1.42
What is Quartile’s trade payables payment period as at 30 September 20X6?
A
B
C
D
108
12.8%
9.8%
15.8%
12.1%
What is the current ratio for the year ended 30 September 20X6?
A
B
C
D
3
7,200
–––––––
41,800
–––––––
What is the return on capital employed for the year ended 30 September 20X6?
A
B
C
D
2
11,200
––––––
41,800
––––––
15,000
11,600
––––––
26,600
Total equity and liabilities
1
$000
60 days
63 days
47 days
45 days
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
4
5
Which of the following are TRUE of trend analysis?
(1)
(2)
(3)
(4)
It uses changes in monetary amount and percentage terms to identify patterns
It concentrates on the relative size of current assets
It examines changes over time
It allows the comparison of two companies over a period of time
A
B
C
D
1 and 3
1 and 4
2 and 3
2 and 4
The following are possible methods of measuring assets and liabilities other than historical
cost:
(1)
(2)
(3)
(4)
Current cost
Realisable value
Present value
Replacement cost
According to the IASB’s Conceptual Framework for Financial Reporting which of the
measurement bases above can be used to measure assets and liabilities in the statement
of financial position?
A
B
C
D
1 and 2 only
1, 2 and 3 only
2 and 3 only
1, 2, 3 and 4
(10 marks)
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109
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question 33 CROSSWIRE
The following information relates to Crosswire a publicly listed company:
Summarised statements of financial position
30 September 20X6
$000
$000
Assets
Non-current assets
Property, plant and equipment (note (i))
Development costs (note (ii))
Current assets
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Share premium
Other equity reserve
Revaluation surplus
Retained earnings
Non-current liabilities
10% convertible loan notes
(note (iii))
Environmental provision
Lease obligations
Deferred tax
Current liabilities
Lease obligations
Trade payables
Total equity and liabilities
30 September 20X5
$000
$000
32,500
1,000
––––––
33,500
8,200
––––––
41,700
––––––
13,100
2,500
––––––
15,600
6,800
––––––
22,400
––––––
5,000
6,000
500
2,000
5,700
–––––
1,000
3,300
5,040
3,360
–––––
1,760
8,040
–––––
14,200
––––––
19,200
12,700
9,800
––––––
41,700
––––––
4,000
2,000
500
nil
3,200
–––––
5,000
nil
nil
1,200
–––––
nil
6,500
–––––
5,700
––––––
9,700
6,200
6,500
––––––
22,400
––––––
Information from the statements of profit or loss
Revenue
Finance costs (note (iv))
Income tax expense
Profit for the year (after tax)
110
30 September 20X6
$000
52,000
1,050
1,000
4,000
30 September 20X5
$000
42,000
500
800
3,000
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
The following information is available:
(i)
During the year to 30 September 20X6, Crosswire embarked on a replacement and expansion
programme for its non-current assets. The details of this programme are:
On 1 October 20X5 Crosswire acquired a platinum mine at a cost of $5 million. A condition
of mining the platinum is a requirement to landscape the mining site at the end of its
estimated life of ten years. The present value of this cost at the date of the purchase was
calculated at $3 million (in addition to the purchase price of the mine of $5 million).
Also on 1 October 20X5 Crosswire revalued its land for the first time. The credit in the
revaluation surplus is the net amount of the revaluation after a transfer to deferred tax on the
gain. The tax rate applicable to Crosswire for deferred tax is 20% per annum.
On 1 April 20X6 Crosswire took out a right-of-use lease for some new plant. The initial
amount recognised for the plant was $10 million. The lease agreement provided for an initial
payment on 1 April 20X6 of $2·4 million followed by eight six-monthly payments of $1·2
million commencing 30 September 20X6.
Plant disposed of during the year had a carrying amount of $500,000 and was sold for $1·2
million. The remaining movement on the property, plant and equipment, after charging
depreciation of $3 million, was the cost of replacing plant.
(ii)
From 1 October 20X5 to 31 March 20X6 a further $500,000 was spent completing the
development project at which date marketing and production started. The sales of the new
product proved disappointing and on 30 September 20X6 the development costs were written
down to $1 million via an impairment charge.
(iii)
During the year ended 30 September 20X6, $4 million of the 10% convertible loan notes
matured. The loan note holders had the option of redemption at par in cash or to exchange
them for equity shares on the basis of 20 new shares for each $100 of loan notes. 75% of the
loan-note holders chose the equity option. Ignore any effect of this on the other equity
reserve.
All the above items have been treated correctly according to International Financial Reporting
Standards.
(iv)
The finance costs are made up of:
For year ended:
30 September 20X6
$000
lease interest
400
unwinding of environmental provision
300
loan-note interest
350
––––––
1,050
––––––
30 September 20X5
$000
nil
nil
500
––––––
500
––––––
Required:
(a)
Prepare a statement of the movements in the carrying amount of Crosswire’s noncurrent assets for the year ended 30 September 20X6;
(8 marks)
(b)
Calculate the amounts that would appear under the headings of “cash flows from
investing activities” and “cash flows from financing activities” in the statement of cash
flows for Crosswire for the year ended 30 September 20X6.
Note: Crosswire includes finance costs paid as a financing activity.
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(7 marks)
111
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(c)
A shareholder has written to the directors of Crosswire expressing particular concern over the
deterioration of the company’s return on capital employed (ROCE).
Required:
Calculate Crosswire’s ROCE for the two years ended 30 September 20X5 and 20X6 and
comment on the apparent cause of its deterioration.
(5 marks)
Note: ROCE should be calculated as profit before interest on long-term borrowings and tax as
a percentage of equity plus loan notes and lease obligations (at the year end).
(20 marks)
Question 34 MOROCCO
(a)
Morocco is a public listed company. Its summarised financial statements for the years ended
31 March 20X7 and the comparative figures are shown below:
Statements of profit or loss and other comprehensive income for the year ended 31 March
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Finance costs
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income
Total comprehensive income
112
20X7
$m
2,700
(1,890)
–––––
810
(230)
(345)
(40)
–––––
195
(60)
–––––
135
80
–––––
215
–––––
20X6
$m
1,820
(1,092)
–––––
728
(130)
(200)
(5)
–––––
393
(113)
–––––
280
nil
–––––
280
–––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Statements of financial position as at 31 March
20X7
Assets
$m
Non-current assets
Property, plant and equipment
Intangible asset: manufacturing licence
Investment at cost: shares in Raremetal
Current assets
Inventory
Trade receivables
Bank
200
195
nil
–––––
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Reserves
Revaluation
Retained earnings
Non-current liabilities
5% Loan notes
10% secured loan notes
Current liabilities
Bank overdraft
Trade payables
Current tax payable
100
300
––––
110
210
80
––––
Total equity and liabilities
20X6
$m
$m
680
300
230
–––––
1,210
395
–––––
1,605
–––––
$m
410
200
nil
–––––
610
110
75
120
–––––
305
–––––
915
–––––
350
250
80
375
–––––
805
nil
295
–––––
545
400
400
–––––
1,605
–––––
100
nil
––––
nil
160
110
––––
100
270
––––
915
––––
The following information is relevant:
Depreciation/amortisation charges for the year ended 31 March 20X7 were:
Property, plant and equipment
Intangible asset: manufacturing licence
$m
115
25
There were no sales of non-current assets during the year, although property has been
revalued.
Required:
Prepare the statement of cash flows for the year ended 31 March 20X7 for Morocco in
accordance with the indirect method in accordance with IAS 7 Statement of cash flows.
(11 marks)
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113
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(b)
Morocco is currently considering the purchase of a foreign subsidiary.
concerned about the identification of the functional currency of an entity.
Management is
Required:
Discuss the principles set out in IAS 21 The Effects of Changes in Foreign Exchange
Rates that determine the functional currency of an entity.
(5 marks)
(c)
On a separate matter, you have been asked to advise on an application for a loan to build an
extension to a sports club which is a not-for-profit organisation. You have been provided
with the audited financial statements of the sports club for the last four years.
Required:
Identify and explain the ratios that you would calculate to assist in determining whether
you would advise that the loan should be granted.
(4 marks)
(20 marks)
Question 35 MONTY
Monty is a publicly listed company. Its financial statements for the year ended 31 March 20X7
including comparatives are shown below:
Statements of profit or loss and other comprehensive income for the year ended 31 March
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Finance costs – loan interest
– lease interest
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income (note (i))
114
20X7
$000
31,000
(21,800)
––––––
9,200
(3,600)
(2,200)
(150)
(250)
––––––
3,000
(1,000)
––––––
2,000
1,350
––––––
3,350
––––––
20X6
$000
25,000
(18,600)
––––––
6,400
(2,400)
(1,600)
(250)
(100)
––––––
2,050
(750)
––––––
1,300
nil
––––––
1,300
––––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Statements of financial position as at 31 March
20X7
$000
Assets
Non-current assets
Property, plant and equipment
Deferred development expenditure
Current assets
Inventory
Trade receivables
Bank
3,300
2,950
50
––––––
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Revaluation surplus
Retained earnings
Non-current liabilities
8% Loan notes
Deferred tax
Lease obligation
Current liabilities
Lease obligation
Trade payables
Current tax payable
20X6
$000
$000
14,000
1,000
––––––
15,000
6,300
––––––
21,300
––––––
10,700
nil
––––––
10,700
3,800
2,200
1,300
––––––
8,000
1,350
3,200
––––––
12,550
1,400
1,500
1,200
––––––
750
2,650
1,250
––––––
Total equity and liabilities
4,100
4,650
––––––
21,300
––––––
$000
7,300
––––––
18,000
––––––
8,000
nil
1,750
––––––
9,750
3,125
800
900
––––––
600
2,100
725
––––––
4,825
3,425
––––––
18,000
––––––
Notes:
(i)
On 1 July 20X6, Monty acquired additional plant under a right-of-use lease, the initial amount
recognised for the asset was $1·5 million. On this date it also revalued its property upwards
by $2 million and transferred $650,000 of the resulting revaluation surplus this created to
deferred tax. There were no disposals of non-current assets during the period.
(ii)
Depreciation of property, plant and equipment was $900,000 and amortisation of the deferred
development expenditure was $200,000 for the year ended 31 March 20X7.
Required:
(a)
Prepare a statement of cash flows for Monty for the year ended 31 March 20X7, in
accordance with IAS 7 Statement of Cash flows, using the indirect method.
(12 marks)
(b)
Briefly comment on the comparative performance of Monty in terms of its return on
capital employed, profit margins, asset utilisation and gearing.
Note: Up to 4 marks are available for the calculation of the ratios.
(8 marks)
(20 marks)
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115
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question 36 KINGDOM
Kingdom is a public listed manufacturing company. Its draft summarised financial statements for the
year ended 30 September 20X6 (and 20X5 comparatives) are:
Statements of profit or loss and other comprehensive income for the year ended 30 September
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Investment properties – rentals received
– fair value changes
Finance costs
Profit before taxation
Income tax
Profit for the year
Other comprehensive income
Total comprehensive income
116
20X6
$000
44,900
(31,300)
–––––––
13,600
(2,400)
(7,850)
350
(700)
(600)
–––––––
2,400
(600)
–––––––
1,800
(1,300)
–––––––
500
–––––––
20X5
$000
44,000
(29,000)
–––––––
15,000
(2,100)
(5,900)
400
500
(600)
–––––––
7,300
(1,700)
–––––––
5,600
1,000
–––––––
6,600
–––––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Statements of financial position as at 30 September
20X6
$000
Assets
Non-current assets
Property, plant and equipment
Investment properties
Current assets
Inventory
Trade receivables
Bank
$000
26,700
4,100
––––––
30,800
2,300
3,000
nil
––––––
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Revaluation surplus
Retained earnings
Non-current liabilities
12% Loan notes
Current liabilities
Trade payables
Accrued finance costs
Bank
Current tax payable
20X5
$000
4,200
100
200
500
––––––
Total equity and liabilities
5,300
––––––
36,100
––––––
$000
25,200
5,000
––––––
30,200
3,100
3,400
300
––––––
6,800
––––––
37,000
––––––
17,200
1,200
7,700
––––––
26,100
15,000
2,500
8,700
––––––
26,200
5,000
5,000
5,000
––––––
36,100
––––––
3,900
50
nil
1,850
––––––
5,800
––––––
37,000
––––––
The following information is relevant:
On 1 July 20X6, Kingdom acquired a new investment property at a cost of $1·4 million. On this date, it
also transferred one of its other investment properties to property, plant and equipment at its fair value
of $1·6 million as it became owner-occupied on that date. Kingdom adopts the fair value model for its
investment properties.
Kingdom also has a policy of revaluing its other properties (included as property, plant and equipment)
to market value at the end of each year. Other comprehensive income and the revaluation surplus both
relate to these properties.
Depreciation of property, plant and equipment during the year was $1·5 million. An item of plant with
a carrying amount of $2·3 million was sold for $1·8 million during September 20X6.
Required:
(a)
Prepare the statement of cash flows for Kingdom for the year ended 30 September 20X6
in accordance with IAS 7 Statement of Cash Flows using the indirect method. (12 marks)
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117
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(b)
At a board meeting to consider the results shown by the draft financial statements, concern
was expressed that, although there had been a slight increase in revenue during the current
year, the profit before tax had fallen dramatically. The purchasing director commented that
he was concerned about the impact of rising prices. During the year to 30 September 20X6,
most of Kingdom’s manufacturing and operating costs have risen by an estimated 8% per
annum.
Required:
(i)
Explain the causes of the fall in Kingdom’s profit before tax.
(5 marks)
(ii)
Describe the main effects which the rising prices may have on the
interpretation of Kingdom’s financial statements. You are not required to
quantify these effects.
(3 marks)
(20 marks)
Question 37 SAVOIR
The following scenario relates to questions 1–5.
The issued share capital of Savoir, a publicly listed company, at 31 March 20X4 was $10 million
(shares of 25 cents each). Savoir’s earnings attributable to its ordinary shareholders for the year ended
31 March 20X4 were also $10 million.
Year ended 31 March 20X5
On 1 July 20X4 Savoir issued eight million ordinary shares at full market value. Earnings attributable
to ordinary shareholders for the year ended 31 March 20X5 were $13,800,000.
Year ended 31 March 20X6
On 1 October 20X5 Savoir made a rights issue of two new ordinary shares at a price of $1·00 each for
every five ordinary shares held. The offer was fully subscribed. The market price of Savoir’s ordinary
shares immediately prior to the offer was $2·40 each. Earnings attributable to ordinary shareholders for
the year ended 31 March 20X6 were $19,500,000.
Year ended 31 March 20X7
On 1 April 20X6 Savoir issued $20 million 8% convertible loan notes at par. The terms of conversion
(on 1 April 20X9) are that for every $100 of loan note, 50 ordinary shares will be issued at the option of
loan holders. Alternatively, the loan notes will be redeemed at par for cash. The income tax rate is
25%. Earnings attributable to ordinary shareholders for the year ended 31 March 20X7 were
$25,200,000.
1
What is the number of shares to be used in the basic earnings per share calculation for
the year ended 31 March 20X5?
A
B
C
D
118
46 million
16 million
48 million
18 million
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
2
Which of the following is the bonus factor to be used in the calculation of the
comparable earnings per share for the year ended 31 March 20X6?
A
B
C
D
3
What amount of earnings should be used in the diluted earnings per share calculation
for the year ended 31 March 20X7?
A
B
C
D
4
$24,000,000
$23,600,000
$26,800,000
$26,400,000
If a bonus issue took place during the year, what number of shares should be used in the
basic earnings per share calculation?
A
B
C
D
5
2.4/2.0
1.4/2.0
2.0/2.4
2.0/1.4
The number of share in issue at the end of the year
The number of shares in issue at the beginning of the year
The weighted average number of shares
The weighted average number of shares adjusted by the bonus element
Which of the following items must be disclosed in the notes to the financial statements in
accordance with IAS 33 Earnings per Share?
(1)
(2)
(3)
(4)
Interest saved on non-convertible loan notes
Number of preference shares currently in issue
Instruments that could potentially dilute future EPS
Ordinary shares issued after the reporting date
A
B
C
D
1 and 2
2 and 4
1 and 3
3 and 4
(10 marks)
Question 38 REBOUND
The following scenario relates to questions 1–5.
The following summarised information is available in relation to Rebound, a publicly listed company:
Statement of profit or loss extracts years ended 31 March
20X6
20X5
Continuing Discontinued Continuing Discontinued
$000
$000
$000
$000
Profit after tax
Existing operations
Operations acquired
on 1 August 20X5
2,000
450
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(750)
1,750
600
nil
119
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Analysts expect profits from the market sector in which Rebound’s existing operations are based to
increase by 6% in the year to 31 March 20X7 and by 8% in the sector of its newly acquired operations.
On 1 April 20X4 Rebound had:


$3 million of equity share capital (shares of 25 cents each);
$5 million 8% convertible loan notes 20Y1; the terms of conversion are 40 equity shares for
each $100 of loan note if conversion is before 31 March 20X9 and 35 equity shares for each
$100 of loan note if conversion is later. Assume an income tax rate of 30%.
1
Based on the above information what will be Rebound’s estimated profit after tax for
the year ended 31 March 20X7?
A
B
C
D
2
In accordance with IAS 33 Earnings per Share, what is Rebound’s basic earnings per
share for the year ended 31 March 20X6?
A
B
C
D
3
120
Interest after tax saved is added back to the basic earnings per share profit
Interest after tax saved is deducted from the basic earnings per share profit
Interest saved is added back to the basic earnings per share profit
Interest saved is deducted from the basic earnings per share profit
What number of shares should be used in the 20X6 calculation of Rebound’s diluted
earnings per share?
A
B
C
D
5
$0.14
$0.57
$0.20
$0.82
When calculating the amount of earnings for a diluted earnings per share calculation,
what is the adjustment for interest on convertible loan notes?
A
B
C
D
4
$2,450,000
$2,849,000
$2,606,000
$2,675,000
12,000,000
14,000,000
13,750,000
12,050,000
Which of the following transactions should be treated as a discontinued operation in
accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations?
(1)
One of 20 factories used by Rebound is in the process of being closed down; the
factory generates 2% of Rebound’s total revenue
(2)
Ceasing the manufacture of one of Rebound’s three main product lines which
creates employment for 40% of the entity’s workforce
(3)
Subsidiary Gentry which was acquired two months ago; on acquisition it was
intended to resell the subsidiary as soon as possible
(4)
A major item of machinery is to be replaced at an expected cost of $1.1 million
which represents 10% of Rebound’s total assets
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
1 and 2
2 and 3
3 and 4
1 and 4
(10 marks)
Question 39 ERRSEA
The following scenario relates to questions 1–5.
The following is an extract of Errsea’s balances of property, plant and equipment and related
government grants at 1 April 20X5:
Accumulated Carrying
Cost
depreciation
amount
$000
$000
$000
Property, plant and equipment
240
180
60
Non-current liabilities
Government grants
30
Current liabilities
Government grants
10
Notes:
(i)
Included in the above figures is an item of plant that was disposed of on 1 April 20X5 for
$12,000 which had cost $90,000 on 1 April 20X2. The plant was being depreciated on a
straight-line basis over four years assuming a residual value of $10,000.
(ii)
An item of plant was acquired on 1 July 20X5 with the following costs:
Base cost
Modifications specified by Errsea
Transport and installation
$000
192
12
6
The plant qualified for a government grant of 25% of the base cost of the plant, but this had
not been received by 31 March 20X6. The plant is to be depreciated on a straight-line basis
over three years with a nil estimated residual value.
(iii)
All other plant is depreciated by 15% per annum on cost
(iv)
$11,000 of the $30,000 non-current liability for government grants at 1 April 20X5 should be
reclassified as a current liability as at 31 March 20X6.
(v)
Depreciation is calculated on a time apportioned basis.
1
What is the profit or loss on the disposal of the item of plant that will be recognised in
Errsea’s statement of profit or loss for the year ended 31 March 20X6?
A
B
C
D
$10,500 profit
$18,000 profit
$10,500 loss
$18,000 loss
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121
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
2
What is the depreciation expense for the year ended 31 March 20X6 to be recognised in
profit or loss?
A
B
C
D
3
What is the total carrying amount of the government grant in Errsea’s statement of
financial position as at 31 March 20X6?
A
B
C
D
4
$66,000
$73,000
$62,000
$36,000
Which of the following assets would NEVER qualify for capitalisation of borrowing
costs under IAS 23 Borrowing Costs?
A
B
C
D
5
$88,500
$106,000
$75,000
$92,500
Intangible assets
Financial assets
Manufacturing plants
Power generation facilities
Which of the following criteria must be met before government grants can be recognised
in accordance with IAS 20 Accounting for Government Grants?
(1)
(2)
The entity must comply with any conditions attached to the grant
The grant must have been received
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 or 2
(10 marks)
Question 40 SKEPTIC
The following scenario relates to questions 1–5.
The following issues have arisen during the preparation of Skeptic’s draft financial statements for the
year ended 31 March 20X6:
(i)
Presentation
From 1 April 20X5, the directors have decided to reclassify research and amortised
development costs as administrative expenses rather than its previous classification as cost of
sales. They believe that the previous treatment unfairly distorted the company’s gross profit
margin.
(ii)
Potential liabilities
Skeptic has two potential liabilities to assess. The first is an outstanding court case
concerning a customer claiming damages for losses due to faulty components supplied by
Skeptic. The second is the provision required for product warranty claims against 200,000
units of retail goods supplied with a one-year warranty.
122
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
The estimated outcomes of the two liabilities are:
Court case
10% chance of no damages awarded
65% chance of damages of $4 million
25% chance of damages of $6 million
(iii)
Product warranty claims
70% of sales will have no claim
20% of sales will require a $25 repair
10% of sales will require a $120 repair
Government grant
On 1 April 20X5, Skeptic received a government grant of $8 million towards the purchase of
new plant. The plant has an estimated life of 10 years and is depreciated on a straight-line
basis. One of the terms of the grant is that the sale of the plant before 31 March 20X9 would
trigger a repayment on a sliding scale as follows:
Sale in the year ended
31 March 20X6
31 March 20X7
31 March 20X8
31 March 20X9
Amount of repayment
100%
75%
50%
25%
Skeptic accounts for government grants as a separate item of deferred credit in its statement
of financial position. Skeptic has no intention of selling the plant before the end of its
economic life.
1
How is the change in accounting for research and development costs to be accounted for
in the financial statements for the year ended 31 March 20X6?
A
B
C
D
2
What is the liability to be recognised, in respect of the court case, as at 31 March 20X6?
A
B
C
D
3
Nil
$6 million
$4.1 million
$4 million
What is the provision which Skeptic would report in its statement of financial position
as at 31 March 20X6 in respect of the product warranty claims?
A
B
C
D
4
As a change in accounting policy requiring retrospective application
As a change in estimate requiring prospective application
As a prior period error requiring retrospective application
As the adoption of a new accounting policy requiring prospective application
$3.4 million
Nil
$17
$24 million
What amount of government grant should be credited to profit or loss for the year
ended 31 March 20X6?
A
B
C
D
$8 million
$800,000
$2 million
$Nil
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123
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
5
Skeptic is about to dispose of an equity investment in another entity which is measured at fair
value through other comprehensive income. Skeptic expects to make a gain on disposal; a
cumulative fair value gain has already been recognised over the period of holding this asset.
What is the accounting treatment of the gains in the year of disposal in accordance with
IFRS 9 Financial Instruments?
A
B
C
D
Gain on disposal
Cumulative gain
Credit profit or loss
Credit other comprehensive income
Credit other comprehensive income
Credit profit or loss
Reclassify to profit or loss
Not reclassified to profit or loss
Reclassify to profit or loss
Transfer to retained earnings
(10 marks)
Question 41 CANDY
The following scenario relates to questions 1–5.
The following is an extract of Candy’s trial balance as at 30 September 20X6:
$000
Proceeds of 5% loan (note (i))
Land ($5 million) and buildings – at cost (note (ii))
Plant and equipment – at cost (note (ii))
Accumulated depreciation at 1 October 20X5:
buildings
plant and equipment
Deferred tax (note (iii))
Interest payment (note (i))
Current tax (note (iii))
$000
30,000
55,000
60,500
20,000
36,500
2,600
1,500
1,000
The following notes are relevant:
(i)
The loan note was issued on 1 October 20X5 and incurred issue costs of $1 million which
were charged to profit or loss. Interest of $1·5 million ($30 million at 5%) was paid on 30
September 20X6. The effective interest rate of the loan note is 9% per annum.
(ii)
Non-current assets:
The directors revalued the land at $8 million and the buildings at $39 million on 1 October
20X5, based on an independent valuer’s report. The remaining life of the buildings at 1
October 20X5 was 15 years.
Plant and equipment is depreciated at 12½% per annum using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30
September 20X6.
(iii)
124
A provision of $2·3 million is required for current income tax on the profit of the year to 30
September 20X6. The balance on current tax in the trial balance is the under/over provision
of tax for the previous year. At 30 September 20X6 Candy has taxable temporary differences,
impacting profit or loss, of $9.8 million. Candy’s rate of tax is 30%.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
1
What is the carrying amount of property, plant and equipment recognised in Candy’s
statement of financial position as at 30 September 20X6?
A
B
C
D
2
What is the tax expense in Candy’s profit or loss for the year ended 30 September 20X6?
A
B
C
D
3
5
$3,640,000
$4,240,000
$1,640,000
$6,240,000
What is the carrying amount of the loan note in Candy’s statement of financial position
as at 30 September 20X6?
A
B
C
D
4
$65,400,000
$57,400,000
$61,087,000
$59,000,000
$30,110,000
$31,500,000
$30,500,000
$31,110,000
Which of the following financial assets can be classified at fair value through other
comprehensive income?
(1)
(2)
(3)
(4)
Preference shares acquired
Equity shares that are not held for trading
Loan asset held for contractual cash flows and proceeds from sale
Treasury shares purchased from stock market
A
B
C
D
1 and 3
1 and 4
2 and 3
2 and 4
Which of the following would lead to a taxable temporary difference in accordance with
IAS 12 Income Taxes?
(1)
(2)
(3)
(4)
Interest receivable where taxation is assessed on a cash basis
Financial asset carried at fair value, where fair value has fallen since acquisition
Goodwill arising on the acquisition of a subsidiary
Convertible loan note where tax authority does not recognise the distinction
between debt and equity for accounting purposes
A
B
C
D
1 and 3
1 and 4
2 and 3
2 and 4
(10 marks)
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125
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question 42 MOSTON
The following scenario relates to questions 1–5.
The following trial balance extracts relate to Moston as at 30 June 20X6:
$000
Revenue (note (i))
Cost of sales
Research and development costs (note (ii))
Revaluation surplus as at 1 July 20X5
Property at valuation 1 July 20X5 (note (iii))
Plant and equipment at cost (note (iii))
Accumulated depreciation plant and equipment 1 July 20X5
Suspense account
$000
113,500
88,500
7,800
3,000
28,500
26,100
9,100
3,000
The following notes are relevant:
(i)
The suspense account represents $3 million received for the sale of maturing goods on 1
January 20X6.
Moston still holds the goods but has excluded them from the inventory
count. Moston has an unexercised option to repurchase them at any time in the next three
years. In three years’ time the goods are expected to be worth $5 million. The repurchase
price will be the original selling price plus interest at 10% per annum from the date of sale to
the date of repurchase.
(ii)
Moston commenced a research and development project on 1 January 20X6. It spent $1
million per month on research until 31 March 20X6 when the project passed into the
development stage. It then spent $1·6 million per month until the year end when
development was completed.
However, it was not until 1 May 20X6 that the directors of Moston were confident that the
new product would be a commercial success.
(iii)
Non-current assets:
Moston’s property is carried at fair value which at 30 June 20X6 was $29 million. Its
remaining life at the beginning of the financial year was 15 years. Moston does not make an
annual transfer to retained earnings in respect of the revaluation surplus.
Plant and equipment is depreciated at 15% per annum using the reducing balance method.
No depreciation has yet been charged for the year ended 30 June 20X6.
1
What adjustments are required to account for the sale of maturing goods in the financial
statements for the year ended 30 June 20X6?
A
B
C
D
126
CREDIT
CREDIT
CREDIT
DEBIT
CREDIT
DEBIT
Revenue $3,000,000
Liability $3,000,000
Liability $3,300,000
Interest expense $300,000
Liability $3,150,000
Interest expense $150,000
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
2
What is the carrying amount of research and development expenditure in the statement
of financial position as at 30 June 20X6?
A
B
C
D
3
What is the total depreciation expense in the statement of profit or loss for the year
ended 30 June 20X6?
A
B
C
D
4
5
$7,800,000
$4,800,000
$1,800,000
$3,200,000
$2,550,000
$4,450,000
$3,915
$5,815,000
Which of the following would be included in the amount initially recognised for an item
of equipment?
(1)
(2)
(3)
(4)
Dismantling costs at the end of the equipment’s useful life
Costs of training staff to use the new equipment
Legal fees incurred in the purchase of the equipment
Costs of re-painting the equipment in the branded colours of the company
A
B
C
D
1 and 3
1 and 4
2 and 3
2 and 4
IFRS 15 Revenue from Contracts with Customers states that the transaction price of contracts
with multiple elements must be determined at the inception of the contract and based on the
standalone selling prices.
What is the best evidence of standalone selling prices?
A
B
C
D
Unadjusted market price for similar goods
Observable price of goods when they are sold separately
Expected costs
Estimate that maximises the use of observable inputs
(10 marks)
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127
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Question 43 NOSTOM
The following scenario relates to questions 1–5.
The following is an extract from the trial balance of Nostom as at 30 June 20X6:
Loan note interest and dividends paid (notes (i) and (iii))
Equity shares of $0.50 each (note (iii))
5% Loan note (note (i))
Under/over provision current tax
Deferred tax 1 July 20X5
$000
5,000
$000
30,000
20,000
60
1,010
The following notes are relevant:
(i)
The 5% loan note was issued on 1 July 20X5 at its nominal value of $20 million incurring
direct issue costs of $500,000 which have been charged to administrative expenses. The loan
note will be redeemed after three years at a premium which gives the loan note an effective
finance cost of 8% per annum. Annual interest was paid on 30 June 20X6.
(ii)
A provision for current tax for the year ended 30 June 20X6 of $1,200,000 is required. At 30
June 20X6 the financial value of Nostom’s net assets was $2,800,000 higher than the tax base
of those net assets. Nostom’s effective tax rate is 30%.
(iii)
Nostom paid a dividend of $0.10 per share on 30 March 20X6. On 1 April 20X6 Nostom
issued 10 million equity shares at their full market value of $1·70.
1
What finance costs should be included in Nostom’s statement of profit or loss for the
year ended 30 June 20X6?
A
B
C
D
2
What is the income tax expense to be included in Nostom’s statement of profit or loss for
the year ended 30 June 20X6?
A
B
C
D
3
$1,090,000
$1,980,000
$2,100,000
$1,030,000
In accordance with IAS 33 Earnings per Share, what number of shares will be used to
calculate basic earnings per share for the year ended 30 June 20X6?
A
B
C
D
128
$1,000,000
$1,560,000
$5,560,000
$1,500,000
52.5 million
62.5 million
22.5 million
32.5 million
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
4
Which of the following is not a method of valuing financial assets in accordance with
IFRS 9 Financial Instruments?
A
B
C
D
5
Transaction price
Fair value
Amortised cost
Equity method
Which of the following would lead to a deductible temporary difference in accordance
with IAS 12 Income Taxes?
(1)
An upward revaluation of a property; the tax authority does not recognise the
revaluation of assets
(2)
An asset that is depreciated over three years but tax allowable depreciation is 25%
(3)
Capitalised development expenditure, where the tax authority recognises the
expense when paid
(4)
Interest payable where the tax authority allows interest paid
A
B
C
D
1 and 3
1 and 4
2 and 3
2 and 4
(10 marks)
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129
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
SPECIMEN EXAM
Section A – ALL 15 questions are compulsory and MUST be attempted.
Each question is worth 2 marks
1
2
Which of the following should be capitalised in the initial carrying amount of an item of
plant?
(1)
(2)
(3)
(4)
Cost of transporting the plant to the factory
Cost of installing a new power supply required to operate the plant
Cost of a three-year plant maintenance agreement
Cost of a three-week training course for staff to operate the plant
A
B
C
D
1 and 3
1 and 2
2 and 4
3 and 4
When a parent is evaluating the assets of a potential subsidiary, certain intangible assets can
be recognised separately from goodwill, even though they have not been recognised in the
subsidiary’s own statement of financial position.
Which of the following is an example of an intangible asset of the subsidiary which may
be recognised separately from goodwill when preparing consolidated financial
statements?
3
A
A new research project which the subsidiary has correctly expensed to profit or loss
but the directors of the parent have reliably assessed to have a substantial fair value
B
A global advertising campaign which was concluded in the previous financial year
and from which benefits are expected to flow in the future
C
A contingent asset of the subsidiary from which the parent believes a flow of future
economic benefits is possible
D
A customer list which the directors are unable to value reliably
On 1 October 20X4, Flash Co acquired an item of plant under a five-year lease. The plant
was initially recognised at an amount of $25m. The agreement specified the interest rate
implicit in the lease as 10% per annum and required an immediate deposit of $2m and annual
rentals of $6m paid on 30 September each year for five years.
What is the current liability for the leased plant in Flash Co’s statement of financial
position as at 30 September 20X5?
A
B
C
D
130
$19,300,000
$4,070,000
$5,000,000
$3,850,000
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
4
Financial statements represent transactions in words and numbers. To be useful, financial
information must represent faithfully these transactions in terms of how they are reported.
Which of the following accounting treatments would be an example of faithful
representation?
5
A
Charging the rental payments for a right-of-use asset to the statement of profit or loss
B
Including a convertible loan note in equity on the basis that the holders are likely to
choose the equity option on conversion
C
Treating redeemable preference shares as part of equity in the statement of financial
position
D
Derecognising factored trade receivables sold without recourse to the seller
On 1 October 20X4, Kalatra Co commenced drilling for oil from an undersea oilfield.
Kalatra Co is required to dismantle the drilling equipment at the end of its five-year licence.
This has an estimated cost of $30m on 30 September 20X9. Kalatra Co’s cost of capital is
8% per annum and $1 in five years’ time has a present value of 68 cents.
What is the provision which Kalatra Co would report in its statement of financial
position as at 30 September 20X5 in respect of its oil operations?
A
B
C
D
6
$32,400,000
$22,032,000
$20,400,000
$1,632,000
When a single entity makes purchases or sales in a foreign currency, it will be necessary to
translate the transactions into its functional currency before the transactions can be included
in its financial records.
In accordance with IAS 21 The Effect of Changes in Foreign Currency Exchange Rates,
which of the following foreign currency exchange rates may be used to translate the
foreign currency purchases and sales?
7
(1)
The rate which existed on the day that the purchase or sale took place
(2)
The rate which existed at the beginning of the accounting period
(3)
An average rate for the year, provided there have been no significant fluctuations
throughout the year
(4)
The rate which existed at the end of the accounting period
A
B
C
D
2 and 4
1 only
3 only
1 and 3
On 1 October 20X4, Hoy Co had $2·5 million of equity share capital (shares of 50 cents each)
in issue.
No new shares were issued during the year ended 30 September 20X5, but on that date there
were outstanding share options which had a dilutive effect equivalent to issuing 1·2 million
shares for no consideration.
Hoy’s profit after tax for the year ended 30 September 20X5 was $1,550,000.
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131
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
In accordance with IAS 33 Earnings per Share, what is Hoy’s diluted earnings per share
for the year ended 30 September 20X5?
A
B
C
D
8
$0·25
$0·41
$0·31
$0·42
Fork Co owns an 80% investment in Spoon Co which it purchased several years ago. The
goodwill on acquisition was valued at $1,674,000 and there has been no impairment of that
goodwill since the date of acquisition.
On 30 September 20X4, Fork Co disposed of its entire investment in Spoon Co, details of
which are as follows:
$000
Sales proceeds of Fork Co’s entire investment in Spoon Co
5,580
Cost of Fork Co’s entire investment in Spoon Co
3,720
Immediately before the disposal, the consolidated financial statements of Fork Co included
the following amounts in respect of Spoon Co:
$000
Carrying amount of the net assets (excluding goodwill)
4,464
Carrying amount of the non-controlling interests
900
What is the profit/loss on disposal (before tax) which will be recorded in Fork Co’s
CONSOLIDATED statement of profit or loss for the year ended 30 September 20X4?
A
B
C
D
9
$1,860,000 profit
$2,016,000 profit
$342,000 profit
$558,000 loss
Consolidated financial statements are presented on the basis that the companies within the
group are treated as if they are a single economic entity.
Which of the following are requirements of preparing consolidated financial
statements?
132
(1)
All subsidiaries must adopt the accounting policies of the parent in their individual
financial statements
(2)
Subsidiaries with activities which are substantially different to the activities of other
members of the group should not be consolidated
(3)
All entity financial statements within a group should normally be prepared to the
same accounting year end prior to consolidation
(4)
Unrealised profits within the group must be eliminated from the consolidated
financial statements
A
B
C
D
1 and 3
2 and 4
3 and 4
1 and 2
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
10
A parent company sells goods to its 80% owned subsidiary during the financial year, some of
which remains in inventory at the year end.
What is the adjustment required in the consolidated statement of financial position to
eliminate any unrealised profit in inventory?
A
B
C
D
11
DEBIT
CREDIT
DEBIT
DEBIT
CREDIT
DEBIT
CREDIT
DEBIT
CREDIT
CREDIT
Group retained earnings
Inventory
Group retained earnings
Non-controlling interest
Inventory
Inventory
Group retained earnings
Inventory
Group retained earnings
Non-controlling interest
Caddy Co acquired 240,000 of Ambel Co’s 800,000 equity shares for $6 per share on 1
October 20X4. Ambel Co’s profit after tax for the year ended 30 September 20X5 was
$400,000 and it paid an equity dividend on 20 September 20X5 of $150,000.
On the assumption that Ambel Co is an associate of Caddy Co, what would be the
carrying amount of the investment in Ambel Co in the consolidated statement of
financial position of Caddy Co as at 30 September 20X5?
A
B
C
D
12
$1,560,000
$1,395,000
$1,515,000
$1,690,000
Quartile Co is in the jewellery retail business which can be assumed to be highly seasonal.
For the year ended 30 September 20X5, Quartile Co assessed its operating performance by
comparing selected accounting ratios with those of its business sector average as provided by
an agency. Assume that the business sector used by the agency is a meaningful representation
of Quartile Co’s business.
Which of the following circumstances may invalidate the comparison of Quartile Co’s
ratios with those of the sector average?
(1)
In the current year, Quartile Co has experienced significant rising costs for its
purchases
(2)
The sector average figures are compiled from companies whose year ends are
between 1 July 20X5 and 30 September 20X5
(3)
Quartile Co does not revalue its properties, but is aware that other entities in this
sector do
(4)
During the year, Quartile Co discovered an error relating to the inventory count at
30 September 20X4. This error was correctly accounted for in the financial
statements for the current year ended 30 September 20X5
A
B
C
D
1 and 3
2 and 4
2 and 3
1 and 4
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133
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
13
14
Which of the following criticisms does NOT apply to historical cost financial statements
during a period of rising prices?
A
They are difficult to verify because transactions could have happened many years
ago
B
They contain mixed values; some items are at current values and some are at out of
date values
C
They understate assets and overstate profit
D
They overstate gearing in the statement of financial position
The following information has been taken or calculated from Fowler’s financial statements
for the year ended 30 September 20X5:
Cash cycle at 30 September 20X5
Inventory turnover
Year-end trade payables at 30 September 20X5
Credit purchases for the year ended 30 September 20X5
Cost of sales for the year ended 30 September 20X5
70 days
six times
$230,000
$2 million
$1·8 million
What is Fowler’s trade receivables collection period as at 30 September 20X5?
A
B
C
D
15
106 days
89 days
56 days
51 days
On 1 October 20X4, Pyramid Co acquired 80% of Square Co’s 9 million equity shares. At
the date of acquisition, Square Co had an item of plant which had a fair value of $3m in
excess of its carrying amount. At the date of acquisition it had a useful life of five years.
Pyramid Co’s policy is to value non-controlling interests at fair value at the date of
acquisition. For this purpose, Square Co’s shares had a value of $3·50 each at that date. In
the year ended 30 September 20X5, Square Co reported a profit of $8m.
At what amount should the non-controlling interests in Square Co be valued in the
consolidated statement of financial position of the Pyramid group as at 30 September
20X5?
A
B
C
D
$26,680,000
$7,900,000
$7,780,000
$12,220,000
(30 marks)
134
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Section B – ALL 15 questions are compulsory and MUST be attempted
Each question is worth 2 marks.
The following scenario relates to questions 16 – 20.
Telepath Co has a year end of 30 September and owns an item of plant which it uses to produce and
package pharmaceuticals. The plant cost $750,000 on 1 October 20X0 and, at that date, had an
estimated useful life of five years. A review of the plant on 1 April 20X3 concluded that the plant
would last for a further three and a half years and that its fair value was $560,000.
Telepath Co adopts the policy of revaluing its non-current assets to their fair value but does not make
an annual transfer from the revaluation surplus to retained earnings to represent the additional
depreciation charged due to the revaluation.
On 30 September 20X3, Telepath Co was informed by a major customer that it would no longer be
placing orders with Telepath Co. As a result, Telepath revised its estimates that net cash inflows earned
from the plant for the next three years would be:
Year ended 30 September:
20X4
20X5
20X6
$
220,000
180,000
200,000
Telepath Co’s cost of capital is 10% which results in the following discount factors:
Value of $1 at 30 September:
20X4
20X5
20X6
0·91
0·83
0·75
Telepath Co also owns Rilda Co, a 100% subsidiary, which is treated as a cash generating unit. On 30
September 20X3, there was an impairment to Rilda’s assets of $3,500,000. The carrying amount of the
assets of Rilda Co immediately before the impairment were:
Goodwill
Factory building
Plant
Receivables and cash (at recoverable amount)
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$
2,000,000
4,000,000
3,500,000
2,500,000
–––––––––
12,000,000
–––––––––
135
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
16
17
In accordance with IAS 36 Impairment of Assets, which of the following explains the
impairment of an asset and how to calculate its recoverable amount?
A
An asset is impaired when the carrying amount exceeds its recoverable amount and
the recoverable amount is the higher of its fair value less costs of disposal and its
value in use
B
An asset is impaired when the recoverable amount exceeds its carrying amount and
the recoverable amount is the lower of its fair value less costs of disposal and its
value in use
C
An asset is impaired when the recoverable amount exceeds its carrying amount and
the recoverable amount is the higher of its fair value less costs of disposal and its
value in use
D
An asset is impaired when the carrying amount exceeds its recoverable amount and
the recoverable amount is the lower of its fair value less costs of disposal and its
value in use
Prior to considering any impairment, what is the carrying amount of Telepath Co’s
plant and the balance on the revaluation surplus at 30 September 20X3?
A
B
C
D
18
20
$600,000
$450,000
$499,600
$nil
Which of the following are TRUE in accordance with IAS 36 Impairment of Assets?
(1)
A cash generating unit is the smallest identifiable group of assets for which
individual cash flows can be identified and measured
(2)
When considering the impairment of a cash generating unit, the calculation of the
carrying amount and the recoverable amount does not need to be based on exactly
the same group of net assets
(3)
When it is not possible to calculate the recoverable amount of a single asset, then
that of its cash generating unit should be measured instead
A
B
C
D
1 only
2 and 3
3 only
1 and 3
What is the carrying amount of Rilda Co’s plant at 30 September 20X3 after the
impairment loss has been correctly allocated to its assets?
A
B
C
D
136
Revaluation surplus
$000
nil
185
185
nil
What is the value in use of Telepath Co’s plant as at 30 September 20X3?
A
B
C
D
19
Plant carrying amount
$000
480
300
480
300
$2,479,000
$2,800,000
$2,211,000
$3,500,000
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
The following scenario relates to questions 21 – 25.
At a board meeting in June 20X3, Neutron Co’s directors made the decision to close down one of its
factories by 30 September 20X3 and market both the building and the plant for sale. The decision had
been made public, was communicated to all affected parties and was fully implemented by 30
September 20X3.
The directors of Neutron Co have provided the following information relating to the closure:
Of the factory’s 250 employees, 50 will be retrained and deployed to other subsidiaries within the
Neutron group during the year ended 30 September 20X4 at a cost of $125,000. The remainder
accepted redundancy at an average cost of $5,000 each.
The factory’s plant had a carrying amount of $2·2 million, but is only expected to sell for $500,000,
incurring $50,000 of selling costs. The factory itself is expected to sell for a profit of $1·2 million.
As at 30 September 20X3 Neutron has a loan secured against the factory. The present value of the loan
is $1 million and settlement is due in three years’ time. The lender agreed to the sale of the building
subject to receiving $900,000 in full settlement of the loan on 31 October 20X3. Neutron’s directors
have agreed to these terms.
Penalty payments, due to the non-completion of supply contracts, are estimated to be $200,000, 50% of
which is expected to be recovered from Neutron Co’s insurers.
21
22
Which of the following must exist for an operation to be classified as a discontinued
operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations?
(1)
(2)
(3)
(4)
The operation represents a separate major line of business or geographical area
The operation is a subsidiary
The operation has been sold or is held for sale
The operation is considered not to be capable of making a future profit following a
period of losses
A
B
C
D
2 and 4
3 and 4
1 and 3
1 and 2
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations prescribes the
recognition criteria for non-current assets held for sale. For an asset or a disposal group to be
classified as held for sale, the sale must be highly probable.
Which of the following must apply for the sale to be considered highly probable?
(1)
(2)
(3)
(4)
A buyer must have been located
The asset must be marketed at a reasonable price
Management must be committed to a plan to sell the asset
The sale must be expected to take place within the next six months
A
B
C
D
2 and 3
3 and 4
1 and 4
1 and 2
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137
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
23
What is the employee cost associated with the closure and sale of Neutron Co’s factory
which should be charged to profit or loss for the year ended 30 September 20X3?
A
B
C
D
24
What is the profit or loss on discontinued operations relating to property, plant and
equipment for the year ended 30 September 20X3?
A
B
C
D
25
$125,000
$1,250,000
$1,125,000
$1,000,000
$1·75 million loss
$1·75 million profit
$550,000 loss
$550,000 profit
In respect of the loan and penalty payments, what is the total of the liability and
provision required in the statement of financial position of Neutron Co as at 30
September 20X3?
A
B
C
D
$900,000
$1,200,000
$1,000,000
$1,100,000
The following scenario relates to questions 26 – 30.
Speculate Co is preparing its financial statements for the year ended 30 September 20X3.
following issues are relevant:
(1)
The
Financial assets
Shareholding A – a long-term investment in 10,000 of the equity shares of another company.
These shares were acquired on 1 October 20X2 at a cost of $3·50 each. Transaction costs of
1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares
is $4·50 each.
Shareholding B – a short-term speculative investment in 2,000 of the equity shares of another
company. These shares were acquired on 1 December 20X2 at a cost of $2·50 each.
Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair
value of these shares is $3·00 each.
Where possible, Speculate Co makes an irrevocable election for the fair value movements on
financial assets to be reported in other comprehensive income.
(2)
Taxation
The existing debit balance on the current tax account of $2·4m represents the over/under
provision of the tax liability for the year ended 30 September 20X2. A provision of $28m is
required for income tax for the year ended 30 September 20X3. The existing credit balance on
the deferred tax account is $2·5m and the provision required at 30 September 20X3 is $4·4m.
(3)
Revenue
On 1 October 20X2, Speculate Co sold one of its products for $10 million. As part of the sale
agreement, Speculate Co is committed to the ongoing servicing of the product until 30
September 20X5 (i.e. three years after the sale). The sale value of this service has been
included in the selling price of $10 million. The estimated cost to Speculate Co of the
servicing is $600,000 per annum and Speculate Co’s gross profit margin on this type of
servicing is 25%. Ignore discounting.
138
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
26
27
Which of the following meet the definition of a financial asset in accordance with IFRS 9
Financial Instruments?
(1)
An equity instrument of another entity
(2)
A contract to exchange financial instruments with another entity under conditions
which are potentially favourable
(3)
A contract to exchange financial instruments with another entity under conditions
which are potentially unfavourable
(4)
Cash
A
B
C
D
1 and 2 only
1, 2 and 4
1, 3 and 4
4 only
In respect of the financial assets of Speculate Co, what amount will be included in other
comprehensive income for the year ended 30 September 20X3?
A
B
C
D
28
What is the total amount which will be charged to the statement of profit or loss for the
year ended 30 September 20X3 in respect of taxation?
A
B
C
D
29
$28,000,000
$30,400,000
$32,300,000
$29,900,000
What is the amount of deferred income which Speculate Co should recognise in its
statement of financial position as at 30 September 20X3 relating to the contract for the
supply and servicing of products?
A
B
C
D
30
$9,650
$10,650
$10,000
$nil
$1,200,000
$1,600,000
$600,000
$1,500,000
Which of the following are TRUE in respect of the income which Speculate Co has
deferred at 30 September 20X3?
(1)
The deferred income will be split evenly between the current and non-current
liabilities in Speculate Co’s statement of financial position as at 30 September 20X3
(2)
The costs associated with the deferred income of Speculate Co should be recognised
in the statement of profit or loss at the same time as the revenue is recognised
(3)
The deferred income can only be recognised as revenue by Speculate Co when there
is a signed written contract of service with its customer
(4)
When recognising the revenue associated with the service contract of Speculate Co,
the stage of its completion is irrelevant
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139
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A
B
C
D
1 and 2
3 and 4
2 and 3
1 and 4
(30 marks)
Question 31 KANDY CO
After preparing a draft statement of profit or loss for the year ended 30 September 20X5 and adding the
current year’s draft profit (before any adjustments required by notes (i) to (iii) below) to retained
earnings, the summarised trial balance of Kandy Co as at 30 September 20X5 is:
$000
Equity shares of $1 each
Retained earnings as at 30 September 20X5
Proceeds of 6% loan note (note (i))
Investment properties at fair value (note (ii))
Land ($5 million) and buildings – at cost (note (ii))
Plant and equipment – at cost (note (ii))
Accumulated depreciation at 1 October 20X4:
buildings
plant and equipment
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
15,500
30,000
20,000
35,000
58,500
20,000
34,500
68,700
43,400
2,500
1,800
––––––––
184,000
––––––––
1,100
17,000
––––––––
184,000
––––––––
The following notes are relevant:
(i)
The loan note was issued on 1 October 20X4 and incurred issue costs of $1 million which
were charged to profit or loss. Interest of $1·8 million ($30 million at 6%) was paid on 30
September 20X5. The loan is redeemable on 30 September 20X9 at a substantial premium
which gives an effective interest rate of 9% per annum. No other repayments are due until 30
September 20X9.
(ii)
Non-current assets:
On 1 October 20X4, Kandy owned two investment properties. The first property had a
carrying amount of $15 million and was sold on 1 December 20X4 for $17 million. The
disposal proceeds have been credited to a suspense account in the trial balance above. On 31
December 20X4, the second property became owner occupied and so was transferred to land
and buildings at its fair value of $6 million. Its remaining useful life on 31 December 20X4
was considered to be 20 years. Ignore any deferred tax implications of this fair value.
The price of property has increased significantly in recent years and so the directors decided
to revalue the land and buildings. The directors accepted the report of an independent
surveyor who, on 1 October 20X4, valued the land at $8 million and the buildings at $39
million on that date. This revaluation specifically excludes the transferred investment
property described above. The remaining life of these buildings at 1 October 20X4 was 15
years. Kandy does not make an annual transfer to retained profits to reflect the realisation of
the revaluation gain; however, the revaluation will give rise to a deferred tax liability. The
income tax rate applicable to Kandy is 20%.
140
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Plant and equipment is depreciated at 12½% per annum using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30
September 20X5.
(iii)
A provision of $2·4 million is required for income tax on the profit for the year to 30
September 20X5. The balance on current tax in the trial balance is the under/over provision
of tax for the previous year. In addition to the temporary differences relating to the
information in note (ii), Kandy has further taxable temporary differences of $10 million as at
30 September 20X5.
Required:
(a)
Prepare a schedule of adjustments required to the retained earnings of Kandy Co as at
30 September 20X5 as a result of the information in notes (i) to (iii) above.
(8 marks)
(b)
Prepare the statement of financial position of Kandy Co as at 30 September 20X5.
(9 marks)
Note: The notes to the statement of financial position are not required.
(c)
Prepare the extracts from Kandy Co’s statement of cash flows for operating and
investing activities for the year ended 30 September 20X5 which relate to property,
plant and equipment.
(3 marks)
(20 marks)
Question 32 TANGIER GROUP
The summarised consolidated financial statements for the year ended 30 September 20X5 (and the
comparative figures) for the Tangier group are shown below:
Consolidated statements of profit or loss for the year ended 30 September
Revenue
Cost of sales
Gross profit
Administrative expense
Distribution costs
Finance costs
Profit before taxation
Income tax expense
Profit for the year
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20X5
$m
2,700
(1,890)
––––––
810
(345)
(230)
(40)
––––––
195
(60)
––––––
135
––––––
20X4
$m
1,820
(1,092)
––––––
728
(200)
(130)
(5)
––––––
393
(113)
––––––
280
––––––
141
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Consolidated statements of financial position as at 30 September
20X5
$m
Non-current assets
Property, plant and equipment
Intangible asset: manufacturing licences
goodwill
Current assets
Inventory
Trade receivables
Bank
200
195
nil
––––
Total assets
Equity and liabilities
Equity shares of $1 each
Other components of equity
Retained earnings
Non-current liabilities
5% secured loan notes
10% secured loan notes
Current liabilities
Bank overdraft
Trade payables
Current tax payable
Total equity and liabilities
20X5
$m
20X4
$m
680
300
230
––––––
1,210
395
––––––
1,605
––––––
310
100
200
––––
610
110
75
120
––––
330
100
375
––––––
805
100
300
––––
110
210
80
––––
400
400
––––––
1,605
––––––
20X4
$m
305
––––
915
––––
250
nil
295
––––
545
100
nil
––––
nil
160
110
––––
100
270
––––
915
––––
At 1 October 20X4, the Tangier group consisted of the parent, Tangier Co, and two wholly owned
subsidiaries which had been owned for many years. On 1 January 20X5, Tangier Co purchased a third
100% owned investment in a subsidiary called Raremetal Co. The consideration paid for Raremetal Co
was a combination of cash and shares. The cash payment was partly funded by the issue of 10% loan
notes. On 1 January 20X5, Tangier Co also won a tender for a new contract to supply aircraft engines
which Tangier Co manufactures under a recently acquired long-term licence. Raremetal Co was
purchased with a view to securing the supply of specialised materials used in the manufacture of these
engines. The bidding process had been very competitive and Tangier Co had to increase its
manufacturing capacity to fulfil the contract.
142
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Required:
(a)
Comment on how the new contract and the purchase of Raremetal Co may have
affected the comparability of the consolidated financial statements of Tangier Co for the
years ended 30 September 20X4 and 20X5.
(5 marks)
(b)
Calculate appropriate ratios and comment on Tangier Co’s profitability and gearing.
Your analysis should identify instances where the new contract and the purchase of
Raremetal Co have limited the usefulness of the ratios and your analysis.
(12 marks (up to 5 marks for the ratio calculations))
Note: Your ratios should be based on the consolidated financial statements provided and you
should not attempt to adjust for the effects of the new contract or the consolidation. Working
capital and liquidity ratios are not required.
(c)
Explain what further information you might require to make your analysis more
meaningful.
(3 marks)
(20 marks)
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143
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
SEPTEMBER 2016 EXAM
Section A – ALL 15 questions are compulsory and MUST be attempted
Each question is worth 2 marks.
1
2
3
Which of the following is NOT a duty of the IFRS Interpretations Committee?
A
To interpret the application of International Financial Reporting Standards
B
To work directly with national standard setters to bring about convergence with IFRS
C
To provide guidance on financial reporting issues not specifically addressed in IFRSs
D
To publish draft interpretations for public comment
Which of the following will be treated as a subsidiary of Poulgo Co as at 31 December
20X7?
(1)
The acquisition of 60% of Zakron Co’s equity share capital on 1 March 20X7.
Zakron Co’s activities are significantly different from the rest of the Poulgo group
of companies
(2)
The offer to acquire 70% of Unto Co’s equity share capital on 1 November 20X7.
The negotiations were finally signed off during January 20X8
(3)
The acquisition of 45% of Speeth Co’s equity share capital on 31 December 20X7.
Poulgo Co is able to appoint three of the 10 members of Speeth Co’s board
A
B
C
D
1 only
2 and 3
3 only
1 and 2
On 1 January 20X6, Gardenbugs Co received a $30,000 government grant relating to
equipment which cost $90,000 and had a useful life of six years. The grant was netted off
against the cost of the equipment. On 1 January 20X7, when the equipment had a carrying
amount of $50,000, its use was changed so that it was no longer being used in accordance
with the grant. This meant that the grant needed to be repaid in full but by 31 December
20X7, this had not yet been done.
Which journal entry is required to reflect the correct accounting treatment of the
government grant and the equipment in the financial statements of Gardenbugs Co for
the year ended 31 December 20X7?
A
B
C
D
144
Dr Property, plant and equipment
Dr Depreciation expense
Cr Liability
$10,000
$20,000
Dr Property, plant and equipment
Dr Depreciation expense
Cr Liability
$15,000
$15,000
Dr Property, plant and equipment
Dr Depreciation expense
Dr Retained earnings
Cr Liability
$10,000
$15,000
$5,000
Dr Property, plant and equipment
Dr Depreciation expense
Cr Liability
$20,000
$10,000
$30,000
$30,000
$30,000
$30,000
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
4
The following two issues relate to Spiko Co’s mining activities:
Issue 1: Spiko Co began operating a new mine in January 20X3 under a five-year government
licence which required Spiko Co to landscape the area after mining ceased at an estimated
cost of $100,000.
Issue 2: During 20X4, Spiko Co’s mining activities caused environmental pollution on an
adjoining piece of government land. There is no legislation which requires Spiko Co to
rectify this damage, however, Spiko Co does have a published environmental policy which
includes assurances that it will do so. The estimated cost of the rectification is $1,000,000.
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets,
which of the following statements is correct in respect of Spiko Co’s financial statements
for the year ended 31 December 20X4?
A
B
C
D
5
A provision is required for the cost of both issues 1 and 2
Both issues 1 and 2 require disclosure only
A provision is required for the cost of issue 1 but issue 2 requires disclosure only
Issue 1 requires disclosure only and issue 2 should be ignored
Parket Co acquired 60% of Suket Co on 1 January 20X7. The following extract has been
taken from the individual statements of profit or loss for the year ended 31 March 20X7:
Cost of sales
Parket Co
$000
710
Suket Co
$000
480
Parket Co consistently made sales of $20,000 per month to Suket Co throughout the year. At
the year end, Suket Co held $20,000 of this in inventory. Parket Co made a mark-up on cost
of 25% on all sales to Suket Co.
What is Parket Co’s consolidated cost of sales for the year ended 31 March 20X7?
A
B
C
D
6
$954,000
$950,000
$774,000
$766,000
A company has decided to change its depreciation method to better reflect the pattern of use
of its equipment.
Which of the following correctly reflects what this change represents and how it should
be applied?
A
B
C
D
It is a change of accounting policy and must be applied prospectively
It is a change of accounting policy and must be applied retrospectively
It is a change of accounting estimate and must be applied retrospectively
It is a change of accounting estimate and must be applied prospectively
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145
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
7
Included within the financial assets of Zinet Co at 31 March 20X9 are the following two
recently purchased investments in publically-traded equity shares:
Investment 1 – 10% of the issued share capital of Haruka Co. This shareholding was acquired
as a long-term investment as Zinet Co wishes to participate as an active shareholder of
Haruka Co.
Investment 2 – 10% of the issued share capital of Lukas Co. This shareholding was acquired
for speculative purposes and Zinet Co expects to sell these shares in the near future.
Neither of these shareholdings gives Zinet Co significant influence over the investee
companies.
Wherever possible, the directors of Zinet Co wish to avoid taking any fair value movements
to profit or loss, so as to minimise volatility in reported earnings.
How should the fair value movements in these investments be reported in Zinet Co’s
financial statements for the year ended 31 March 20X9?
A
B
C
D
8
In profit or loss for both investments
In other comprehensive income for both investments
In profit or loss for investment 1 and in other comprehensive income for investment 2
In other comprehensive income for investment 1 and in profit or loss for investment 2
Shiba Co entered into a lease for a right-of-use asset on 1 January 20X7; the lease contract is
for four years and the useful life of the asset is six years. Information relating to the lease is
as follows:
Initial lease liability
Deposit paid on 1 January 20X7
Direct costs incurred by Shiba
Maintenance costs of $2,000 per annum
$48,000
$2,000
$5,000
$8,000
What will be the carrying amount of the right-of-use asset at 31 December 20X8?
A
B
C
D
9
$27,500
$41,250
$31,500
$36,667
Trasten Co operates in an emerging market with a fast-growing economy where prices
increase frequently.
Which of the following statements are true when using historical cost accounting
compared to current value accounting in this type of market?
146
(1)
Capital employed which is calculated using historical costs is understated compared
to current value capital employed
(2)
Historical cost profits are overstated in comparison to current value profits
(3)
Capital employed which is calculated using historical costs is overstated compared
to current value capital employed
(4)
Historical cost profits are understated in comparison to current value profits
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
A
B
C
D
10
1 and 2
1 and 4
2 and 3
3 and 4
Patula Co acquired 80% of Sanka Co on 1 October 20X5. At this date, some of Sanka Co’s
inventory had a carrying amount of $600,000 but a fair value of $800,000. By 31 December
20X5, 70% of this inventory had been sold by Sanka Co.
The individual statements of financial position at 31 December 20X5 for both companies
show the following:
Patula Co
Sanka Co
Inventories
$3,250,000
$1,940,000
What will be the total inventories figure in the consolidated statement of financial
position of Patula Co as at 31 December 20X5?
A
B
C
D
11
$5,250,000
$5,330,000
$5,130,000
$5,238,000
Top Trades Co has been trading for a number of years and is currently going through a period
of expansion.
An extract from the statement of cash flows for the year ended 31 December 20X7 for Top
Trades Co is presented as follows:
$000
Net cash from operating activities
995
Net cash used in investing activities
(540)
Net cash used in financing activities
(200)
Net increase in cash and cash equivalents
255
Cash and cash equivalents at the beginning of the period
200
Cash and cash equivalents at the end of the period
455
Which of the following statements is correct according to the extract of Top Trades Co’s
statement of cash flows?
12
A
The company has good working capital management
B
Net cash generated from financing activities has been used to fund the additions to
non-current assets
C
Net cash generated from operating activities has been used to fund the additions to
non-current assets
D
Existing non-current assets have been sold to cover the cost of the additions to noncurrent assets
Rooney Co acquired 70% of the equity share capital of Marek Co, its only subsidiary, on 1
January 20X6. The fair value of the non-controlling interest in Marek Co at acquisition was
$1·1m. At that date the fair values of Marek Co’s net assets were equal to their carrying
amounts, except for a building which had a fair value of $1·5m above its carrying amount and
30 years remaining useful life.
During the year to 31 December 20X6, Marek Co sold goods to Rooney Co, giving rise to an
unrealised profit in inventory of $550,000 at the year end. Marek Co’s profit after tax for the
year ended 31 December 20X6 was $3·2m.
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147
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
What amount will be presented as the non-controlling interest in the consolidated
statement of financial position of Rooney Co as at 31 December 20X6?
A
B
C
D
13
$1,895,000
$1,495,000
$1,910,000
$1,880,000
When a gain on a bargain purchase (negative goodwill) arises, IFRS 3 Business Combinations
requires an entity to first of all review the measurement of the assets, liabilities and
consideration transferred in respect of the combination.
When the negative goodwill is confirmed, how is it then recognised?
A
B
C
D
14
It is credited directly to retained earnings
It is credited to profit or loss
It is debited to profit or loss
It is deducted from positive goodwill
On 1 October 20X5, Anita Co purchased 75,000 of Binita Co’s 100,000 equity shares when
Binita Co’s retained earnings amounted to $90,000.
On 30 September 20X7, extracts from the statements of financial position of the two
companies were:
Anita Co
Binita Co
$000
$000
Equity shares of $1 each
125
100
Retained earnings
300
150
––––
––––
Total
425
250
––––
––––
What is the total equity which should appear in Anita Co’s consolidated statement of
financial position as at 30 September 20X7?
A
B
C
D
15
$125,000
$470,000
$345,000
$537,500
On 1 October 20X1, Bash Co borrowed $6m for a term of one year, exclusively to finance the
construction of a new piece of production equipment. The interest rate on the loan is 6% and
is payable on maturity of the loan. The construction commenced on 1 November 20X1 but no
construction took place between 1 December 20X1 to 31 January 20X2 due to employees
taking industrial action. The asset was available for use on 30 September 20X2 having a
construction cost of $6m.
What is the carrying amount of the production equipment in Bash Co’s statement of
financial position as at 30 September 20X2?
A
B
C
D
$5,016,000
$6,270,000
$6,330,000
$6,360,000
(30 marks)
148
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Section B – ALL 15 questions are compulsory and MUST be attempted
Each question is worth 2 marks.
The following scenario relates to questions 16–20.
Aphrodite Co has a year end of 31 December and operates a factory which makes computer chips for
mobile phones. It purchased a machine on 1 July 20X3 for $80,000 which had a useful life of 10 years
and is depreciated on the straight-line basis, time apportioned in the years of acquisition and disposal. The
machine was revalued to $81,000 on 1 July 20X4. There was no change to its useful life at that date.
A fire at the factory on 1 October 20X6 damaged the machine leaving it with a lower operating
capacity. The accountant considers that Aphrodite Co will need to recognise an impairment loss in
relation to this damage. The accountant has ascertained the following information at 1 October 20X6:
(1)
The carrying amount of the machine is $60,750.
(2)
An equivalent new machine would cost $90,000.
(3)
The machine could be sold in its current condition for a gross amount of $45,000.
Dismantling costs would amount to $2,000.
(4)
In its current condition, the machine could operate for three more years which gives it a value
in use figure of $38,685.
16
In accordance with IAS 16 Property, Plant and Equipment, what is the depreciation
charged to Aphrodite Co’s profit or loss in respect of the machine for the year ended 31
December 20X4?
A
B
C
D
17
$9,000
$8,000
$8,263
$8,500
IAS 36 Impairment of Assets contains a number of examples of internal and external events
which may indicate the impairment of an asset.
In accordance with IAS 36, which of the following would definitely NOT be an indicator
of the potential impairment of an asset (or group of assets)?
18
A
An unexpected fall in the market value of one or more assets
B
Adverse changes in the economic performance of one or more assets
C
A significant change in the technological environment in which an asset is
employed making its software effectively obsolete
D
The carrying amount of an entity’s net assets being below the entity’s market
capitalisation
What is the total impairment loss associated with Aphrodite Co’s machine at 1 October
20X6?
A
B
C
D
$nil
$17,750
$22,065
$15,750
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149
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
19
The accountant has decided that it is too difficult to reliably attribute cash flows to this one
machine and that it would be more accurate to calculate the impairment on the basis of the
factory as a cash-generating unit.
In accordance with IAS 36, which of the following is TRUE regarding cash generating
units?
20
A
A cash-generating unit to which goodwill has been allocated should be tested for
impairment every five years
B
A cash-generating unit must be a subsidiary of the parent
C
There is no need to consistently identify cash-generating units based on the same
types of asset from period to period
D
A cash-generating unit is the smallest identifiable group of assets for which
independent cash flows can be identified
On 1 July 20X7, it is discovered that the damage to the machine is worse than originally
thought. The machine is now considered to be worthless and the recoverable amount of the
factory as a cash-generating unit is estimated to be $950,000.
At 1 July 20X7, the cash-generating unit comprises the following assets:
Building
Plant and equipment (including the damaged machine
at a carrying amount of $35,000)
Goodwill
Net current assets (at recoverable amount)
$000
500
335
85
250
––––––
1,170
––––––
In accordance with IAS 36, what will be the carrying amount of Aphrodite Co’s plant
and equipment when the impairment loss has been allocated to the cash-generating
unit?
A
B
C
D
$262,500
$300,000
$237,288
$280,838
The following scenario relates to questions 21–25.
During 20X5, Blocks Co entered into new lease agreements as follows:
Agreement one
This right-of-use lease relates to a new piece of machinery. The fair value of the
machine is $220,000. The agreement requires Blocks Co to pay a deposit of
$20,000 on 1 January 20X5 followed by five equal annual instalments of $55,000,
starting on 31 December 20X5. The implicit rate of interest is 11·65%.
Agreement two
This is a two-year agreement, commencing on 1 July 20X5, for 10 computer tablets
to be used by senior management. The purchase price of each tablet is $1,000.
Blocks Co will make 24 monthly payments of $550 and legally own the tablets
when the final payment has been made. The present value of the future cash flows
is $11,000.
150
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Agreement three
This sale and leaseback relates to a cutting machine purchased by Blocks Co on 1
January 20X4 for $300,000. The carrying amount of the machine as at 31 December
20X4 was $250,000. On 1 January 20X5, it was sold to Cogs Co for $370,000, the
fair value of the asset was $320,000, and Blocks Co will lease the machine back for
five years. The sale meets the revenue recognition requirements of IFRS 15
Revenue from Contracts with Customers. The financial liability is measured at
$300,000 on 1 January 20X5, of which $50,000 relates to the additional financing.
Blocks Co has elected not to apply the recognition exemptions permitted by IFRS 16 Leases.
21
22
According to IFRS 16 Leases, which of the following gives the measurement of a rightof-use asset at the commencement of a lease?
A
Sum of all rental payments to be paid to the lessor less any initial direct costs and
dismantling costs
B
The amount of the initial measurement of the lease liability less any initial direct
costs and dismantling costs
C
Sum of all rental payments to be paid to the lessor plus any initial direct costs and
dismantling costs
D
The amount of the initial measurement of the lease liability plus any initial direct
costs and dismantling costs
For agreement one, what is the finance cost charged to profit or loss for the year ended
31 December 20X6?
A
B
C
D
23
$23,300
$12,451
$19,607
$16,891
The following calculations have been prepared for agreement one:
Year
31 December 20X7
31 December 20X8
31 December 20X9
Interest Annual payment Balance
$
$
$
15,484
(55,000)
93,391
10,880
(55,000)
49,271
5,729
(55,000)
0
How will the lease liability be presented in the statement of financial position as at 31
December 20X7?
A
B
C
D
24
$44,120 as a non-current liability and $49,271 as a current liability
$49,271 as a non-current liability and $44,120 as a current liability
$93,391 as a non-current liability
$93,391 as a current liability
For agreement two, what amount of asset would be initially recognised on
commencement of the lease?
A
B
C
D
Nil
$10,000
$5,500
$11,000
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151
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
25
For agreement three, what profit should be recognised for the year ended 31 December
20X5 as a result of the sale and leaseback?
A
B
C
D
$24,000
$120,000
$54,688
$15,312
The following scenario relates to questions 26–30.
Mighty IT Co provides hardware, software and IT services to small business customers.
Mighty IT Co has developed an accounting software package. The company offers a supply and
installation service for $1,000 and a separate two-year technical support service for $500.
Alternatively, it also offers a combined goods and services contract which includes both of these
elements for $1,200. Payment for the combined contract is due one month after the date of installation.
In December 20X5, Mighty IT Co revalued its corporate headquarters. Prior to the revaluation, the
carrying amount of the building was $2m and it was revalued to $2·5m.
Mighty IT Co also revalued a sales office on the same date. The office had been purchased for $500,000
earlier in the year, but subsequent discovery of defects reduced its value to $400,000. No depreciation
had been charged on the sales office and any impairment loss is allowable for tax purposes.
Mighty It Co’s income tax rate is 30%.
26
27
In accordance with IFRS 15 Revenue from Contracts with Customers, when should
Mighty IT Co recognise revenue from the combined goods and services contract?
A
Supply and install: on installation
Technical support: over two years
B
Supply and install: when payment is made
Technical support: over two years
C
Supply and install: on installation
Technical support: on installation
D
Supply and install: when payment is made
Technical support: when payment is made
For each combined contract sold, what is the amount of revenue which Mighty IT Co
should recognise in respect of the supply and installation service in accordance with
IFRS 15?
A
B
C
D
28
$700
$800
$1,000
$1,200
Mighty IT Co sells a combined contract on 1 January 20X6, the first day of its financial year.
In accordance with IFRS 15, what is the total amount for deferred income which will be
reported in Mighty IT Co’s statement of financial position as at 31 December 20X6?
A
B
C
D
152
$400
$250
$313
$200
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
29
In accordance with IAS 12 Income Taxes, what is the impact of the property
revaluations on the income tax expense of Mighty IT Co for the year ended 31 December
20X5?
A
B
C
D
30
Income tax expense increases by $180,000
Income tax expense increases by $120,000
Income tax expense decreases by $30,000
No impact on income tax expense
In January 20X6, the accountant at Mighty IT Co produced the company’s draft financial
statements for the year ended 31 December 20X5. He then realised that he had omitted to
consider deferred tax on development costs. In 20X5, development costs of $200,000 had
been incurred and capitalised. Development costs are deductible in full for tax purposes in
the year they are incurred. The development is still in process at 31 December 20X5.
What adjustment is required to the income tax expense in Mighty IT Co’s statement of
profit or loss for the year ended 31 December 20X5 to account for deferred tax on the
development costs?
A
B
C
D
Increase of $200,000
Increase of $60,000
Decrease of $60,000
Decrease of $200,000
(30 marks)
Section C – BOTH questions are compulsory and MUST be attempted
Question 31 TRIAGE
After preparing a draft statement of profit or loss (before interest and tax) for the year ended 31 March
20X6 (before any adjustments which may be required by notes (i) to (iv) below), the summarised trial
balance of Triage Co as at 31 March 20X6 is:
$000
Equity shares of $1 each
Retained earnings as at 1 April 20X5
Draft profit before interest and tax for year ended 31 March 20X6
6% convertible loan notes (note (i))
Property (original life 25 years) – at cost (note (ii))
75,000
Plant and equipment – at cost (note (ii))
72,100
Accumulated depreciation at 1 April 20X5:
property
plant and equipment
Trade receivables (note (iii))
28,000
Other current assets
9,300
Current liabilities
Deferred tax (note (iv))
Interest payment (note (i))
2,400
Current tax (note (iv)
700
––––––––
187,500
––––––––
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$000
50,000
3,500
30,000
40,000
15,000
28,100
17,700
3,200
––––––––
187,500
––––––––
153
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
The following notes are relevant:
(i)
Triage Co issued 400,000 $100 6% convertible loan notes on 1 April 20X5. Interest is
payable annually in arrears on 31 March each year. The loans can be converted to equity
shares on the basis of 20 shares for each $100 loan note on 31 March 20X8 or redeemed at
par for cash on the same date. An equivalent loan without the conversion rights would have
required an interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 6% and
8%, are:
End of year
(ii)
1
2
3
6%
0·94
0·89
0·84
8%
0·93
0·86
0·79
Non-current assets:
The directors decided to revalue the property at $66·3m on 1 October 20X5. Triage Co does
not make an annual transfer from the revaluation surplus to retained earnings to reflect the
realisation of the revaluation gain; however, the revaluation will give rise to a deferred tax
liability at the company’s tax rate of 20%.
The property is depreciated on a straight-line basis and plant and equipment at 15% per
annum using the reducing balance method.
No depreciation has yet been charged on any non-current assets for the year ended 31 March
20X6.
(iii)
In September 20X5, the directors of Triage Co discovered a fraud. In total, $700,000 which
had been included as receivables in the above trial balance had been stolen by an employee.
$450,000 of this related to the year ended 31 March 20X5, the rest to the current year. The
directors are hopeful that 50% of the losses can be recovered from the company’s insurers.
(iv)
A provision of $2·7m is required for current income tax on the profit of the year to 31 March
20X6. The balance on current tax in the trial balance is the under/over provision of tax for the
previous year. In addition to the temporary differences relating to the information in note (ii),
at 31 March 20X6, the carrying amounts of Triage Co’s net assets are $12m more than their
tax base.
Required:
(a)
Prepare a schedule of adjustments required to the draft profit before interest and tax (in
the above trial balance) to give the profit or loss of Triage Co for the year ended 31
March 20X6 as a result of the information in notes (i) to (iv) above.
(5 marks)
(b)
Prepare the statement of financial position of Triage Co as at 31 March 20X6. (12 marks)
(c)
The issue of convertible loan notes can potentially dilute the basic earnings per share (EPS).
Calculate the diluted earnings per share for Triage Co for the year ended 31 March
20X6 (there is no need to calculate the basic EPS).
(3 marks)
Note: A statement of changes in equity and the notes to the statement of financial position are not
required.
(20 marks)
154
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Question 32 GREGORY
Gregory Co is a listed company and, until 1 October 20X5, it had no subsidiaries. On that date, it
acquired 75% of Tamsin Co’s equity shares by means of a share exchange of two new shares in
Gregory Co for every five acquired shares in Tamsin Co. These shares were recorded at the market
price on the day of the acquisition and were the only shares issued by Gregory Co during the year ended
31 March 20X6.
The summarised financial statements of Gregory Co as a single entity at 31 March 20X5 and as a group
at 31 March 20X6 are:
Gregory
Gregory Co
group
single entity
Statements of profit or loss for the year ended
31 March 20X6 31 March 20X5
$000
$000
Revenue
46,500
28,000
Cost of sales
(37,200)
(20,800)
–––––––
–––––––
Gross profit
9,300
7,200
Operating expenses
(1,800)
(1,200)
–––––––
–––––––
Profit before tax (operating profit)
7,500
6,000
Income tax expense
(1,500)
(1,000)
–––––––
–––––––
Profit for the year
6,000
5,000
–––––––
–––––––
Profit for year attributable to:
Equity holders of the parent
5,700
Non-controlling interest
300
–––––––
6,000
–––––––
Statements of financial position as at
Assets
Non-current assets
Property, plant and equipment
Goodwill
Current assets
Total assets
Equity and liabilities
Equity shares of $1 each
Other component of equity (share premium)
Retained earnings
Equity attributable to owners of the parent
Non-controlling interest
Current liabilities
Total equity and liabilities
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31 March 20X6
31 March 20X5
54,600
3,000
–––––––
57,600
44,000
–––––––
101,600
–––––––
41,500
nil
–––––––
41,500
36,000
–––––––
77,500
–––––––
46,000
6,000
18,700
–––––––
70,700
3,600
–––––––
74,300
27,300
–––––––
101,600
–––––––
40,000
nil
13,000
–––––––
53,000
nil
–––––––
53,000
24,500
–––––––
77,500
–––––––
155
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Other information:
(i)
Each month since the acquisition, Gregory Co’s sales to Tamsin Co were consistently $2m.
Gregory Co had chosen to only make a gross profit margin of 10% on these sales as Tamsin
Co is part of the group.
(ii)
The values of property, plant and equipment held by both companies have been rising for
several years.
(iii)
On reviewing the above financial statements, Gregory Co’s chief executive officer (CEO)
made the following observations:
(1)
I see the profit for the year has increased by $1m which is up 20% on last year, but I
thought it would be more as Tamsin Co was supposed to be a very profitable
company.
(2)
I have calculated the earnings per share (EPS) for 20X6 at 13 cents (6,000/46,000 ×
100) and for 20X5 at 12·5 cents (5,000/40,000 × 100) and, although the profit has
increased 20%, our EPS has barely changed.
(3)
I am worried that the low price at which we are selling goods to Tamsin Co is
undermining our group’s overall profitability.
(4)
I note that our share price is now $2·30, how does this compare with our share price
immediately before we bought Tamsin Co?
Required:
(a)
Reply to the four observations of the CEO.
(b)
Using the above financial statements, calculate the following ratios for Gregory Co for
the years ended 31 March 20X6 and 20X5 and comment on the comparative
performance:
(i)
(ii)
(iii)
(iv)
(8 marks)
Return on capital employed (ROCE);
Net asset turnover;
Gross profit margin;
Operating profit margin.
Note: Four marks are available for the ratio calculations.
(12 marks)
Note: Your answers to (a) and (b) should reflect the impact of the consolidation of Tamsin Co
during the year ended 31 March 20X6.
(20 marks)
156
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Item Answer
1
Justification
INTERNATIONAL FINANCIAL REPORTING STANDARDS
1.1
C
The supervision of the IFRS organisation is a function of the IFRS Foundation.
1.2
B
This is the function of the IFRS Interpretations Committee.
1.3
C
By definition of general purpose financial statements. They are aimed at the
primary users of financial statements which include current and potential investors,
creditors, customers and employees. Other parties may well use the financial
statements but they are not primary users.
1.4
A
The International Accounting Standards Board (IASB) is the sole body having
responsibility and authority to issue IFRS and is overseen by the IFRS Foundation.
IFRS IC and the IFRS Advisory Board are separate bodies within the IFRS
Foundation framework.
1.5
B
This is stated in the IASB’s objectives. Although only certain elements of the
public may be users of the financial statements, the members of the public as a
whole are affected by the activities of companies and users of financial statements.
Reliable financial information underpins the economies of all jurisdictions.
1.6
D
IFRSs are not issued to clarify users’ issues concerning application of an IFRS.
This is the purpose of an IFRIC.
1.7
D
A limited liability partnership is a business form with a profit motive. The primary
objectives of the other entities are not-for-profit.
2
CONCEPTUAL FRAMEWORK
2.1
D
Since the Framework was revised in 20X0 only going concern is an underlying
assumption.
2.2
A
The format of financial statements is covered by IAS 1 Presentation of Financial
Statements.
2.3
C
The recognition criteria require that there is a probable flow of economic benefits
and the item has a cost or value that can be measured reliably.
2.4
B
(1) is incorrect as concept is economic substance over legal form. Information
should not be excluded merely on the grounds of difficulty (3).
2.5
C
Historical cost is not the only convention that requires money measurement (e.g. a
revaluation model requires money measurement also).
2.6
C
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest
priority to Level 3 inputs. Quoted prices (unadjusted) in active markets for identical
assets or liabilities that are accessible at the measurement date are Level 1 inputs.
2.7
B
Understandability and comparability are enhancing qualitative characteristics.
2.8
C
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1001
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
2.9
D
The risks and rewards have not been transferred by Tenby as they still bears the
default risk. The substance of the contract is that of a financing arrangement and
therefore the trade receivables should still be recognised in full.
2.10
B
Historical cost annual depreciation = $90,000 ((500,000 × 90%) ÷ 5 years).
After two years carrying amount would be $320,000 (500,000 – (2 × 90,000)).
Current cost annual depreciation = $108,000 ((600,000 × 90%) ÷ 5 years).
After two years carrying amount would be $384,000 (600,000 – (2 × 108,000)).
2.11
D
As the receivable is “sold” with recourse it must remain as an asset in the statement
of financial position; it is not derecognised.
2.12
D
As it is a new type of transaction, comparability with existing treatments is not
relevant.
3
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
3.1
B
IAS 1 states that disclosure of the reasons for change is required plus the fact that
comparatives may not be comparable.
3.2
B
(2) is not a disclosure requirement of IAS 1.
3.3
A
Intangible assets must be shown separately. Although the other items may be
shown on the face of the statement of financial position, they do not have to be and
are usually relegated to a note.
3.4
D
None of these items needs further analysis.
3.5
C
$000
Property 1
Disposal proceeds
Less Carrying amount (1,900,000 × 810 )
Profit on disposal
Property 2
Revalued amount
Less Historical carrying amount (1,000 – 350)
Unrealised gain
3.6
C
Profit for the year
Unrealised surplus on revaluation of properties (135 – 60)
Total comprehensive income
1,550
(1,520)
–––––
30
–––––
2,000
(650)
–––––
1,350
–––––
$000
183
75
––––
258
––––
Tutorial note: Dividends are deducted from retained earnings and prior period
adjustments are dealt with in the statement of changes in equity.
3.7
B
The others would be included using the function of expense format.
3.8
D
Dividends are generally accounted for when paid; a disclosure note could be made
in the 20X5 financial statements.
1002
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
3.9
A
(2) and (3) are just two of the items that make up a reconciliation of carrying
amounts at the beginning and end of period (i.e. (4)). (Other items include
additions, disposals and impairment losses.) (1) would be disclosed as an
accounting policy.
Tutorial note: Even though IAS 16 is not specified in the question disclosure
requirements should always be assessed against IFRS.
4
ACCOUNTING POLICIES
4.1
A
The others are changes in estimate.
4.2
B
This is an error as IAS 23 requires all borrowing costs, relating to qualifying assets,
to be capitalised as part of the cost of the asset. All other items are changes in
estimate that require prospective adjustment.
4.3
C
All other items are changes in estimate.
4.4
B
Closing inventory was correct in the 20X5 draft statement of financial position and
therefore net assets remain unchanged at $6,957,300 when the error is corrected.
Opening inventory (last year’s closing inventory) was valued at selling price and
therefore overstated. Opening retained earnings will be reduced by $300,000 to
correct the error but profits for 20X5 will be increased by $300,000. Thus closing
retained earnings remain unchanged at $1,644,900.
4.5
B
Only the fraud relating to the current year should be expensed against profit or loss;
the remainder will be a prior period adjustment against retained earnings and will be
presented in the statement of changes in equity.
4.6
A
A change of classification in presentation in financial statements is a change of
accounting policy under IAS 8.
5
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
5.1
D
The first three statements are all steps in the core principle of recognising revenue.
5.2
B
$200 profit per month for 6 months = $1,200
5.3
B
Only revenue for 3 months should be recognised; the payment for the second three
months is an advanced payment and is presented in current liabilities.
5.4
D
The criteria for revenue recognition have not yet been met and so the payment is an
advanced payment and should be presented in current liabilities.
5.5
B
Bill-and-hold arrangements are where the customer is billed for the goods but the
seller holds the goods until the customer requests delivery (e.g. if the customer has
limited space to store the goods).
5.6
C
$
2,000
1,200
––––––
3,200
––––––
Costs to date (1,800 + 200)
Estimated costs to completion
Costs to profit or loss = 3,200 × 2,520 = $1,920
4,200
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1003
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
5.7
D
$
145
(125)
–––
20
–––
Cash received
Performance completed
Liability
5.8
B
As the asset is being repurchased for less than the selling price the transaction must
be accounted for as a lease.
5.9
A
Whether a customer is likely to reject delivery of the asset is not an indicator that is
considered when determining if performance obligations are satisfied at a specific
point in time.
5.10
D
The contract meets the criteria for revenue recognition. Prompt payment discount is
not anticipated; it will be an operating expense in profit or loss. If there is any
doubt regarding settlement this should be reflected against the amount receivable
from the customer; not the recognition of actual revenue.
5.11
C
Although the invoiced amount is $180,000, $30,000 of this has not yet been earned
and must be deferred until the servicing work has been completed.
6
INVENTORY AND BIOLOGICAL ASSETS
6.1
A
386,400 – 3,800 (loss on (1)) = $382,600
6.2
C
836,200 – 8,600 + 700 + (14,000 × 70%) = $838,100
6.3
A
(2) is a distribution cost and (4) an administration cost; neither are manufacturing
costs.
6.4
B
Factory management costs are a production overhead and are therefore included in
factory overheads.
6.5
C
Inventory is only carried at net realisable value where it is less than cost.
6.6
B
Settlement discounts are not selling/distribution costs.
6.7
B
IAS 2 states that costs of those staff engaged in the service contract and any
attributable overheads are included in the cost of inventory. A profit margin and
sales staff costs are specifically identified as costs that should be expensed as
incurred.
6.8
C
IAS 2 allows either first-in first-out or weighted average as a valuation model to be
applied to inventories.
6.9
C
Inventory should be stated at lower of cost and net realisable value:
Cost (on FIFO basis) (20 × 13)
Net realisable value (20 × 12)
1004
$260
––––
$240
––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
6.10
B
Product
I
II
III
Lower of FIFO and NRV
$
10
13
7
–––
30
–––
6.11
C
Wine is an example of products that are the result of processing after harvest and
IAS 41 does not deal with the processing of agricultural produce after harvest, IAS
2 Inventory would be the relevant standard for wine.
6.12
B
A biological asset shall be measured at the end of each reporting period at its fair
value less costs to sell. Costs to sell are the incremental costs directly attributable to
the disposal of an asset, excluding finance costs and income taxes.
$10,500 (Estimated sale price of the biological assets) – $700 (Transportation cost)
= $9,800
6.13
D
Once crops are harvested IAS 41 is no longer applicable.
6.14
D
The normal selling price of damaged inventory is $300,000 (210 ÷ 70%).
This will now sell for $240,000 (300,000 × 80%), and have a NRV of $180,000
(240 – (240 × 25%)). The expected loss on the inventory is $30,000 (210 cost – 180
NRV) and therefore the inventory should be valued at $970,000 (1,000 – 30).
7
IAS 16 PROPERTY, PLANT AND EQUIPMENT
7.1
C
48,000 + 400 + 2,200 = $50,600
7.2
B
Depreciation: 1/40 × 1,000,000 = $25,000
Revaluation: 1,000,000 – (800,000 – 2% × 10 × 800,000) = $360,000
7.3
D
Assets with indefinite lives (e.g. land) are not depreciated. Goodwill cannot be
revalued.
7.4
D
IAS 16 requires that depreciation is based on the carrying amount of the asset and
the full depreciation expense must be charged to profit or loss. IAS 16 does allow
the difference between depreciation charged on historical cost and the revalued
amount to be transferred from revaluation surplus to retained earnings as a transfer
within equity, this would be presented in the statement of changes in equity.
7.5
B
31 March 20X6
20,000
31 March 20X5
20,000
= $25,000
0.8
31 March 20X4
25,000
= $31,250
0.8
31,250
= $39,062
0.8
Accumulated depreciation = $(39,062 – 20,000)
= $19,062 (i.e. approximately $19,000)
31 March 20X3
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1005
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
7.6
B
Selling price
Carrying amount (to balance)
Profit/(loss)
Machine 1
$
90,000
(60,000)
–––––––
30,000
–––––––
Machine 2
$
40,000
(60,000)
–––––––
(20,000)
–––––––
120,000
(60,000)
–––––––
60,000
–––––––
100,000
(60,000)
––––––
40,000 =
–––––––
Cost
Carrying amount
Accumulated depreciation
100,000
–––––––
7.7
D
Depreciable amount after six years
Depreciation charge in year 7
= (100,000 – 2,000) × 14 20
= 68,600 × 1 25 = $2,744
= 68,600
7.8
B
As at 1 January 20X4 carrying amount was $104,000 and remaining useful life was
six years.
Depreciation charge for 20X4 should be $104,000 ÷ 6 = $17,400.
The change to straight line method of depreciation is a change in estimate and is
accounted for prospectively; prior period figures are not adjusted.
8
IAS 23 BORROWING COSTS
8.1
B
Borrowing costs can only be capitalised in respect of directly attributable assets, all
other borrowing costs must be expensed as incurred.
8.2
D
(3) and (4) are explicitly mentioned in IAS 23. IAS 23 refers to “interest expense
calculated using the effective interest method as described in IFRS 9 Financial
Instruments. Premiums (1) and discounts (2) fall to be treated as borrowing costs
based on the definition of “effective interest method” given in IFRS 9.
8.3
D
Borrowing costs for all three categories (A, B and C) of borrowed funds must be
capitalised when used for the acquisition, construction and production of qualifying
assets. Funds in respect of the construction of the new office have already been
allocated to that qualifying asset and therefore cannot be allocated to other
qualifying assets.
8.4
A
An entity must be consistent year-on-year in its treatment of borrowing costs.
8.5
C
The capitalisation rate to be used is the weighted average capitalisation rate and
excludes finance for specific projects.
Preference shares
Short-term loan
Convertible debt
Debt
$000
500
80
200
––––
780
––––
Rate
7%
10%
4%
Cost
$000
35
8
8
––––
51
––––
Weighted average = $51,000 ÷ $780,000 = 6.54%
1006
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
9
GOVERNMENT GRANTS
9.1
B
IAS 20 allows the grant to be presented as a deduction from the cost of the asset or
as a liability. Only government grants relating to income can be credited
immediately to profit or loss.
9.2
A
A forgivable loan is a loan which the lender undertakes to waive repayment of
under certain prescribed conditions.
9.3
A
The grant is credited to profit or loss in the same manner as the depreciation
expense on the related asset.
9.4
A
Free technical or marketing advice is named specifically as a form of government
assistance, while B and C are specifically mentioned as being not government
assistance. D is a government grant not government assistance.
9.5
B
As the grant is offset against the asset the depreciation charge is $180,000 (1/5 ×
(1,000,000 – 100,000). As management intends to use the asset for five years no
provision for repayment is required.
10
IAS 40 INVESTMENT PROPERTY
10.1
C
According to IAS 40 investment property is property (land or building or both) held
(by the owner or a lessee under a finance lease) to earn rentals or for capital
appreciation or both.
10.2
B
Both these items are mentioned as examples of investment property in IAS 40.
10.3
A
A vacant building held to be rented is an example of investment property.
10.4
B
This transfer results in a change from a cost measurement basis before transfer to a
fair value measurement basis after transfer.
10.5
D
11
IAS 38 INTANGIBLE ASSETS
11.1
D
IAS 38 requires six criteria to be met before development expenditure can be
capitalised. The other items have still to meet all the criteria and so their costs must
be expensed.
11.2
C
This is the purchase of a separate intangible asset that is capable of being recognised
in the statement of financial position.
Tutorial note: Advertising is an expense that is recognised when it is incurred (so
not A). B is a contingent asset that would need to be “virtually certain” rather than
merely “probable” to be recognised as an asset. An internally-generated brand
cannot be recognised as an asset (so not D).
11.3
C
IAS 38 does not specify a maximum period for amortisation, therefore not (A). If
the conditions exist, asset recognition is not an option, therefore not (B).
Amortisation is an expense in profit or loss, therefore not (D).
11.4
C
The others are intangible.
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1007
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
11.5
A
Payments on account of patents may be shown as an intangible asset. IAS 38 does
not allow any of the other three items to be capitalised.
11.6
C
$000
Customer list
100
Patents purchased
70
Costs incurred in developing patents
60
––––
230
––––
Legal fees must be written off as incurred. Internally-generated goodwill can never
be carried as an asset.
11.7
C
IAS 38 Intangible Assets requires that adequate resources exist to complete the
project.
11.8
C
Assets held for use under research and development should be presented as tangible
non-current assets.
11.9
B
The charge to profit or loss will be the research expenditure incurred in year plus
the development expenditure amortised in year, this is found by reconciling the
movement in development expenditure.
$000
Research
267
Development
Opening balance
305
Incurred in year
215
Closing balance
(375)
––––
145
––––
412
––––
12
NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
12.1
C
IFRS 5 does not allow restructuring costs of continuing businesses to be included in
the loss from discontinued operations.
12.2
A
IFRS 5 requires non-current assets held for sale to be measured at the lower of
carrying amount (900) and fair value less costs to sell (800 – 50)
12.3
C
The disposal of a component of an entity and also a subsidiary acquired with the
intent to resell are both discontinued operations in accordance with IFRS 5.
12.4
C
Depreciation for first six months of the year should be charged (i.e. $31,250).
At the date the asset is classified as held for sale it is tested for impairment. The
carrying amount would be $281,250 and it is expected to realise $254,000 so an
impairment loss of $27,250 should also be recognised. Once an asset is classified as
held-for-sale it is no longer depreciated.
12.5
1008
A
IFRS 5 states that the selling price must be reasonable compared to current fair
value (so not (3)) and that the asset must be in a condition that would allow an
immediate sale (so not (4)).
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
12.6
C
At 30 September 20X4:
Carrying amount = $37·5 million (45,000 – 6,000 b/f – 1,500 for 6 months; no
further depreciation when classified as held for sale).
Recoverable amount = $36·8 million ((42,000 × 90%) – 1,000).
Therefore included at $36·8 million (lower of carrying amount and fair value less
cost to sell).
13
IAS 36 IMPAIRMENT OF ASSETS
13.1
C
13.2
B
An impairment loss occurs when the recoverable amount is less than the carrying
amount. The recoverable amount is the higher of fair value less costs of disposal
and value in use. For asset B the recoverable amount is greater and so no
impairment loss has occurred. The recoverable amount of asset A is 90, leading to a
loss of 10; and the recoverable amount of asset B is 35 leading to a loss of 5.
Carrying amount
Less Historical cost carrying amount
Dr Other comprehensive income
(and then Revaluation surplus)
Historical cost carrying amount
Less Market value
Dr Profit or loss
13.3
B
Carrying amount
Less Recoverable amount
Impairment
$000
253
(207)
––––
46
––––
$000
207
(180)
–––––
27
–––––
$
2,750
(1,000)
––––––
1,750
––––––
A revaluation surplus of $1,500 exists for this asset and it will bear any impairment
loss up to this amount. Any further impairment loss must be expensed to profit or
loss.
13.4
B
For a revalued asset an impairment is debited to other comprehensive income to the
extent of the revaluation surplus on the asset, with any excess loss expensed to
profit or loss. The surplus on any other revalued asset cannot be used for the
impairment of a different asset.
13.5
C
Recoverable amount is the higher of fair value less costs of disposal and value in
use.
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1009
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
13.6
A
Goodwill should be written off in full and the remaining loss is allocated pro rata to
property plant and equipment and the product patent.
Property, plant and equipment
Goodwill
Product patent
Net current assets (at NRV)
13.7
14
D
B/f
$
200,000
50,000
20,000
30,000
–––––––
300,000
–––––––
Loss
$
(45,455)
(50,000)
(4,545)
nil
–––––––
(100,000)
–––––––
Post-loss
$
154,545
nil
15,455
30,000
–––––––
200,000
–––––––
Although the estimated NRV is lower than it was (due to fire damage), the entity
will still make a profit on the inventory and thus it is not an indicator of impairment.
IFRS 16 LEASES
14.1
B
Interest charge for 20X7
= 12% × 12,000 = $1,440
14.2
B
Interest expense is not capitalised into the cost of the asset and only the initial direct
costs of the lessee are capitalised into the cost of the asset. Statements 1 and 4 are
correct.
14.3
B
The lease is for the right-of-use of an asset that should be capitalised at the present
value of minimum lease payments (i.e. $220,000), as this is the initial amount of
lease liability recognised.
14.4
C
Initial amount capitalised of asset $1,750,000, less initial payment ($520,000) =
$1,230,000 to be financed.
Finance charge at 13% = $159,900
Depreciation over four years (shorter of useful life and lease period) $437,500
Therefore, total charge is $597,400.
14.5
B
14.6
B
Balance
$
45,000
37,175
Interest at 7%
$
3,150
2,602
Instalment
$
10,975
10,975
Rental of excavation equipment (short-term)
Depreciation of leased plant (340 ÷ 5 years)
Finance cost ((340 – 90) × 10%)
Total
1010
Balance
$
37,175
28,802
$
18,000
68,000
25,000
–––––––
111,000
–––––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
15
IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
15.1
B
The case against TY meets the definition of a provision and therefore should be
recognised. The claim against the sub-contractor is a contingent asset and should be
disclosed in the financial statements.
15.2
C
$1,000,000 × discount rate 0.463 = $463,000 × 1.08 = $500,040; so a provision of
$500,000 would meet the requirement of IAS 37.
Tutorial note: The $40 rounding is suitable as this is an accounting estimate.
15.3
D
No provision can be made for future operating losses. Non-adjusting events are
disclosed. Contingents assets are not recognised until virtually certain.
15.4
A
A contingent liability with a probable outflow of economic benefits should be
accounted and a provision recognised. A contingent liability where flow of
economic benefits is not probable should be disclosed.
15.5
A
A present obligation is a provision and must be provided for. A contingent asset
with a probable flow of economic benefits should be disclosed.
15.6
A
The legal action does not relate to conditions existing at the year-end as the cause
arose subsequently.
15.7
C
(1) is an onerous contract. A provision for (3) is still required if there is no intention
to sell.
15.8
B
$000
Extraction provision at 30 September 20X4 (250 × 10)
Dismantling provision:
At 1 October 20X3 (30,000 × 0·68)
20,400
Unwinding of the discount at 8%
Total provision
16
$000
2,500
22,032
–––––––
24,532
–––––––
IAS 10 EVENTS AFTER THE REPORTING PERIOD
16.1
C
The three other events are all adjusting events.
16.2
C
The three other events are all non-adjusting events.
16.3
A
(2) and (3) are non-adjusting events (as conditions did not exist at the end of the
reporting period).
16.4
A
The announcement of changes in tax rates and major restructuring are both nonadjusting events.
16.5
D
A, B and C could all be adjusting events – since they affect conditions existing at
the reporting date.
16.6
C
If the entity had not recognised a receivable (because a successful claim was only
probable rather than “virtually certain”) the adjustment will be an increase in
receivables (and profit) of $1.5 million. If the proceeds were recognised as an asset
(because a successful claim was “virtually certain”) the adjustment will be $1
million decrease in receivables (and profit) of $1 million ($2.5 – $1.5).
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1011
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Tutorial note: A and B are non-adjusting events. If the inventory (D) had been
sold before 31 August, when the financial statements were approved, it would have
been an adjusting event; but as the transaction was later it cannot be adjusting.
17
IAS 12 INCOME TAXES
17.1
B
17.2
B
Carrying amount in the accounting records (132,000 – 44,000) is $88,000.
Tax base (82,500 – 20,625) is $61,875.
Difference (26,125 × 25%) is $6,531.
Accounting
$
200,000
(40,000)
Cost
Accumulated depreciation
First year allowance
–––––––
160,000
(40,000)
Depreciation
Annual allowance
–––––––
120,000
–––––––
Tax
$
200,000
(100,000)
–––––––
100,000
(25,000)
–––––––
75,000
–––––––
Temporary difference 120,000 – 75,000 = 45,000
Deferred tax 45,000 × 25% = 11,250
17.3
C
Income tax
Cash
C/f
17.4
$
194,300
A
Tax charge
B
Carrying amount
Tax base
Taxable temporary difference
Tax rate
Deferred tax liability balance
1012
B/f
–––––––
331,900
–––––––
137,600
137,600
–––––––
331,900
–––––––
Tax due for the year
Over provision previous year
17.5
B/f
Expense for year
$
187,500
144,400
$
320
(10)
––––
310
––––
$
365,700
(220,000)
–––––––
145,700
–––––––
25%
36,425
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
18
FINANCIAL INSTRUMENTS
18.1
D
IAS 32 requires that treasury shares are presented as a deduction from equity.
18.2
C
(1), (3) and 4 all meet the definition of financial liabilities.
18.3
B
A convertible loan note must be separated into its liability and equity components
on initial issue based on the future cash flows associated with it.
18.4
A
The future cash flows are discounted to present value with the difference classified
as the equity component.
18.5
D
As payments are being made every six months some of the debt will be presented as
current and the remainder as non-current.
18.6
C
PV of future cash flows using effective interest rate of 14%:
Principle ($2,200 × 0.592)
Annual interest ($160 × 2.913)
Interest expense 20X2 ($1,768 × 14%)
Cash flow
Balance 31 December 20X2
Interest expense 20X3 ($1,855 × 14%)
18.7
D
18.8
A
As PQR’s business model is not to hold this type of asset for contractual cash flows
(this is a matter of fact) the asset must be valued at fair value with any changes in
fair value being taken through profit or loss.
Cash interest $1,000 × 4% × 5 years
Discount on issue ($1,000 × 5%)
Premium on redemption ($1,000 × 10%)
Total finance costs
18.9
$
1,302
466
––––––
1,768
248
(160)
––––––
1,855
––––––
260
$
200
50
100
––––––
350
––––––
A
Year ended
30 September
20X4
20X5
20X6
Cash flow
$000
500
500
10,500
Value of debt component
Difference – value of equity option component
Proceeds
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Discount Discounted
rate
cash flows
At 8%
$000
0·93
465
0·86
430
0·79
8,295
––––––
9,190
810
––––––
10,000
––––––
1013
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
19
CONCEPTUAL PRINCIPLES OF GROUP ACCOUNTING
19.1
C
Control is established by reference to voting shares. Harwich only has 70,000 out
of 300,000 votes (100,000 + (10 × 20,000)) whereas Felixstowe has 180,000 votes
giving it control over Sall (60%).
19.2
B
Voting rights in Sam = (2,000 × 10) + (8,000 × 1) = 28,000 votes.
Tom has 1,500 A shares giving a total of 15,000 votes.
Dick has 6,000 B shares giving 6,000 votes.
Tom has 53.6% of votes and therefore has control over Sam.
19.3
C
Jamee has 1 million ($500,000 × 50c per share) shares in issue.
Harvert holds 400,000 shares or 40% of the share capital.
With a holding of 40% and one nominated director, it is virtually certain that
Harvert can exercise a significant influence over the operating and financial policies
of Jamee, but cannot exercise control.
19.4
B
The consolidated statement of financial position includes 100% of every asset of the
subsidiary. Only the parent’s share capital is included in the consolidated statement
of financial position.
19.5
C
3 and 4 both give control over a subsidiary.
19.6
D
The investment no longer meets the definition of a subsidiary (ability to control)
and therefore would not be consolidated.
20
20.1
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
C
IFRS 3 allows non-current interest to be valued at either fair value on acquisition or
at a proportion of the identifiable net assets; this affects the amount of goodwill.
Fair value on acquisition
Cost of investment
Fair value of non-controlling interest
(100,000 × 20% × $1.70)
Net asset on acquisition
$
140,000
34,000
(126,000)
–––––––
48,000
–––––––
Proportion of identifiable net assets
Cost of investment
Net assets on acquisition (126,000 × 80%)
20.2
C
Cost of investment
Fair value of net assets acquired ((600 × 0.5) + 50 + 20))
Goodwill on acquisition
1014
140,000
(100,800)
–––––––
39,200
–––––––
$000
1,400
(370)
–––––
1,030
–––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
20.3
D
(576,000 + 140,000) – (180,000 + 108,000) = 428,000
20.4
C
Consolidated retained earnings
Vaynor
Weeton ((40 + 10) × 80%)
Goodwill impaired (15 × 80%)
20.5
D
$000
90
40
(12)
–––––
118
–––––
$000
Fair value of non-controlling interest on acquisition
(200,000 × 20% × $3.10)
Post-acquisition profits (50,000 × 20%)
20.6
C
124
10
–––––
134
–––––
If none of the goods have been paid for then receivable and payables need to be
reduced by the full amount of the intra-group balances, $48,000.
The unrealised profit is $48,000 × 331/3 ÷ 1331/3 × 60% = $7,200
20.7
D
$000
1,044
783
——
261
——
Sales value
Cost of sales
Profit
%
100
75
——
25
——
Tutorial note: Margin is “on sales” therefore sales value is 100%. If margin is
25%, cost is 75%.
Unrealised profit in inventory is $261,000 × 60% = $156,600
Alternatively: (60% × $1,044,000) × 25/100 = $156,600
20.8
B
$
1,224,000
Parent as per question
Post-acquisition share of Malta
(80% × ((680,000 – 3,000) – 476,000))
160,800
——–——
1,384,800
——–——
Unrealised profit is 20% on cost price, $18,000 is selling price so profit element is
20
/120 = 3,000
20.9
B
60% × (25/125 × $200,000) = $24,000
20.10
B
There is no requirement to value assets at fair value.
20.11
D
H
$000
500
(220)
–––––
280
–––––
Current assets
Current liabilities
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S
$000
200
(90)
–––––
110
–––––
Adjustment Consolidated
$000
$000
–22 + 2
680
+20
(290)
–––––
390
–––––
1015
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
20.12
D
%
120
(20)
––––
100
––––
Selling price
Mark-up
Cost
20.13
A
$
1,200
(200)
––––––
1,000
––––––
$
15,000
(3,000)
––––––
12,000
––––––
Carrying amount
Profit element (25/125)
Cost
Tutorial note: Bass (the parent) is the seller of the goods.
adjustment does not affect the non-controlling interest.
20.14
B
Is
$
40,000
(8,000)
––––––
32,000
––––––
Cost
Accumulated depreciation
Carrying amount
Therefore the
Should be
$
42,000
(18,000)
––––––
24,000
––––––
Adjustment required Cr Non-current assets at carrying amount $8,000.
Non-current assets in consolidated statement of financial position:
= 260,000 + 80,000 – 8,000 = $332,000
20.15
21
21.1
A
Is the correct treatment for a bargain purchase (“negative goodwill”).
FURTHER CONSOLIDATION ADJUSTMENTS
A
Cash element (500,000 × 60% × $3.45)
Share exchange (500,000 × 60% × 3/2 × $6.50)
$000
1,035
2,925
–––––
3,960
–––––
21.2
B
IFRS 3 requires that goodwill is carried as an asset and tested annually for
impairment.
21.3
C
(2) is a post-acquisition implication.
21.4
B
Where provision has been made by the company to be acquired, and costs would be
incurred whether or not acquisition went ahead, a provision should be included.
21.5
D
All are assets or liabilities that existed on which a fair value must be placed.
1016
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
21.6
D
$
12
(7)
–––
5
–––
Cost of investment
Less: Share of net assets acquired
Tutorial note: The future operating losses and reorganisation costs are not taken
into account when assessing fair value on acquisition.
21.7
C
$000
Cash element
(200,000 × 75% × $2)
Deferred consideration
(200,000 × 75% × $3 ÷ 1.062)
300
400
–––
700
–––
The amount of deferred consideration is determined at the acquisition date; the
unwinding of the discount is an expense for the period. The liability will be settled
after 12 months and should therefore be presented as a non-current liability.
21.8
B
The contingent consideration will be measured based on the fair value at 31
December 20X2; any change in fair value is taken to profit or loss. If the fair value
falls in the next period this fall will be accounted for in that period.
21.9
A
Transaction costs must be expensed immediately but any costs relating to the issue
of shares as part of the purchase consideration are to be treated as a deduction from
equity.
22
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
22.1
B
Consolidated revenue
Constable
Whistler
22.2
A
Revenue = 460,000 + 120,000 – 60,000
= $520,000
22.3
C
Cost of sales
Unrealised profit
$
400
100
–––––
500
–––––
Walcot
$m
(11)
Ufton
$m
(10)
Adjustment Consolidated
$m
$m
3
(19)
(1)
22.4
D
Reduce revenue by all intra-group sales of $40,000
22.5
A
Reduce consolidated profit by provision for unrealised profit.
20,000 × 25/125 = $4,000
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1017
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
22.6
C
Revenue
Cost of sales
Sanderstead Croydon
$
$
600,000
300,000
(400,000)
(200,000)
–––––––
–––––––
Adjustment
$
(20,000)
20,000
–––––––
Gross profit
Consolidated
$
880,000
(580,000)
–––––––
300,000
–––––––
Tutorial note: The goods have been sold on by Croydon so there is no unrealised
profit requiring adjustment.
22.7
A
Selling price
Cost
Gross profit
%
150
(100)
––––
50
––––
$
60,000
(40,000)
––––––
20,000
––––––
Tutorial note: The entire unrealised profit ($20,000) is deducted in arriving at
gross profit (control).
22.8
A
Unrealised profit
Closing (30,000 × 30/130)
Opening (15,000 × 30/130)
$
6,923
(3,462)
–––––
3,461
–––––
Increase required
22.9
B
Share of consolidated profit (25% × 118,000)
Less Share of unrealised profit (25% × 36,000 × 50/150)
22.10
B
Hot
Warm
$
29,500
(3,000)
––––––
26,500
––––––
$
40,000
36,000
––––––
76,000
––––––
Tutorial note: The tax expense of the associate is not included in the consolidated
profit or loss.
22.11
B
Proceeds on disposal
Net assets
Goodwill remaining
Non-controlling interest
Profit on disposal
1018
$000
275
(186)
(29)
37
–––
97
–––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
23
INVESTMENTS IN ASSOCIATES
23.1
C
23.2
C
Income from associate = $6,500 × 30% × 3/4 = $1,462.50 (rounded = $1,463)
Original investment
Share of profit for year
Less share of dividend paid
Value of investment in SX
$000
70
45.5
(28)
––––
87.5
––––
23.3
C
An investment in an associate is only carried at cost initially. (Thereafter the
carrying amount is increased or decreased to recognise the investor’s share in profit
or loss of the post-acquisition period.)
23.4
D
More than half of the voting power constitutes control. The three other items are all
indicators of significant influence mentioned in IAS 28 Investment in Associates
and Joint Ventures.
23.5
C
Raby
Seal
Toft
– over 20%, significant influence demonstrated.
– over 20%, but no significant influence.
– less than 20%, but has a significant influence.
Therefore Raby and Toft are associated undertakings of Inveresk.
23.6
A
23.7
B
Profit in inventory (½ × 15,000 × 25/125)
Holly’s share (30%)
Consolidated retained earnings
Vaynor
Weeton ((40 + 10) × 100%)
Yarlet ((70 – 30) × 40%)
$
1,500
450
–––––
$000
90
50
16
––––
156
––––
24
FOREIGN CURRENCY TRANSACTIONS
24.1
B
The foreign denominated payable and the dividend receivable are both monetary
items which must be retranslated at the reporting date.
24.2
A
If the economic environment has changed then the functional currency must be
reviewed and changed if necessary.
24.3
B
28 November Krown 220,000 ÷ $5.50 = $40,000. Half is settled on 17 December
and half remains outstanding on 31 December.
$
17 December Krown (110,000 ÷ $5.30) = $20,755 
755 loss
31 December Krown (110,000 ÷ $5.60) = $19,643 
357 gain
–––
Profit or loss
398 net loss
–––
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1019
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
24.4
C
The prepayment is not a monetary item and is therefore not retranslated at the
reporting date. No gain or loss is recognised.
24.5
D
Non-current liability at 31 December 20X6 is Krown 800,000 × $2.46 =
$1,968,000. There will also be a current liability of one instalment of Krown
100,000 ($246,000); however the question only asked for the non-current liability.
25
ANALYSIS AND INTERPRETATION
25.1
B
An overstatement in opening inventory will increase cost of goods sold (and reduce
gross profit).
25.2
B
The amount of the overstatement in closing inventory (A) will reduce cost of sales
in the current period, hence gross profit would increase. (B) will charge to profit
costs that relate to the next period. (Note that the goods are not in inventory at the
period end, hence cost of sales is overstated.) (C) would inflate sales and hence
increase profit. (D) would lead to a higher revenue figure and therefore an increase
in gross profit.
25.3
D
Cost of sales has been overstated by $48,000 ($24,000 of opening inventory
valuation was not an expense + carry forward of $24,000 expense in closing
inventory valuation). If inventory days is calculated using average inventory there
is no error in average inventory but cost of sales in the denominator is overstated so
turnover days are lower than they should be. (If closing inventory was used
turnover days will have been even lower.) Current assets in the current ratio were
understated so this was also lower.
25.4
B
ROCE
25.5
D
Credit sales
Average receivables
Receivables turnover
Collection period
=
795
Operating profit (before loan interest)
=
= 19.9%
Share capital  Reserves  Loan notes
4,000
= $200 × 80% = $160
= ½ $(16 + 24) = $20
= $160 ÷ $20= 8
= 365 ÷ 8 = 46 days
Sales
Cost of sales (40 + 120 – 50)
Gross profit
25.6
B
$
200
(110)
––––
90
––––
%
100
55
––––
45
––––
Receiving cash for a long-term loan increases current assets with no change in
current liabilities, hence improves the ratio. Payment to an existing trade payable
improves the ratio.
Writing off a trade receivable against an allowance has no effect on current assets.
Therefore receiving cash in respect of a short-term loan must be the correct choice.
Tutorial note: Suppose current ratio is 2:1, say loan = $50
Inventory, receivables and bank
Current liabilities
Current ratio
25.7
1020
A
100 + 50
50 + 50
2:1
150
100
1.5:1
A not-for-profit entity is unlikely to have shareholders or “earnings”.
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
26
IAS 7 STATEMENT OF CASH FLOWS
26.1
B
The other two items will appear as investing cash flows.
26.2
A
B and C would be adjustments to profit before tax in the indirect cash flow
statement and finance costs are presented after cash generated from operations.
26.3
B
Depreciation expense should have been added back to profit and increase in
payables should also have been added back.
26.4
A
Non-current assets (at carrying amount)
B/f
Revalued
Cash (to balance)
$000
250
25
60
——
335
——
$000
20
45
270
——
335
——
Depreciation
Disposals
C/f
New additions in the period were $60,000 and cash proceeds on disposal were
$50,000, therefore there was a net cash outflow of $10,000.
26.5
B
Acquisitions and disposals of non-current assets are investing activities. A profit on
disposal is not a cash flow and therefore deducted.
26.6
C
Non-current asset cash flows
Proceeds on sale of non-current asset
Purchase of non-current assets (240 + 80 – 180)
Net cash outflow
26.7
B
$000
20
(140)
––––
120
––––
A decrease in warranty provision will be credited to operating profit but is not a
cash flow.
A revaluation of non-current assets does not affect cash and is not included in
operating profit.
26.8
B
26.9
D
The expenditure is an addition to non-current assets.
Non-current assets (Carrying amount)
B/f
Additions
$000
110
25
——
135
——
26.10
D
Depreciation
Disposals (20 – 5)
C/f
$000
30
15
90
——
135
——
A note to the cash flow statement should explain this non-cash transaction.
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1021
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
26.11
B
Interest payable
$000
5
33
15
——
55
——
Provision
Cash to balance
Bal c/f
Bal b/f
Expense
$000
12
41
——
55
——
The unwinding of the discount on the decommissioning provision is an interest
expense but not a cash flow. The interest on the lease is a correct charge to profit or
loss and it was paid in the period.
26.12
27
27.1
A
Cash flow is (in $ million):
23·4 – 14·4 b/f + 2·5 depreciation + 3 disposal – 2 revaluation – 4 non-cash
acquisition = 8·5
IAS 33 EARNINGS PER SHARE
C
4 × $3.00 = $12.00
5 × $2.80 = $14.00
Therefore, the offer would have been $2.00
Finance raised = $2.00 × $10m ÷ 4 = $5,000,000
27.2
D
27.3
B
2  $2  3  $4
5
= $3.20
Profit for year $394,696 (528,934 – 6,578 – 1,800 – 125,860) divided by number of
ordinary shares in issue of 240,000 gives $1.64.
Tutorial note: The calculation is based on profit for the year (i.e. after interest,
which includes the preference dividend, and taxation).
27.4
B
The profit figure to be used in the basic EPS calculation is profit for year, which is
after payment of preference dividend but before payment of ordinary dividend. The
ordinary dividend of $800,000 must therefore be added back to retained profit for
year of $4.8 million, leading to a profit for year of $5.6 million.
If there is a bonus issue during the year then the number of shares used in the EPS
calculation is the number of shares after the bonus issue (i.e. 4 million).
27.5
D
Earnings is the amount of profit attributable to ordinary shareholders. This can be
calculated by adding the ordinary dividend and retained profit ($3,715,500).
Earnings per share is found by dividing earnings by the number of ordinary shares
(1·5 million).
$3,715,500 ÷ 1,500,000 = $2.48
27.6
B
Earnings = $524,054 (i.e. operating profit less interest and taxation). (Although the
dividend has been paid to shareholders, it is part of “earnings”.)
There are 500,000 shares in issue, so EPS is: $524,054 ÷ 500,000 = $1.05
1022
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
27.7
C
Earnings
$
689,424
65,000
–––––––
754,424
–––––––
= Retained profit
+ Ordinary dividend
Number of shares = 65,000 ÷ 0·10
EPS (754,424 × 100) ÷ 60,000
27.8
A
650,000
$1.16
Earnings = Operating profit – tax (i.e. $1,034,000)
The bonus shares issued during the year should be included in the number of shares.
Therefore, EPS = $1,034,000 ÷ 440,000 = $2.35
27.9
C
Proceeds on issue of shares (50,000 × $1.60)
Divide by average market price
Assumed shares issued at average market price
Bonus element (50 – 40)
10,000
$80,000
$2
40,000
Earnings
Number of shares = 1,000,000 + 10,000
EPS
27.10
A
Increase in profit ($100,000 × 6% × 70%)
Increase in shares ($100,000 × 5/4)
Earnings = $160,000 + $5,600
Number of shares = 500,000 + 125,000
Diluted EPS
27.11
$1,600,000
1,010,000
$1.58
C
$5,600
125,000
$165,600
625,000
$0.265
(2) and (3) relate to “potential ordinary shares” and must be reflected in the diluted
EPS calculation. (1) and (4) are reflected already in the basic EPS calculation.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1023
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 1 WARDLE
Item Answer
Justification
1
Outstanding liability
C
$000
6,000
600
660
–––––
7,260
–––––
Opening balance
Year 1 interest
Year 2 interest
2
A
Under the legal form of the transaction a sale has taken place followed by a
repurchase, therefor there will be no finance costs incurred
3
D
Following the substance of the transaction, the debt and asset will be recognised
making the capital base in the calculation higher and therefore giving a lower
ROCE when compared to following the legal form.
As the debt is recognised it will mean there will be more debt in the gearing
calculation and therefore result will give a higher gearing ratio, implying greater
risk.
4
D
Warranty provisions are liabilities that should be provided for in accordance with
IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
5
B
The goods must already be in inventory and placed to one side ready for delivery to
the customer, if they have not been manufactured a bill-and-hold transaction cannot
be recognised.
Answer 2 DEXON
(a)
Redraft profit or loss for the year
$000
Retained profit for period per question
Dividends paid (W1)
Draft profit for year ended 31 March 20X7
Discovery of fraud (W2)
Goods sold without commercial substance (W3)
Depreciation (W4) – buildings (165,000 ÷ 15 years)
– plant (180,500 × 20%)
Increase in investments ((12,500 × 1,296 ÷ 1,200) – 12,500)
Provision for income tax
Increase in deferred tax (W5)
Recalculated profit for year ended 31 March 20X7
1024
11,000
36,100
–––––
$000
96,700
15,500
–––––––
112,200
(2,500)
(1,800)
(47,100)
1,000
(11,400)
(800)
–––––––
49,600
–––––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(b)
Statement of changes in equity for the year ended 31 March 20X7
At 1 April 20X6
Prior period adjustment (W2)
Ordinary
shares
$000
200,000
Restated earnings at 1 April 20X6
Rights issue (see below)
50,000
Total comprehensive income
(from (a) and (W4)
Dividends paid (W1)
––––––
At 31 March 20X7
250,000
––––––
Share Revaluation Retained
premium
reserve
earnings
$000
$000
$000
30,000
18,000
12,300
(1,500)
––––––
10,800
10,000
4,800
––––––
40,000
––––––
––––––
22,800
––––––
49,600
(15,500)
––––––
44,900
––––––
Total
$000
260,300
(1,500)
60,000
54,400
(15,500)
––––––
357,700
––––––
Rights issue: 250 million shares in issue after a rights issue of one for four would mean that
50 million shares were issued (250,000 × 1/5). As the issue price was $1·20, this would create
$50 million of share capital and $10 million of share premium.
(c)
Statement of financial position as at 31 March 20X7
Assets $000
Non-current assets
Property (W4)
Plant (180,500 – 36,100 depreciation see (a))
Investments at fair value through profit or loss
(12,500 + 1,000 see (a))
Current assets
Inventory (84,000 + 6,000 (W3))
Trade receivables (52,200 – 4,000 (W2) – 7,800 (W3))
Bank
$000
180,000
144,400
13,500
–––––––
337,900
90,000
40,400
3,800
–––––––
Total assets
Equity and liabilities
Equity (from (b))
Ordinary shares of $1 each
Share premium
Revaluation surplus
Retained earnings
Non-current liabilities
Deferred tax (19,200 + 2,000 (W5))
Current liabilities (81,800 + 11,400 income tax)
Total equity and liabilities
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
134,200
–––––––
472,100
–––––––
250,000
40,000
22,800
44,900
–––––––
107,700
–––––––
357,700
21,200
93,200
–––––––
472,100
–––––––
1025
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
WORKINGS (amounts in brackets in $000)
(1)
Dividends paid
The dividend in May 20X6 would be $8 million (200 million shares × $0.04) and in
November 20X6 would be $7·5 million (250 million shares × $0.03). Total dividends would
therefore have been $15·5 million.
(2)
Fraud
The discovery of the fraud means that $4 million should be written off trade receivables. $1·5
million debited to retained earnings as a prior period adjustment (in the statement of changes
in equity) and $2·5 million written off in the profit or loss for the year ended 31 March 20X7.
(3)
Commercial substance
Revenue includes $7.8 million of goods sold without commercial substance, the cost of the
goods sold was $6 million (7.8 × 100/130); so profit should be reduced by $1.8 million. Trade
receivables should be reduced by $7.8 million and inventory increased by $6 million.
(4)
Property
The carrying amount of the property (after the year’s depreciation) is $174 million (185,000 –
11,000). A valuation of $180 million would create a revaluation surplus of $6 million of
which $1·2 million (6,000 × 20%) would be transferred to deferred tax.
(5)
Deferred tax
An increase in the taxable temporary differences of $10 million would create a transfer
(credit) to deferred tax of $2 million (10,000 × 20%). Of this $1·2 million relates to the
revaluation of the property and is debited to the revaluation surplus. The balance, $800,000,
is charged to profit or loss.
Answer 3 SANDOWN
(a)
Statement of profit or loss and other comprehensive income
for the year ended 30 September 20X6
Revenue (380,000 – 4,000 (W1))
Cost of sales (W2)
Gross profit
Distribution costs
Administrative expenses (50,500 – 12,000 (W3))
Investment income
Finance costs (W5)
Profit before tax
Income tax expense (16,200 + 2,100 – 1,500 (W6))
Profit for the year
$000
376,000
(259,800)
–––––––
116,200
(17,400)
(38,500)
1,300
(1,475)
–––––––
60,125
(16,800)
–––––––
43,325
–––––––
Other comprehensive income
Gain on fair value though other comprehensive income investments (W4) 4,700
–––––––
Total comprehensive income
48,025
–––––––
1026
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(b)
Statement of financial position as at 30 September 20X6
Assets
Non-current assets
Property, plant and equipment (W7)
Intangible – brand (30,000 – (9,000 + 3,000))
Financial asset investments (at fair value)
Current assets
Inventory
Trade receivables
Bank
$000
67,500
18,000
29,000
–––––––
114,500
38,000
44,500
8,000
–––––––
Total assets
Equity and liabilities
Equity shares of 20 cents each
Equity option
Other reserve (W9)
Retained earnings (W8)
Non-current liabilities
Deferred tax (W6)
Deferred income (W1)
5% convertible loan note (W5)
Current liabilities
Trade payables
Deferred income (W1)
Current tax payable
Total equity and liabilities
$000
90,500
–––––––
205,000
–––––––
50,000
2,000
5,700
61,385
–––––––
119,085
3,900
2,000
18,915
–––––––
42,900
2,000
16,200
–––––––
24,815
61,100
–––––––
205,000
–––––––
WORKINGS (amounts in brackets in $000)
(1)
Servicing element
IFRS 15 Revenue from Contracts with Customers requires that where revenue includes an
amount for after sales servicing and support costs it must be allocated between the
performance obligations (i.e. the sale of goods and the after-sales service). The allocation
should be based on the stand-alone selling prices of the obligations. This will result in a
deferral of an element of revenue. The amount deferred should cover the cost and a
reasonable profit (in this case a gross profit of 40%) on the services. As the servicing and
support is for three years and the date of the sale was 1 October 20X5, revenue relating to two
years’ servicing and support provision must be deferred: ($1·2 million × 2/0·6) = $4 million.
This is shown as $2 million in both current and non-current liabilities.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1027
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(2)
Cost of sales
Per question
Depreciation
Amortisation
– building (50,000 ÷ 50 years – see below)
– plant and equipment (42,200 – 19,700) × 40%))
– brand
246,800
1,000
9,000
3,000
–––––––
259,800
–––––––
The cost of the building of $50 million (63,000 – 13,000 land) has accumulated depreciation
of $8 million at 30 September 20X5 which is eight years after its acquisition. Thus the life of
the building must be 50 years.
The brand is being amortised at $3 million per annum (30,000 ÷ 10 years).
(3)
Dividend
A dividend of 4·8 cents per share would amount to $12 million (50 million × 5 (i.e. shares are
$0.20 each) × 4·8 cents). This is not an administrative expense but a distribution of profits
that should be accounted for through equity.
(4)
Fair value through other comprehensive income financial assets
gain on disposal (11,000 proceeds – 8,800 carrying amount)
Increase in fair value of remaining investments:
(29,000 – 26,500)
Included in other comprehensive income
2,200
2,500
–––––
4,700
–––––
The gain on the investments disposed of $4,000 (11,000 – 7,000) has now been realised and
can be transferred to retained earnings from other equity reserve. As the investments are
equity instruments classified at fair value through other comprehensive income the
cumulative gain on disposal cannot be reclassified through profit or loss, but it can be
transferred within equity.
(5)
Convertible loan note
The finance cost of the convertible loan note is based on its effective rate of 8% applied to
$18,440,000 carrying amount at 1 October 20X5 = $1,475,000 (rounded). The accrual of
$475,000 (1,475 – 1,000 interest paid) is added to the carrying amount of the loan note giving
a figure of $18,915,000 (18,440 + 475) in the statement of financial position at 30 September
20X6.
(6)
Deferred tax
Credit balance required at 30 September 20X6 (13,000 × 30%)
Balance at 1 October 20X5
Credit (reduction in balance) to profit or loss
1028
3,900
(5,400)
–––––
1,500
–––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(7)
Non-current assets
Property (63,000 – (8,000 + 1,000)) (W2)
Plant and equipment (42,200 – (19,700 + 9,000)) (W2)
Property, plant and equipment
(8)
Retained earnings
At 1 October 20X5
Profit for year
Transfer from other equity reserve ((W4)
Dividend paid (W3)
(9)
54,000
13,500
––––––
67,500
––––––
26,060
43,325
4,000
(12,000)
––––––
61,385
––––––
Other reserve
Relating to financial asset investments:
At 1 October 20X5
Other comprehensive income for year (W4)
Transfer to retained earnings ((W4)
5,000
4,700
(4,000)
––––––
5,700
––––––
Answer 4 CAVERN
(a)
Statement of profit or loss and other comprehensive income
for the year ended 30 September 20X6
Revenue
Cost of sales (W1)
Gross profit
Distribution costs
Administrative expenses (25,000 – 18,500 dividends (W3))
Investment income
Finance costs (300 + 400 (W2) + 3,060 (W4))
Profit before tax
Income tax expense (5,600 + 900 – 250 (W5))
Profit for the year
Other comprehensive income
Loss on fair value through other comprehensive income investments
(15,800 – 13,500)
Gain on revaluation of land and buildings (W2)
Total other comprehensive losses for the year
Total comprehensive income
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$000
182,500
(137,400)
–––––––
45,100
(8,500)
(6,500)
700
(3,760)
––––––
27,040
(6,250)
––––––
20,790
––––––
(2,300)
800
––––––
(1,500)
––––––
19,290
––––––
1029
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(b)
Statement of financial position as at 30 September 20X6
Assets
$000
Non-current assets
Property, plant and equipment (41,800 + 51,100 (W2))
Fair value through other comprehensive income investments
Current assets
Inventory
Trade receivables
19,800
29,000
–––––––
Total assets
Equity and liabilities
Equity shares of 20 cents each
Share premium
11,000
Other equity reserve
700
Revaluation surplus (7,000 + 800)
7,800
Retained earnings (12,100 + 20,790 per (a) – 18,500 (W3)) 14,390
–––––––
Non-current liabilities
Provision for decontamination costs (4,000 + 400 (W2))
8% Loan note (W4)
Deferred tax (W5)
Current liabilities
Trade payables
Bank overdraft
Current tax payable
Total equity and liabilities
4,400
31,260
3,750
–––––––
21,700
4,600
5,600
–––––––
$000
92,900
13,500
–––––––
106,400
48,800
–––––––
155,200
–––––––
50,000
33,890
––––––
83,890
39,410
––––––
31,900
–––––––
155,200
–––––––
WORKINGS (amounts in brackets in $000)
(1)
Cost of sales
Per trial balance
Depreciation of building (36,000 ÷ 18 years)
Depreciation of new plant (14,000 ÷ 10 years)
Depreciation of existing plant and equipment
((67,400 – 10,000 – 13,400) × 12·5%)
1030
128,500
2,000
1,400
5,500
–––––––
137,400
–––––––
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(2)
Property, plant and equipment
The new plant of $10 million should be grossed up by the provision for the present value of
the estimated future decontamination costs of $4 million to give a gross cost of $14 million.
The “unwinding” of the provision will give rise to a finance cost in the current year of
$400,000 (4,000 × 10%) to give a closing provision of $4·4 million.
The gain on revaluation and carrying amount of the land and building will be:
Valuation – 30 September 20X5
Building depreciation (W1)
Carrying amount before revaluation
Revaluation – 30 September 20X6
Gain on revaluation
The carrying amount of the plant and equipment will be:
New plant (14,000 – 1,400)
Existing plant and equipment (67,400 – 10,000 – 13,400 – 5,500)
(3)
43,000
(2,000)
––––––
41,000
41,800
––––––
800
––––––
12,600
38,500
––––––
51,100
––––––
Rights issue/dividends paid
Based on 250 million (50 million × 5 – as shares are $0.20 each) shares in issue at 30
September 20X6, a rights issue of 1 for 4 on 1 April 20X5 would have resulted in the issue of
50 million new shares (250 million – (250 million × 4/5)). This would be recorded as share
capital of $10 million (50,000 × $0.20) and share premium of $11 million (50,000 × ($0.42 –
$0.20)).
The dividend of $0.03 per share paid on 30 November 20X5 would have been based on 200
million shares and been $6 million. The dividend of 5 cents per share paid on 31 May 20X6
would have been based on 250 million shares and been $12·5 million. Therefore the total
dividends paid, incorrectly included in administrative expenses, were $18·5 million.
(4)
Loan note
The finance cost of the loan note, at the effective rate of 10% applied to the carrying amount
of the loan note of $30·6 million, is $3·06 million. The interest actually paid is $2·4 million.
The difference between these amounts of $660,000 (3,060 – 2,400) is added to the carrying
amount of the loan note to give $31·26 million (30,600 + 660) for inclusion as a non-current
liability in the statement of financial position.
(5)
Deferred tax
Provision required at 30 September 20X6 (15,000 × 25%)
Provision at 1 October 20X5
Credit (reduction in provision) to profit or loss
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
3,750
(4,000)
–––––
250
–––––
1031
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 5 FRESCO
(a)
Statement of profit or loss and other comprehensive income
Revenue
Cost of sales (W1)
Gross profit
Distribution costs
Administrative expenses (26,900 + 3,000 current year fraud)
Finance costs (300 + 2,300 (W2))
Loss before tax
Income tax relief (2,400 + 200 (W3) – 800)
Loss for the year
Other comprehensive income
Revaluation of leased property (W2)
4,000
–––––––
(3,800)
–––––––
Total comprehensive losses
(b)
$000
350,000
(311,000)
–––––––
39,000
(16,100)
(29,900)
(2,600)
–––––––
(9,600)
1,800
–––––––
(7,800)
Statement of changes in equity
Balances at 1 April 20X6
Prior period adjustment (fraud)
Restated balance
Rights share issue (see below)
Total comprehensive losses
(see (a) above)
Transfer to retained earnings
Balances at 31 March 20X7
Share
capital
$000
45,000
9,000
––––––
54,000
––––––
Share Revaluation Retained
premium
surplus
earnings
$000
$000
$000
5,000
nil
5,100
(1,000)
––––––
4,100
4,500
––––––
9,500
––––––
4,000
(500)
––––––
3,500
––––––
(7,800)
500
––––––
(3,200)
––––––
Total
equity
$000
55,100
(1,000)
13,500
(3,800)
––––––
63,800
––––––
The rights issue was 18 million shares (45,000 ÷ $0.50 × 1/5) at $0.7 = $13·5 million. This
equates to the balance on the suspense account. This should be recorded as $9 million equity
shares (18,000 × $0.50) and $4·5 million share premium (18,000 × ($0.75 – $0.50)).
The discovery of the fraud represents an error part of which is a prior period adjustment ($1
million) in accordance with IAS 8 Accounting policies, changes in accounting estimates and
errors.
1032
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(c)
Statement of financial position
Assets
Non-current assets
Property, plant and equipment (W2)
Current assets
Inventory
Trade receivables (28,500 – 4,000 fraud)
Current tax refund
$000
62,700
25,200
24,500
2,400
–––––––
Total assets
Equity and liabilities
Equity (see (b))
Equity shares of 50 cents each
Reserves
Share premium
Revaluation
Retained earnings
Non-current liabilities
Lease obligation (W2)
Deferred tax (W3)
Current liabilities
Trade payables
Lease obligation (19,300 – 15,230 (W2))
Bank overdraft
$000
52,100
–––––––
114,800
–––––––
54,000
9,500
3,500
(3,200)
–––––––
15,230
3,000
27,300
4,070
1,400
–––––––
Total equity and liabilities
9,800
–––––––
63,800
18,230
–––––––
32,770
–––––––
114,800
–––––––
WORKINGS (amounts in brackets are in $000)
(1)
Cost of sales
Per question
Amortisation of – property (W2)
Amortisation of – leased plant (W2)
Depreciation of other plant and equipment ((47,500 – 33,500) × 20%)
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
$000
298,700
4,500
5,000
2,800
–––––––
311,000
–––––––
1033
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(2)
Non-current assets
Carrying amount 1 April 20X6 (48,000 – 16,000)
Revaluation surplus
32,000
4,000
–––––––
Revalued amount 1 April 20X7
36,000
Amortisation year to 31 March 20X7 (over 8 years)
(4,500)
–––––––
Carrying amount 31 March 20X7
31,500
–––––––
$500,000 (4,000 ÷ 8 years) of the revaluation surplus will be transferred to retained earnings
(reported in the statement of changes in equity).
Leased plant:
Fair value 1 April 20X6
Deposit
25,000
(2,000)
–––––––
23,000
2,300
(6,000)
–––––––
19,300
1,930
(6,000)
–––––––
15,230
–––––––
Initial liability
Interest at 10%
Payment 31 March 20X7
Lease obligation 31 March 20X7
Interest at 10%
Payment 31 March 20X8
Lease obligation 31 March 20X8
Amortisation for the leased plant for the year ended 31 March 20X7 is $5 million (25,000 ÷ 5
years).
Summarising the carrying amount of property, plant and equipment as at 31 March 20X8:
Property
Owned plant (47,500 – 33,500 – 2,800)
Leased plant (25,000 – 5,000)
(3)
31,500
11,200
20,000
–––––––
62,700
–––––––
Deferred tax
Provision required at 31 March 20X7 (12,000 × 25%)
Provision at 1 April 20X6
Credit (reduction in provision) to profit or loss
1034
3,000
(3,200)
–––––––
200
–––––––
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Answer 6 ATLAS
(a)
Statement of profit or loss and other comprehensive income
for the year ended 31 March 20X7
Revenue (550,000 – 10,000 in substance loan)
Cost of sales (W1)
Gross profit
Distribution costs
Administrative expenses
(30,900 + 5,400 directors’ bonus of 1% of sales made)
Finance costs (700 + 500 (10,000 × 10% × 6/12 in substance loan))
Profit before tax
Income tax expense (27,200 – 1,200 + (9,400 – 6,200) deferred tax)
Profit for the year
Other comprehensive income
Revaluation gain on land and buildings (W2)
(36,300)
(1,200)
–––––––
60,400
(29,200)
–––––––
31,200
7,000
–––––––
38,200
–––––––
Total comprehensive income for the year
(b)
$000
540,000
(420,600)
–––––––
119,400
(21,500)
Statement of changes in equity for the year ended 31 March 20X7
Balances at 1 April 20X6
Share issue (see below)
Total comprehensive income
(see (i) above)
Dividend paid
Balances at 31 March 20X7
Share
capital
$000
40,000
10,000
Share Revaluation Retained Total
premium reserve earnings equity
$000
$000
$000
$000
6,000
nil
11,200 57,200
14,000
24,000
7,000
––––––
50,000
––––––
––––––
20,000
––––––
––––––
7,000
––––––
31,200 38,200
(20,000) (20,000)
–––––– ––––––
22,400 99,400
–––––– ––––––
The rights issue of 20 million shares (50,000 ÷ $0.50 × 1/5) at $1·20 has been recorded as $10
million equity shares (20 million × $0·50) and $14 million share premium (20 million ×
($1·20 – $0·50)).
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1035
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(c)
Statement of financial position as at 31 March 20X7
Assets
Non-current assets
Property, plant and equipment (44,500 + 52,800 (W2))
Current assets
Inventory (43,700 + 7,000 in substance loan)
Trade receivables
$000
$000
97,300
50,700
42,200
––––––
Plant held for sale (W2)
92,900
3,600
–––––––
193,800
–––––––
Total assets
Equity and liabilities
Equity (see (b) above)
Equity shares of 50 cents each
Share premium
Revaluation surplus
Retained earnings
50,000
20,000
7,000
22,400
––––––
Non-current liabilities
In substance loan from Xpede
(10,000 + 500 accrued interest)
Deferred tax
10,500
9,400
––––––
Current liabilities
Trade payables
Income tax
Accrued directors’ bonus
Bank overdraft
35,100
27,200
5,400
6,800
––––––
Total equity and liabilities
49,400
–––––––
99,400
19,900
74,500
–––––––
193,800
–––––––
WORKINGS (amounts in $000)
(1)
Cost of sales
Per question
Closing inventory (in substance loan)
Depreciation of buildings (W2)
Depreciation of plant and equipment (W2)
(2)
411,500
(7,000)
2,500
13,600
–––––––
420,600
–––––––
Non-current assets
Land and buildings
Carrying amount at 1 April 20X6 (60,000 – 20,000)
Revaluation at that date (12,000 + 35,000)
Gain on revaluation
Buildings depreciation (35,000 ÷ 14 years)
Carrying amount at 31 March 20X7 (47,000 – 2,500)
1036
40,000
47,000
–––––
7,000
–––––
(2,500)
–––––
44,500
–––––
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Plant
The plant held for sale should be shown separately and not depreciated after 1 October 20X6.
Other plant
Carrying amount at 1 April 20X6 (94,500 – 24,500)
Plant held for sale (9,000 – 5,000)
Depreciation for year ended 31 March 20X7 (20% reducing balance)
Carrying amount at 31 March 20X7
Plant held for sale:
At 1 April 20X6 (from above)
Depreciation to date of reclassification (4,000 × 20% × 6/12)
Carrying amount at 1 October 20X6
70,000
(4,000)
––––––
66,000
(13,200)
––––––
52,800
––––––
4,000
(400)
–––––––
3,600
–––––––
Total depreciation of plant for year ended 31 March 20X7 (13,200 + 400) 13,600
As the fair value of the plant held for sale at 1 October 20X6 is $4·2 million, it should
continue to be carried at its (lower) carrying amount (and no longer depreciated).
Answer 7 EMERALD
Item Answer
Justification
1
Capitalised development expenditure
Incurred in year to 31 March:
20X6 ($1,000 – 1/4 × 1,000)
20X7
A
$000
750
400
–––––
1,150
–––––
2
D
Depreciation of $50,000 must be expensed for the first six months of the year. As
the property is being transferred from IAS 16 property to IAS 40 investment
property the gain on remeasurement ($350,000) is taken through other
comprehensive income. The increase in fair value of $40,000 in the second six
months is credited to profit or loss.
3
A
In the consolidated financial statements the asset will fall under IAS 16 and must be
measured at depreciated historic cost. Depreciation of $50,000 would have been
charged for the year, leaving the asset at a carrying amount of $1,450,000.
4
D
The decommissioning provision will fall within the remit of IAS 37 Provisions,
Contingent Liabilities and Contingent Assets
5
A
The search for alternative uses falls to be treated as research expenditure.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1037
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 8 DERRINGDO
Item Answer
Justification
1
A
Derringdo is acting as an agent for the sale of A grade products and therefore will
not recognise any inventory for those goods. B Grade goods belong to Derringdo
and will be recognised at cost in the statement of financial position.
2
B
A grade – Revenue to be recognised is just the commission earned:
Selling price (18,400 × 150/100)
Commission (12·5% × 36,800)
$000
36,800
4,600
3
C
Revenue will include the carpets sold in the current year ($23,000) plus the carpets
sold in the previous year ($1,200) on which revenue was not previously recognised.
4
A
The change in depreciation method is a change in accounting estimate and is
therefore accounted for prospectively. The new method of trading in carpets
requires a new accounting policy which can only be applied on a prospective basis.
5
C
No revenue would be recognised until the earlier date of the carpets having been
sold onwards, or six months, and the carpets would remain as inventory of
Derringdo (acting as principal in the agreement). That Derringdo can require
transfer indicates that it still controls the carpets.
Answer 9 LINNET
(a)
Recognition principles
If an entity transfers control of a good or service over time, it will recognise revenue
associated with that contract over a period of time if one of the following criteria is met:

The customer simultaneously receives and consumes the good or service provided
under the contract;

The entity’s performance creates or enhances an asset that is under the customer’s
control; or

The entity’s performance creates an asset which the entity has no alternative use for
and the entity has an enforceable right to payment for performance completed to date.
If Linnet is constructing assets to customers’ specific requirements and they cannot otherwise
be used by Linnet, Linnet should recognise revenue over the term of the contracts.
If a performance contract is not satisfied over time, then the performance obligation will be
satisfied at a point in time, when the customer obtains control of the asset. Indicators of the
transfer of control may include the following:





The entity has a present right to be paid for the asset;
The customer has legal title to the asset;
The entity has transferred physical possession of the asset;
The customer has significant risks and rewards of ownership of the asset; and
The customer has accepted the asset.
If Linnet is fulfilling construction projects with the aim of selling on the asset at some point in
the future then revenue will be recognised at a point in time, and not over the term of the
construction project (e.g. if Linnet were constructing houses or apartments to sell to the public
on completion.
1038
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(b)
Statement of profit or loss (extract) for the year to 31 March 20X7
$m
70
(81)
–––
(11)
–––
Sales revenue
Cost of sales (64 + 17)
Loss for period
Statement of financial position extracts – as at 31 March 20X7
Current assets
Work in progress (costs incurred (195 + 17)) less costs expensed (112 + 81))
Receivable (W3)
19
40
WORKINGS
Sales
Cost of sales
Rectification costs
Profit/(loss)
(1)
Cumulative
Cumulative
1 April 20X6 31 March 20X7
$m
$m
150
(W1) 220
(112)
(W2) (176)
nil
(17)
––––
––––
38
(W2) 27
––––
––––
Amounts
for year
$m
70
(64)
(17)
––––
(11)
––––
Contract sales
Progress payments received are $180 million. This is 90% of the work certified (at 28
February 20X7); therefore the work certified at that date was $200 million. The value of the
further work completed in March 20X7 is given as $20 million, giving a total value of
contract sales at 31 March 20X7 of $220 million.
(2)
Total estimated profit (excluding rectification costs)
Contract price
Cost to date
Estimated cost to complete
Estimated total profit
$m
300
(195)
(45)
––––
60
––––
The degree of completion (by the method specified) is 220/300.
Costs recognised to date are based on total expected cost of $240 million × 220/300 = $176
million less costs recognised in prior period of $112 million to arrive at costs recognised this
period of $64 million. However, the rectification costs, of $17 million, are an abnormal cost
and must be charged against profits in the year they are incurred; they cannot be spread over
the term of the contract. Therefore costs to be recognised this period are $81 million (64 +
17), leading to a loss recognised for this period of $11 million.
(3)
Contract assets
Total contract assets, reported as current assets, are $59 million (actual costs incurred to date
(195 + 17) plus cumulative profit (27) less cash received (180)). Of this, $40 million (220 –
180 progress payments received) would be recognised as a receivable asset under IFRS 9
Financial Instruments and $19 million would be recognised as work in progress (costs
incurred (195 + 17) less costs expensed (112 + 81)).
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1039
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 10 DEARING
Item Answer
Justification
1
Initial cost
B
$000
1,050
(210)
––––
840
30
28
22
––––
920
––––
Manufacturer’s base price
Less: Trade discount (20%)
Base cost
Freight charges
Electrical installation cost
Pre-production testing
Initial capitalised cost
2
C
Depreciable amount = $1,260,000 – $60,000 = $1,200,000
Useful life = 6,000 hours
Depreciation per depreciable hour = $200
Year 2 usage = 1,800 hours × $200 = $360,000
3
B
Carrying amount of asset at 30 September 20X6 ($2,620,000 × 39/40) = $2,554,500
Revalue to $2,800,000, gives increase in value of $245,500.
Of which $125,000 will be credited to profit or loss as a reversal of previous loss.
Leaving $120,500 as a credit to other comprehensive income (revaluation surplus).
4
A
All other expenditure would be classified as revenue-based expenditure and charged
to profit or loss in the year incurred.
5
A
Under IAS 16 bearer plant assets are initially measured at cost.
Answer 11 SHAWLER
Item Answer
Justification
1
C
Initial provision
At 30 September 20X5 = $18,000
Discount back 2 years using 8% discount rate = $18,000 ÷ 1.082 = $15,432
2
D
Remaining grant
Included in non-current liabilities will be $7,200, as $1,200 will have been
transferred to current liabilities. The requirement was for the total government
grant, so current and non-current elements will be added together
3
B
Depreciation
Main body = $60,000 ÷ 10 years = $6,000
Replacement liner = $10,000 ÷ 5 years = $2,000
4
D
IAS 20 requires all three disclosures in respect of government grants.
5
D
There is no effect as there is no present legal obligation to fit the filters at the
reporting date.
1040
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Answer 12 DEXTERITY
Item Answer
Justification
1
A
Goodwill
B
$m
35
(15)
(10)
(2)
––––
Goodwill (to balance)
8
––––
Only development costs are capitalised; any research costs must remain expensed.
Cost of investment
Net assets
Patent
Work in progress
2
Tutorial note: Market value of an intangible asset can only be recognised if an
active market for it exist, which is most unlikely for the patented drug.
3
C
IAS 38 specifies that training costs cannot be capitalised and must be expensed as
incurred.
4
C
Under IAS 38 costs incurred in the search for possible alternative products are
research expenditure and therefore must be expensed as incurred.
5
D
IAS 38 only allows intangible assets that have an active market to be revalued. It
does not allow the revaluation of an asset that has not previously been recognised.
Answer 13 DARBY
(a)
Non-current assets definition
There are four elements to the assistant’s definition of a non-current asset and he is
substantially incorrect in respect of all of them.
The term non-current assets will normally include intangible assets and certain investments;
the use of the term “physical asset” would be specific to tangible assets only.
Whilst it is usually the case that non-current assets are of relatively high value this is not a
defining aspect. A waste paper bin may exhibit the characteristics of a non-current asset, but on
the grounds of materiality it is unlikely to be treated as such. Furthermore the past cost of an
asset may be irrelevant; no matter how much an asset has cost, it is the expectation of future
economic benefits flowing from a resource (normally in the form of future cash inflows) that
defines an asset according to the IASB’s Conceptual Framework for Financial Reporting.
The concept of ownership is no longer a critical aspect of the definition of an asset. It is
probably the case that most non-current assets in an entity’s statement of financial position are
owned by the entity; however, it is the ability to “control” assets (including preventing others
from having access to them) that is now a defining feature. For example: this is an important
characteristic in treating a finance lease as an asset of the lessee rather than the lessor.
It is also true that most non-current assets will be used by an entity for more than one year and a
part of the definition of property, plant and equipment in IAS 16 Property, Plant and Equipment
refers to an expectation of use in more than one period, but this is not necessarily always the case.
It may be that a non-current asset is acquired which proves unsuitable for the entity’s intended use
or is damaged in an accident. In these circumstances assets may not have been used for longer
than a year, but nevertheless they were reported as non-current during the time they were in use.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1041
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A non-current asset may be within a year of the end of its useful life but (unless a sale agreement
has been reached under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations)
would still be reported as a non-current asset if it was still giving economic benefits. Another
defining aspect of non-current assets is their intended use (i.e. held for continuing use in the
production, supply of goods or services, for rental to others or for administrative purposes).
(b)
Issues
(i)
Training course
The expenditure on the training courses may exhibit the characteristics of an asset in that they
have and will continue to bring future economic benefits by way of increased efficiency and
cost savings to Darby. However, the expenditure cannot be recognised as an asset on the
statement of financial position and must be charged as an expense as the cost is incurred. The
main reason for this lies with the issue of “control”; it is Darby’s employees that have the
“skills” provided by the courses, but the employees can leave the company and take their
skills with them or, through accident or injury, may be deprived of those skills. Also the
capitalisation of staff training costs is specifically prohibited under International Financial
Reporting Standards (specifically IAS 38 Intangible Assets).
(ii)
Research and development expenditure
The question specifically states that the costs incurred to date on the development of the new
processor chip are research costs. IAS 38 states that research costs must be expensed. This is
mainly because research is the relatively early stage of a new project and any future benefits
are so far in the future that they cannot be considered to meet the definition of an asset (probable
future economic benefits), despite the good record of successes with similar projects.
Although the work on the automatic vehicle braking system is still at the research stage, this
is different in nature from the previous example as the work has been commissioned by a
customer, As such, from the perspective of Darby, it is work in progress (a current asset) and
should not be written off as an expense. A note of caution should be added here in that the
question says that the success of the project is uncertain which presumably means it may not
be completed. This does not mean that Darby will not receive payment for the work it has
carried out, but it should be checked to the contract to ensure that the amount it has spent to
date ($2·4 million) will be recoverable. In the event that say, for example, the contract stated
that only $2 million would be allowed for research costs, this would place a limit on how
much Darby could treat as work in progress. If this were the case then, for this example,
Darby would have to expense $400,000 and treat only $2 million as work in progress.
(iii)
Installation contract
The question suggests the correct treatment for this kind of contract is to treat the costs of the
installation as a non-current asset and (presumably) depreciate it over its expected life of (at
least) three years from when it becomes available for use. In this case the asset will not come
into use until the next financial year/reporting period and no depreciation needs to be
provided at 30 September 20X6.
The capitalised costs to date of $58,000 should only be written down if there is evidence that
the asset has been impaired. This occurs where the recoverable amount of an asset is less than
its carrying amount. The assistant appears to believe that the recoverable amount is the future
profit, whereas (in this case) it is the future (net) cash inflows. Thus any impairment test at 30
September 20X6 should compare the carrying amount of $58,000 with the expected net cash
flow from the system of $98,000 ($50,000 per annum for three years less future cash outflows
to completion the installation of $52,000 (see note below)). As the future net cash flows are
in excess of the carrying amount, the asset is not impaired and it should not be written down
but shown as a non-current asset (under construction) at cost of $58,000.
1042
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Tutorial note: As the contract is expected to make a profit of $40,000 on income of $150,000,
the total costs must be $110,000; with $58,000 costs to date, completion costs are $52,000.
Answer 14 ESP
Item Answer
Justification
1
Value in use
C
$000
200.2
149.4
165
––––––
514.6
––––––
Year 1 = 220 × 0.91
Year 2 = 180 × 0.83
Year 3 = (170 + 50) × 0.75
Tutorial note: Do not forget to include sale proceeds of $50,000 in year 3.
2
B
Carrying amount prior to impairment
Annual depreciation (800 – 50) ÷ 5years
Carrying amount at end of year 2 (800 – (150 × 2))
3
$000
150
500
A
Per
question
$000
Goodwill
1,800
Factory
4,000
Plant
3,500
Receivables and cash
1,500
––––––
10,800
––––––
After plant
write off
$000
1,800
4,000
3,000
1,500
––––––
10,300
––––––
Write off in full
Pro rata loss of 4/7
Pro rata loss of 3/7
Realisable value
Value in use
After impairment
losses
$000
–
2,286
1,714
1,500
––––––
5,500
––––––
Tutorial note: The plant with a carrying amount of $500,000 that has been
damaged to the point of no further use should be written off (it no longer meets the
definition of an asset). After this:
(1)
(2)
goodwill is written off in full;
Any remaining impairment loss is written off the remaining assets pro rata
to their carrying amounts, except that no asset should be written down to
less than its fair value less costs to sell (net realisable value).
That is, after writing off the damaged plant the remaining impairment loss is $4·8m
(10.3 – 5.5) of which $1·8m is applied to the goodwill and the remaining $3.0m is
apportioned pro rata (3 ÷ (4 + 3)) to the factory and the remaining plant.
4
B
IAS 38 requires intangible assets not yet ready for use and intangible assets with an
indefinite life to be tested annually for impairment, they are not amortised.
5
A
The addition of the solar panels is an enhancing cost and would not be included in
cash flows for the calculation of value in use in accordance with IAS 38.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1043
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 15 BOROUGH
Item Answer
Justification
1
Carrying amount of license
Licence for oil extraction (50,000 + 20,000)
Amortisation (10 years)
B
Carrying amount
2
A
Environmental provision
((20,000 + (150,000 × $0·02)) × 1·08 finance cost)
$000
70,000
(7,000)
––––––
63,000
––––––
24,840
––––––
3
A
From Borough’s perspective, as a separate entity, the guarantee for Hamlet’s loan is
a contingent liability of $10 million. As Hamlet is a separate entity, Borough has no
liability for the secured amount of $15 million, not even for the potential shortfall
for the security of $3 million. The $10 million contingent liability would normally
be described and disclosed in the notes to Borough’s entity financial statements.
4
C
A and D are only possible obligations and therefore no provision is required; B is a
contingent asset.
5
C
IAS 37 requires the least net cost of an onerous contract to be recognised as a
provision.
Answer 16 RADAR
Item Answer
Justification
1
D
Redundancy provision
200 employees paid $5,000 each
$1,000,000
Retraining costs are a cost of the ongoing business and are not provided for in
advance.
2
B
Loss on property, plant and equipment
Carrying amount
Net proceeds (500 – 50)
3
C
Short-term lease rentals are normally expensed to profit or loss :
Machine 1
Machine 2
Machine 3
$
2,200
(450)
–––––
1,750
–––––
5 × $500
4 × $1,400
2 × $800
$
2,500
5,600
1,600
–––––
9,700
–––––
4
C
Until drilling commences there is no legal or constructive obligation, therefore a
provision is not required.
5
A
Past actions or statements can be taken as a constructive obligation if a similar event
happens in the future. The repair of faulty goods under the terms of a contract is a
legal obligation.
1044
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Answer 17 WAXWORK
Item Answer
Justification
1
C
No adjustment to the current period but the event should be disclosed in current year
disclosures
2
B
70% of the inventory amounts to $322,000 (460,000 × 70%) and this was sold for a
net amount of $238,000 (280,000 × 85%). Inventory is required to be valued at the
lower of cost and net realisable value, thus this is an adjusting event.
$280,000 ÷ 70% = $400,000, less commission of 15% = $340,000.
3
C
The tax rates were changed after the accounts were authorised for issue so this is not
classified as an event after the reporting period.
4
A
Tax expense
Closing deferred tax liability ($80,000 × 24%)
Opening deferred tax liability
$
19,200
24,800
––––––
(5,600)
53,960
––––––
48,360
––––––
Decrease in liability
Current tax
Total tax expense
5
B
IAS 41 does not apply to land related to agricultural activity (IAS 16 applies) or
intangible assets related to agricultural activity (IAS 38 applies).
Tutorial note: IAS 2 Inventories applies to agricultural produce after the point of
harvest.
Answer 18 PINGWAY
Item Answer
Justification
1
B
$10,000,000 ÷ $100 × 20 shares = 2,000,000 shares issued on conversion
2
A
Convertible loan notes – discounted using the effective interest rate of 8%:
Cash flows
Year 1 interest
Year 2 interest
Year 3 interest and capital
Total value of debt component
300
300
10,300
Discount
factor at 8%
0·93
0·86
0·79
Present
value
$000
279
258
8,137
–––––
8,674
–––––
3
A
On initial recognition the liability recognised is based on the present value of future
cash flows discounted using the effective interest rate. Interest will initially be based
on this amount and be added to the liability, making the next year’s interest higher.
4
B
As the loan assets are classified at fair value through other comprehensive income
any changes in fair value plus any profit or loss on disposal is then reclassified to
profit or loss.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1045
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
5
D
Loan assets that are held in a business model whose objective is achieved through
collecting contractual cash flows (i.e. interest and principal repayments) and selling
them must be classified as at fair value through other comprehensive income.
Answer 19 PATRONIC
(a)
Consolidated statement of profit or loss for the year ended 31 March 20X6
Revenue (150,000 + (78,000 × 8/12) – (1,250 × 8 months intra group))
Cost of sales (W1)
Gross profit
Distribution costs (7,400 + (3,000 × 8/12))
Administrative expenses (12,500 + (6,000 × 8/12))
Finance costs (W2)
Impairment of goodwill
Share of profit from associate (6,000 × 30%)
Profit before tax
Income tax expense (10,400 + (3,600 × 8/12))
Profit for the year
Attributable to:
Equity holders of the parent
Non-controlling interest (W3)
(b)
$000
192,000
(119,100)
–––––––
72,900
(9,400)
(16,500)
(5,000)
(2,000)
1,800
––––––
41,800
(12,800)
––––––
29,000
––––––
27,400
1,600
––––––
29,000
––––––
Significant influence
An associate is defined by IAS 28 Investments in Associates and Joint Ventures as an
investment over which an investor has significant influence. There are several indicators of
significant influence, but the most important are usually considered to be a holding of 20% or
more of the voting shares and board representation. Therefore it was reasonable to assume
that the investment in Acerbic (at 31 March 20X6) represented an associate and was correctly
accounted for under the equity accounting method.
The current position (from May 20X6) is that although Patronic still owns 30% of Acerbic’s
shares, Acerbic has become a subsidiary of Spekulate as it has acquired 60% of Acerbic’s
shares. Acerbic is now under the control of Spekulate (part of the definition of being a
subsidiary), therefore it is difficult to see how Patronic can now exert significant influence
over Acerbic. The fact that Patronic has lost its seat on Acerbic’s board seems to reinforce
this point. In these circumstances the investment in Acerbic falls to be treated under IFRS 9
Financial Instruments. It will cease to be equity accounted from the date of loss of significant
influence. Its carrying amount at that date will be its initial recognition value under IFRS 9
and thereafter it will be carried at fair value.
1046
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
WORKINGS
(1)
Cost of sales
$000
Patronic
Sardonic (51,000 × 8/12)
Intra group purchases (1,250 × 8 months)
Additional depreciation: plant (2,400 ÷ 4 years × 8/12)
property (per question)
Unrealised profit in inventories (3,000 × 20/120)
400
200
––––
$000
94,000
34,000
(10,000)
600
500
–––––––
119,100
–––––––
Tutorial note: For both sales revenues and cost of sales, only the post-acquisition intra
group trading should be eliminated.
(2)
Finance costs
Patronic per question
Unwinding interest – deferred consideration (36,000 × 10% × 8/12)
Sardonic (900 × 8/12)
(3)
$000
2,000
2,400
600
––––––
5,000
––––––
Non-controlling interest
Sardonic’s post-acquisition profit (13,500 × 8/12)
Less post-acquisition additional depreciation (W1)
Less goodwill impairment
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
9,000
(600)
(2,000)
––––––
6,400
× 25% = 1,600
1047
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 20 PEDANTIC
(a)
Consolidated statement of financial position as at 30 September 20X6
Assets
Non-current assets
Property, plant and equipment
(40,600 + 12,600 + 2,000 – 200 depreciation adjustment (W1))
Goodwill (W2)
Current assets (W3)
Total assets
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of $1 each (10, 000 + 1,600 (W3)
Share premium (W2)
Retained earnings (W4)
55,000
4,500
––––––
59,500
21,400
––––––
80,900
––––––
11,600
8,000
35,700
––––––
55,300
6,100
––––––
61,400
Non-controlling interest (W5)
Total equity
Non-current liabilities
10% Loan notes (4,000 + 3,000)
Current liabilities (8,200 + 4,700 – 400 intra-group balance)
7,000
12,500
––––––
80,900
––––––
Total equity and liabilities
WORKINGS (amounts in brackets in $000)
(1)
Net assets of Sophistic
Share capital
Retained earnings
Fair value reserve (equipment)
Unrealised profit
(($8 million – $5·2 million) × 40/140 )
Total
Reporting
date
$000
4,000
6,500
1,800
Date of
acquisition
$000
4,000
5,000
2,000
Change
(800)
––––––
11,500
––––––
–
––––––
11,000
––––––
(800)
––––––
500
––––––
Pre-acquisition reserves:
At 30 September 20X6
Earned in the post-acquisition period (3,000 × 6/12)
1048
$000
0
1,500
(200)
6,500
(1,500)
––––––
5,000
––––––
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(2)
Goodwill in Sophistic
Investment at cost (4,000 × 60% × 2/3 × $6)
Fair value of non-controlling interest (see below)
Cost of the controlling interest
Less: Fair value of net assets at acquisition
Total goodwill
Fair value of non-controlling interest (at acquisition)
Share of fair value of net assets (11,000 × 40%)
Attributable goodwill per question
9,600
5,900
–––––
15,500
(11,000)
–––––
4,500
–––––
4,400
1,500
–––––
5,900
–––––
The 1·6 million shares (4,000 × 60% × 2/3) issued by Pedantic would be recorded as share
capital of $1·6 million and share premium of $8 million (1,600 × $5).
(3)
Current assets
Pedantic
Sophistic
Unrealised profit in inventory
Cash in transit
Intra-group balance
(4)
Retained earnings
Pedantic per statement of financial position
Sophistic’s post-acquisition profit (500 × 60%)
(5)
35,400
300
––––––
35,700
––––––
Non-controlling interest
Fair value on acquisition (W2) =
Share of post-acquisition profits (500 × 40%)
(b)
16,000
6,600
(800)
200
(600)
––––––
21,400
––––––
5,900
200
––––––
6,100
––––––
Accounting for Arkright
If Pedantic acquires a 30% shareholding and has significant influence over Arkright, Arkright
will be an associate of Pedantic. Pedantic should therefore apply the equity method to
account for Arkright’s results in the consolidated financial statements.
Consolidated statement of financial position
No assets or liabilities of Arkright will be included in the consolidated statement of financial
position. Instead Pedantic will include just one line item of “Investment in associate”. The
amount of this investment will be the cost of investment plus a share (30%) of postacquisition profits less any impairment losses.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1049
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Consolidated statement of profit or loss and other comprehensive income
No revenue or expenses of Arkright will be included in the consolidated statement. Instead
Pedantic will include a single line item “Share of profit of associate” as a source of other
income above income tax expense in the consolidated statement (i.e. before profit before tax
where that is shown). The amount of this will be Pedantic’s share (30%) of Arkright’s profit
after tax.
The “bottom line” of the acquisition method of accounting for Sophistic and the equity
method of accounting for Arkright is the same, in that both methods include a percentage of
profits of the investment. What is different is how that is presented:

for a subsidiary: 100% of the profit is initially taken and then a deduction is made
for the non-controlling interest to leave the parent’s share of the profits (60% in the
case of Sophistic);

for an associate: only the parent’s share (30% in the case of Arkright) is included as
a single line item.
Using the acquisition method goodwill relating to the subsidiary is presented separately but
under the equity method any goodwill relating to the associate is included in the cost of
investment.
The acquisition method includes 100% of the assets, liabilities, revenue and expenses of the
subsidiary but the equity method does not include any of these items in the consolidated
statements. This means that a non-controlling is recognised under the acquisition method
(unless the subsidiary is wholly-owned) but never arises when applying the equity method.
Answer 21 PANDAR
(a)
Goodwill in Salva at 1 April 20X6
$000
Controlling interest
Shares issued (120 million × 80% × 3/5 × $6)
Non-controlling interest (120 million × 20% × $3·20)
Equity shares
Pre-acquisition reserves:
At 1 October 20X5
To date of acquisition (see below)
Fair value adjustments (5,000 + 20,000)
Goodwill arising on acquisition
$000
345,600
76,800
–––––––
422,400
120,000
152,000
11,500
25,000
–––––––
308,500
–––––––
113,900
–––––––
The interest on the 8% loan note is $2 million ($50 million × 8% × 6/12). This is included in
Salva’s statement of profit or loss in the post-acquisition period. Thus Salva’s profit for the
year of $21 million has a split of $11·5 million pre-acquisition ((21 million + 2 million
interest) × 6/12) and $9·5 million post-acquisition.
1050
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(b)
Consolidated statement of profit or loss for the year ended 30 September 20X6
$000
Revenue (210,000 + (150,000 × 6/12) – 15,000 intra-group sales)
Cost of sales (W1)
Gross profit
Distribution costs (11,200 + (7,000 × 6/12))
Administrative expenses (18,300 + (9,000 × 6/12))
Investment income (W2)
Finance costs (W3)
Share of loss from associate (5,000 × 40% × 6/12)
Impairment of investment in associate
Profit before tax
Income tax expense (15,000 + (10,000 × 6/12))
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interest (W4)
(1,000)
(3,000)
––––––
$000
270,000
(162,500)
–––––––
107,500
(14,700)
(22,800)
1,100
(2,300)
(4,000)
–––––––
64,800
(20,000)
–––––––
44,800
–––––––
43,000
1,800
–––––––
44,800
–––––––
WORKINGS (amounts in brackets in $000)
(1)
Cost of sales
Pandar
Salva (100,000 × 6/12)
Intra-group purchases
Additional depreciation: plant (5,000 ÷ 5 years × 6/12)
Unrealised profit in inventories (15,000 ÷ 3 × 20%)
126,000
50,000
(15,000)
500
1,000
–––––––
162,500
–––––––
As the registration of the domain name is renewable indefinitely (at only a nominal cost) it
will not be amortised.
(2)
Investment income
In Pandar’s statement of profit or loss (given)
Intra-group interest (50,000 × 8% × 6/12)
Intra-group dividend (8,000 × 80%)
(3)
9,500
(2,000)
(6,400)
–––––
1,100
–––––
Finance costs
Pandar
Salva post-acquisition ((3,000 – 2,000) × 6/12)
1,800
500
–––––
2,300
–––––
Tutorial note: $2,000 of Salva interest is intra-group and so is cancelled on consolidation to
match the cancelling of the income (W2).
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1051
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(4)
Non-controlling interest
Salva’s post-acquisition profit (see (i) above)
Less: post-acquisition additional depreciation (W1)
9,500
(500)
––––––
9,000 × 20% = 1,800
––––––
––––––
Answer 22 PRODIGAL
(a)
Consolidated statement of profit or loss and other comprehensive income
for the year ended 31 March 20X6
6
Revenue (450,000 + (240,000 × /12) – 40,000 intra-group sales)
Cost of sales (W1)
Gross profit
Distribution costs (23,600 + (12,000 × 6/12))
Administrative expenses (27,000 + (23,000 × 6/12))
Finance costs (1,500 + (1,200 × 6/12))
Profit before tax
Income tax expense (48,000 + (27,800 × 6/12))
Profit for the year
$000
530,000
(278,800)
–––––––
251,200
(29,600)
(38,500)
(2,100)
–––––––
181,000
(61,900)
–––––––
119,100
–––––––
Other comprehensive income
Gain on revaluation of land (2,500 + 1,000)
3,500
Loss on fair value of equity financial asset investments (700 + (400 × 6/12)) (900)
–––––––
2,600
–––––––
Total comprehensive income
121,700
–––––––
Profit attributable to:
Owners of the parent
111,600
Non-controlling interest (W2)
7,500
–––––––
119,100
–––––––
Total comprehensive income attributable to:
Owners of the parent
114,000
Non-controlling interest (W2)
7,700
–––––––
121,700
–––––––
1052
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(b)
Equity section of consolidated statement of financial position as at 31 March 20X6
Equity attributable to owners of the parent
Share capital (250,000 + 80,000)
Share premium (100,000 + 240,000)
Revaluation surplus (land) (8,400 + 2,500 + (1,000 × 75%))
Other equity reserve (3,200 – 700 – (400 × 6/12 × 75%))
Retained earnings (W3)
Non-controlling interest (100,000 at acquisition + 7,700 (per (a))
Total equity
330,000
340,000
11,650
2,350
201,600
–––––––
885,600
107,700
–––––––
993,300
–––––––
Tutorial note: The share exchange would result in Prodigal issuing 80 million shares
(160,000 × 75% × 2/3) at a value of $4 each (capital 80,000; premium 240,000).
WORKINGS (amounts in brackets in $000)
(1)
Cost of sales
$000
Prodigal
260,000
Sentinel (110,000 × 6/12)
55,000
Intra-group purchases
(40,000)
Unrealised profit on sale of plant
1,000
Depreciation adjustment on sale of plant
(1,000 ÷ 2½ years × 6/12)
(200)
Unrealised profit in inventory (12,000 × 10,000 ÷ 40,000)
3,000
–––––––
278,800
–––––––
(2)
Non-controlling interest in profit or loss and other comprehensive income
Sentinel’s post-acquisition profit (66,000 × 6/12)
Less: Unrealised profit in inventory (W1)
Non-controlling interest in total comprehensive income
Profit or loss (30,000 × 25%)
Other comprehensive income (1,000 – (400 × 6/12) × 25%)
(3)
33,000
(3,000)
––––––
30,000
––––––
7,500
200
––––––
7,700
––––––
Retained earnings
Prodigal at 1 April 20X5
Per (a)
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90,000
111,600
–––––––
201,600
–––––––
1053
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 23 VIAGEM
(a)
Consolidated goodwill on acquisition of Greca as at 1 January 20X6
$000
Investment at cost
Shares (10,000 × 90% × 2/3 × $8·50)
Non-controlling interest (10,000 × 10% × $2·50)
Net assets (based on equity) of Greca as at 1 January 20X6
Equity shares
10,000
Retained earnings b/f at 1 October 20X5
35,000
Earnings 1 October 20X5 to acquisition (6,200 × 3/12)
1,550
Fair value adjustment – plant
1,800
––––––
Net assets at date of acquisition
Consolidated goodwill
(b)
$000
51,000
2,500
––––––
53,500
(48,350)
––––––
5,150
––––––
Consolidated statement of profit or loss for the year ended 30 September 20X6
Revenue (64,600 + (38,000 × 9/12)
Cost of sales (W)
Gross profit
Distribution costs (1,600 + (1,800 × 9/12))
Administrative expenses
(3,800 + (2,400 × 9/12) + 2,000 goodwill impairment)
Income from associate (2,000 × 40% based on underlying earnings)
Finance costs
Profit before tax
Income tax expense (2,800 + (1,600 × 9/12))
Profit for the year
$000
93,100
(71,150)
––––––
21,950
(2,950)
(7,600)
800
(420)
––––––
11,780
(4,000)
––––––
7,780
––––––
Profit for year attributable to:
Equity holders of the parent
7,560
Non-controlling interest
((6,200 × 9/12) – 450 depreciation – 2,000 goodwill impairment) × 10%))
220
––––––
7,780
––––––
WORKING in $000
Cost of sales
Viagem
Greca (26,000 × 9/12)
Additional depreciation (1,800 ÷ 3 years × 9/12)
1054
51,200
19,500
450
––––––
71,150
––––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(c)
Profit on disposal
If Viagem were to dispose of its shareholding in Greca then the consolidated statement of
financial position would no longer recognise the net assets of the subsidiary; non-controlling
interest would also no longer be included in the statement.
The consolidated profit or loss would include the results of Greca until the date of disposal
with non-controlling interest taking their 10% share of those profits. The consolidated profit
or loss would also include the profit on disposal of the shareholding.
Viagem single entity profit
$000
55,000
(51,000)
––––––
4,000
––––––
Proceeds
Cost of investment (a)
Profit on disposal
Viagem consolidated profit
$000
Proceeds
Greca net assets on disposal
Goodwill remaining (5,150 – 2,000)
Fair value non-controlling interest
52,550
3,150
(2,720)
––––––
Profit on disposal
$000
55,000
(52,980)
––––––
2,020
––––––
Tutorial note: The difference 1,980 (4,000 – 2,020) is the group’s share of post-acquisition
profit 90% × ((6,200 × 9/12) – (2,000 + 450)).
Answer 24 PARADIGM
Item Answer
1
Justification
A
Share exchange ((20,000 × 75%) × 2/5 × $2)
10% Loan notes (15,000 × 100/1,000)
Cost of investment
$000
12,000
1,500
––––––
13,500
––––––
2
D
Non-controlling interest is $6,000,000 (20m × 25% × $1·20).
3
B
47,400 (parent) + 25,500 (subsidiary) – 3,000 fair value adjustment + 500
depreciation) = 70,400 ($000)
4
C
Negative goodwill arises when the parent acquires shares in subsidiary for less than
fair value. The gain belongs entirely to the parent and is credited immediately to
consolidated profit or loss.
5
C
Consolidated profit or loss on disposal is calculated as:
Proceeds – Subsidiary’s net assets – Remaining goodwill + Non-controlling interest.
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1055
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 25 POLESTAR
(a)
Consolidated statement of profit or loss for the year ended 30 September 20X6
6
Revenue (110,000 + (66,000 × /12))
Cost of sales (W1)
Gross profit
Distribution costs (3,000 + (2,000 × 6/12))
Administrative expenses
(5,250 + (2,400 × 6/12) – 3,400 “excess” (W3))
Loss on equity investments
Decrease in contingent consideration (1,800 – 1,500)
Finance costs
Profit before tax
Income tax expense (3,500 – (1,000 × 6/12))
Profit for the year
Profit for year attributable to:
Equity holders of the parent
Non-controlling interest losses (see below)
$000
143,000
(121,700)
–––––––
21,300
(4,000)
(3,050)
(200)
300
(250)
–––––––
14,100
(3,000)
–––––––
11,100
–––––––
11,700
(600)
–––––––
11,100
–––––––
Southstar’s adjusted post-acquisition losses for the year ended 30 September 20X6 are $3
million (4,600 × 6/12 + (100 additional depreciation)). Therefore the non-controlling interest’s
share of the losses is $600,000 (2,400 × 25%).
Tutorial note: IFRS 3 “Business Combinations” states that any excess of fair value of net
assets over consideration (“negative goodwill”) should be credited to the acquirer, thus none
is attributed to the non-controlling interest.
1056
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(b)
Consolidated statement of financial position as at 30 September 20X6
$000
Assets
Non-current assets
Property, plant and equipment (W2)
Financial asset: equity investments
(16,000 – (13,500 cash consideration) – 200 loss)
Current assets (16,500 + 4,800)
Total assets
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of 50 cents each
Retained earnings (W4)
Non-controlling interest (W5)
Total equity
Current liabilities
Contingent consideration
Other (15,000 + 7,800)
Total equity and liabilities
63,900
2,300
–––––––
66,200
21,300
–––––––
87,500
–––––––
30,000
30,200
–––––––
60,200
3,000
–––––––
63,200
1,500
22,800
–––––––
87,500
–––––––
WORKINGS (amounts in brackets in $000)
(1)
Cost of sales
Polestar
Southstar (67,200 × 6/12)
Additional depreciation on property (2,000 ÷10 years × 6/12)
(2)
$000
88,000
33,600
100
–––––––
121,700
–––––––
Property, plant and equipment
Polestar
Southstar
Fair value adjustment
Additional depreciation
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
$000
41,000
21,000
2,000
(100)
––––––
63,900
––––––
1057
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(3)
Goodwill in Southstar
$000
Investment at cost
Immediate cash consideration
(6,000 × 2 (i.e. shares of $0.50) × 75% × $1·50)
Contingent consideration
Non-controlling interest (12,000 × 25% × $1·20)
Net assets (equity) of Southstar at 30 September 20X6
Add back: post-acquisition losses (4,600 × 6/12)
Fair value adjustment for property
13,500
1,800
3,600
––––––
18,900
18,000
2,300
2,000
––––––
Net assets at date of acquisition
Bargain purchase – excess credited directly to profit or loss
(4)
(22,300)
––––––
(3,400)
––––––
Retained earnings
Polestar
Southstar’s post-acquisition adjusted losses (2,400 × 75%)
Negative goodwill
Loss on equity investments
Decrease in contingent consideration
(5)
$000
$000
28,500
(1,800)
3,400
(200)
300
––––––
30,200
––––––
Non-controlling interest in statement of financial position
At date of acquisition
Post-acquisition loss from statement of profit or loss
$000
3,600
(600)
––––––
3,000
––––––
Answer 26 RANGOON
Item
Answer Justification
1
B
IAS 21 states that functional currency should be determined by the currency in
which an entity sells its product and in which it incurs its input costs.
2
D
Carrying amount at fair value in accordance with IFRS 9:
1 January (Krown 7,430,000 ÷ $4.99)
31 December (Krown 8,100,000 ÷ $6.02)
Change in value
$
1,488,978
1,345,515
––––––––
143,463 loss
––––––––
3
B
Carrying amount 31 December is Krown 528,000 ÷ $6.02 = $87,708
4
A
Gains and losses on the translation of foreign denominated monetary balances are
presented in profit or loss
5
C
Change in functional currency only occurs if the underlying economic conditions
change.
1058
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Answer 27 WITTON WAY
(a)
Disposal of Brew4Two
It is highly likely that Brew4Two would be classified as a component of the group as cash
flows and results would be distinguishable from those cash flows and results of other
components of the group, namely Witton Way. A component of a group that has been
disposed of in the period and represents a separate major line of business, as Brew4Two does,
will be classified as a discontinued operation.
The consolidated statement of profit or loss of Witton Way must present a single amount,
comprising the post-tax operating profit or loss for Brew4Two for the period and the profit or
loss made on its disposal. This amount must then be analysed, either in the statement of profit
or loss or the notes thereto, between revenue and expenses, the profit or loss on disposal and
the tax related to the two components.
In the consolidated statement of cash flows the net cash flows relating to operating, investing
and financing activities for Brew4Two must also be disclosed separately from those cash
flows relating to continuing operations.
The disclosures should also be made for all prior period results presented in the financial
statements. Therefore the results for 20X6 for Brew4Two must also be presented separately
from continuing operations.
(b)
Ratios and analysis
20X7
20X6
Return on Capital Employed (ROCE)
Profit before interest and tax (PBIT) ÷
Long-term capital employed
Excluding results of Brew4Two
7,490 ÷ 42,420 = 17.6%
4,600 ÷ 46,050 = 10%
5,300 (W) ÷ 42,420 = 12.5%
Working: 7,490 – 1,400 – (480 + 310) = 5,300
Profit margin
PBIT ÷ Revenue
Excluding results of Brew4Two
7,490 ÷ 25,060 = 29.9%
4,600 ÷ 26,140 = 17.6%
5,300 ÷ 20,950 = 25.3%
Asset turnover
Revenue ÷
Long-term capital employed
25,060 ÷ 42,420 = 0.59
Excluding results of Brew4Two
20,950 ÷ 42,420 = 0.49
26,140 ÷ 46,050 = 0.57
Tutorial note: Alternatively, asset turnover may be calculated as ROCE ÷ Profit margin (e.g.
for 20X6, 10% ÷ 17.6% = 0.57). The formula would usually take Revenue (25,050) and
divide by Long-Term Capital Employed (42,420).
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1059
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Inventory days
Inventory ÷ Cost of sales × 365
(8,420 ÷ 13,390) × 365
= 230 days
(5,270 ÷ 18,730) × 365
= 103 days
(5,470 ÷ 20,950) × 365
= 95 days
(3,900 ÷ 26,140) × 365
= 54 days
(3,760 ÷ 13,390) × 365
= 102 days
(2,460 ÷ 18,730) × 365
= 48 days
13,390 = 16,190 – 2,800 (group- sub)
Receivable days
Receivables ÷ Revenue × 365
20,950 = 25,060 – 4,110 (group- sub)
Payable days
Payables ÷ Cost of sales × 365
13,390 = 16,190 – 2,800 (group- sub)
The inventory, receivables and payables day calculations for 20X7 exclude the results of
Brew4Two for the period. The payables figures are based on current liabilities less tax
payable.
Analysis
The results of Brew4Two are included for the whole of year ended 30 April 20X6 but only 6
months of results are included for year ended 30 April 20X7; this makes meaningful
comparison of the two sets of figures unreliable without additional information. However, the
figures can still be analysed and commentary can be made, with the proviso that further
investigation would be needed. Some of the calculations above have adjusted the figures to
exclude the results of Brew4Two for 20X7.
The results for 20X7 do show that profits have more than doubled, but what needs to be taken
into consideration is that the results for 20X7 do include the profit on disposal of Brew4Two
plus 6 months of revenue and expenses; when adjusting for these figures ROCE has only
increased to 12.5%, rather than 17.6% when looking at the reported results for the period.
Therefore the comment made by the CEO regarding the increase in profits, although correct,
needs to be put into context and must take account of the disposal of the subsidiary during the
year.
Profit margin is much higher in 20X7, even after adjusting for the results of Brew4Two, this
would indicate that the ongoing business was selling goods at a higher margin than
Brew4Two which might indicate that the disposal of the company was a good move.
However, Brew4Two was still a profitable entity and unless the resources freed up by the
disposal are put to good use then Witton Way could see profits begin to decrease in the future.
The asset turnover figures indicate that the business is selling high-margin, low-volume
goods; it seems that the group is very capital intensive. If demand for the products were to
fall this could cause problems for Witton Way as profits would fall and it could take some
time for the company to generate new growth, either organically or through acquisitions or
mergers.
The working capital days do give some worrying results as inventory days have more than
doubled, receivable days have nearly doubled and payable days have also more than doubled.
This is a very worrying trend and is a sign that Witton Way has lost control of its working
capital. It appears that Witton Way may be producing excess goods, and have poor inventory
management. It is no good manufacturing goods if they cannot be sold.
1060
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Once the goods have been sold there is then a further problem of collecting cash as it now
takes three months for the customer to pay for their goods, rather than two months previously.
This is also shown up by cash balances in the statement of financial position, at the end of the
previous year cash balance of $1,600,000 was held, currently the balance is just $40,000.
Although profitability is increasing and the CEO is aiming for even further increases in
profitability it is worrying that the management of inventory and receivables is resulting in a
deteriorating liquidity situation, which if allowed to continue could be a major cause for
concern. It is no good making profits if the company is illiquid.
It should be noted that gearing levels are low and some long-term debt was repaid during the
year, or was part of the liabilities of Brew4Two that were disposed of during the year.
However, interest expense has increased even though long-term debt has decreased; this could
be due to overdrawn bank balances resulting in higher interest charges. This could tie in with
the low cash balance, perhaps for some of the year Witton Way was overdrawn at the bank.
Although profit for 20X7 was good it is worrying to see that retained earnings have only
increased by $130,000. Some of the difference would be due to the retained earnings of
Brew4Two that are no longer included in the consolidated figures; the remainder of the
difference is probably due to a large dividend payment. This is further cause for concern
especially when linked to the reduced cash balance.
For a fair comparison to be made the results of the discontinued operation, Brew4Two, would
need to be totally excluded from both years, along with the profit on disposal. It would also
be useful to see industry averages, to assess whether Witton Way was performing above or
below the industry average.
Summarising the main issues from this analysis:



Profits are increasing;
Liquidity is a cause for concern;
Poor working capital management.
Answer 28 IONA
(a)
Performance, financial position and liquidity
Introduction
The financial statements and ratios provided by the directors appear to show strong growth
between 20X6 and 20X7. This is reflected by pre-tax profits increasing by 22% ((2,160 ÷
1,770) – 1). The strength of the statement of financial position seems to have improved as
gearing has reduced and ROCE improved.
Tutorial note: Additional ratios are included in an appendix.
Profitability
ROCE has increased to 11.6%. This is significantly above the market average; it is likely that
the acquisition of Arran has contributed to this ROCE. The calculation of ROCE uses the
capital employed based on the closing statement of financial position whereas the results of
the acquired operations are only included for three months. Therefore the calculation is mismatched and in this situation will understate ROCE.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1061
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Revenue has increased by 19% year on year ((23,460 ÷ 19,710) – 1). However, excluding the
acquisition of Arran the organic growth rate is 11.2% (((23,460 – 1,550) ÷ 19,710) – 1). This
is below the industry estimate of the growth in the engineering market. While Iona has a
stated growth strategy, their above average performance arises from acquisitions.
Staff numbers have decreased year on year, which is surprising as Arran was acquired during
the year, which would lead to an increase in employee numbers. It may be that as part of the
acquisition Iona has rationalised their operations and made employees redundant. This could
have led to large redundancy payments being made resulting in an increase in operating
expenses and a decrease in the operating margin.
The gross profit margin has increased marginally (by half of a percentage point). No details
are given for the margin of the acquired company, so no detailed analysis can be undertaken.
Arran appears to be more profitable than the existing operations but without a detailed
analysis this cannot be confirmed.
Operating expenses have increased by 34.8% ((3,410 ÷ 2,530) – 1) and now represent 14.5%
of revenue (20X6 – 12.8%). This increase seems unusual given the reductions in employee
numbers. It may be that the rationalisation of employees has increased inefficiency in other
areas, or as mentioned above has led to high redundancy costs for the period.
Profit from operations has increased by 9.7% ((3,270 ÷ 2,980) – 1). However, the operating
profit margin has reduced by over one percentage point. As gross profit has increased
marginally the marked change is within operating expenses.
The acquired operations have an operating margin of 24.5% (380 ÷ 1,550). Excluding the
acquired operations, profits from operations have reduced by 3% (((3,270 – 380) ÷ 2,980) – 1)
and operating margins to 13.2%. The acquired operations have masked underperformance in
the existing operations.
Interest cover has increased from 2.5 times to 2.9 times. This is probably due to the issue of
share capital for the acquisition of Arran and also the reduction of debt of $2.5 million.
Dividend cover has decreased to 1.4 times. The increase in share capital has increased the
amount of dividend paid despite the dividend per share remaining unchanged. The new
shares issued are entitled to the full annual dividend. However, Arran’s profits are only
included for three months and this will distort dividend cover.
Financial position
The gearing has reduced dramatically from 42.8% to 23.7%. The use of shares to acquire
Arran would have positively affected gearing. The combination of the new shares and the
retained earnings has contributed positively to the reduction in net debt of over $2.5 million
(20X7: 5,500 – 100; 20X6: 8,000 – 20).
The non-current asset turnover (1.07 times compared to 0.89 times) and net asset turnover
(0.82 times compared to 0.74 times) figures show year on year improvements. This would
probably arise from the acquisition as the non-current assets acquired were $1,480,000 and
the revenue for the three months was over $1.5 million.
The acquisition of Arran generated over $1.5 million of intangible assets, being customer base
and goodwill. It is likely that these two intangibles will have to be written off in the near
future, especially the customer base, resulting in additional expenses in future years.
1062
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
The finance cost in the statement of profit or loss does not yet appear to reflect the reduced
level of borrowing. Net debt at year end is over $2.5 million lower than 20X6. The annual
finance cost of this net debt level should be substantially lower than the amount in the
statement of profit or loss.
Liquidity
The current ratio shows no marked change year on year. However, the acid test ratio has
fallen to 0.92 times from 1.00 times. Hence inventory levels have changed significantly.
Inventory turnover has reduced to 3.9 times (20X6: 4.4 times). This is high but may reflect a
long production cycle in the engineering sector. In anticipating further growth Iona may be
investing in inventory levels to meet increased customer demand.
The trade receivable collection period has decreased from 41 days to 37 days. This may
reflect a change in customer mix either from existing customers or as a result of the
acquisition.
Trade payables payment period has reduced marginally from 42 days to 41 days. No trade
payables information was available for Arran. It may be that current supply chain
arrangements have been used for the acquired operations.
These ratios have been calculated based on the year end statement of financial position.
However, only three months results for Arran are included in the statement of profit or loss.
This could have a significant effect on the ratios presented.
Appendix – Additional ratios
20X7
20X6
Gross profit percentage
=
Gross profit
× 100
Revenue
6,680
× 100
23,460
5,510
× 100
19,710
= 28.5%
= 28.0%
3,410
× 100
23,460
2,530
× 100
19,710
= 14.5%
= 12.8%
Operating cost percentage
=
Operating costs/overheads
× 100
Re venue
Operating margin (ex-acquisition)
=
Profit from operations - acquired
Re venue
(3,270 - 380)
× 100
(23,460 - 1,550)
= 13.2% 1
5.1% (no change)
6,790
= 2.56:1
2,650
5,480
= 2.47:1
2,220
Current ratio
=
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1063
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Acid test ratio
=
=
6,790  4,340
= 0.92:1
2,650
5,480  3,250
= 1.00:1
2,220
23,460
= 1.07 times
22,010
19,710
= 0.89 times
22,190
23,460
(23,220  5,500  100)
19,710
(18,650  8,000  20)
= 0.82 times
= 0.74 times
1,350
= 1.41 times
960
1,180
= 1.48 times
800
3,270
= 2.9 times
1,110
2,980
= 2.5 times
1,210
Non-current asset turnover
=
Revenue
Non - current assets
Net asset turnover
=
Revenue
Equity + net debt
Dividend cover
=
Profit after tax
Dividends payable
Interest cover
=
PBIT + Investment income
Interest payable
Tutorial note: Only an additional five ratios were required; as an acquisition occurred
during the year ratios that excluded the results of the acquired company would generate
relevant information.
(b)
Disclosure of acquisitions
The disclosure of information on business combinations during the year allows a user of
financial information to evaluate the nature and financial effect of the combination.
The disclosures assist in explaining the financial performance and confirming previous
estimates. They also have a predictive quality and help formulate judgements about future
performance.
Business combinations accounted for as acquisitions raise questions about the consistency of
financial information and its comparability year on year. Statements of profit or loss only
reflect results from the date of acquisition. Statements of financial position reflect the assets
at year end. Even rudimentary analysis can be difficult.
Providing details of the acquisition, the results included in the statement of profit or loss and
proforma information about the whole year assists the user in understanding performance and
position.
1064
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Answer 29 HARBIN
(a)
Ratios
Calculated in $m:
20X6
ROCE
11·2 %
Net asset turnover
1·2 times
Gross profit margin (given)
20%
Net profit (before tax) margin
6·4%
Current ratio
0·9:1
Closing inventory holding period 46 days
Receivables’ collection period 19 days
Gearing
46·7%
WORKINGS
/(114 + 100)
250
/214
24
16
/250
/44
25
/200 × 365
13
/250 × 365
100
/214
38
20X5
7·1%
1·6
16·7%
4·4%
2·5
37
16
nil
20X5 Fatima (b)
18·9%
0·6
42·9%
31·4%
The gross profit margins and relevant ratios for 20X5 are given in the question, and some
additional ratios for Fatima are included above to enable a clearer analysis in answering part
(b) (references to Fatima should be taken to mean Fatima’s net assets).
(b)
Analysis
Analysis of the comparative financial performance and position of Harbin for the year ended
30 September 20X6. (References to 20X6 and 20X5 should be taken as the years ended 30
September 20X6 and 20X5.)
Introduction
The figures relating to the comparative performance of Harbin “highlighted” in the Chief
Executive’s report may be factually correct, but they take a rather biased and one dimensional
view. They focus entirely on the performance as reflected in profit or loss without reference
to other measures of performance (notably the ROCE); nor is there any reference to the
purchase of Fatima at the beginning of the year which has had a favourable effect on profit for
20X6. Due to this purchase, it is not consistent to compare Harbin’s results in 20X5 directly
with those of 20X6 because it does not match like with like. Immediately before the $100
million purchase of Fatima, the carrying amount of the net assets of Harbin was $112 million.
Thus the investment represented an increase of nearly 90% of Harbin’s existing capital
employed. The following analysis of performance will consider the position as shown in the
reported financial statements (based on the ratios required by part (a) of the question) and
then go on to consider the impact the purchase has had on this analysis.
Profitability
The ROCE is often considered to be the primary measure of operating performance, because
it relates the profit made by an entity (return) to the capital (or net assets) invested in
generating those profits. On this basis the ROCE in 20X6 of 11·2% represents a 58%
improvement (i.e. 4·1% on 7·1%) on the ROCE of 7·1% in 20X5. Given there were no
disposals of non-current assets, the ROCE on Fatima’s net assets is 18·9% ((22m ÷ 100m) +
16·5m).
Tutorial note: The net assets of Fatima at the year-end would have increased by profit after
tax of $16·5 million (i.e. 22m × 75% (at a tax rate of 25%)). Put another way, without the
contribution of $22 million to profit before tax, Harbin’s “underlying” profit would have
been a loss of $6 million which would give a negative ROCE.
The principal reasons for the beneficial impact of Fatima’s purchase is that its profit margins
at 42·9% gross and 31·4% net (before tax) are far superior to the profit margins of the
combined business at 20% and 6·4% respectively.
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1065
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
The other contributing factor to the ROCE is the net asset turnover and in this respect
Fatima’s is actually inferior at 0·6 times (70m ÷ 116·5m) to that of the combined business of
1·2 times.
It could be argued that the finance costs should be allocated against Fatima’s results as the
proceeds of the loan note appear to be the funding for the purchase of Fatima. Even if this is
accepted, Fatima’s results still far exceed those of the existing business.
Thus the Chief Executive’s report, which is already criticised for focussing on statement of
profit or loss alone, is still highly misleading. Without the purchase of Fatima, underlying
sales revenue would be flat at $180 million and the gross margin would be down to 11·1%
(20m ÷ 180m) from 16·7% resulting in a loss before tax of $6 million. This sales
performance is particularly poor given it is likely that there must have been an increase in
spending on property plant and equipment beyond that related to the purchase of Fatima’s net
assets as the increase in property, plant and equipment is $120 million (after depreciation).
Liquidity
The company’s liquidity position as measured by the current ratio has deteriorated
dramatically during the period. A relatively healthy 2·5:1 is now only 0·9:1 which is rather
less than what one would expect from the quick ratio (which excludes inventory) and is a
matter of serious concern. A consideration of the component elements of the current ratio
suggests that small increases in both the inventory and trade receivables holding days should
have caused the current ration to increase, the opposite of what has actually happened. The
real culprit of the current ration falling below 1:1 is the cash position. Harbin has gone from
having a bank balance of $14 million in 20X5 to showing short-term bank borrowings of $17
million in 20X6.
A cash flow statement would give a better appreciation of the movement in the bank/short
term borrowing position. It is not possible to assess, in isolation, the impact of the purchase
of Fatima on the liquidity of the company.
Dividends
A dividend of $0.10 per share in 20X6 amounts to $10 million (100m × $0.10), thus the
dividend in 20X5 would have been $8 million (the dividend in 20X6 is 25% up on 20X5). It
may be that the increase in the reported profits led the Board to pay a 25% increased dividend,
but the dividend cover is only 1·2 times (12m ÷ 10m) in 20X6 which is very low. In 20X5
the cover was only 0·75 times (6m ÷ 8m) meaning previous years’ reserves were used to
facilitate the dividend. The low retained earnings indicate that Harbin has historically paid a
high proportion of its profits as dividends. However in times of declining liquidity, it is
difficult to justify such high dividends.
Gearing
The company has gone from a position of nil gearing (i.e. no long-term borrowings) in 20X5
to a relatively high gearing of 46·7% in 20X6. This has been caused by the issue of the $100
million 8% loan note which would appear to be the source of the funding for the $100 million
purchase of Fatima’s net assets. At the time the loan note was issued, Harbin’s ROCE was
7·1%, slightly less than the finance cost of the loan note. In 20X6 the ROCE has increased to
11·2%, thus the manner of the funding has had a beneficial effect on the returns to the equity
holders of Harbin. However, high gearing does not come without risk; any future downturn
in the results of Harbin would expose the equity holders to much lower proportionate returns
and continued poor liquidity may mean payment of the loan interest could present a problem.
Harbin’s gearing and liquidity position would have looked far better had some of the
acquisition been funded by an issue of equity shares.
1066
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Conclusion
There is no doubt that the purchase of Fatima has been a great success and appears to have
been a wise move on the part of the management of Harbin. However, it has disguised a
serious deterioration of the underlying performance and position of Harbin’s existing
activities which the Chief Executive’s report may be trying to hide. It may be that the
acquisition was part of an overall plan to diversify out of what has become existing loss
making activities. If such a transition can continue, then the worrying aspects of poor
liquidity and high gearing may be overcome.
Answer 30 VICTULAR
(a)
Equivalent ratios from the financial statements of Merlot (workings in $000)
Return on year end capital employed (ROCE) 20·9% (1,400 + 590) ÷ (2,800 + 3,200 + 500 + 3,000)
Pre-tax return on equity (ROE)
50% 1,400/2,800
Net asset turnover
2·3 times 20,500 ÷ (14,800 – 5,700)
Gross profit margin
12·2% 2,500/20,500
Operating profit margin
9·8% 2,000/20,500
Current ratio
1·3:1 7,300/5,700
Closing inventory holding period
73 days 3,600/18,000 × 365
Trade receivables’ collection period
66 days 3,700/20,500 × 365
Trade payables’ payment period
77 days 3,800/18,000 × 365
Gearing
71% (3,200 + 500 + 3,000) ÷ 9,500 × 100
Interest cover
3·3 times 2,000/600
Dividend cover
1·4 times 1,000/700
As stated, Merlot’s obligations under finance leases (3,200 + 500) have been treated as debt
when calculating the ROCE and gearing ratios.
(b)
Relative performance and financial position of Grappa and Merlot for the year ended 30
September 20X6
Introduction
This report is based on the draft financial statements supplied and the ratios shown in (a)
above. Although covering many aspects of performance and financial position, the report has
been approached from the point of view of a prospective acquisition of the entire equity of
one of the two companies.
Profitability
The ROCE of 20·9% of Merlot is far superior to the 14·8% return achieved by Grappa.
ROCE is traditionally seen as a measure of management’s overall efficiency in the use of the
finance/assets at its disposal. More detailed analysis reveals that Merlot’s superior
performance is due to its efficiency in the use of its net assets; it achieved a net asset turnover
of 2·3 times compared to only 1·2 times for Grappa. Put another way, Merlot makes sales of
$2·30 per $1 invested in net assets compared to sales of only $1·20 per $1 invested for
Grappa. The other element contributing to the ROCE is profit margins. In this area Merlot’s
overall performance is slightly inferior to that of Grappa, gross profit margins are almost
identical, but Grappa’s operating profit margin is 10·5% compared to Merlot’s 9·8%. In this
situation, where one company’s ROCE is superior to another’s it is useful to look behind the
figures and consider possible reasons for the superiority other than the obvious one of greater
efficiency on Merlot’s part.
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1067
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
A major component of the ROCE is normally the carrying amount of the non-current assets.
Consideration of these in this case reveals some interesting issues. Merlot does not own its
premises whereas Grappa does. Such a situation would not necessarily give a ROCE
advantage to either company as the increase in capital employed of a company owning its
factory would be compensated by a higher return due to not having a rental expense (and vice
versa). If Merlot’s rental cost, as a percentage of the value of the related factory, was less
than its overall ROCE, then it would be contributing to its higher ROCE. There is insufficient
information to determine this.
It may be that Merlot’s owned plant is nearing the end of its useful life (carrying amount is
only 22% of its cost) and the company seems to be replacing owned plant with leased plant.
Again this does not necessarily give Merlot an advantage, but the finance cost of the leased
assets at only 7·5% is much lower than the overall ROCE (of either company) and therefore
this does help to improve Merlot’s ROCE. The other important issue within the composition
of the ROCE is the valuation basis of the companies’ non-current assets. From the question,
it appears that Grappa’s factory is at current value (there is a property revaluation surplus) and
note (ii) of the question indicates the use of historical cost for plant. The use of current value
for the factory (as opposed to historical cost) will be adversely impacting on Grappa’s ROCE.
Merlot does not suffer this deterioration as it does not own its factory.
The ROCE measures the overall efficiency of management; however, as Victular is
considering buying the equity of one of the two companies, it would be useful to consider the
return on equity (ROE) – as this is what Victular is buying. The ratios calculated are based on
pre-tax profits; this takes into account finance costs, but does not cause taxation issues to
distort the comparison. Clearly Merlot’s ROE at 50% is far superior to Grappa’s 19·1%.
Again the issue of the revaluation of Grappa’s factory is making this ratio appear
comparatively worse (than it would be if there had not been a revaluation). In these
circumstances it would be more meaningful if the ROE was calculated based on the asking
price of each company (which has not been disclosed) as this would effectively be the
carrying amount of the relevant equity for Victular.
Gearing
From the gearing ratio it can be seen that 71% of Merlot’s assets are financed by borrowings
(39% is attributable to Merlot’s policy of leasing its plant). This is very high in absolute
terms and double Grappa’s level of gearing. The effect of gearing means that all of the profit
after finance costs is attributable to the equity even though (in Merlot’s case) the equity
represents only 29% of the financing of the net assets. Whilst this may seem advantageous to
the equity shareholders of Merlot, it does not come without risk. The interest cover of Merlot
is only 3·3 times whereas that of Grappa is 6 times. Merlot’s low interest cover is a direct
consequence of its high gearing and it makes profits vulnerable to relatively small changes in
operating activity. For example, small reductions in sales, profit margins or small increases in
operating expenses could result in losses and mean that interest charges would not be covered.
Another observation is that Grappa has been able to take advantage of the receipt of
government grants; Merlot has not. This may be due to Grappa purchasing its plant (which
may then be eligible for grants) whereas Merlot leases its plant. It may be that the lessor has
received any grants available on the purchase of the plant and passed some of this benefit on
to Merlot via lower lease finance costs (at 7·5% per annum, this is considerably lower than
Merlot has to pay on its 10% loan notes).
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Liquidity
Both companies have relatively low liquid ratios of 1·2 and 1·3 for Grappa and Merlot
respectively, although at least Grappa has $600,000 in the bank whereas Merlot has a $1·2
million overdraft. In this respect Merlot’s policy of high dividend pay-outs (leading to a low
dividend cover and low retained earnings) is very questionable. Looking in more depth, both
companies have similar inventory days; Merlot collects its receivables one week earlier than
Grappa (perhaps its credit control procedures are more active due to its large overdraft), and
of notable difference is that Grappa receives (or takes) a lot longer credit period from its
suppliers (108 days compared to 77 days). This may be a reflection of Grappa being able to
negotiate better credit terms because it has a higher credit rating.
Summary
Although both companies may operate in a similar industry and have similar profits after tax,
they would represent very different purchases. Merlot’s sales revenues are over 70% more
than those of Grappa, it is financed by high levels of debt, it rents rather than owns property
and it chooses to lease rather than buy its replacement plant. Also its remaining owned plant
is nearing the end of its life. Its replacement will either require a cash injection if it is to be
purchased (Merlot’s overdraft of $1·2 million already requires serious attention) or create
even higher levels of gearing if it continues its policy of leasing. In short although Merlot’s
overall return seems more attractive than that of Grappa, it would represent a much more
risky investment. Ultimately the investment decision may be determined by Victular’s
attitude to risk, possible synergies with its existing business activities, and not least, by the
asking price for each investment (which has not been disclosed to us).
Answer 31 HARDY
Tutorial note: References to 20X5 and 20X6 should be taken as being to the years ended 30 September
20X5 and 20X6 respectively.
Financial performance
Statement of profit or loss
Hardy’s results dramatically show the effects of the downturn in the global economy; revenues are
down by 18% (6,500 ÷ 36,000 × 100), gross profit has fallen by 60% and a healthy after tax profit of
$3·5 million has reversed to a loss of $2·1 million. These are reflected in the profit (loss) margin ratios
shown in the appendix (the “as reported” figures for 20X6). This in turn has led to a 15·2% return on
equity being reversed to a negative return of 11·9%. However, a closer analysis shows that the results
are not quite as bad as they seem. The downturn has directly caused several additional costs in 20X6:
employee severance, property impairments and losses on investments (as quantified in the appendix).
These are probably all non-recurring costs and could therefore justifiably be excluded from the 20X6
results to assess the company’s “underlying” performance. If this is done the results of Hardy for 20X6
appear to be much better than on first sight, although still not as good as those reported for 20X5. A
gross margin of 27·8% in 20X5 has fallen to only 23·1% (rather than the reported margin of 13·6%)
and the profit for period has fallen from $3·5 million (9·7%) to only $2·3 million (7·8%). As well as
the fall in the value of the investments, the related investment income has also shown a sharp decline
which has contributed to lower profits in 20X6.
Given the economic climate in 20X6 these are probably reasonably good results and may justify the
Chairman’s comments. The cost saving measures which have helped to mitigate the impact of the
downturn could have some unwelcome effects should trading conditions improve; it may not be easy to
re-hire employees and a lack of advertising may cause a loss of market share.
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1069
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Statement of financial position
Perhaps the most obvious aspect of the statement of financial position is the fall in value ($8·5 million)
of the non-current assets, most of which is accounted for by losses of $6 million and $1·6 million
respectively on the properties and investments. Ironically, because these falls are reflected in equity,
this has mitigated the fall in the return of the equity (from 15·2% to 13·1% underlying) and contributed
to a perhaps unexpected improvement in asset turnover from 1·6 times to 1·7 times.
Liquidity
Despite the downturn, Hardy’s liquidity ratios now seem at acceptable levels (though they should be
compared to manufacturing industry norms) compared to the low ratios in 20X5. The bank balance has
improved by $1·1 million. This has been helped by a successful rights issue (this is in itself a sign of
shareholder support and confidence in the future) raising $2 million and keeping customer’s credit
period under control. Some of the proceeds of the rights issue appear to have been used to reduce the
bank loan which is sensible as its financing costs have increased considerably in 20X6. Looking at the
movement on retained earnings (6,500 – 2,100 – 3,600) it can be seen that the company paid a dividend
of $800,000 during 20X6. Although this is only half the dividend per share paid in 20X5, it may seem
unwise given the losses and the need for the rights issue. A counter view is that the payment of the
dividend may be seen as a sign of confidence of a future recovery. It should also be mentioned that the
worst of the costs caused by the downturn (specifically the property and investments losses) are not
cash costs and have therefore not affected liquidity.
The increase in the inventory and work-in-progress holding period and the trade receivables collection
period being almost unchanged appear to contradict the declining sales activity and should be
investigated. Although there is insufficient information to calculate the trade payables credit period as
there is no analysis of the cost of sales figures, it appears that Hardy has received extended credit
which, unless it had been agreed with the suppliers, has the potential to lead to problems obtaining
future supplies of goods on credit.
Gearing
On the reported figures debt to equity shows a modest increase due to losses and the reduction of the
revaluation surplus, but this has been mitigated by the repayment of part of the loan and the rights issue.
Conclusion
Although Hardy’s results have been adversely affected by the global economic situation, its underlying
performance is not as bad as first impressions might suggest and supports the Chairman’s comments.
The company still retains a relatively strong statement of financial position and liquidity position which
will help significantly should market conditions improve. Indeed the impairment of property and
investments may well reverse in future. It would be a useful exercise to compare Hardy’s performance
during this difficult time to that of its competitors – it may well be that its 20X6 results were relatively
very good by comparison.
Appendix
An important aspect of assessing the performance of Hardy for 20X6 (especially in comparison with
20X5) is to identify the impact that several “one off” charges have had on the results of 20X6. These
charges are $1·3 million redundancy costs and a $1·5 million (6,000 – 4,500 previous surplus) property
impairment, both included in cost of sales and a $1·6 million loss on the market value of investments,
included in administrative expenses. Thus in calculating the “underlying” figures for 20X6 (below) the
adjusted cost of sales is $22·7 million (25,500 – 1,300 – 1,500) and the administrative expenses are
$3·3 million (4,900 – 1,600). These adjustments feed through to give an underlying gross profit of $6·8
million (4,000 + 1,300 + 1,500) and an underlying profit for the year of $2·3 million (–2,100 + 1,300 +
1,500 + 1,600).
1070
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Tutorial note: it is not appropriate to revise Hardy’s equity (upwards) for the one-off losses when
calculating equity-based underlying figures, as the losses will be a continuing part of equity (unless
they reverse) even if (or when) future earnings recover.
20X6
20X5
Underlying As reported
Gross profit % (6,800 ÷ 29,500 × 100)
23·1%
13·6%
27·8%
Profit (loss) for period % (2,300 ÷ 29,500 × 100)
7·8%
(7·1)%
9·7%
Return on equity (2,300 ÷ 17,600 × 100)
13·1%
(11·9)%
15·2%
Net asset (taken as equity) turnover (29,500 ÷ 17,600) 1·7 times
same 1·6 times
Debt to equity (4,000 ÷ 17,600)
22·7%
same
21·7%
Current ratio (6,200:3,400)
1·8:1
same
1·0:1
Quick ratio (4,000:3,400)
1·2:1
same
0·6:1
Receivables collection (in days) (2,200 ÷ 29,500 × 365) 27 days
same
28 days
Inventory and work-in-progress holding period
(2,200 ÷ 22,700 × 365)
35 days
31 days
27 days
Tutorial note: Only the amounts used for the calculations of the “underlying” ratios are shown; “as
reported” and the comparative ratios are based on equivalent figures from the summarised financial
statements provided. Alternative ratios/calculations would be acceptable (e.g. net asset turnover could
be calculated using total assets less current liabilities).
Answer 32 QUARTILE
Item Answer
Justification
1
D
Profit before interest and tax = $3,400 + $800 = $4,200
Capital employed = Equity of $26,600 + Debt of $8,000 = $34,600
ROCE = $4,200 ÷ $34,600 = 12.1%
2
B
Current assets = $11,200
Current liabilities = $7,200
Current ratio = $11,200 ÷ $7,200 = 1.56
3
D
Trade payable = $5,400
Purchases = $43,900
Payment period = $5,400 ÷ $43,900 × 365 days = 45 days
4
A
Trend analysis looks at how figures have changed over a period of time, relative to
each other.
5
D
All four valuation models are included in the Conceptual Framework and are
models that could be used to value assets and liabilities.
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1071
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 33 CROSSWIRE
(a)
Non-current assets
Property, plant and equipment
Carrying amount b/f
Mine (5,000 + 3,000 environmental cost)
Revaluation (2,000 ÷ 0·8 allowing for effect of deferred tax transfer)
Initial amount recognised for leased plant
Plant disposal
Depreciation
Replacement plant (balance)
Carrying amount c/f
Development costs
Carrying amount b/f
Additions during year
Amortisation and impairment (balance)
2,500
500
(2,000)
––––––
1,000
––––––
Carrying amount c/f
(b)
$000
13,100
8,000
2,500
10,000
(500)
(3,000)
2,400
––––––
32,500
––––––
Cash flows from investing activities
Purchase of property, plant and equipment (W1)
Disposal proceeds of plant
Development costs
Net cash used in investing activities
Cash flows from financing activities:
Issue of equity shares (W2)
Redemption of convertible loan notes ((5,000 – 1,000) × 25%)
Lease obligations (W3)
Interest paid (400 + 350)
Net cash used in financing activities
(7,400)
1,200
(500)
––––––
(6,700)
––––––
2,000
(1,000)
(3,200)
(750)
––––––
(2,950)
––––––
WORKINGS (amounts in brackets in $000)
(1)
Mine
The cash elements of the increase in property, plant and equipment are $5 million for the
mine (the capitalised environmental provision is not a cash flow) and $2·4 million for the
replacement plant making a total of $7·4 million.
(2)
Convertible loan notes
Of the $4 million convertible loan notes (5,000 – 1,000) that were redeemed during the year,
75% ($3 million) of these were exchanged for equity shares on the basis of 20 new shares for
each $100 in loan notes. This would create 600,000 (3,000 ÷ 100 × 20) new shares of $1 each
and share premium of $2·4 million (3,000 – 600). As 1 million (5,000 – 4,000) new shares
were issued in total, 400,000 must have been for cash. The remaining increase (after the
effect of the conversion) in the share premium of $1·6 million (6,000 – 2,000 b/f – 2,400
conversion) must relate to the cash issue of shares, thus cash proceeds from the issue of shares
is $2 million (400 par value + 1,600 premium).
1072
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(3)
Lease
The initial lease obligation is $7.6 million (initial amount recognised for the plant less deposit
paid on 1 April). At 30 September 20X6 total lease obligations are $6·8 million (5,040 +
1,760), thus repayments in the year were $3·2 million (10,000 – 6,800).
(c)
ROCE for the two years
Using the definition of ROCE provided:
Year ended 30 September 20X6
Profit before tax and interest on long-term borrowings
(4,000 + 1,000 + 400 + 350)
Equity plus loan notes and lease obligations
(19,200 + 1,000 + 5,040 + 1,760)
ROCE
$000
27,000
21·3%
Equivalent for year ended 30 September 20X5
(3,000 + 800 + 500)
(9,700 + 5,000)
ROCE
4,300
14,700
29·3%
5,750
To help explain the deterioration it is useful to calculate the components of ROCE i.e.
operating margin and net asset turnover (utilisation):
20X6
Operating margin (5,750 ÷ 52,000 × 100) 11·1%
Net asset turnover (52,000 ÷ 27,000)
1·93 times
20X5
(4,300 ÷ 42,000)
10·2%
(42,000 ÷ 14,700) 2·86 times
From the above it can be clearly seen that the 20X6 operating margin has improved by nearly
1% point, despite the $2 million impairment charge on the write down of the development
project. This means the deterioration in the ROCE is due to poorer asset turnover. This
implies there has been a decrease in the efficiency in the use of the company’s assets this year
compared to last year.
Looking at the movement in the non-current assets during the year reveals some mitigating
points:

The land revaluation has increased the carrying amount of property, plant and
equipment without any physical increase in capacity. This unfavourably distorts the
current year’s asset turnover and ROCE figures.

The acquisition of the platinum mine appears to be a new area of operation for
Crosswire which may have a different (perhaps lower) ROCE to other previous
activities or it may be that it will take some time for the mine to come to full
production capacity.

The substantial acquisition of the leased plant was half-way through the year and
can only have contributed to the year’s results for six months at best. In future
periods a full year’s contribution can be expected from this new investment in plant
and this should improve both asset turnover and ROCE.
In summary, the fall in the ROCE may be due largely to the above factors (effectively the
replacement and expansion programme), rather than to poor operating performance, and in
future periods this may be reversed.
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1073
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
It should also be noted that if the ROCE had been calculated on the average capital employed
during the year (rather than the year end capital employed), which is arguably more correct,
the deterioration in the ROCE would have been less pronounced.
Answer 34 MOROCCO
(a)
Statement of cash flows for the year ended 31 March 20X7
Cash flows from operating activities:
Profit before tax
Adjustments for:
Depreciation/amortisation of non-current assets
Finance costs
Increase in inventory (200 – 110)
Increase in trade receivables (195 – 75)
Increase in trade payables (210 – 160)
$m
140
40
(90)
(120)
50
––––
215
(40)
(90)
––––
85
Cash generated from operations
Interest paid
Income tax paid (W1)
Net cash from operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment (W2)
Purchase of intangibles (300 – 200 + 25)
Purchase of investment
Net cash used in investing activities
Cash flows from financing activities:
Shares issued (350 – 250)
Issue of 10% loan notes
Equity dividends paid (W3)
(305)
(125)
(230)
––––
(660)
100
300
(55)
––––
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$m
195
345
––––
(230)
120
––––
(110)
––––
WORKINGS
(1)
Income tax
Provision b/f
Profit or loss
Tax paid (= balance)
Provision c/f
1074
$m
(110)
(60)
90
––––
(80)
––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(2)
Property, plant and equipment
Balance b/f
Depreciation
Revaluation
Acquired during year (= balance)
Balance c/f
(3)
Equity dividends
Retained earnings b/f
Profit for the year
Dividends paid (= balance)
Retained earnings c/f
(b)
410
(115)
80
305
––––
680
––––
295
135
(55)
––––
375
––––
Functional currency
The functional currency is the currency of the primary economic environment in which the
entity operates (IAS 21). The primary economic environment in which an entity operates is
normally the one in which it primarily generates and expends cash. An entity’s management
considers the following factors in determining its functional currency (IAS 21):


the currency that dominates the determination of the sales prices; and
the currency that most influences operating costs.
The currency that dominates the determination of sales prices will normally be the currency in
which the sales prices for goods and services are denominated and settled. It will also
normally be the currency of the country whose competitive forces and regulations have the
greatest impact on sales prices.
Factors other than the dominant currency for sales prices and operating costs are also
considered when identifying the functional currency. The currency in which an entity’s
finances are denominated is also considered. The focus is on the currency in which funds
from financing activities are generated and the currency in which receipts from operating
activities are retained.
Additional factors include consideration of the autonomy of a foreign operation from the
reporting entity and the level of transactions between the two. Consideration is given to
whether the foreign operation generates sufficient functional cash flows to meet its cash needs
or whether it is dependent on another party for finance.
(c)
Advice on loan to NFP organisation
Although the sports club is a not-for-profit organisation, the request for a loan is a commercial
activity that should be decided on according to similar criteria as would be used for other
profit-orientated entities.
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1075
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
The main consideration in making a loan is how secure it would be. A form of capital gearing
ratio should be calculated; say existing long-term borrowings to net assets (i.e. total assets
less current liabilities). Clearly if this ratio is high, further borrowing would be at an
increased risk. Another aspect is the sports club’s ability to repay the interest (and ultimately
the principal) on the loan. This may be determined from information in statement of profit or
loss. A form of interest cover should be calculated; say the excess of income over
expenditure (broadly equivalent to profit) compared to (the forecast) interest payments. The
higher this ratio the lower the risk of interest default. Calculations would be made for all four
years to ascertain any trends that may indicate a deterioration or improvement in these ratios.
As for profit-oriented entities, the nature and trend of the income should be investigated. For
example, are the club’s sources of income increasing or decreasing, does reported income
include “one-off” donations (which may not be recurring), etc? Also matters such as the
market value of, and existing prior charges against, any assets intended to be used as security
for the loan would be relevant to the lender’s decision-making process. It may be possible
that the sports club’s governing body (perhaps the trustees) may be willing to give a personal
guarantee for the loan.
Answer 35 MONTY
(a)
Statement of cash flows for the year ended 31 March 20X7
$000
Cash flows from operating activities:
Profit before tax
Adjustments for:
depreciation of non-current assets
amortisation of non-current assets
finance costs
decrease in inventories (3,800 – 3,300)
increase in receivables (2,950 – 2,200)
increase in payables (2,650 – 2,100)
3,000
900
200
400
500
(750)
550
––––––
4,800
(400)
(425)
––––––
3,975
Cash generated from operations
Finance costs paid
Income tax paid (W1)
Net cash from operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment (W2)
Deferred development expenditure (1,000 + 200)
Net cash used in investing activities
Cash flows from financing activities:
Redemption of 8% loan notes (3,125 – 1,400)
Repayment of lease obligations (W3)
Equity dividend paid (W4)
(1,725)
(1,050)
(550)
––––––
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
1076
(700)
(1,200)
––––––
(1,900)
Net cash used in financing activities
Cash and cash equivalents at end of period
$000
(3,325)
––––––
(1,250)
1,300
––––––
50
––––––
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
WORKINGS
$000
(1)
Income tax paid
Provision b/f
– current
– deferred
Tax charge
Transfer from revaluation surplus
Provision c/f
– current
– deferred
Balance – cash paid
(2)
Property, plant and equipment
Balance b/f
Revaluation
New lease
Depreciation
Balance c/f
Balance – cash purchases
(3)
– current
– non-current
New finance lease
Balances c/f
– current
– non-current
Balance cash repayment
(4)
10,700
2,000
1,500
(900)
(14,000)
––––––
(700)
––––––
Lease liabilities
Balances b/f
(600)
(900)
(1,500)
750
1,200
––––––
(1,050)
––––––
Equity dividend
Retained earnings b/f
Profit for the year
Retained earnings c/f
Balance – dividend paid
(b)
(725)
(800)
(1,000)
(650)
1,250
1,500
––––––
(425)
––––––
1,750
2,000
(3,200)
––––––
(550)
––––––
Analysis
Return on capital employed
The most striking feature of Monty’s performance is the increase in its ROCE; although this
is 4·7% (21·4% – 16·7%), it represents an increase in return of 28·1% (4·7% ÷ 16·7% × 100)
which is an excellent performance during a period of apparent expansion. Indeed, had Monty
not revalued its property, the return would have been even higher. Looking at the component
parts of the ROCE, it can be seen that most areas contributed to the improvement.
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1077
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Profit margins
Gross margins improved, means either selling prices increased and/or cost of sales were
reduced. Operating margins improved (as a consequence of this) even though overheads
actually increased proportionally with revenue. There may be a correlation between the
increase in operating cost and increase in sales, such as higher expenditure on advertising may
have led to increased sales and higher gross margins.
Asset utilisation
The other component of ROCE is asset utilisation; here again Monty has had some success
increasing sales per $1 invested by 12·1% ((1·95 – 1·74) ÷ 1·74 × 100). Given the new
investment in property, plant and equipment (including new finance leased assets that have
not been operating for a full year), this is an excellent achievement and bodes well for future
periods. Also, it seems likely that some of the improvement is due to the development project
coming on stream (as it is being amortised) and generating revenues. These factors have
more than overcome the comparatively suppressing effect on ROCE due to the revaluation of
the property.
Gearing
The capital structure changes of repaying $1,725,000 of the 8% loan less a net increase in
lease obligations of $450,000 (1,950 – 1,500) have reduced debt by $1,275,000. This,
coupled with an increase in equity of $2·8 million (albeit that nearly half of this came from
the revaluation surplus of $1·35 million), has acted to reduce gearing markedly from 47·4%
last year to only 26·7% in the current year. Many shareholders may be comforted by a
reduction in debt; however, debt is not necessarily a bad thing. Monty is borrowing at 8% (on
the loan notes, the interest rate of the lease is unknown) yet earning an overall ROCE of
21·4%; this means shareholders are benefiting from the relatively cheap debt.
Appendix
Calculation of ratios (in $000)
20X6
20X5
Return on capital employed (ROCE)
((3,000 + 150 + 250) ÷ (12,550 + 1,400 + 1,950) × 100)
21·4%
16·7%
Margins:
Gross profit margin (9,200 ÷ 31,000 × 100)
Operating margin (3,400 ÷ 31,000 × 100)
29·7%
11·0%
25·6%
9·6%
1·95 times
1·74 times
26·7%
47·4%
Utilisation:
Net asset turnover (31,000 ÷ 15,900)
Gearing (debt ÷ equity) (1,400 + (1,950 ÷ 12,550))
Tutorial note: The amounts for the calculation of 20X6 ratios are given in brackets; the
amounts for 20X5 are similarly derived. Capital employed is taken as equity + loan notes +
lease obligations (current and non-current).
1078
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Answer 36 KINGDOM
(a)
Statement of cash flows for the year ended 30 September 20X6
$000
Cash flows from operating activities:
Profit before tax
Adjustments for:
depreciation of property, plant and equipment
loss on sale of property, plant and equipment (2,300 – 1,800)
finance costs
investment properties – rentals received
– fair value changes
decrease in inventory (3,100 – 2,300)
decrease in receivables (3,400 – 3,000)
increase in payables (4,200 – 3,900)
Cash generated from operations
Interest paid (600 – 100 + 50)
Income tax paid (W1)
Net cash from operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment (W2)
Sale of property, plant and equipment
Purchase of investment property
Investment property rentals received
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2,400
1,500
500
600
(350)
700
–––––
5,350
800
400
300
–––––
6,850
(550)
(1,950)
–––––
4,350
(5,000)
1,800
(1,400)
350
–––––
Net cash used in investing activities
Cash flows from financing activities:
Issue of equity shares (17,200 – 15,000)
Equity dividends paid (W3)
$000
(4,250)
2,200
(2,800)
–––––
(600)
–––––
(500)
300
–––––
(200)
–––––
WORKINGS
$000
(1)
Income tax
Provision b/f
Profit or loss charge
Provision c/f
Tax paid (= balance)
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(1,850)
(600)
500
––––––
(1,950)
––––––
1079
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(2)
Property, plant and equipment
Balance b/f
Depreciation
Revaluation (downwards)
Disposal (at carrying amount)
Transfer from investment properties
Balance c/f
(25,200)
1,500
1,300
2,300
(1,600)
26,700
––––––
(5,000)
––––––
Acquired during year (= balance)
(3)
Equity dividends
Retained earnings b/f
Profit for the year
Retained earnings c/f
8,700
1,800
(7,700)
––––––
2,800
––––––
Dividends paid (= balance)
Tutorial note: The reconciliation of the investment properties is:
$000
5,000
1,400
(700)
(1,600)
–––––
4,100
–––––
Balance b/f
Acquired during year (from question)
Loss in fair value
Transfer to property, plant and equipment
Balance c/f
(b)
Analysis
(i)
Causes of fall in profit before tax
The fall in the company’s profit before tax can be analysed in three elements:
(1)
(2)
(3)
changes at the gross profit level;
the effect of overheads; and
the relative performance of the investment properties.
The absolute effect on profit before tax of these elements are reductions of $1·4 million
(15,000 – 13,600), $2·25 million (10,250 – 8,000) and $1·25 million (900 + 350)
respectively, amounting to $4·9 million in total. Many companies would consider returns on
investment properties as not being part of operating activities; however, these returns do
affect profit before tax.
Gross profit
Despite slightly higher revenue, gross profit fell by $1·4 million. This is attributable to a fall
in the gross profit margin (down from 34·1% to 30·3%). Applying the stated 8% rise in the
cost of sales, last year’s cost of sales of $29 million would translate to an equivalent figure of
$31·32 million in the current year which is almost the same as the actual figure ($31·3
million). This implies that the production activity/volume of sales has remained the same as
last year.
1080
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
As the increase in revenue in the current year is only 2%, the decline in gross profitability has
been caused by failing to pass on to customers the percentage increase in the cost of sales.
This may be due to management’s slow response to rising prices and/or to competitive
pressures in the market.
Operating costs/overheads
The administrative expenses and distribution costs are the main culprit of the fall in profit
before tax as these are $2·25 million (or 28%) higher than last year. Even if they too have
increased 8%, due to rising prices, they are still much higher than would have been expected,
which implies a lack of cost control of these overheads. The profit margin has fallen from
17.9% in 20X5 to 6.7% in 20X6 and although gross profit margin fell slightly the fall in the
profit margin ratio does highlight that it is the lack of control of overheads that has been the
main cause in the fall in profits.
Performance of investment properties
The final element of the fall in profit before tax is due to declining returns on the investment
properties. This has two elements. First, a reduction in rentals received which may be due to
the change in properties under rental (one transferred to owner-occupation and one newly let
property) and/or a measure of falling rentals generally. The second element is clearer: there
has been a decrease in the fair values of the properties in the current year compared to a rise
in their fair values in the previous year. The fall in investment properties mirrors a fall in the
value of the company’s other properties within property, plant and equipment (down $1·3
million), which suggests problems in the commercial property market.
(ii)
Effects of rising prices
The term rising prices may relate to specific goods/assets or to average prices (general
inflation). Either way, they have two main effects on financial statements: an understatement
of operating costs and a potentially greater understatement of asset values.
In the statement of profit or loss, input costs tend to be understated in terms of their real cost.
The most commonly quoted examples of these are inventory, where the purchase at historical
cost would be lower than the cost of replacing them (a form of current cost), and depreciation
charges which understate the real value of the benefit consumed by the asset’s use (as the fair
value of the non-current assets will have increased).
In terms of interpreting financial performance, rising prices distort trend comparisons,
meaning that previous years’ results are not directly comparable with the current year’s
results. The most obvious example of this is with the return on capital employed (ROCE).
When comparing previous years with the current year, using historical cost, the numerator
(profit) would be relatively higher or overstated (due to lower operating costs) and the
denominator (equal to net assets) would be relatively lower or understated (due to lower
reported asset values).
The “overstated” profit due to not adjusting for rising prices may also give rise to other
problems, such as leading to higher wage demands, higher dividend payments and even
higher taxes.
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1081
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 37 SAVOIR
Item Answer
Justification
1
The issue on 1 July at full market value needs to be weighted:
A
Existing shares
New shares
2
C
40m × 3/12 =
8m
––––
48m × 9/12 =
10m
36m
––––
46m
––––
The rights issue of two for five on 1 October 20X5 is half way through the year.
The theoretical ex rights value can be calculated as:
Holder of
Subscribes for
Now holds
100 shares worth $2·40 =
40 shares at $1 each =
–––
140 worth (in theory)
–––
Bonus factor to be used for prior year comparatives
3
D
$240
$40
–––––
$280 (i.e. $2·0 each)
–––––
2·0/2·4
Profit for year given as $25.2 million
On conversion loan interest of $1·2 million after tax would be saved ($20 million ×
8% × (100% – 25%))
Profit for diluted EPS = $26.4 million
4
A
The number of shares in issue at the end of the year is used in the basic EPS
calculation when a bonus issue takes place during the year.
5
D
IAS 33 requires disclosure of (3) any potential ordinary shares that can affect future
EPS calculations and (4) any ordinary shares issued after the reporting date but prior
to signing off of the accounts. (1) Interest saved is only relevant if it relates to
convertible loan notes and (2) preference shares are not used in the EPS calculation.
Answer 38 REBOUND
Item
1
Answer Justification
B
Estimated profit after tax for the year ending 31 March 20X7:
Existing operations (continuing only) ($2 million × 1·06)
Newly acquired operations ($450,000 × 12/8 months × 1·08)
2
A
$000
2,120
729
–––––
2,849
–––––
Basic earnings per share
Profit = 2,000 + 450 – 750 = 1,700
Shares = $3,000 ÷ $0.25 = 12,000
EPS = $0.14
1082
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
3
A
Interest after tax is added back to the profit figure as if debt is converted interest
will no longer be payable, and interest is tax deductible.
4
B
Weighted average number of shares (000)
At 1 April 20X4
(3,000 × 4 (i.e. shares of $0.25 each))
Convertible loan note ($5,000 ÷ 100 × 40)
5
B
12,000
2,000
––––––
14,000
––––––
As the factory only generates 2% of revenue this would not be seen as a major part
of the business; although the machine is a material asset it is not a separate line of
the business or a geographical area of operations.
Answer 39 ERRSEA
Item Answer
Justification
1
D
Annual depreciation on plant is $20,000 (90,000 – 10,000) ÷ 4 years
3 years have passed since acquisition and therefore $60,000 of depreciation has
been charged, leaving a carrying amount of the asset of $30,000.
Loss on disposal of plant (30,000 – 12,000) is $18,000
2
C
Depreciation:
On acquired plant ($210,000 ÷ 3 years × 9/12)
Other plant (b/f 240,000 – 90,000 (disposed of) × 15%)
$
52,500
22,500
––––––
75,000
––––––
Tutorial note: The cost of the acquired plant, $210,000, is base cost (192) plus the
costs of modification (12) and transport and installation (6).
3
A
Grant included in current liabilities ($10,000) will not be there at year end.
Grant in non-current liabilities of $30,000 will still be there at year end; $11,000 in
current and $19,000 in non-current.
Grant on new plant is $48,000 (25% × base cost $192,000). This will be credited to
profit or loss on a straight line basis over 3 years, giving annual credit of $16,000.
The asset was purchased on 1 July, 3 months into the year, therefore in year 1 only
$12,000 ($16,000 × 9/12) is credited to profit or loss, leaving a balance of $36,000.
$30,000 + $36,000 = $66,000
4
B
A financial asset cannot meet the definition of a qualifying asset; all the others can.
5
A
The grant does not necessarily have to be received before it is recognised. As long
as the entity is reasonable certain the grant will be received it can recognise it.
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1083
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 40 SKEPTIC
Item Answer
Justification
1
A
A change of classification in presentation is a change in accounting policy under
IAS 8 and must be applied retrospectively.
2
D
For a single possible outcome the best estimate is the most likely outcome. In this
case the most likely outcome (with a 65% probability) is damages of $4 million.
3
A
Where measurement of a provision involves a large population of items then an
“expected value” model should be used. The expected value of repair costs on the
sale of a unit is $17 (($0 × 70%) + ($25 × 20%) + ($120 × 10%))
The provision required for the sale of 200,000 units is therefore $3.4 million ($17 ×
200,000).
4
B
The government grant is credited to profit and loss in the same manner as the
depreciation of the related asset. In this case the asset is being depreciated on a
straight line basis over 10 years. Therefore the grant is credited to profit or loss at
$800,000 each year ($8 million ÷ 10).
5
B
As the asset is classified at fair value through other comprehensive income the gain
on disposal is taken to other comprehensive income. IFRS 9 does not allow the
reclassification of the cumulative gain to profit or loss but a reserve transfer to
retained earnings can be made.
Answer 41 CANDY
Item
1
Answer Justification
A
Land
Buildings ($39m × 14/15 years)
Plant and equipment ($60.5m – $36.5m) × 87.5%
Total
2
C
Estimated expense for current year
Over provision prior year
Increase in deferred tax (W)
WORKING
Opening deferred tax
Closing deferred tax (9,800 × 30%)
Increase in deferred tax
1084
$000
8,000
36,400
21,000
––––––
65,400
––––––
$000
2,300
(1,000)
340
–––––
1,640
–––––
2,600
2,940
–––––
340
–––––
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
3
A
Initial amount recognised (30 – 1)
Interest at 9%
Interest paid at 5%
4
C
$000
29,000
2,610
(1,500)
––––––
30,110
––––––
Equity shares that are not held for trading may, on initial recognition, be designated
at fair value through other comprehensive income.
Loan assets held for their contractual cash flows and selling financial assets must be
classified at fair value through other comprehensive income.
5
B
Interest receivable, where taxed on a cash basis, will generate a taxable temporary
difference.
In the financial accounts the liability element of the loan will be less than the tax
base of the liability as, under financial accounting, some of the loan is classified as
equity.
Answer 42 MOSTON
Item Answer
Justification
1
D
Revenue is not recognised as in substance this is a financing transaction. Interest
for six months should be expensed and added to the amount of loan liability.
2
D
Capitalisation of development expenditure cannot take place until the criteria of IAS
38 have been met, one of those criteria is the commercial success of the project; this
does not happen until 1 May and therefore only 2 months of expenditure can be
capitalised ($1.6m × 2 months = $3.2 million).
3
B
Depreciation
Property (28,500 ÷ 15 years)
Plant and equipment ((26,100 – 9,100) × 15%)
Total depreciation expense for period
$
1,900
2,550
–––––
4,450
–––––
4
A
Only costs incurred in bringing an asset to its place and condition of use can be
capitalised in the cost of the asset. Staff training costs and painting the asset cannot
therefore be included in the initial cost and must be expensed.
5
B
IFRS 15 states that the best evidence of stand-alone selling prices is to take the
observable price of goods when they are sold separately.
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1085
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Answer 43 NOSTOM
Item Answer
Justification
1
Initial amount recognised for loan will be proceeds less issue costs is $19,500,000
($20m – $500,000).
B
Applying the effective rate of interest gives interest $1,560,000 (19,500,000 × 8%).
2
A
$000
1,200
60
(170)
–––––
1,090
–––––
Estimated expense for current year
Under provision prior year
Decrease in deferred tax (W)
WORKING
Opening deferred tax
Closing deferred tax (2,800 × 30%)
1,010
840
–––––
170
–––––
Decrease in deferred tax
3
A
When there is an issue of shares at full market price during the year the number of
shares used in the basic EPS calculation is time weighted.
The issue took place on 31 March which is 9 months into the year.
50,000 shares × 9/12 months = 37,500 shares
60,000 shares × 3/12 months = 15,000 shares
Time weighted average = 52,500 shares
4
D
The equity method is a valuation method used for an investment of an associate in
accordance with IAS 28 Investments in Associates (and Joint Ventures).
Transaction price can be used for trade receivables that do not include a significant
financing element.
5
D
A deductible temporary difference arises if the tax base of an asset is higher than its
carrying amount or the tax base of a liability is less than its carrying amount.
(2) results in a deductible temporary difference because the carrying amount of the
asset is less than the tax base. (4) results in a deductible temporary difference
because the tax base of the liability is nil (which is less than the carrying amount of
any interest accrual).
Where the tax authority allows expenses based on cash flows interest payable will
lead to a deductible temporary difference.
Tutorial note: (1) and (3) give rise to a taxable temporary differences (i.e.
carrying amount exceeds the tax base).
1086
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
SPECIMEN EXAM
Section A
Item Answer
1
B
2
A
3
B
4
D
5
B
6
D
7
A
8
C
Justification
25,000 – 2,000 = 23,000 + 2,300 (10% interest) – 6,000 (payment) = 19,300
19,300 + 1,930 (10% interest) – 6,000 (payment) = 15,230
Current liability = 19,300 – 15,230 = $4,070
Dismantling provision at 1 October 20X4 is $20·4 million (30,000 × 0·68) discounted
This will increase by an 8% finance cost by 30 September 20X5 = $22,032,000
(1,550 ÷ (2,500 × 2 + 1,200)) = $0·25
Sales proceeds
Net assets at disposal
Goodwill at disposal
Less: carrying value of NCI
9
C
10
A
11
C
$000
5,580
4,464
1,674
(900)
––––––
Cost (240,000 × $6)
Share of associate’s profit (400 × 240 ÷ 800)
Less dividend received (150 × 240 ÷ 800)
12
C
13
A
14
D
15
C
(5,238)
––––––
342
––––––
$000
1,440
120
(45)
––––––
1,515
––––––
Inventory turnover is 61 days (365 ÷ 6)
Trade payables period is 42 days (230,000 ÷ 2 million × 365)
Therefore, receivables collection period is 51 days (70 – 61 + 42)
FV of NCI at 1 October 14 (9,000 × 20% × $3·50)
Post-acquisition profit (8,000 – (3,000 ÷ 5)) = 7,400 at 20%
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
$000
6,300
1,480
––––––
7,780
––––––
1087
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Section B
16
A
17
C
Annual depreciation prior to the revaluation is $150,000 (1/5 × 750). At the date of
revaluation (1 April 20X3), the carrying amount is $375,000 (750 – (150 × 2·5
years)). Revalued to $560,000 with a remaining life of 3½ years results in a
depreciation charge of $160,000 per annum which means $80,000 for six months.
The carrying amount at 30 September 20X3 is therefore $480,000 (560 – 80).
Tutorial note: Alternatively $560,000 – ($560,000 ÷ 3½ × 6/12) = $480,000.
The revaluation surplus has a balance of $185,000 (560,000 – 375,000).
18
C
19
D
20
B
Cash flow Discount factor Present value
$000
at 10%
$000
Year ended: 30 September 20X4
220
0·91
200·2
30 September 20X5
180
0·83
149·4
30 September 20X6
200
0·75
150·0
––––––
499·6
––––––
Goodwill
Property
Plant
Cash and receivables
Carrying
Impairment
Carrying
amount before
loss
amount after
$000
$000
$000
2,000
2,000
Nil
4,000
800
3,200
3,500
700
2,800
2,500
Nil
2,500
–––––––
––––––
––––––
12,000
3,500
8,500
–––––––
––––––
––––––
21
C
22
A
23
D
200 employees at $5,000 = $1,000,000 redundancy costs. The retraining costs are a
future cost.
24
A
Impairment loss on plant is $1,750,000 (2,200,000 – (500,000 – 50,000)).
25
D
Penalty payments $200,000 + agreed settlement of loan $900,000 = $1,100,000.
Tutorial note: The expected insurance receipt is a contingent asset that would only
be disclosed, if material. Even if virtually certain it cannot be netted off against the
provision.
26
1088
B
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
27
A
Shareholding A is not held for trading as an election made – FVTOCI.
Shareholding B is held for trading and so FVTPL (transaction costs are not included
in carrying amount).
$
Cost of shareholding A (10,000 × $3·50 × 1·01)
35,350
FV at 30 September 20X3 (10,000 × $4·50)
45,000
––––––
Gain
9,650
––––––
28
C
Deferred tax provision required at 30 September 20X3
Provision at 1 October 20X2
Increase in provision (expense)
Write off underprovision at 30 September 20X2
Income tax for the year ended 30 September 20X3
Charge for the year ended 30 September 20X3
$000
4,400
(2,500)
–––––––
1,900
2,400
28,000
–––––––
32,300
–––––––
Tutorial note: To eliminate the “over/under provision” on deferred tax described
as a debit must be current year expense (i.e. prior year was underprovided).
29
B
30
A
At 30 September 20X3 there are two more years of servicing work, thus
$1·6 million ((2 × 600,000) × 100/75) must be treated as deferred income.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1089
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Section C
Answer 31 KANDY CO
(a)
Schedule of retained earnings as at 30 September 20X5
$000
Retained earnings per trial balance
15,500
Adjustments re:
Note (i)
Add back issue costs of loan note (W1)
1,000
Loan finance costs (29,000 × 9% (W1))
(2,610)
Note (ii)
Gain on disposal of investment property (17,000 – 15,000)
2,000
Gain on revaluation of investment property prior to transfer (6,000 – 5,000) 1,000
Depreciation of buildings (W2)
(2,825)
Depreciation of plant and equipment (W2)
(3,000)
Note (iii)
Income tax expense (W3)
(800)
–––––––
Adjusted retained earnings
10,265
–––––––
(b)
Statement of financial position as at 30 September 20X5
$000
Assets
Non-current assets
Property, plant and equipment (50,175 + 21,000 (W2))
Current assets (per trial balance)
71,175
68,700
–––––––
139,875
–––––––
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Revaluation surplus (32,000 – 6,400 (W2 and W3))
Retained earnings (from (a))
Non-current liabilities
Deferred tax (W3)
6% loan note (W1)
Current liabilities
Per trial balance
Current tax payable
Total equity and liabilities
1090
$000
20,000
25,600
10,265
–––––––
55,865
8,400
29,810
–––––––
43,400
2,400
–––––––
38,210
45,800
–––––––
139,875
–––––––
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
WORKINGS (monetary figures in brackets in $000)
(1)
Loan note
The issue costs should be deducted from the proceeds of the loan note and not charged as an
expense. The finance cost of the loan note, at the effective rate of 9% applied to the carrying
amount of the loan note of $29 million (30,000 – 1,000), is $2,610,000. The interest actually
paid is $1·8 million. The difference between these amounts of $810,000 (2,610 – 1,800) is
added to the carrying amount of the loan note to give $29,810,000 (29,000 + 810) for
inclusion as a non-current liability in the statement of financial position.
(2)
Non-current assets
Land and buildings
The gain on revaluation and carrying amount:
Carrying amount at 1 October 20X4 (35,000 – 20,000)
Revaluation at that date (8,000 + 39,000)
Gain on revaluation
Buildings depreciation for the year ended 30 September 20X5:
Land and buildings existing at 1 October 20X4 (39,000 ÷ 15 years)
Transferred investment property (6,000 ÷ 20 × 9/12)
Carrying amount at 30 September 20X5 (47,000 + 6,000 – 2,825)
$000
15,000
47,000
––––––
32,000
––––––
2,600
225
––––––
2,825
––––––
50,175
––––––
Plant and equipment
Carrying amount at 1 October 20X4 (58,500 – 34,500)
Depreciation for year (12½% reducing balance)
Carrying amount at 30 September 20X5
(3)
24,000
(3,000)
––––––
21,000
––––––
Taxation
Income tax expense
Provision for year ended 30 September 20X5
Less over provision in previous year
Deferred tax (see below)
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
$000
2,400
(1,100)
(500)
––––––
800
––––––
1091
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Deferred tax
Provision required at 30 September 20X5 ((10,000 + 32,000) × 20%)
Provision at 1 October 20X4
Increase in provision (expense)
Recognised in other comprehensive
on revaluation of land and buildings (32,000 × 20%)
Balance – credit to profit or loss
(c)
8,400
(2,500)
––––––
5,900
(6,400)
––––––
(500)
––––––
Cash flow statement extracts
Cash flows from operating activities:
Add back depreciation
Deduct gain on revaluation of investment property
Deduct gain on disposal of investment property
$000
5,825
(1,000)
(2,000)
Cash flows from investing activities:
Investment property disposal proceeds
17,000
Answer 32 TANGIER GROUP
(a)
Purchase of Raremetal
Tutorial note: References to “20X5” are in respect of the year ended 30 September 20X5
and “20X4” refers to the year ended 30 September 20X4.
The key matter to note is that the ratios for 20X4 and 20X5 will not be directly comparable
because two significant events, the acquisition of Raremetal and securing the new contract,
have occurred between these dates. This means that the underlying financial statements are
not directly comparable. For example, the 20X4 statement of profit or loss (SOPL) will not
include the results of Raremetal or the effect of the new contract. However, the 20X5 SOPL
will contain nine months of the results of Raremetal (although intra-group transactions will
have been eliminated) and nine months of the effects of the new contract (which may have
resulted in either a net profit or loss). Likewise, the 20X4 statement of financial position does
not contain any of Raremetal’s assets and liabilities, whereas that of 20X5 contains all of the
net assets of Raremetal and the cost of the new licence. This does not mean that comparisons
between the two years are not worthwhile, just that they need to be treated with caution. For
some ratios, it may be necessary to exclude all of the subsidiaries from the analysis and use
the single entity financial statements of Tangier as a basis for comparison with the
performance of previous years. Similarly, it may still be possible to compare some of the
ratios of the Tangier group with those of other groups in the same sector although not all
groups will have experienced similar acquisitions.
Assuming there has been no impairment of goodwill, the investment in Raremetal has
resulted in additional goodwill of $30 million which means that the investment has cost more
than the carrying amount of Raremetal’s net assets. Although there is no indication of the
precise cost, it is known to have been achieved by a combination of a share exchange (hence
the $180 million new issue of shares) and a cash element (funded from the proceeds of the
loan issue and the decrease in the bank balance). Any intra-group sales have been eliminated
on consolidation and it is not possible to determine in which individual company any profit on
these intra-group sales will be reported; it is therefore difficult to measure any benefits of the
investment. Indeed, the benefit of the investment might not be a financial one but merely to
secure the supply of raw materials. It would be useful to establish the cost of the investment
and the profit (if any) contributed by Raremetal so that an assessment of the benefit of the
investment might be made.
1092
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(b)
Relevant ratios
Gross profit margin % (810 ÷ 2,700 × 100)
Operating profit margin (235 ÷ 2,700 × 100)
ROCE (235 ÷ (805 + 400))
Net asset turnover (2,700 ÷ (805 + 400))
Debt/equity (400 ÷ 805)
Interest cover (235 ÷ 40)
20X5
30·0%
8·7%
19·5%
2·24 times
49·7%
5·9 times
20X4
40·0%
21·9%
61·7%
2·82 times
18·3%
79·6 times
All of the issues identified in part (a) make a comparison of ratios difficult and, if more
information was available, then some adjustments may be required. For example, if it is
established that the investment is not generating any benefits, then it might be argued that the
inclusion of the goodwill in the ROCE and asset turnover is unjustified (it may be impaired
and should be written off). Goodwill has not been excluded from any of the following ratios.
The increase in revenues of 48·4% (880 ÷ 1,820 × 100) in 20X5 will be partly due to the
consolidation of Raremetal and the revenues associated with the new contract. Yet, despite
these increased revenues, the company has suffered a dramatic fall in its profitability. This
has been caused by a combination of a falling gross profit margin (from 40% in 20X4 to only
30% in 20X5) and markedly higher operating overheads (operating profit margin has fallen
from 21·9% in 20X4 to 8·7% in 20X5). Again, it is important to note that some of these costs
will be attributable to the consolidation of Raremetal and some to the new contract. It could
be speculated that the 73% increase in administrative expenses may be due to one-off costs
associated with the tendering process (consultancy fees, etc) and the acquisition of Raremetal
and the 77% increase in higher distribution costs could be due to additional
freight/packing/insurance cost of the engines, delivery distances may also be longer (even to
foreign countries) (although some of the increase in distribution costs may also be due to
consolidation).
This is all reflected in the ROCE falling from an impressive 61·7% in 20X4 to only 19·5% in
20X5 (though even this figure is respectable). The fall in the ROCE is attributable to a
dramatic fall in profit margin at operating level (from 21·9% in 20X4 to only 8·7% in 20X5)
which has been compounded by a reduction in the asset turnover, with only $2·24 being
generated from every $1 invested in net assets in 20X5 (from $2·82 in 20X4).
The information in the question points strongly to the possibility (even probability) that the
new contract may be responsible for much of the deterioration in Tangier’s operating
performance. For example, it is likely that the new contract may account for some of the
increased revenue; however, the bidding process was “very competitive” which may imply
that Tangier had to cut its prices (and therefore its profit margin) in order to win the contract.
The costs of fulfilling the contract have also been heavy: investment in property, plant and
equipment has increased by $370 million (at carrying amount), representing an increase of
61% (no doubt some of this increase will be due to the acquisition of Raremetal). The
increase in licence costs to manufacture the new engines has cost $200 million plus any
amortisation and there is also the additional goodwill of $30 million.
An eight-fold increase in finance cost caused by the increased borrowing at double the interest
rate of the borrowing in 20X4 and (presumably) some overdraft interest has led to the
dramatic fall in the company’s interest cover (from 79·6 in 20X4 to only 5·9 in 20X5). The
finance cost of the new $300 million 10% loan notes to partly fund the investment in
Raremetal and other non-current assets has also increased debt/equity (one form of gearing
measure) from 18·3% in 20X4 to 49·7% in 20X5 despite also issuing $180 million in new
equity shares. At this level, particularly in view of its large increase from 20X4, it may give
debt holders (and others) cause for concern as there is increased risk for all Tangier’s lenders.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1093
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
If it could be demonstrated that the overdraft could not be cleared for some time, this would
be an argument for including it in the calculation of debt/equity, making the 20X5 gearing
level even worse. It is also apparent from the movement in the retained earnings that Tangier
paid a dividend during 20X5 of $55 million (295,000 + 135,000 – 375,000) which may be a
questionable policy when the company is raising additional finance through borrowings and
contributes substantially to Tangier’s overdraft.
Overall, the acquisition of Raremetal to secure supplies appears to have been an expensive
strategy, perhaps a less expensive one might have been to enter into a long-term supply
contract with Raremetal.
(c)
1094
Further information which would be useful to obtain

The cost of the investment in Raremetal, the carrying amount of the assets acquired
and whether Tangier has carried out a goodwill impairment test as required under
IFRS.

The benefits generated from the investment; for example, Raremetal’s individual
financial statements and details of sales to external customers (not all of these
benefits will be measurable in financial terms).

The above two pieces of information would demonstrate whether the investment in
Raremetal had been worthwhile.

The amount of intra-group sales made during the year and those expected to be
made in the short to medium term.

The pricing strategy agreed with Raremetal so that the effects on the profits reported
in the individual financial statements of Raremetal and Tangier can be more readily
determined.

More information is needed to establish if the new contract has been detrimental to
Tangier’s performance. The contract was won sometime between 1 October 20X4
and 1 January 20X5 and there is no information of when production/sales started,
but clearly there has not been a full year’s revenue from the contract. Also there is
no information on the length or total value of the contract.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
SEPTEMBER 2016 EXAM
Item Answer
Justification
1
B
This is one of the roles of the IFRS Foundation.
2
A
(2) will not be a subsidiary until the negotiations have been signed off and (3)
would be classified as an associate.
3
A
The repayment of the grant must be treated as a change in accounting estimate. The
carrying amount of the asset must be increased as the netting off method has been
used. The resulting extra depreciation must be charged immediately to profit or loss.
Cost
Grant
Depreciation
Carrying amount
Original
As if no grant
Adjustment
90,000
90,000
(30,000)
––––––
60,000
(10,000) [1 year] (30,000) [2 year]
Dr Depreciation 20,000
––––––
––––––
50,000
60,000Dr PPE 10,000
[1.1.X7]
[31.12.X7]
Cr Liability 30,000
4
A
Both issues fall to be treated as provisions under IAS 37. (1) is a legal obligation
and (2) is a constructive obligation.
5
C
710,000 + (480,000 × 3/12) – (20,000 × 3) + (20,000 × 25/125) = $774,000
6
D
According to IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors it is a change in accounting estimate and must be applied prospectively.
7
D
As (1) is being held for the long term it can be classified at fair value through other
comprehensive income. (2) must be classified at fair value through profit or loss.
8
A
The right-of-use asset will initial be measured at $55,000, which is the sum of the
deposit ($2,000), the initial lease liability ($48,000) and the direct costs incurred
($5,000). The asset will be depreciated over four years (i.e. the shorter of the lease
term and its useful life); therefore the carrying amount at the end of year 2 will be
$55,000 × 2/4 = $27,500
Tutorial note: The maintenance costs are expensed over the life of the contract.
9
A
Historical asset values will be lower than current values and therefore capital
valuations will be understated in times of rising prices. Cost of sales will be based
on historical prices and depreciation will also be based on lower historical costs,
therefore profit will be overstated.
10
A
3,250 + 1,940 + (800 – 600 × 30%) = 5,250,000
11
C
The only statement that can be verified based on the information given is that cash
flows from operating activities have been used to finance non-current assets. This is
based on positive operating cashflows and negative investing cash flows.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1095
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
12
D
FV of NCI at acquisition
1,100
Profit for year × 30%
3,200
Depreciation on fair value adjustment ($1·5m ÷ 30) (50)
Unrealised profit
(550)
––––––
2,600 × 30% 780
––––––
1,880
––––––
13
B
IFRS 3 requires that any negative goodwill is immediately credited to profit or loss.
14
B
Retained earnings = 300 + ((150 – 90) × 75%) = 345
Total equity = 125 + 345 = 470
15
B
Production cost
Capitalisation of borrowing costs ($6m × 6% × 9/12)
Total cost capitalised (and carrying amount) at 30 September 20X2
$000
6,000
270
–––––
6,270
–––––
16
D
Depreciation 1 January to 30 June 20X4 (80,000 ÷ 10 × 6/12) = 4,000
Depreciation 1 July to 31 December 20X4 (81,000 ÷ 9 × 6/12) = 4,500
Total depreciation = 8,500
17
D
A, B and C are all possible indicators of impairment; D implies a “revaluation”
surplus.
18
B
Value in use is lower than fair value (less costs to sell), so impairment is 60,750 –
43,000 = $17,750
19
D
This is the definition of a cash generating unit in IAS 36.
20
A
The impairment loss of $220,000 (1,170 – 950) is allocated $35,000 to damaged
plant, $85,000 to goodwill and the remaining $100,000 allocated proportionally to
the building and the undamaged plant (i.e. (100 × 300 ÷ 800) = $37,500 against the
plant). The carrying amount of the plant will then be $262,500 (335,000 – 35,000 –
37,500).
21
C
The initial amount of right-of-use asset is the initial amount of the lease liability
plus any initial direct costs and dismantling costs.
22
C
Year 1 200,000 × 11·65% = 23,300
Year 2 (200,000 + 23,300 – 55,000) × 11·65% = $19,607
23
B
The total lease liability at 31 December 20X7 ($93,391) is $49,271 a year later,
making this the non-current portion at 31 December 20X7.
24
A
As the assets are of low value (less than $5,000) the rentals will be expensed to
profit or loss on a straight line basis over the period of the lease; no asset is
recognised in the statement of financial position.
1096
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REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
25
D
The difference between the selling price and carrying amount is $120,000, but this
cannot be recognised as profit (and $24,000 a year over 5 years is also incorrect).
The profit to be recognised is based on the rights transferred to the lessor and is
calculated as:
Gain 
Fair value of asset - lease liability
Fair value of asset
= 70,000 
(320,000  250,000)
= $15,312
320,000
26
A
Supply and install is an obligation performed at a point in time; technical support is
provided over a period of time.
27
B
1,000 ÷ 1,500 × 1,200 = $800
28
D
½ × (500 ÷ 1,500 × 1,200) = $200
29
C
$30,000 (400 – 500 × 30%)
Revaluation and deferred tax of headquarters goes through OCI.
30
B
$60,000 (200 × 30%)
Dr Income tax expense Cr Deferred tax liability
Answer 31 TRIAGE
(a)
Schedule of adjustments to profit for the year ended 31 March 20X6
Draft profit before interest and tax per trial balance
Adjustments re:
Note (i): Convertible loan note finance costs (W1)
Note (ii): Depreciation of property (1,500 + 1,700 (W2))
Depreciation of plant and equipment (W2)
Note (iii): Current year loss on fraud (700 – 450 see below)
Note (iv): Income tax expense (2,700 + 700 – 800 (W3))
Profit for the year
$000
30,000
(3,023)
(3,200)
(6,600)
(250)
(2,600)
––––––
14,327
––––––
The $450,000 fraud loss in the previous year is a prior period adjustment (reported in the
statement of changes in equity).
The possible insurance claim is a contingent asset and should be ignored.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1097
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(b)
Statement of financial position as at 31 March 20X6
$000
Assets
Non-current assets
Property, plant and equipment (64,600 + 37,400 (W2))
Current assets
Trade receivables (28,000 – 700 fraud)
Other current assets per trial balance
102,000
27,300
9,300
––––––
Total assets
Equity and liabilities
Equity shares of $1 each
Other component of equity (W1)
Revaluation surplus (7,800 – 1,560 (W2))
Retained earnings (W4)
36,600
–––––––
138,600
–––––––
50,000
2,208
6,240
17,377
–––––––
75,825
Non-current liabilities
Deferred tax (W3)
6% convertible loan notes (W1)
3,960
38,415
––––––
Current liabilities
Per trial balance
Current tax payable
17,700
2,700
–––––––
Total equity and liabilities
(c)
$000
42,375
20,400
–––––––
138,600
–––––––
Earnings per share
Diluted earnings per share (W5)
29 cents
WORKINGS (monetary figures in brackets in $000)
(1)
6% convertible loan notes
The convertible loan notes are a compound financial instrument having a debt and an equity
component which must both be quantified and accounted for separately:
Year ended 31
20X6
20X7
20X8
Debt component
Equity component (= balance)
Proceeds of issue
March outflow
$000
2,400
2,400
42,400
8%
0·93
0·86
0·79
present value
$000
2,232
2,064
33,496
––––––
37,792
2,208
––––––
40,000
––––––
The finance cost will be $3,023,000 (37,792 × 8%) and the carrying amount of the loan notes
at 31 March 20X6 will be $38,415,000 (37,792 + (3,023 – 2,400)).
1098
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
(2)
Non-current assets
Property
$000
Carrying amount at 1 April 20X5 (75,000 – 15,000)
60,000
Depreciation to date of revaluation (1 October 20X5) (75,000 ÷ 25 × 6/12) (1,500)
––––––
Carrying amount at revaluation
58,500
Gain on revaluation (balancing amount)
7,800
––––––
Revaluation at 1 October 20X5
66,300
6
Depreciation to 31 March 20X6 (66,300 ÷ 19·5 years × /12)
(1,700)
––––––
Carrying amount at 31 March 20X6
64,600
––––––
Annual depreciation is $3m (75,000 ÷ 25 years); therefore the accumulated depreciation at 1
April 20X5 of $15m represents five years’ depreciation. At the date of revaluation (1 October
20X5), there will be a remaining life of 19·5 years.
Of the revaluation gain, $6·24m (80%) is credited to the revaluation surplus and $1·56m
(20%) is credited to deferred tax.
Plant and equipment
Carrying amount at 1 April 20X5 (72,100 – 28,100)
Depreciation for year ended 31 March 20X6 (15% reducing balance)
Carrying amount at 31 March 20X6
(3)
Deferred tax
Provision required at 31 March 20X6:
Revalued property and other assets ((7,800 + 12,000) × 20%)
Provision at 1 April 20X5
Increase in provision
Revaluation of land and buildings (7,800 × 20%)
Balance credited to profit or loss
(4)
$000
44,000
(6,600)
––––––
37,400
––––––
3,960
(3,200)
––––––
760
(1,560)
––––––
(800)
––––––
Retained earnings
Balance at 1 April 20X5
Prior period adjustment (fraud)
Adjusted profit for year (from (a))
Balance at 31 March 20X6
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
3,500
(450)
14,327
––––––
17,377
––––––
1099
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
(5)
Diluted earnings per share
The maximum additional shares on conversion is 8 million (40m × 20 ÷ 100), giving total
shares of 58 million.
The loan interest “saved” is $2·418m (3,023 (from (W1) above × 80% (i.e. after tax)), giving
adjusted earnings of $16·745m (14,327 + 2,418).
Therefore diluted EPS is
$16,745,00 0 × 100
= 29 cents
58 million
Answer 32 GREGORY
(a)
Four observations
Tutorial note: References to 20X6 and 20X5 are to the years ending 31 March 20X6 and
20X5 respectively.
Comment (1): I see the profit for the year has increased by $1m which is up 20% on last year,
but I thought it would be more as Tamsin was supposed to be a very profitable company.
There are two issues with this statement: first, last year’s profit is not comparable with the
current year’s profit because in 20X5 Gregory was a single entity and in 20X6 it is now a
group with a subsidiary. A second issue is that the consolidated statement of profit or loss for
the year ended 31 March 20X6 only includes six months of the results of Tamsin, and,
assuming Tamsin is profitable, future results will include a full year’s profit. This latter point
may, at least in part, mitigate the CEO’s disappointment.
Comment (2): I have calculated the EPS for 20X6 at 13 cents (6,000/46,000 × 100 shares)
and at 12·5 cents for 20X5 (5,000/40,000 × 100) and, although the profit has increased 20%,
our EPS has barely changed.
The stated EPS calculation for 20X6 is incorrect for two reasons:
(1)
it is the profit attributable to only the equity shareholders of the parent which should
be used; and
(2)
the 6m new shares were only in issue for six months and should be weighted by 6/12.
Thus, the correct EPS for 20X6 is 13·3 cents (5,700 ÷ 43,000 × 100). This gives an increase
of 6% (13·3 – 12·5) ÷ 12·5) on 20X5 EPS which is still less than the increase in profit. The
reason why the EPS may not have increased in line with reported profit is that the acquisition
was financed by a share exchange which increased the number of shares in issue. Thus, the
EPS takes account of the additional consideration used to generate profit, whereas the trend of
absolute profit does not take additional consideration into account. This is why the EPS is
often said to be a more accurate reflection of company performance than the trend of profits.
Comment (3): I am worried that the low price at which we are selling goods to Tamsin Co is
undermining our group’s overall profitability.
Assuming the consolidated financial statements have been correctly prepared, all intra-group
trading has been eliminated, thus the pricing policy will have had no effect on these financial
statements. The comment is incorrect and reflects a misunderstanding of the consolidation
process.
1100
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
Comment (4): I note that our share price is now $2·30, how does this compare with our share
price immediately before we bought Tamsin Co?
The increase in share capital is 6m shares, the increase in the share premium is $6m, thus the
total proceeds for the 6m shares was $12m giving a share price of $2·00 at the date of
acquisition of Tamsin. The current price of $2·30 presumably reflects the market’s
favourable view of Gregory’s current and future performance.
(b)
Ratios and comments
20X6
10·1%
20X5
11·3%
(i)
Return on capital employed (ROCE) (7,500 ÷ 74,300 × 100)
(ii)
Net asset turnover (46,500 ÷ 74,300)
(iii)
Gross profit margin (9,300 ÷ 46,500 × 100)
20·0%
25·7%
(iv)
Operating profit margin (7,500 ÷ 46,500 × 100)
16·1%
21·4%
0·63 times 0·53 times
Looking at the above ratios, it appears that the overall performance of Gregory has declined
marginally; the ROCE has fallen from 11·3% to 10·1%. This is has been caused by a
substantial fall in the gross profit margin (down from 25·7% in 20X5 to 20% in 20X6); this is
more than a 22% (5·7% ÷ 25·7%) decrease. The group/company have relatively low
operating expenses (at around 4% of revenue), so the poor gross profit margin feeds through
to the operating profit margin. The overall decline in the ROCE, due to the weaker profit
margins, has been mitigated by an improvement in net asset turnover, increasing from 0·53
times to 0·63 times. Despite the improvement in net asset turnover, it is still very low with
only 63 cents of sales generated from every $1 invested in the business, although this will
depend on the type of business Gregory and Tamsin are engaged in.
On this analysis, the effect of the acquisition of Tamsin seems to have had a detrimental effect
on overall performance, but this may not necessarily be the case; there could be some
distorting factors in the analysis. As mentioned above, the 20X6 results include only six
months of Tamsin’s results, but the statement of financial position includes the full amount of
the consideration for Tamsin.
Tutorial note: The consideration has been calculated (see (4) above) as $12m for the
parent’s 75% share plus $3·3m (3,600 – 300 share of post-acquisition profit) for the noncontrolling interest’s 25%, giving total consideration of $15·3 m.
The above factors disproportionately increase the denominator of ROCE which has the effect
of worsening the calculated ROCE. This distortion should be corrected in 20X7 when a full
year’s results for Tamsin will be included in group profit. Another factor is that it could take
time to fully integrate the activities of the two companies and more savings and other
synergies may be forthcoming such as bulk buying discounts.
The non-controlling interest share in the profit for the year in 20X6 of $300,000 allows a
rough calculation of the full year’s profit of Tamsin at $2·4m (300,000 ÷ 25% × 12/6, i.e. the
$300,000 represents 25% of 6/12 of the annual profit). This figure is subject to some
uncertainty such as the effect of probable increased post-acquisition depreciation charges.
However, a profit of $2·4m on the investment of $15·3m represents a return of 16% (and
would be higher if the profit was adjusted to a pre-tax figure) which is much higher than the
current year ROCE (at 10·1%) of the group. This implies that the performance of Tamsin is
much better than that of Gregory (as a separate entity) and that Gregory’s performance in
20X6 must have deteriorated considerably from that in 20X5 and this is the real cause of the
deteriorating performance of the group.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
1101
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
Another issue potentially affecting the ROCE is that, as a result of the consolidation process,
Tamsin’s net assets, including goodwill, are included in the statement of financial position at
fair value, whereas Gregory’s net assets appear to be based on historical cost (as there is no
revaluation surplus). As the values of property, plant and equipment have been rising, this
effect favourably flatters the 20X5 ratios. This is because the statement of financial position
of 20X5 only contains Gregory’s assets which, at historical cost, may considerably understate
their fair value and, on a comparative basis, overstate 20X5 ROCE.
In summary, although on first impression the acquisition of Tamsin appears to have caused a
marginal worsening of the group’s performance, the distorting factors and imputation of the
non-controlling interest’s profit in 20X6 indicate the underlying performance may be better
than the ratios portray and the contribution from Tamsin is a very significant positive. Future
performance may be even better.
Without information on the separate financial statements of Tamsin, it is difficult to form a
more definite view.
1102
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
Financial Reporting
Tuesday 6 December 2016
Time allowed: 3 hours 15 minutes
This question paper is divided into three sections:
Section A – ALL 15 questions are compulsory and MUST be attempted
Section B – ALL 15 questions are compulsory and MUST be attempted
Section C – BOTH questions are compulsory and MUST be attempted
Do NOT open this question paper until instructed by the supervisor.
Do NOT record any of your answers on the question paper.
This question paper must not be removed from the examination hall.
Paper F7
Fundamentals Level – Skills Module
The Association of
Chartered Certified
Accountants
Section A – ALL 15 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple
choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
1
Which of the following is a possible advantage of a rules-based system of financial reporting?
A
B
C
D
2
It
It
It
It
encourages the exercise of professional judgement
prevents a fire-fighting approach to the formulation of standards
offers accountants more protection in the event of litigation
ensures that no standards conflict with each other
IFRS 10 Consolidated Financial Statements states that ‘A parent shall prepare consolidated financial statements using
uniform accounting policies for like transactions and other events in similar circumstances’.
Which of the following situations requires an adjustment because of this constraint?
A
B
C
D
3
A subsidiary has been acquired and its land is to be included in the consolidated financial statements at fair value
A subsidiary carries its assets at historical cost but the parent’s assets are carried at revalued amounts
There have been intra-group transactions during the year which have resulted in unrealised profit in inventory at
the year end
There has been intra-group trading which has resulted in intra-group balances for receivables and payables at
the year end
The following trial balance extract relates to Topsy Co as at 30 April 20X6:
Land at cost
Building:
Valuation at 1 May 20X2
Accumulated depreciation at 30 April 20X5
Revaluation surplus at 30 April 20X5
$’000
800
$’000
1,500
90
705
On 1 May 20X2, when the carrying amount of the building was $750,000, it was revalued for the first time to $1·5m
and its remaining useful life at that date was estimated to be 50 years. Topsy Co has correctly accounted for this
revaluation in the above trial balance. However, Topsy Co has not yet charged depreciation for the year ended 30 April
20X6 or transferred the excess depreciation from the revaluation surplus to retained earnings at 30 April 20X6.
In February 20X6, the land, but not the building, was independently valued at $950,000. This adjustment has yet
to be made for the year ended 30 April 20X6.
What is the balance on the revaluation surplus of Topsy Co as at 30 April 20X6 after the required adjustments
have been made?
A
B
C
D
$555,000
$690,000
$840,000
$870,000
2
4
Plow Co purchased 3,500 of the 10,000 $1 equity shares of Styre Co on 1 August 20X4 for $6·50 per share.
Styre Co’s profit after tax for the year ended 31 July 20X5 was $7,500. Styre Co paid a dividend of $0·50 per share
on 31 December 20X4.
What is the carrying amount of the investment in Styre Co in the consolidated statement of financial position of
Plow Co as at 31 July 20X5?
A
B
C
D
5
6
Which of the following are correct when calculating the impairment loss of an asset?
(1)
(2)
(3)
(4)
Assets should be carried at the lower of their carrying amount and recoverable amount
Assets should be carried at the higher of their carrying amount and recoverable amount
The recoverable amount of an asset is the higher of value in use and fair value less costs of disposal
The recoverable amount of an asset is the lower of value in use and fair value less costs of disposal
A
B
C
D
1
1
2
2
and
and
and
and
3
4
3
4
Which of the following statements is NOT true?
A
B
C
D
7
$25,375
$22,750
$27,125
$23,625
In some countries, accounting standards can be a detailed set of rules which companies must follow
Local accounting standards can be influenced by the tax regime within a country
Accounting standards on their own provide a complete system of regulation
Accounting standards are particularly important where a company’s shares are publicly traded
A company had issued share capital on 1 January 20X9 of 2,000,000 equity $1 shares. On 1 October 20X9, a rights
issue was made on a one for four basis which was fully taken up.
On 30 September 20X9, each share had a market value of $3·25, giving a theoretical ex-rights value of $2·84 per
share.
In accordance with IAS 33 Earnings Per Share, what is the weighted average number of shares in issue for the
year ended 31 December 20X9?
A
B
C
D
8
2,341,549
1,935,769
2,125,000
2,431,778
shares
shares
shares
shares
Which of the following would result in a credit to the deferred tax account?
(1)
(2)
(3)
(4)
Interest receivable, which will be taxed when the interest is received
A loan, the repayment of which will have no tax consequences
Interest payable, which will be allowable for tax when paid
Prepaid expenses, which have been deducted to calculate the taxable profits of the previous year
A
B
C
D
1
3
1
2
and
and
and
and
2
4
4
3
3
[P.T.O.
9
IFRS 15 Revenue from Contracts with Customers states that, where performance obligations are satisfied over time,
entities should apply an appropriate method of measuring progress.
Which of the following are appropriate OUTPUT methods of measuring progress?
(1)
(2)
(3)
(4)
Total costs to date of the contract as a percentage of total contract revenue
Physical milestones reached as a percentage of physical completion
Surveys of performance completed to date as a percentage of total contract revenue
Labour hours expended as a percentage of total expected labour hours
A
B
C
D
1
3
1
2
and
and
and
and
2
4
4
3
10 Fifer Co has a current ratio of 1·2:1 which is below the industry average. Fifer Co wants to increase its current ratio
by the year end.
Which of the following actions, taken before the year end, would lead to an increase in the current ratio?
A
B
C
D
Return some inventory which had been purchased for cash and obtain a full refund on the cost
Make a bulk purchase of inventory for cash to obtain a large discount
Make an early payment to suppliers, even though the amount is not due
Offer early payment discounts in order to collect receivables more quickly
11 On 1 October 20X8, Picture Co acquired 60% shares in Frame Co. At 1 April 20X8, the credit balances on the
revaluation surpluses relating to Picture Co and Frame Co’s equity financial asset investments stood at $6,400 and
$4,400 respectively.
The following extract was taken from the financial statements for the year ended 31 March 20X9:
Other comprehensive income: loss on fair value of equity financial asset investments
Picture Co
$
(1,400)
Frame Co
$
(800)
Assume the losses accrued evenly throughout the year.
What is the amount of the revaluation surplus in the consolidated statement of financial position of Picture Co as
at 31 March 20X9?
A
B
C
D
$4,520
$4,760
$5,240
$9,160
12 A local authority department is responsible for waste collections. They have an annual budget to provide a regular
collection service from households in the local area. The budget was increased to enable the department to increase
the percentage of waste disposed of in an environmentally friendly manner.
Which of the following is the best measurement to justify the increase in the budget?
A
B
C
D
An increase in the number of collections made during the period
The percentage of waste recycled rather than being placed in landfill sites
The fair value of the machinery used in making the collections
A breakdown of expenditure between the cost of making collections and the cost of processing waste
4
13 Panther Co owns 80% of Tiger Co. An extract from the companies’ individual statements of financial position as at
30 June 20X8 shows the following:
Panther Co
$’000
370
Property, plant and equipment (carrying amount)
Tiger Co
$,000
285
On 1 July 20X7, Panther Co sold a piece of equipment which had a carrying amount of $70,000 to Tiger Co for
$150,000. The equipment had an estimated remaining life of five years when sold.
What is the carrying amount of property, plant and equipment in the consolidated statement of financial position
of Panther Co as at 30 June 20X8?
A
B
C
D
$591,000
$575,000
$671,000
$534,000
14 On 1 July 20X7, Lime Co acquired 90% of Soda Co’s equity share capital. On this date, Soda Co had an internally
generated customer list which was valued at $35m by an independent team of experts. At 1 July 20X7, Soda Co was
also in negotiations with a potential new major customer. If the negotiations are successful, the new customer will
sign the contract on 15 July 20X7 and the value of the total customer base would then be worth $45m.
What amount would be recognised for the customer list in the consolidated statement of financial position of
Lime Co as at 1 July 20X7?
A
B
C
D
$0
$10m
$35m
$45m
15 Which of the following statements relating to goodwill is correct?
A
B
C
D
Goodwill is amortised over its useful life with the charge expensed to profit or loss
On the investment in an associate, any related goodwill should be separately identified in the consolidated
financial statements
The testing of goodwill for impairment is only required when circumstances exist which indicate potential
impairment
If the fair value of a subsidiary’s contingent liabilities can be reliably measured at the date of acquisition, they
should be included in consolidated net assets and will increase goodwill
(30 marks)
5
[P.T.O.
Section B – ALL 15 questions are compulsory and MUST be attempted
Please use the grid provided on page two of the Candidate Answer Booklet to record your answers to each multiple
choice question. Do not write out the answers to the MCQs on the lined pages of the answer booklet.
Each question is worth 2 marks.
The following scenario relates to questions 16–20.
Artem Co prepares financial statements to 30 June each year.
During the year to 30 June 20X5, the company spent $550,000 on new plant as follows:
$’000
525
3
12
2
8
Plant cost
Delivery to site
Building alterations to accommodate the plant
Costs of initial testing of the new plant
Plant operator training costs
Artem Co’s fixtures and fittings were purchased on 1 July 20X2 at a cost of $50,000. The directors have depreciated them
on a straight line basis over an estimated useful life of eight years assuming a $5,000 residual value. At 1 July 20X4, the
directors realise that the remaining useful life of the fixtures is five years. There is no change to the estimated residual
value.
Artem Co began a research project in October 20X3 with the aim of developing a new type of machine. If successful,
Artem Co will manufacture the machines and sell them to customers as well as using them in their own production
processes. During the year ended 30 June 20X4, costs of $25,000 were incurred on conducting feasibility studies and
some market research. During the year ended 30 June 20X5, a further $80,000 was incurred on constructing and testing
a prototype of the machine.
16 In accordance with IAS 16 Property, Plant and Equipment, what is the value of additions to plant for Artem Co
for the year ended 30 June 20X5?
A
B
C
D
$525,000
$542,000
$550,000
$540,000
17 Which of the following is TRUE in relation to the change in the remaining useful life of the fixtures and fittings?
A
B
C
D
It
It
It
It
is
is
is
is
a
a
a
a
change
change
change
change
of
of
of
of
accounting
accounting
accounting
accounting
policy which should be retrospectively applied
policy which should be disclosed in the notes to the financial statements
estimate which should be retrospectively applied
estimate which should be prospectively applied
18 In accordance with IAS 16, what is the depreciation charge for the fixtures and fittings for Artem Co for the year
ended 30 June 20X5?
A
B
C
D
$7,500
$9,000
$7,750
$6,750
6
19 In accordance with IAS 38 Intangible Assets, what is the correct treatment of the $25,000 costs incurred on the
research project by Artem Co during the year ended 30 June 20X4?
A
B
C
D
They should be recognised as an intangible non-current asset as future economic benefits are expected from the
use and sale of the machinery
They should be written off to profit or loss as an expense as they are research costs at this date
They should be included in tangible non-current assets as machinery which will be put into use once completed
They should be set against a provision made for the estimated total cost of the project which was set up at the
start of the research
20 In accordance with IAS 38, which of the following is true when Artem Co moves to the production and testing
stage of the prototype during the year ended 30 June 20X5?
A
B
C
D
The project has moved to the development stage. If the IAS 38 development expenditure criteria are met,
Artem Co can choose whether or not to recognise the $80,000 costs as an intangible non-current asset
The project is still in its research stage and the $80,000 costs incurred by Artem Co cannot be recognised as an
intangible non-current asset until a product is ready for sale
The project has moved to the development stage. If the IAS 38 development expenditure criteria are met, Artem
Co must recognise the $80,000 costs as an intangible non-current asset
The project is still in its research stage and so Artem Co must expense the $80,000 costs to profit or loss
7
[P.T.O.
The following scenario relates to questions 21–25.
Maykorn Co prepares its financial statements to 30 September each year. Maykorn Co’s draft financial statements were
finalised on 20 October 20X3. They were authorised for issue on 15 December 20X3 and the annual general meeting of
shareholders took place on 23 December 20X3.
On 30 September 20X3, Maykorn Co moved out of one of its properties and put it up for sale. The property met the criteria
as held for sale on 30 September 20X3. On 1 October 20X2, the property had a carrying amount of $2·6m and a
remaining life of 20 years. The property is held under the revaluation model. The property was expected to sell for a gross
amount of $2·5m with selling costs estimated at $50,000.
Maykorn Co decided to sell an item of plant during the year ended 30 September 20X3. On 1 October 20X2, the plant
had a carrying amount of $490,000 and a remaining useful life of seven years. The plant met the held for sale criteria on
1 April 20X3. At 1 April 20X3, the plant had a fair value less costs to sell of $470,000, which had fallen to $465,000
at 30 September 20X3.
21 In accordance with IAS 10 Events after the Reporting Period, which of the following statements is/are CORRECT
for Maykorn Co?
(1) All events which occur between 30 September 20X3 and 15 December 20X3 should be considered as events
occurring after the reporting period
(2) An event which occurs between 30 September 20X3 and 15 December 20X3 and which provides evidence of
a condition which existed at 30 September 20X3 should be considered as an adjusting event
A
B
C
D
1 only
Both 1 and 2
2 only
Neither 1 nor 2
22 In accordance with IAS 10, which of the following events would be classed as a non-adjusting event in Maykorn
Co’s financial statements for the year ended 30 September 20X3?
A
B
C
D
During October 20X3, there was evidence of a permanent diminution in the carrying amount of a property held
at 30 September 20X3
On 1 December 20X3 the acquisition of a subsidiary was completed, following lengthy negotiations which began
in September 20X3
The sale of inventory during October 20X3 at a value less than its cost. This inventory was included in the
financial statements at cost on 30 September 20X3
The insolvency of a major customer during October 20X3, whose balance was included within receivables at
30 September 20X3
23 What is the total amount charged to Maykorn Co’s profit or loss in respect of the property for the year ended 30
September 20X3?
A
B
C
D
$130,000
$180,000
$150,000
$100,000
24 In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what is the carrying
amount of the plant in Maykorn Co’s statement of financial position as at 30 September 20X3?
A
B
C
D
$420,000
$470,000
$455,000
$465,000
8
25 Which of the following items should be classed as an asset held for sale under IFRS 5?
A
B
C
D
Maykorn Co’s head office building is to be demolished, at which point the land will be put up for sale. A number
of prospective bidders have declared an interest and the land is expected to sell within a few months of the
demolition
An item of plant was put up for sale at the start of the year for $500,000. Six parties have made a bid to
Maykorn Co for the plant but none of these bids have been above $200,000
A chain of retail outlets are currently advertised for sale. Maykorn Co has provisionally accepted a bid, subject to
surveys being completed. The surveys are not expected to highlight any problems. The outlets are currently empty
A brand name which Maykorn Co purchased in 20X2 is associated with the sale of potentially harmful products.
Maykorn Co has decided to stop producing products under this brand, which is currently held within intangible
assets
9
[P.T.O.
The following scenario relates to questions 26–30.
Vitrion Co issued $2m 6% convertible loan notes on 1 April 20X2. The convertible loan notes are redeemable on 31 March
20X5 at par for cash or can be exchanged for equity shares in Vitrion Co on that date. Similar loan notes without the
conversion option carry an interest rate of 9%.
The following table provides information about discount rates:
6%
0·943
0·890
0·840
Year 1
Year 2
Year 3
9%
0·917
0·842
0·772
On 1 April 20X3, Vitrion Co purchased 50,000 $1 equity shares in Gowhizzo Co at $4 per share, incurring transaction
costs of $4,000. The intention is to hold the shares for trading. By 31 March 20X4 the shares are trading at $7 per share.
In addition to the gain on investment, Vitrion Co also received a dividend from Gowhizzo Co during the year to 31 March
20X4.
26 In accordance with IAS 32 Financial Instruments: Presentation, which of the following describes an equity
instrument?
A
B
C
D
A
A
A
A
contractual obligation to deliver cash or another financial asset to another entity
contract which is evidence of a residual interest in the assets of an entity after deducting all of its liabilities
contractual right to exchange financial instruments with another entity under potentially favourable conditions
contract which gives rise to both a financial asset of one entity and a financial liability of another
27 In accordance with IAS 32, how should the issue of the convertible loan notes be recognised in Vitrion Co’s
financial statements?
A
B
C
D
As debt. Interest should be charged at 6% because it cannot be assumed that loan note holders will choose the
equity option
As equity because the loan notes are convertible to equity shares
As debt and equity because the convertible loan notes contain elements of both
As debt. Interest should be charged at 9% to allow for the conversion of the loan notes
28 What amount in respect of the loan notes will be shown under non-current liabilities in Vitrion Co’s statement of
financial position as at 1 April 20X2 (to the nearest $’000)?
A
B
C
D
$2,000,000
$1,848,000
$1,544,000
$2,701,000
29 In accordance with IFRS 9 Financial Instruments, at what amount will the Gowhizzo Co shares be shown under
‘investments in equity instruments’ in Vitrion Co’s statement of financial position as at 31 March 20X4?
A
B
C
D
$204,000
$354,000
$346,000
$350,000
10
30 Where should the gain on the investment in Gowhizzo Co and its dividend be recognised in Vitrion Co’s financial
statements for the year ended 31 March 20X4?
A
B
C
D
Both
Gain
Gain
Both
in profit or loss
on investment in other comprehensive income and the dividend in profit or loss
on investment in profit or loss and the dividend in other comprehensive income
in other comprehensive income
(30 marks)
11
[P.T.O.
Section C – BOTH questions are compulsory and MUST be attempted
Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet.
31 On 1 January 20X6, Laurel Co acquired 60% of the equity share capital of Rakewood Co in a share exchange in
which Laurel Co issued three new shares for every five shares it acquired in Rakewood Co. The share issue has not
yet been recorded by Laurel Co. Additionally, on 31 December 20X6, Laurel Co will pay to the shareholders of
Rakewood Co $1·62 per share acquired. Laurel Co’s cost of capital is 8% per annum.
At the date of acquisition, shares in Laurel Co and Rakewood Co had a market value of $7·00 and $2·00 each
respectively.
Statements of profit or loss for the year ended 30 September 20X6
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Investment income (note (iv))
Finance costs
Profit before tax
Income tax expense
Profit for the year
Laurel Co
$’000
84,500
(58,200)
–––––––
26,300
(2,000)
(4,100)
500
(300)
–––––––
20,400
(4,800)
–––––––
15,600
–––––––
Rakewood Co
$’000
52,000
(34,000)
–––––––
18,000
(1,600)
(2,800)
400
nil
–––––––
14,000
(3,600)
–––––––
10,400
–––––––
$’000
20,000
72,000
$’000
15,000
25,000
Equity as at 1 October 20X5
Equity shares of $1 each
Retained earnings
The following information is relevant:
(i)
At the date of acquisition, Laurel Co conducted a fair value exercise on Rakewood Co’s net assets which were
equal to their carrying amounts with the following exceptions:
–
an item of plant had a fair value of $4m above its carrying amount. At the date of acquisition it had a
remaining life of two years.
–
inventory of $800,000 had a fair value of $1m. All of this inventory had been sold by 30 September 20X6.
(ii) Laurel Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose
Rakewood Co’s share price at 1 January 20X6 can be deemed to be representative of the fair value of the shares
held by the non-controlling interest.
(iii) Laurel Co had traded with Rakewood Co for many years before the acquisition. Sales from Rakewood Co to
Laurel Co throughout the year ended 30 September 20X6 were consistently $1·2m per month. Rakewood Co
made a mark-up on cost of 20% on these sales. Laurel Co had $1·8m of these goods in inventory as at
30 September 20X6.
(iv) Laurel Co’s investment income consists of:
–
its share of a dividend of $500,000 paid by Rakewood Co in August 20X6.
–
a dividend of $200,000 received from Artic Co, a 25% owned associate which it has held for several years.
The profit after tax of Artic Co for the year ended 30 September 20X6 was $2·4m.
(v) Assume, except where indicated otherwise, that all items of income and expense accrue evenly throughout the
year.
(vi) There were no impairment losses within the group during the year ended 30 September 20X6.
12
Required:
(a) Calculate the consolidated goodwill at the date of acquisition of Rakewood Co.
(7 marks)
(b) Prepare the consolidated statement of profit or loss for Laurel Co for the year ended 30 September 20X6.
(13 marks)
(20 marks)
13
[P.T.O.
32 Landing Co is considering the acquisition of Archway Co, a retail company. The summarised financial statements of
Archway Co for the year ended 30 September 20X6 are:
Statement of profit or loss
$’000
94,000
(73,000)
–––––––
21,000
(4,000)
(6,000)
(400)
–––––––
10,600
(2,120)
–––––––
8,480
–––––––
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Finance costs
Profit before tax
Income tax expense (at 20%)
Profit for the year
Statement of financial position
$’000
Assets
Non-current assets
Property, plant and equipment
Current assets
Inventory
Bank
29,400
10,500
100
–––––––
Total assets
Equity and liabilities
Equity
Equity shares of $1 each
Retained earnings
Current liabilities
4% loan notes (redeemable 1 November 20X6)
Trade payables
Current tax payable
$’000
10,600
–––––––
40,000
–––––––
10,000
8,800
–––––––
18,800
10,000
9,200
2,000
–––––––
Total equity and liabilities
21,200
–––––––
40,000
–––––––
From enquiries made, Landing Co has obtained the following information:
(i)
Archway Co pays an annual licence fee of $1m to Cardol Co (included in cost of sales) for the right to package
and sell some goods under a well-known brand name owned by Cardol Co. If Archway Co is acquired, this
arrangement would be discontinued. Landing Co estimates that this would not affect Archway Co’s volume of
sales, but without the use of the brand name packaging, overall sales revenue would be 5% lower than currently.
(ii) Archway Co buys 50% of its purchases for resale from Cardol Co, one of Landing Co’s rivals, and receives a bulk
buying discount of 10% off normal prices (this discount does not apply to the annual licence fee referred to in
note (i) above). This discount would not be available if Archway Co is acquired by Landing Co.
(iii) The 4% loan notes have been classified as a current liability due to their imminent redemption. As such, they
should not be treated as long-term funding. However, they will be replaced immediately after redemption by 8%
loan notes with the same nominal value, repayable in ten years’ time.
14
(iv) Landing Co has obtained some of Archway Co’s retail sector average ratios for the year ended 30 September
20X6. It has then calculated the equivalent ratios for Archway Co as shown below:
Annual sales per square metre of floor space
Return on capital employed (ROCE)
Net asset (total assets less current liabilities) turnover
Gross profit margin
Operating profit (profit before interest and tax) margin
Gearing (debt/equity)
Sector average
$8,000
18·0%
2·7 times
22·0%
6·7%
30·0%
Archway Co
$7,833
58·5%
5·0 times
22·3%
11·7%
nil
A note accompanying the sector average ratios explains that it is the practice of the sector to carry retail property
at market value. The market value of Archway Co’s retail property is $3m more than its carrying amount (ignore
the effect of any consequent additional depreciation) and gives 12,000 square metres of floor space.
Required:
(a) After making adjustments to the financial statements of Archway Co which you think may be appropriate for
comparability purposes, restate:
(i)
(ii)
(iii)
(iv)
Revenue;
Cost of sales;
Finance costs;
Equity (assume that your adjustments to profit or loss result in retained earnings of $2·3 million at
30 September 20X6); and
(v) Non-current liabilities.
(5 marks)
(b) Recalculate comparable sector average ratios for Archway Co based on your restated figures in (a) above.
(6 marks)
(c) Comment on the performance and gearing of Archway Co compared to the retail sector average as a basis
for advising Landing Co regarding the possible acquisition of Archway Co.
(9 marks)
(20 marks)
End of Question Paper
15
Answers
Fundamentals Level – Skills Module, Paper F7
Financial Reporting
December 2016 Answers
Section A
1
C
2
B
3
C
$
At 30 April 20X5
Increase in value of land in the year ($900,000 – $750,000)
Annual transfer to retained earnings
Depreciation based on revalued amount ($1,500,000/50 years)
Depreciation based on historic cost ($750,000/50 years)
30,000
(15,000)
–––––––
At 30 April 20X6
4
$
705,000
150,000
––––––––
855,000
(15,000)
––––––––
840,000
––––––––
D
Cost of investment
Share of post acq profit
Less dividend received
5
A
6
C
7
A
1 January X9–30 September X9
1 October X9–31 December X9
8
C
9
D
3,500 x 6·50
35% x 7,000
3,500 x $0·50
22,750
2,625
(1,750)
–––––––
23,625
2,000,000 x 3·25/2·84 x 9/12
2,500,000 x 3/12
1,716,549
625,000
––––––––––
2,341,549
10 C
11 B
(6,400 – 1,400 loss – (800 loss x 60% x 6/12)) = 4,760
12 B
13 A
Carrying amount 370,000 + 285,000 – 64,000 (see below) = 591,000
The unrealised profit on the sale is 80,000 (150,000 – 70,000) of which 64,000 (80,000 x 4 years/5 years) is still unrealised
at 30 June 20X8.
19
14 C
15 D
Section B
16 B
Correct answer does not include training costs.
17 D
18 D
Carrying amount at date of revised remaining life is (50,000 – (50,000 – 5,000)/8 years x 2 years) = 38,750
Depreciation year ended 30 June 20X5 is therefore 38,750 – 5,000/5 years = 6,750 pa
19 B
20 C
21 B
22 B
23 B
Property is depreciated by $130,000 ($2,600,000/20) giving a carrying amount of $2,470,000. When classed as held for sale,
property is revalued to its fair value of $2,500,000 (as it is carried under the revaluation model, $30,000 would go to revaluation
surplus). Held for sale assets are measured at the lower of carrying amount (now $2,500,000) and fair value less costs to sell
($2,500,000 – $50,000 = $2,450,000), giving an impairment of $50,000. Total charge to profit or loss is $130,000 +
$50,000 = $180,000.
24 C
Carrying amount at 1 April is $455,000 (490 – (490/7 x 6/12)).
25 C
26 B
27 C
28 B
120,000 x 0·917
120,000 x 0·842
2,120,000 x 0·772
110,040
101,040
1,636,640
––––––––––
1,847,720 rounded to 1,848,000
29 D
50000 shares at $7 each
30 A
20
Section C
31 (a)
Laurel Co: Consolidated goodwill on acquisition of Rakewood Co
$’000
$’000
Investment at cost
Shares (15,000 x 60% x 3/5 x $7·00)
Deferred consideration (9,000 x $1·62/1·08)
Non-controlling interest (15,000 x 40% x $2·00)
37,800
13,500
12,000
–––––––
63,300
Net assets (based on equity) of Rakewood Co as at 1 January 20X6
Equity shares
Retained earnings at 1 October 20X5
Earnings 1 October 20X5 to acquisition (10,400 x 3/12)
Fair value adjustments:
plant
inventory
15,000
25,000
2,600
4,000
200
–––––––
Net assets at date of acquisition
(46,800)
–––––––
16,500
–––––––
Consolidated goodwill
(b)
Laurel Co: Consolidated statement of profit or loss for the year ended 30 September 20X6
Revenue (84,500 + (52,000 x 9/12) – (1,200 x 9 months) intra-group sales)
Cost of sales (working)
Gross profit
Distribution costs (2,000 + (1,600 x 9/12))
Administrative expenses (4,100 + (2,800 x 9/12))
Investment income (400 x 9/12)
Income from associate (2,400 x 25% based on underlying earnings)
Finance costs (300 + (13,500 x 8% x 9/12 re deferred consideration))
Profit before tax
Income tax expense (4,800 + (3,600 x 9/12))
Profit for the year
Profit for year attributable to:
Equity holders of the parent
Non-controlling interest
((10,400 x 9/12) – 200 re inventory – 1,500 depreciation – 300 URP) x 40%))
$’000
112,700
(74,900)
––––––––
37,800
(3,200)
(6,200)
300
600
(1,110)
––––––––
28,190
(7,500)
––––––––
20,690
––––––––
18,370
2,320
––––––––
20,690
––––––––
Working in $’000
Cost of sales
Laurel Co
Rakewood Co (34,000 x 9/12)
Intra-group purchases (1,200 x 9 months)
Fair value inventory adjustment
URP in inventory at 30 September 20X6 (1,800 x 20/120)
Additional depreciation (4,000/2 years x 9/12)
21
$’000
58,200
25,500
(10,800)
200
300
1,500
–––––––
74,900
–––––––
32 (a)
Archway Co’s restated figures
On the assumption that Landing Co purchases Archway Co, the following adjustments relate to the effects of notes (i) to (iii)
in the question and the property revaluation:
$’000
89,300
76,000
800
15,300
10,000
Revenue (94,000 x 95%)
Cost of sales (see below)
Loan interest (10,000 x 8%)
Equity (10,000 + 2,300 RE + 3,000 revaluation)
Non-current liabilities: 8% loan notes
The cost of sales should be first adjusted for the annual licence fee of $1m, reducing this to $72m. Half of these, $36m, are
net of a discount of 10% which equates to $4m (36,000/90% – 36,000). Adjusted cost of sales is $76m (73,000 – 1,000
+ 4,000).
(b)
These figures would give the following ratios:
Annual sales per square metre of floor space
(89,300/12,000)
ROCE
(13,300 – 10,000)/(15,300 + 10,000) x 100)
Net asset turnover
(89,300/(15,300 + 10,000))
Gross profit margin
((89,300 – 76,000)/89,300 x 100)
Operating profit margin
((13,300 – 10,000)/89,300 x 100)
Gearing (debt/equity)
(10,000/15,300)
(c)
$7,442
13%
3·5 times
15%
3·7 %
65·4%
Performance
Archway Co
as reported
$7,833
58·5%
5·0 times
22·3%
11·7%
nil
Annual sales per square metre of floor space
ROCE
Net asset turnover
Gross profit margin
Operating profit margin
Gearing (debt/equity)
Archway Co
as adjusted
$7,442
13%
3·5 times
15%
3·7%
65·4%
Sector
average
$8,000
18·0%
2·7 times
22·0%
6·7%
30·0%
A comparison of Archway Co’s ratios based upon the reported results compares very favourably to the sector average ratios
in almost every instance. ROCE is particularly impressive at 58·5% compared to a sector average of 18%; this represents a
return of more than three times the sector average. The superior secondary ratios of profit margin and asset utilisation (net
asset turnover) appear to confirm Archway Co’s above average performance. It is only sales per square metre of floor space
which is below the sector average. The unadjusted figure is very close to the sector average, as too is the gross profit margin,
implying a comparable sales volume performance. However, the reduction in selling prices caused by the removal of the brand
premium causes sales per square metre to fall marginally.
As indicated in the question, should Archway Co be acquired by Landing Co, many figures particularly related to the statement
of profit or loss would be unfavourably impacted as shown above in the workings for Archway Co’s adjusted ratios. When
these effects are taken into account and the ratios are recalculated, a very different picture emerges. All the performance
ratios, with the exception of net asset turnover, are significantly reduced due to the assumed cessation of the favourable
trading arrangements. The most dramatic effect is on the ROCE, which, having been more than three times the sector average,
would be 27·8% (18·0 – 13·0)/18·0 x 100) below the sector average (at 13% compared to 18·0%). Analysing the
component parts of the ROCE (net asset turnover and profit margins), both aspects are lower when the reported figures are
adjusted.
The net asset turnover (although adjusted to a lower multiple) is still considerably higher than the sector average. The fall in
this ratio is due to a combination of lower revenues (caused by the loss of the branding) and the increase in capital employed
(equal to net assets) due to classifying the loan notes as debt (non-current). Gross margin deteriorates from 22·3% to only
15·0% caused by a combination of lower revenues (referred to above) and the loss of the discount on purchases. The
distribution costs and administrative expenses for Archway Co are less than those of its retail sector in terms of the percentage
of sales revenue (at 11·3% compared to 15·3%), which mitigates (slightly) the dramatic reduction in the profit before interest
and tax. The reduction in sales per square metre of floor space is caused only by the reduced (5%) volume from the removal
of the branded sales.
Gearing
The gearing ratio of nil based on the unadjusted figures is not meaningful due to previous debt being classified as a current
liability because of its imminent redemption. When this debt is replaced by the 8% loan notes and (more realistically)
classified as a non-current liability, Archway Co’s gearing is much higher than the sector average. There is no information as
to how the increased interest payable at 8% (double the previous 4%) compares to the sector’s average finance cost. If such
a figure were available, it may give an indication of Archway Co’s credit status although the doubling of the rate does imply
a greater degree of risk in Archway Co seen by the lender.
22
Summary and advice
Based upon Archway Co’s reported figures, its purchase by Landing Co would appear to be a good investment. However,
when Archway Co’s performance is assessed based on the results and financial position which might be expected under
Landing Co’s ownership, the recalculated ratios are generally inferior to Archway Co’s retail sector averages. In an investment
decision such as this, an important projected ratio would be the return on the investment (ROI) which Landing Co might
expect. The expected net profit after tax can be calculated as $2m ((3,300 before interest and tax – 800 interest) x 80%
post-tax), however, there is no information in the question as to what the purchase consideration of Archway Co would be.
That said, at a (probable) minimum purchase price based on Archway Co’s net asset value (with no goodwill premium), the
ROI would only be 7·9% (2,000/25,300 x 100) which is very modest and should be compared to Landing Co’s existing ROI.
A purchase price exceeding $25·3m would obviously result in an even lower expected ROI. It is possible that under
Landing Co’s management, Archway Co’s profit margins could be improved, perhaps coming to a similar arrangement
regarding access to branded sales (or franchising) as currently exists with Cardol Co, but with a different company. If so, the
purchase of Archway Co may still be a reasonable acquisition.
23
Fundamentals Level – Skills Module, Paper F7
Financial Reporting
December 2016 Marking Scheme
This marking scheme is given as a guide in the context of the suggested answers. Scope is given to markers to award marks for
alternative approaches to a question, including relevant comment, and where well-reasoned conclusions are provided. This is
particularly the case for written answers where there may be more than one acceptable solution.
Section A
Marks
30
–––
2 marks per question
Section B
30
–––
3 cases (5 questions each) 2 marks per question
Section C
31 (a)
(b)
32 (a)
Maximum marks
Consolidated goodwill:
consideration – share exchange
– deferred consideration
– NCI
net assets
– equity shares
– retained earnings at acquisition
– fair value adjustments
1
1
1
½
1½
2
–––
7
–––
Consolidated statement of profit or loss:
revenue
cost of sales
distribution costs
administrative expenses
investment income
finance costs
income tax expense
NCI
1½
4½
½
½
1½
1½
1
2
–––
13
–––
20
–––
revenue
cost of sales
loan interest
equity
non-current liabilities
½
2
½
1½
½
–––
5
–––
(b)
1 mark per ratio
6
–––
(c)
1 mark per relevant comment up to
9
–––
20
–––
25
Awarded
ACCA
F7 FINANCIAL REPORTING
OBJECTIVE TEST QUESTION PRACTICE
For Computer Based Examinations from September 2017 to June 2018
®
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
(i)
No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this publication can be accepted by the author, editor or publisher.
This training material has been prepared and published by Becker Professional Development
International Limited: www.becker.com/acca
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No part of this training material may be translated, reprinted or reproduced or utilised in any form
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addressed to the Permissions Department, DeVry/Becker Educational Development Corp.
Acknowledgement
Past ACCA examination questions are the copyright of the Association of Chartered Certified
Accountants and have been reproduced by kind permission.
(ii)
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
CONTENTS
Question
Page
Page
Answer
Marks
Date worked
COMPUTER BASED EXAMINATIONS
Introduction
(iv)
OBJECTIVE TEST QUESTIONS
1
Multiple response
1
1001
14
2
Pull-down list
3
1002
14
3
Number entry
5
1003
14
4
Hot area
7
1004
12
5
Hot spot
9
1006
4
6
Enhanced matching
11
1008
10
14
16
18
19
21
1010
1011
1012
1013
1014
10
10
10
10
10
OT CASES
1
2
3
4
5
ESP
Rangoon
Rebound
Skeptic
Candy
This question practice includes OT question types that will appear only in a computer-based exam, but
provides valuable practice for all students whichever version of the exam they are sitting.
ACCA’s CBE Specimen can be accessed under exam resources at
www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-studyresources/f7.html
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
(iii)
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
Introduction
“Multiple choice – single answer” – is the standard OT type in paper-based examinations. In CBE this
type is presented with radio bullets instead of A B, C, D options.
Illustration
Recognition is the process of including within the financial statements items which meet the definition
of an element according to the IASB’s Conceptual Framework for Financial Reporting.
Which of the following items should be recognised as an asset in the statement of financial
position of a company?
o
A skilled and efficient workforce which has been very expensive to train. Some of these
staff are still in the employment of the company
o
A highly lucrative contract signed during the year which is due to commence shortly after
the year end
o
A government grant relating to the purchase of an item of plant several years ago which has
a remaining life of four years
o
A receivable from a customer which has been sold (factored) to a finance company. The
finance company has full recourse to the company for any losses
How to answer?



Click on a radio button to select an answer from the choices provided.
You can select only one.
If you want to change your answer, click on your new choice and the original choice will be
removed automatically.
Answer

A receivable from a customer which has been sold (factored) to a finance company. The
finance company has full recourse to the company for any losses
As the receivable is “sold” with recourse it must remain as an asset in the statement of
financial position; it is not derecognised.
OTHER OT TYPES
The following OT types appear only in CBE:
(1)
(2)
(3)
(4)
(5)
(6)
Multiple response
Pull down list
Number entry
Hot area
Hot spot
Enhanced matching
These are illustrated below.
(iv)
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
(1)
Multiple response
Description – candidates are required to select more than one response from the options provided by
clicking the appropriate tick boxes.
Illustration 1
Which TWO of the following should Tynan recognise as liabilities as at 30 September 20X4,
Tynan’s year end?
The signing of a non-cancellable contract in September 20X4 to supply goods in the following
year on which, due to a pricing error, a loss will be made
The cost of a reorganisation which was approved by the board in August 20X4 but has not yet
been implemented, communicated to interested parties or announced publicly
An amount of deferred tax relating to the gain on the revaluation of a property during the
current year. Tynan has no intention of selling the property in the foreseeable future
The balance on the warranty provision which relates to products for which there are no
outstanding claims and whose warranties had expired by 30 September 20X4
How to answer?



Two is the maximum you are permitted to select.
You can deselect a chosen answer to clear it.
When you have chosen the required number, deselecting an answer will allow you to select
another answer.
Answer
The signing of a non-cancellable contract in September 20X4 to supply goods in the following
year on which, due to a pricing error, a loss will be made
An amount of deferred tax relating to the gain on the revaluation of a property during the current
year. Tynan has no intention of selling the property in the foreseeable future
Tutorial note: The non-cancellable agreement is an onerous contract. A liability for deferred tax
arises even if there is no intention to sell.
(2)
Pull down list
Description – candidates are required to select one answer from a list of choices within a drop down
list.
Illustration 2
Constable owns 40% of Turner which it treats as an associated undertaking. Constable also owns 60%
of Whistler. Constable has held both of these shareholdings for more than one year. Revenue of each
company for the year ended 30 June 20X2 was as follows:
$m
Constable
400
Turner
200
Whistler
100
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
(v)
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
What is the revenue which will be reported in Constable’s CONSOLIDATED statement of profit
or loss for the year ended 30 June 20X2?
Select...
$460 million
$500 million
$580 million
$700 million

Answer
Consolidated revenue
Constable
Whistler
$m
400
100
–––––
500
–––––
Tutorial note: Turner is an associate of Constable; under equity accounting revenue of the associate
is not included in consolidated profit or loss.
(3)
Number entry
Description – candidates are required to key in a numerical response.
Illustration 3
The HY group acquired 35% of the equity share capital of SX on 1 July 20X0 paying $70,000. This
shareholding enabled HY group to exercise significant influence over SX.
SX made a profit for the year ended 30 June 20X1 (prior to dividend distribution) of $130,000 and
paid a dividend of $80,000 to its equity shareholders.
What is the amount for the investment in associate recognised in HY’s consolidated statement of
financial position at 30 June 20X1?
$000
How to answer?

Enter a numerical value in the answer box.

The only permitted characters for numerical answer are:

One full stop as a decimal point (if required);

One minus symbol at the front of the figure if the answer is negative.
For example: -10234.35


(vi)
No other characters, including commas, are accepted.
You can change your answer by adding permitted characters or deleting one or more highlighted
characters.
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
Answer
$000
70
45.5
(28)
––––––
87.5
––––––
Original investment
Share of profit for year
Less share of dividend paid
Value of investment in SX
(4)
Hot area
Description – candidates are required to select one or more areas in an image as their answer(s).
Illustration 4
Inveresk has equity shareholdings in four other companies, as shown below, and has a seat on the
board of each:
Raby
Inveresk
40%
Other shareholders
No other holdings larger than 10%
Seal
30%
Another company holds 60% of Seal’s equity
Toft
15%
Two other companies hold respectively 50% and 35% of Toft’s
equity, and each has a seat on its board. Inveresk exerts
significant influence over Toft
Unad
19%
Inveresk provides technical support to Unad and also has
regular interchanges of management personnel
Which of the above shareholdings are associated undertakings of Inversk?
Raby
ASSOCIATE
NO
Seal
ASSOCIATE
NO
Toft
ASSOCIATE
NO
Unad
ASSOCIATE
NO
How to answer?




Click on a hotspot area to select an answer from the hotspot choices provided.
You can select only one per line.
The selected area will be highlighted.
If you want to choose a different answer click on an alternative area.
Answer
Raby
ASSOCIATE
Seal
NO
Toft
ASSOCIATE
Unad
ASSOCIATE
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(vii)
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
(5)
Hot spot
Description – candidates are required to select one or more points by clicking on an image.
Illustration 5
In October 20X4, Hoy Co had $2.5 million of equity shares ($0.50 each) in issue. No new shares were
issued during the year ended 30 September 20X5, but on that date there were outstanding share
options which had a dilutive effect equivalent to issuing 1.2 million shares for no consideration.
Hoy Co’s profit after tax for the year ended 30 September 20X5 was $1,550,000.
The graph below represents a trend in both basic and diluted earnings per share (EPS) since
20X3. Complete the EPS trend analysis by calculating the diluted EPS for the year ended 30
September 20X5 for Hoy Co and click on graph to identify its position.
Cents
34
33.5
33
32.5
32
31.5
31
30.5
30
29.5
29
28.5
28
27.5
27
26.5
26
25.5
25
24.5
24
23.5
23
(viii)
Basic EPS
Diluted
20X3
20X4
20X5
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
Answer
000
5,000
1,200
––––––
6,200
––––––
$1,550
––––––
Current shares ($2,500 ÷ 0.50)
Dilutive effect
Number of shares
Profit ($000)
Diluted earnings per share ($1,550 ÷ 6,200)
$0.25
Click the point on the 20X5 line on the graph corresponding to 25 cents.
Cents
34
33.5
33
32.5
32
31.5
31
30.5
30
29.5
29
28.5
28
27.5
27
26.5
26
25.5
25
24.5
24
23.5
23
Basic EPS
Diluted
20X3
20X4
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20X5
(ix)
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
(6)
Enhanced matching
Description – candidates are required to select and drag their chosen answers to other areas of the
screen.
Illustration 6
The IASB’s Conceptual Framework for Financial Reporting identifies qualitative characteristics of
financial statements.
In accordance with the Framework, which of the following characteristics are fundamental
qualitative characteristics and which are enhancing characteristics?
Characteristic
Relevance
Fundamental
Enhancing
Fundamental
Enhancing
Relevance
Understandability
Faithful representation
Verifiability
Understandability
Faithful representation
Neutrality
Completeness
Comparability
Answer
Tutorial note: Neutrality and completeness are aspects of the fundamental characteristic of faithful
representation.
(x)
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
OBJECTIVE TEST QUESTIONS
1
MULTIPLE RESPONSE
1.1
DT’s final dividend for the year ended 31 October 20X5 of $150,000 was declared on 1
February 20X6 and paid in cash on 1 April 20X6. The financial statements were approved on
31 March 20X6.
Which of the following TWO statements reflect the correct treatment of the dividend in
the financial statements of DT?
The payment settles an accrued liability in the statement of financial position as at 31
October 20X5
The dividend is shown as a deduction in the statement of profit or loss for the year
ended 31 October 20X6
The dividend is shown as an accrued liability in the statement of financial position as at
31 October 20X6
The $150,000 dividend was shown in the notes to the financial statements at 31
October 20X5
The dividend is shown as a deduction in the statement of changes in equity for the year
ended 31 October 20X6
1.2
In accordance with IAS 40 Investment Property, which THREE of the following are
classified as investment property?
Property held for long-term capital appreciation
Owner-occupied property
Land held for an undetermined future use
Property occupied by employees
1.3
Which TWO of the following would be classified as “a change in accounting policy” as
determined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
Increasing the loss allowance for trade receivables for 20X6 from 5% to 10% of
outstanding balances
Changing the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation
Changing the valuation method of inventory from first-in first-out to weighted average
Changing the useful economic life of its motor vehicles from six years to four years
Classifying rental income as a deduction from cost of sales in the statement of profit or
loss, having previously classified it as other operating income
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1
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
1.4
Which TWO of the following statements regarding consolidated financial statements are
correct?
Only the group’s share of the assets of a subsidiary is reflected on the consolidated
statement of financial position
Under equity accounting only the group’s share of the net assets of an associate is
reflected on the consolidated statement of financial position
The value of share capital on a consolidated statement of financial position will include
the share capital of both the investor and the investee
An entity has a choice when it comes to valuing the non-controlling interest of a
subsidiary
1.5
Which THREE of the following could provide evidence of “significant influence”?
51% of the voting power of the investee
Interchange of management personnel
Participation in decisions about dividends
Provision of essential technical information
Owning 40% of the equity shares and having agreement with another 20% of the equity
shareholders that they will cast their votes as directed by you
1.6
Which TWO of the following may be classified as a monetary item in accordance with
IAS 21 The Effects of Changes in Foreign Exchange Rates?
A provision for the settlement of a foreign currency debt that is to be settled with the
delivery of an item of machinery
A foreign currency denominated payable
A dividend due from the holding of a foreign equity investment
Inventory due to be exported in the following period
1.7
Aqua has correctly calculated its basic earnings per share (EPS) for the current year.
Which TWO of the following items need to be additionally considered when calculating
Aqua’s diluted EPS for the year?
A 1 for 5 rights issue of equity shares during the year at $1.20 when the market price of
the equity shares was $2.00
The issue during the year of a convertible (to equity shares) loan note
The granting during the year of directors’ share options exercisable in three years’ time
Equity shares issued during the year as the purchase consideration for the acquisition of
a new subsidiary company
(14 marks)
2
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
2
PULL-DOWN LIST
2.1
Bell made a profit of $183,000 for the year ended 30 June 20X7 and paid a dividend during
the year of $18,000. During the year the company wrote off development costs of $45,000
directly to retained earnings as a prior period adjustment and revalued a property with a
carrying amount of $60,000 to $135,000.
What was total comprehensive income for period ended 30 June 20X7?

Select...
$195,000
$240,000
$258,000
$318,000
2.2
In 20X3 Falkirk identified that a fraud had been perpetrated by an employee who had been
making payments to himself amounting to $6,200,000. $1,400,000 million were payments
made in 20X3, $1,800,000 in 20X2 and $3,000,000 prior to 20X2; the double entry to the
payments had created false assets.
What is the amount of fraud to be recognised as an expense in the statement of profit or
loss for 20X3?
Select...
$nil
$1,400,000
$3,200,000
$6,200,000
2.3

Digger commenced contract X47 on 1 July 20X3. Performance obligations under the contract
are to be satisfied over time and the stage of completion is regularly assessed. Details for the
first year of the contract were as follows:
Amounts invoiced
Costs incurred at date of last assessment
Costs incurred since last assessment
Amounts received
Total contract price
Estimated costs to complete
Survey of performance completed
$
2,400
1,800
200
2,100
4,200
1,200
2,520
The company invoices the customer immediately it receives an assessment of the value of the
work done.
What amount should Digger include as cost of sales for the X47 contract for the year
ended 30 June 20X4, assuming revenue is based on performance completed?
Select...
$1,800,000
$1,828,000
$1,920,000
$2,000,000

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3
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
2.4
On 31 December 20X3 Tenby sold $100,000 of trade receivables to a factoring company, for
$90,000. If the factor has not collected the debt by 28 February 20X4 they can return the debt
to Tenby.
What is the current asset for the trade receivables in Tenby’s statement of financial
position as at 31 December 20X3?
Select...
$0
$10,000
$90,000
$100,000
2.5

At 1 October 20X1 DX had the following balances in respect of property, plant and
equipment:
$
Cost
$220,000
Tax written down value
$82,500
Statement of financial position:
Carrying amount
$132,000
DX depreciates all property, plant and equipment over five years using the straight line
method and no residual value. All assets were less than five years old at 1 October 20X1. No
assets were purchased or sold during the year ended 30 September 20X2.
The local tax regime allows tax depreciation of 50% on additions to property, plant and
equipment in the accounting period in which they are purchased. In subsequent accounting
periods, tax depreciation of 25% per year of the tax written down value is allowed. Income
tax on profits is at a rate of 25%.
What is the amount for deferred tax in DX’s statement of financial position as at 30
September 20X2 in accordance with IAS 12 Income Taxes?
Select...
$5,843
$6,531
$12,375
$23,375
2.6

The non-current assets of Ealing were as follows:
Cost
Aggregate depreciation
Carrying amount
Start of year
$
180,000
(120,000)
–––––––
60,000
–––––––
End of year
$
240,000
(140,000)
–––––––
100,000
–––––––
During the year non-current assets which had cost $80,000 and had a carrying amount of
$30,000 were sold for $20,000.
4
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
What is the net cash flow in respect of non-current assets for the year?
Select...
$60,000
$40,000
$120,000
$140,000
2.7

The HY group acquired 35% of the equity share capital of SX on 1 July 20X0 paying
$70,000. This shareholding enabled HY group to exercise significant influence over SX.
SX made a profit for the year ended 30 June 20X1 (prior to dividend distribution) of $130,000
and paid a dividend of $80,000 to its equity shareholders.
What is the amount for the investment in associate recognised in HY’s consolidated
statement of financial position at 30 June 20X1?
Select...
$115,500
$98,000
$87,500
$70,000

(14 marks)
3
NUMBER ENTRY
3.1
At 30 September 20X1 the closing inventory of a company has been incorrectly stated at
$386,400. The following items were included in this total at cost:
(1)
1,000 items which had cost $18 each. These items were all sold in October 20X1
for $15 each, and the company incurred $800 of costs to sell the goods.
(2)
Five items which had been purchased for $100 each eight years ago. These items
were sold in October 20X1 for $1,000 each, net of selling expenses.
What is the correct carrying amount of inventory in the company’s statement of
financial position at 30 September 20X1?
$
3.2
BN has an asset that was classified as held for sale at 31 March 20X2. The asset had a
carrying amount of $900 and a fair value of $800. The cost of disposal was estimated to be
$50.
In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, at what amount should the asset be stated in BN’s statement of financial
position as at 31 March 20X2?
$
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5
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
3.3
On 1 January 20X2 LMN issued $2,000,000 8% convertible debt at par. The debt is
repayable, or convertible, at a premium of 10% four years after issue. The effective interest
rate for the debt is 14%. The present values $1 receivable at the end of each year, based on
discount rates of 8%, 10% and 14% are:
8%
10%
14%
End of year 1
0.926
0.909
0.877
2
0.857
0.826
0.769
3
0.794
0.751
0.675
4
0.735
0.683
0.592
What is the finance charge to LMN’s profit or loss (to the nearest $000) for the year
ended 31 December 20X3?
$000
3.4
Salt owns 100% of Pepper. During the year Salt sold goods to Pepper for a sales price of
$1,044,000, generating a margin of 25%. 40% of these goods had been sold on by Pepper to
external parties at the end of the reporting period.
What adjustment for unrealised profit should be made in preparing Salt’s consolidated
financial statements?
$
3.5
Cherry owned 75% of Plum. For the year ended 31 December 20X1 Plum reported a net
profit of $118,000. During 20X1 Plum sold goods to Cherry for $36,000 at cost plus 50%.
At the year-end these goods are still held by Cherry.
What is the non-controlling interest in the consolidated statement of profit or loss for
the year ended 31 December 20X1?
$
3.6
Vaynor acquired 100,000 ordinary shares in Weeton and 20,000 ordinary shares in Yarlet
some years ago. The investment in Yarlet gives Vaynor significant influence.
Extracts from the statements of financial position of the three companies as at 30 September
20X7 are as follows:
Vaynor
Weeton
Yarlet
$000
$000
$000
Ordinary shares of $1 each
500
100
50
Retained earnings
90
40
70
At acquisition the retained earnings of Weeton showed a deficit of $10,000 and of Yarlet a
surplus of $30,000.
What were the consolidated retained earnings of Vaynor on 30 September 20X7?
$000
6
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
3.7
Chartwell has in issue $120,000 of equity share capital (shares of 50 cents each) and 10,000
6% Preference shares of $3 each.
Extracts from the financial statements for the year to 31 March 20X3 are shown below:
Profit before interest and tax
Interest paid
Preference dividend
Taxation
Ordinary dividend
$
528,934
6,578
1,800
125,860
10,800
In accordance with IAS 33 Earnings per Share, what is Chartwell’s basic earnings per
share for the year ended 31 March 20X3?
$
(14 marks)
4
HOT AREA
4.1
Identify, by clicking on the relevant box in the table whether each statement regarding
non-current assets is true or false.
4.2
All non-current assets must be depreciated
TRUE
FALSE
If goodwill is revalued, the revaluation surplus appears in the
statement of changes in equity
TRUE
FALSE
If a tangible non-current asset is revalued, all tangible assets of the
same class should be revalued
TRUE
FALSE
In a company’s published statement of financial position, tangible
assets and intangible assets must be shown separately
TRUE
FALSE
An extract from a statement of cash flows prepared by a trainee accountant is shown below:
$m
28
Profit before taxation
Adjustments for:
Depreciation
(9)
––
19
3
(4)
(8)
––
10
—
Operating profit before working capital changes
Decrease in inventories
Increase in receivables
Increase in payables
Cash generated from operations
Identify which of the following criticisms of this extract are correct.
Depreciation charges should have been added, not deducted
CORRECT
INCORRECT
Decrease in inventories should have been deducted, not added
CORRECT
INCORRECT
Increase in receivables should have been added, not deducted
CORRECT
INCORRECT
Increase in payables should have been added, not deducted
CORRECT
INCORRECT
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7
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
4.3
4.4
4.5
Identify, by clicking on the relevant box in the table whether each statement regarding
financial information is true or false.
Faithful representation means that the legal form of a transaction
must be reflected in financial statements, regardless of the
economic substance
TRUE
FALSE
Under the recognition concept only items capable of being
measured in monetary terms can be recognised in financial
statements
TRUE
FALSE
It may sometimes be necessary to exclude information that is
relevant and reliable from financial statements because it is too
difficult for some users to understand
TRUE
FALSE
Information is material if it exceeds a quantitative threshold; any
transaction that does not exceed that threshold does not need to be
disclosed
TRUE
FALSE
Indicate which of the following items should be included in the cost of inventory of a
service provider and which items excluded.
Salary of staff engaged in the service contract
INCLUDED
EXCLUDED
Profit margin factored into the contract price
INCLUDED
EXCLUDED
Depreciation of office computer used by staff engaged on contract
INCLUDED
EXCLUDED
Salary of sales staff who negotiated the service contract
INCLUDED
EXCLUDED
Identify, by clicking on the relevant box in the table the correct purposes of holding
investment properties in accordance with IAS 40 Investment Property is true or false.
For administrative purposes
CORRECT
INCORRECT
For use in the supply of services
CORRECT
INCORRECT
For use in the production of goods
CORRECT
INCORRECT
To earn rental income
CORRECT
INCORRECT
For capital appreciation
CORRECT
INCORRECT
(10 marks)
8
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
5
HOT SPOT
5.1
The following information relate to Cookie for the year ended 31 March 20X6.
Profit before tax
$127,000
Increase in receivables
$29,200
Depreciation
$16,000
Decrease in payables
$7,100
Proceeds on disposal of machinery
Loss on disposal
$24,000
$5,000
Decrease in inventory
$18,500
Investment income
$3,200
Interest paid
$8,400
Finance costs
$7,800
Tax paid
$26,400
The graph below represents the trend in Cookie’s cash generated from operations since
20X3. Calculate the cash generated from operations for the year ended 31 March 20X6
and click on the graph to identify its position.
$000
160
120
80
40
X3
X4
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X5
X6
9
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
5.2
The following information relates to Broady’s trade receivables, sales revenue and cost of
sales for the year ended 31 March 20X6.
$000
$100
$2,528
$1,650
$166
Opening receivables
Sales revenue (of which 80% are credit sales)
Cost of sales (all on credit)
Closing receivables
The graph below represents the trend in Broady’s average trade receivable collection
period since 20X3. Calculate the average trade receivable collection period for the year
ended 31 March 20X6 and click on the graph to identify its position.
Days
60
50
40
30
20
10
X3
X4
X5
X6
(4 marks)
10
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
6
ENHANCED MATCHING
6.1
In 20X3 Angry revalued at $360,000 a plot of land which had been purchased in 20X1 for
$300,000 and recognised a revaluation gain of $60,000.
In 20X4 Angry revalued to $130,000 a second plot of land which had been purchased for
$100,000 in 20X2 and recognised a further revaluation gain of $30,000.
In 20X5 Angry wishes to write down the value of the first plot of land from $360,000 to
$260,000 because of an impairment in its value due to changes in market prices.
There have been no other movements on the revaluation surplus.
Match the amounts to be recognised in profit or loss and other comprehensive income
for 20X5 for the impairment loss.
Amount
Profit or loss
Nil
Other comprehensive income
$10,000
$40,000
$60,000
$90,000
$100,000
6.2
On 1 October 20X3, Bertrand issued $10 million convertible loan notes which carry a
nominal interest (coupon) rate of 5% per annum. The loan notes are redeemable on 30
September 20X6 at par for cash or can be exchanged for equity shares. A similar loan note,
without the conversion option, would have required Bertrand to pay an interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 5% and
8%, can be taken as:
End of year
1
2
3
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5%
0.95
0.91
0.86
8%
0.93
0.86
0.79
11
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
Match the amounts that will be recognised as equity and non-current liability in respect
of the convertible loan in Bertrand’s statement of financial position on initial
recognition (1 October 20X3).
Amount
Equity
Nil
Non-current liability
$40,000
$810,000
$9,190,000
$9,960,000
$10,000,000
6.3
Indicate which of the following events between the end of the reporting period and the
date the financial statements are authorised for issue are adjusting events and which are
non-adjusting events.
Events
The sale of inventory with a carrying amount of $96,000 for $74,000
The discovery of a fraud affecting the previous three years’ financial statements
The identification of an amount to be paid to employees as part of a profit sharing scheme
The announcement of changes in tax rates
Changes in foreign exchanges rates relating to foreign currency monetary balances held
The announcement of a restructuring involving closure of a major business segment
Adjusting
12
Non-adjusting
©2017 DeVry/Becker Educational Development Corp. All rights reserved.
OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
6.4
IAS 32 Financial Instruments: Presentation classifies issued shares as either equity
instruments or financial liabilities.
Match the following instruments to their correct classification in the statement of
financial position.
Instrument
A preference share that is redeemable for cash at a 10% premium in five years’ time
An equity share which is not redeemable and has no restrictions on receiving dividends
A loan note that is redeemable at par in seven years’ time
An irredeemable loan note that pays interest at 7% a year
Equity
6.5
Non-current liability
Identify which of the following situations would indicate that an entity has control or
has significant influence over another entity.
Situations
The company has a 40% shareholding and shares any technical expertise with the other
company
The company owns 100% of preference shares and 10% of the equity shares
The company owns 40% of the ordinary shares and also has an agreement with another 40%
of the owners of ordinary shares that they will always vote with the company
The company owns 30% of the ordinary shares and has the ability to control the board of
directors
Control
Significant influence
(10 marks)
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13
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
OT CASES
Question 1 ESP
The following scenario relates to questions 1–5.
ESP acquired an item of equipment at a cost of $800,000 on 1 April 20X5 that is used to produce and
package medicines. The equipment had an estimated residual value of $50,000 and an estimated life of
five years, neither of which has changed. ESP uses straight-line depreciation. On 31 March 20X7, ESP
was informed by a major customer (who buys products produced by the equipment) that it would no
longer be placing orders with ESP. Even before this information was known, ESP had been having
difficulty finding work for this equipment. It now estimates that net cash inflows earned from the
equipment for the next three years will be:
Year ended:
31 March 20X8
31 March 20X9
31 March 20Y0
$000
220
180
170
On 31 March 20Y0, the equipment is still expected to be sold for its estimated residual value.
ESP has confirmed that there is no market in which to sell the equipment at 31 March 20X7.
ESP’s cost of capital is 10% and the following values should be used:
Value of $1 at:
End of year 1
End of year 2
End of year 3
1
$
0.91
0.83
0.75
What is the value in use of the item of equipment as at 31 March 20X7?
Select... 
$620,000
$570,000
$514,600
$477,100
2
What is the carrying amount of the equipment immediately prior to the impairment test
at 31 March 20X7?
A
B
C
D
14
$480,000
$500,000
$450,000
$650,000
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
3
ESP has a wholly-owned subsidiary, Tilda, which is a cash generating unit. On 31 March
20X7, an explosion damaged some of Tilda’s plant. Tilda’s assets immediately before the
explosion were:
$000
Goodwill
1,800
Factory building
4,000
Plant
3,500
Trade receivables and cash
1,500
––––––
10,800
––––––
As a result of the explosion, the recoverable amount of Tilda is $5.5 million.
The explosion completely destroyed an item of plant that had a carrying amount of $500,000.
What is the carrying amount of Tilda’s plant after accounting for the impairment loss?
$000
4
Which of the following assets must be tested annually for impairment in accordance
with IAS 36 Impairment of Assets?
A footballer acquired by a football club on an initial contract of four years
Software that has met the capitalisation criteria but has yet to be fully completed
An operating license for an international air route granted by government which is
stated to have an indefinite life while the current government is in power
A patent registered in a jurisdiction under which all patents are granted for five years
5
Which of the following cash flows will not be included in the calculation of an asset’s
value in use in accordance with IAS 36 Impairment of Assets?
(1)
(2)
The cost of adding solar panels to the factory roof to reduce heating and power costs
The annual maintenance costs relating to the machinery located in the factory.
A
B
C
D
1 only
2 only
Both 1 and 2
Neither 1 or 2
(10 marks)
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15
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
Question 2 RANGOON
The following scenario relates to questions 1–5.
Rangoon has a financial year end of 31 December. Rangoon has entered into a number of foreign
currency transactions during the last two years, including the following:
Transaction 1
On 1 January 20X5 Rangoon purchased an investment property in a foreign country for Krown
7,650,000. The property has an expected useful life of 40 years and Rangoon has adopted a policy that
reflects the current valuation of the asset, in accordance with IAS 40 Investment Property. The fair
value of the property at 31 December 20X5 had fallen to Krown 7,430,000 and at 31 December 20X6 it
had increased to Krown 8,100,000.
Transaction 2
On 28 November 20X6 Rangoon purchased raw materials from a foreign company for Krown 528,000.
The materials were to be used in the construction of an asset for Rangoon’s own use. At 31 December
20X6 Rangoon had not paid for these raw materials.
Exchange rates are as follows:
1 January 20X5
31 December 20X5
28 November 20X6
31 December 20X6
Average for 20X6
1
$1 = Krown 5.12
$1 = Krown 4.99
$1 = Krown 5.88
$1 = Krown 6.02
$1 = Krown 5.66
In accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates which of
the following factors will determine an entity’s functional currency?
The currency that mainly influences the selling price of goods and services
The currency of the country in which the head office of the entity is located
The currency that the majority of an entity’s input costs are denominated in
The currency that is voted on by shareholders at an entity’s annual general meeting
2
What gain or loss will be recognised in Rangoon’s statement of profit or loss and other
comprehensive income for the year ended 31 December 20X6 in respect of the
investment property?
A
B
C
D
16
$143,463 gain
$5,163 gain
$5,163 loss
$143,463 loss
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
3
What is Rangoon’s trade payable as at 31 December 20X6 in respect of the purchase of
raw materials?
Select... 
$89,796
$87,708
$93,283
$3,178,560
4
Where in the statement of profit or loss and other comprehensive income will gains of
losses for the two transactions be recognised?
A
B
C
D
5
Transaction 1
Profit or loss
Profit or loss
Other comprehensive income
Other comprehensive income
Transaction 2
Profit or loss
Other comprehensive income
Profit or loss
Other comprehensive income
Identify in which of the following circumstances an entity must change its functional
currency.
When shareholders vote for a change at annual general meeting
CHANGE
NO CHANGE
The functional currency can never be changed
CHANGE
NO CHANGE
When the underlying conditions that led to the original
classification changes
CHANGE
NO CHANGE
When the currency suffers from a devaluation
CHANGE
NO CHANGE
(10 marks)
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17
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
Question 3 REBOUND
The following scenario relates to questions 1–5.
The following summarised information is available in relation to Rebound, a publicly listed company:
Statement of profit or loss extracts years ended 31 March
20X6
20X5
Continuing Discontinued Continuing Discontinued
$000
$000
$000
$000
Profit after tax
Existing operations
Operations acquired
on 1 August 20X5
2,000
(750)
450
1,750
600
nil
Analysts expect profits from the market sector in which Rebound’s existing operations are based to
increase by 6% in the year to 31 March 20X7 and by 8% in the sector of its newly acquired operations.
On 1 April 20X4 Rebound had:


$3 million of equity share capital (shares of 25 cents each);
$5 million 8% convertible loan notes 20Y1; the terms of conversion are 40 equity shares in
exchange for each $100 of loan notes. Assume an income tax rate of 30%.
On 1 October 20X5 the directors of Rebound were granted options to buy 2 million shares in the
company for $1 each. The average market price of Rebound’s shares for the year ending 31 March
20X6 was $2.50 each.
1
Based on the above information what will be Rebound’s estimated profit after tax for
the year ended 31 March 20X7?
$000
2
In accordance with IAS 33 Earnings per Share, what is Rebound’s basic earnings per
share for the year ended 31 March 20X6?
Select... 
$0.14
$0.57
$0.20
$0.82
3
What is the adjustment to the basic earnings per share profit for interest on convertible
loan notes for the calculation of diluted earnings per share?
A
B
C
D
18
Interest after tax saved is added back
Interest after tax saved is deducted
Interest before tax saved is added back
Interest before tax saved is deducted
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
4
What number of shares should be used in the calculation of Rebound’s diluted earnings
per share for 20X6?
A
B
C
D
5
12,000,000
14,000,000
14,600,000
12,600,000
Which of the following transactions should be treated as a discontinued operation in
accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations?
One of 20 factories used by Rebound is in the process of being closed down; the
factory generates 2% of Rebound’s total revenue
Ceasing the manufacture of one of Rebound’s three main product lines which creates
employment for 40% of the entity’s workforce
Subsidiary Gentry which was acquired two months ago; on acquisition it was intended
to resell the subsidiary as soon as possible
A major item of machinery is to be replaced at an expected cost of $1.1 million which
represents 10% of Rebound’s total assets
(10 marks)
Question 4 SKEPTIC
The following scenario relates to questions 1–5.
The following issues have arisen during the preparation of Skeptic’s draft financial statements for the
year ended 31 March 20X6:
(i)
Presentation
From 1 April 20X5, the directors have decided to reclassify research and amortised
development costs as administrative expenses rather than its previous classification as cost of
sales. They believe that the previous treatment unfairly distorted the company’s gross profit
margin.
(ii)
Potential liabilities
Skeptic has two potential liabilities to assess. The first is an outstanding court case
concerning a customer claiming damages for losses due to faulty components supplied by
Skeptic. The second is the provision required for product warranty claims against 200,000
units of retail goods supplied with a one-year warranty.
The estimated outcomes of the two liabilities are:
Court case
10% chance of no damages awarded
65% chance of damages of $4 million
25% chance of damages of $6 million
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Product warranty claims
70% of sales will have no claim
20% of sales will require a $25 repair
10% of sales will require a $120 repair
19
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
(iii)
Government grant
On 1 April 20X5, Skeptic received a government grant of $8 million towards the purchase of
new plant. The plant has an estimated life of 10 years and is depreciated on a straight-line
basis. One of the terms of the grant is that the sale of the plant before 31 March 20X9 would
trigger a repayment on a sliding scale as follows:
Sale in the year ended
31 March 20X6
31 March 20X7
31 March 20X8
31 March 20X9
Amount of repayment
100%
75%
50%
25%
Skeptic accounts for government grants as a separate item of deferred credit in its statement
of financial position. Skeptic has no intention of selling the plant before the end of its
economic life.
1
How is the change in accounting for research and development costs to be accounted for
in the financial statements for the year ended 31 March 20X6?
A
B
C
D
2
As a change in accounting policy requiring retrospective application
As a change in estimate requiring prospective application
As a prior period error requiring retrospective application
As the adoption of a new accounting policy requiring prospective application
What is the liability to be recognised, in respect of the court case, as at 31 March 20X6?
$ million
3
What is the provision which Skeptic would report in its statement of financial position
as at 31 March 20X6 in respect of the product warranty claims?
Select... 
$3.4 million
Nil
$17
$24 million
4
What amount of government grant should be credited to profit or loss for the year
ended 31 March 20X6?
A
B
C
D
20
$8 million
$800,000
$2 million
$Nil
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
5
Skeptic is about to dispose of an equity investment in another entity which is measured at fair
value through other comprehensive income. Skeptic expects to make a gain on disposal; a
cumulative fair value gain has already been recognised over the period of holding this asset.
What is the accounting treatment of the gains in the year of disposal in accordance with
IFRS 9 Financial Instruments?
Accounting treatment
Credit profit or loss
Gain on disposal
Cumulative gain
Credit other comprehensive income
Credit retained earnings
Reclassify to profit or loss
Do not reclassify to profit or loss
Transfer to separate component of
equity
(10 marks)
Question 5 CANDY
The following scenario relates to questions 1–5.
The following is an extract of Candy’s trial balance as at 30 September 20X6:
$000
Proceeds of 5% loan (note (i))
Land ($5 million) and buildings – at cost (note (ii))
Plant and equipment – at cost (note (ii))
Accumulated depreciation at 1 October 20X5:
buildings
plant and equipment
Deferred tax (note (iii))
Interest payment (note (i))
Current tax (note (iii))
$000
30,000
55,000
60,500
20,000
36,500
2,600
1,500
1,000
The following notes are relevant:
(i)
The loan note was issued on 1 October 20X5 and incurred issue costs of $1 million which
were charged to profit or loss. Interest of $1.5 million ($30 million at 5%) was paid on 30
September 20X6. The effective interest rate of the loan note is 9% per annum.
(ii)
Non-current assets:
The directors revalued the land at $8 million and the buildings at $39 million on 1 October
20X5, based on an independent valuer’s report. The remaining life of the buildings at 1
October 20X5 was 15 years.
Plant and equipment is depreciated at 12½% per annum using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30
September 20X6.
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21
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
(iii)
A provision of $2.3 million is required for current income tax on the profit of the year to 30
September 20X6. The balance on current tax in the trial balance is the under/over provision of tax
for the previous year. At 30 September 20X6 the provision for deferred tax is $2.94 million.
1
What is the depreciation expense in respect of property, plant and equipment that is
recognised in Candy’s statement of profit or loss for the year ended 30 September 20X6?
A
B
C
D
2
$5,600,000
$6,133,333
$10,162,500
$6,333,333
What is the tax expense in Candy’s profit or loss for the year ended 30 September 20X6?
$000
3
What is the carrying amount of the loan note in Candy’s statement of financial position
as at 30 September 20X6?
A
B
C
D
4
$30,110,000
$31,500,000
$30,500,000
$31,110,000
Which of the following financial assets can be classified at fair value through other
comprehensive income?
Preference shares acquired
Equity shares that are not held for trading
Loan asset held for contractual cash flows and proceeds from sale
Treasury shares purchased from stock market
5
Match each of the following to the correct classification of temporary differences in
accordance with IAS 12 Income Taxes.
Temporary difference
Interest receivable where taxation is assessed on a cash basis
Financial asset carried at fair value, where fair value has fallen since acquisition
Provision for warranty charges where tax authority gives benefit only when cash is paid
Convertible loan note where tax authority does not recognise the distinction between debt
and equity for accounting purposes
Taxable temporary difference
Deductible temporary difference
(10 marks)
22
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
OBJECTIVE TEST ANSWERS
1
MULTIPLE RESPONSE
1.1
The $150,000 dividend was shown in the notes to the financial statements at 31
October 20X5
The dividend is shown as a deduction in the statement of changes in equity for the year
ended 31 October 20X6
Tutorial note: Dividends are generally accounted for when paid; a disclosure note could be
made in the 20X5 financial statements.
1.2
Property held for long-term capital appreciation
Land held for an undetermined future use
Tutorial note: The items are mentioned as examples of investment property in IAS 40.
1.3
Changing the valuation method of inventory from first-in first-out to weighted average
Classifying rental income as a deduction from cost of sales in the statement of profit or
loss, having previously classified it as other operating income
Tutorial note: All other items are changes in estimate.
1.4
Under equity accounting only the group’s share of the net assets of an associate is
reflected on the consolidated statement of financial position
An entity has a choice when it comes to valuing the non-controlling interest of a
subsidiary
Tutorial note: The consolidated statement of financial position includes 100% of every asset
of the subsidiary. Only the parent’s share capital is included in the consolidated statement of
financial position.
1.5
Interchange of management personnel
Participation in decisions about dividends
Provision of essential technical information
Tutorial note: More than half of the voting power constitutes control; as does other parties
agreeing to use their votes in your favour. The three other items are all indicators of
significant influence mentioned in IAS 28 Investment in Associates and Joint Ventures.
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1001
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
1.6
A foreign currency denominated payable
A dividend due from the holding of a foreign equity investment
Tutorial note: The foreign denominated payable and the dividend receivable are both
monetary items which must be retranslated at the reporting date.
1.7
The issue during the year of a convertible (to equity shares) loan note
The granting during the year of directors’ share options exercisable in three years’ time
Tutorial note: The issue of the convertible loan note and the granting of share options need
to be reflected in the diluted EPS calculation; the other two items would have been reflected
already in the basic EPS calculation.
2
PULL-DOWN LIST
2.1
Profit for the year
Unrealised surplus on revaluation of properties (135 – 60)
Total comprehensive income
$000
183
75
––––
258
––––
Tutorial note: Dividends are deducted from retained earnings; prior period adjustments are
dealt with in the statement of changes in equity.
2.2
$1,400,000. Only the fraud relating to the current year should be expensed against profit or
loss; the remainder will be a prior period adjustment against retained earnings and will be
presented in the statement of changes in equity.
2.3
$000
2,000
1,200
––––––
3,200
––––––
Costs to date (1,800 + 200)
Estimated costs to completion
Costs to profit or loss = 3,200,000 × 2,520 = $1,920,000
4,200
2.4
$100,000. The risks and rewards have not been transferred by Tenby as it still bears the risk
of default. The substance of the contract is that of a financing arrangement and therefore the
trade receivables should still be recognised in full.
2.5
Carrying amount in the accounting records (132,000 – 44,000) is $88,000.
Tax base (82,500 – 20,625) is $61,875.
Difference (26,125 × 25%) is $6,531.
1002
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
2.6
Non-current asset cash flows
Proceeds on sale of non-current asset
Purchase of non-current assets (240 + 80 – 180)
$000
20
(140)
––––
120
––––
Net cash outflow
2.7
$000
70
45.5
(28)
––––––
87.5
––––––
Original investment
Share of profit for year
Less share of dividend paid
Value of investment in SX
3
NUMBER ENTRY
3.1
386,400 – 3,800 (loss on (1)) = $
3.2
IFRS 5 requires non-current assets held for sale to be measured at the lower of carrying
382600
750
amount (900) and fair value less costs to sell (800 – 50) = $
3.3
PV of future cash flows using effective interest rate of 14%:
$000
1,302
466
––––––
1,768
248
(160)
––––––
1,855
––––––
Principle ($2,200 × 0.592)
Annual interest ($160 × 2.913)
Interest expense 20X2 ($1,768 × 14%)
Cash flow
Balance 31 December 20X2
Interest expense 20X3 ($1,855 × 14%)
260
3.4
$000
1,044
783
——
261
——
Sales value
Cost of sales
Profit
$000
%
100
75
——
25
——
Tutorial note: Margin is “on sales” therefore sales value is 100%. If margin is 25%, cost is
75%.
Unrealised profit in inventory is $261,000 × 60% = $156,600
Alternatively: (60% × $1,044,000) × 25/100 = $
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156600
1003
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
3.5
$
29,500
(3,000)
––––––
Share of consolidated profit (25% × 118,000)
Less Share of unrealised profit (25% × 36,000 × 50/150)
26500
––––––
3.6
3.7
Consolidated retained earnings
Vaynor
Weeton ((40 + 10) × 100%)
Yarlet ((70 – 30) × 40%)
$000
90
50
16
––––
156
––––
Profit for year $394,696 (528,934 – 6,578 – 1,800 – 125,860) divided by number of ordinary
shares in issue of 240,000 gives $
1.64
Tutorial note: The calculation is based on profit for the year (i.e. after interest, which
includes the preference dividend and taxation).
4
HOT AREA
4.1
All non-current assets must be depreciated
FALSE
If goodwill is revalued, the revaluation surplus appears in the
statement of changes in equity
FALSE
If a tangible non-current asset is revalued, all tangible assets of the
same class should be revalued
TRUE
In a company’s published statement of financial position, tangible
assets and intangible assets must be shown separately
TRUE
Tutorial note: There is no requirement to depreciate land and goodwill cannot be revalued.
4.2
Depreciation charges should have been added, not deducted
Decrease in inventories should have been deducted, not added
INCORRECT
Increase in receivables should have been added, not deducted
INCORRECT
Increase in payables should have been added, not deducted
1004
CORRECT
CORRECT
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
4.3
Faithful representation means that the legal form of a transaction
must be reflected in financial statements, regardless of the
economic substance
Under the recognition concept only items capable of being
measured in monetary terms can be recognised in financial
statements
FALSE
TRUE
It may sometimes be necessary to exclude information that is
relevant and reliable from financial statements because it is too
difficult for some users to understand
FALSE
Information is material if it exceeds a quantitative threshold; any
transaction that does not exceed that threshold does not need to be
disclosed
FALSE
4.4
Salary of staff engaged in the service contract
INCLUDED
Profit margin factored into the contract price
EXCLUDED
Depreciation of office computer used by staff engaged on contract
INCLUDED
Salary of sales staff who negotiated the service contract
EXCLUDED
Tutorial note: IAS 2 states that costs of those staff engaged in the service contract and any
attributable overheads are included in the cost of inventory. A profit margin and sales staff
costs are specifically identified as costs that should be expensed as incurred.
4.5
For administrative purposes
INCORRECT
For use in the supply of services
INCORRECT
For use in the production of goods
INCORRECT
To earn rental income
CORRECT
For capital appreciation
CORRECT
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1005
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
5
HOT SPOT
5.1
Cash generated from operations
$000
160
120
80
40
X3
X4
X5
X6
WORKING
Profit before tax
Depreciation
Loss on disposal of machinery
Investment income
Finance costs
Increase in receivables
Decrease in payable
Decrease in inventory
Interest paid
Tax paid
$
127,000
16,000
5,000
(3,200)
7,800
(29,200)
(7,100)
18,500
(8,400)
(26,400)
————
100,000
————
Tutorial note: The sale proceeds are irrelevant in cash generated from operations
1006
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
5.2
Average trade receivables collection period
Days
60
50
40
30
20
10
X3
X4
X5
X6
WORKING
Average trade receivable days = ½ ($100,000 + $166,000) = $133,000
Credit sales = $2,528,000 × 80% = $2,022,400
Collection period = ($133,000 ÷ $2,022,400) × 365 = 24 days
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1007
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
6
ENHANCED MATCHING
6.1
Profit or loss
Other comprehensive
income
$40,000
$60,000
Tutorial note: For a revalued asset an impairment is debited to other comprehensive income
to the extent of the revaluation surplus on the asset, with any excess loss expensed to profit or
loss. The surplus on any other revalued asset cannot be used for the impairment of a different
asset.
6.2
Equity
Non-current liability
$810,000
$9,190,000
WORKING
Year ended
30 September
Cash flow
$000
500
500
10,500
20X4
20X5
20X6
Value of debt component
Difference – value of equity option component
Proceeds
Discount Discounted
rate
cash flows
At 8%
$000
0·93
465
0·86
430
0·79
8,295
––––––
9,190
810
––––––
10,000
––––––
6.3
Adjusting events
1008
Non-adjusting events
The sale of inventory with a carrying amount
of $96,000 for $74,000
The announcement of changes in tax rates
The discovery of a fraud affecting the
previous three years’ financial statements
Changes in foreign exchanges rates relating
to foreign currency monetary balances held
The identification of an amount to be paid to
employees as part of a profit sharing scheme
The announcement of a restructuring
involving closure of a major business
segment
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
6.4
Equity
An equity share which is not redeemable and
has no restrictions on receiving dividends
Non-current liability
A preference share that is redeemable for
cash at a 10% premium in five years’ time
A loan note that is redeemable at par in
seven years’ time
An irredeemable loan note that pays interest
at 7% a year
6.5
Control
Significant influence
The company owns 40% of the ordinary
shares and also has an agreement with
another 40% of the owners of ordinary
shares that they will always vote with the
company
The company has a 40% shareholding and
shares any technical expertise with the other
company
The company owns 30% of the ordinary
shares and has the ability to control the board
of directors
The company owns 100% of preference
shares and 10% of the equity shares
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1009
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
OT CASES
Answer 1 ESP
Item
Answer Justification
1
Value in use
$000
200.2
149.4
165
––––––
514.6
––––––
Year 1 = 220 × 0.91
Year 2 = 180 × 0.83
Year 3 = (170 + 50) × 0.75
Tutorial note: Do not forget to include sale proceeds of $50,000 in year 3.
2
B
Carrying amount
Annual depreciation (800 – 50) ÷ 5years
Carrying amount at end of year 2 (800 – (150 × 2))
$000
150
500
3
Goodwill
Factory
Plant
Receivables and cash
Per
question
$000
1,800
4,000
After plant
write off
$000
1,800
4,000
3,500
1,500
––––––
10,800
––––––
3,000
1,500
––––––
10,300
––––––
Write off in full
Pro rata loss of 4/7
Pro rata loss of 3/7
Realisable value
Value in use
After impairment
losses
$000
–
2,286
1714
1,500
––––––
5,500
––––––
Tutorial note: The plant with a carrying amount of $500,000 that has been
damaged to the point of no further use should be written off (it no longer meets the
definition of an asset). After this:
(1)
(2)
goodwill is written off in full;
Any remaining impairment loss is written off the remaining assets pro rata
to their carrying amounts, except that no asset should be written down to
less than its fair value less costs to sell (net realisable value).
That is, after writing off the damaged plant the remaining impairment loss is $4·8m
(10.3 – 5.5) of which $1·8m is applied to the goodwill and the remaining $3.0m is
apportioned pro rata (3 ÷ (4 + 3)) to the factory and the remaining plant.
1010
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
4
Software that has met the capitalisation criteria but has yet to be fully completed
An operating license for an international air route granted by government which is
stated to have an indefinite life while the current government is in power
Tutorial note: IAS 38 requires intangible assets not yet ready for use and intangible assets
with an indefinite life to be tested annually for impairment, they are not amortised.
5
A
The addition of the solar panels is an enhancing cost and would not be included in
cash flows for the calculation of value in use in accordance with IAS 38.
Answer 2 RANGOON
Item
Answer Justification
1
The currency that mainly influences the selling price of goods and services
The currency that the majority of an entity’s input costs are denominated in
Tutorial note: IAS 21 states that functional currency should be determined by the currency in
which an entity sells its product and in which it incurs its input costs.
2
D
Carrying amount at fair value in accordance with IAS 40:
1 January 20X6 (Krown 7,430,000 ÷ $4.99)
31 December 20X6 (Krown 8,100,000 ÷ $6.02)
Change in value
3
4
$
1,488,978
1,345,515
––––––––
143,463 loss
––––––––
Carrying amount 31 December 20X6 = Krown 528,000 ÷ $6.02 = $87,708
A
Gains and losses on the translation of foreign denominated monetary balances are
presented in profit or loss
5
When shareholders vote for a change at annual general meeting
NO CHANGE
The functional currency can never be changed
NO CHANGE
When the underlying conditions that led to the original
classification changes
When the currency suffers from a devaluation
CHANGE
NO CHANGE
Tutorial note: A change in functional currency only occurs if the underlying economic
conditions change.
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1011
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
Answer 3 REBOUND
Item
Answer Justification
1
Estimated profit after tax for the year ending 31 March 20X7:
Existing operations (continuing only) ($2 million × 1·06)
Newly acquired operations ($450,000 × 12/8 months × 1·08)
$000
2,120
729
–––––
2849
–––––
2
Basic earnings per share
Profit = 2,000 + 450 – 750 = 1,700
Shares = $3,000 ÷ $0.25 = 12,000
EPS = $0.14
3
A
Interest after tax is added back to the profit figure as if debt is converted interest
will no longer be payable, and interest is tax deductible.
4
C
Weighted average number of shares (000)
At 1 April 20X4
(3,000 × 4 (i.e. shares of $0.25 each))
Convertible loan stock ($5,000 ÷ 100 × 40)
Share options (see tutorial note)
12,000
2,000
600
––––––
14,600
––––––
Tutorial note: Exercising the options would create proceeds of $2m. At the market
price of $2·50 each this would buy 800,000 shares ($2m ÷ $2·50). The diluting
number of shares is therefore 1·2 million. This would be weighted for 6/12 in 20X6
as the grant was half way through the year.
5
Ceasing the manufacture of one of Rebound’s three main product lines which creates
employment for 40% of the entity’s workforce
Subsidiary Gentry which was acquired two months ago; on acquisition it was intended
to resell the subsidiary as soon as possible
Tutorial note: As the factory only generates 2% of revenue this would not be seen as a major
part of the business; although the machine is a material asset it is not a separate line of the
business or a geographical area of operations.
1012
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OBJECTIVE TEST QUESTION PRACTICE – FINANCIAL REPORTING (F7)
Answer 4 SKEPTIC
Item
1
Answer Justification
A
2
A change of classification in presentation is a change in accounting policy under
IAS 8 and must be applied retrospectively.
For a single possible outcome the best estimate is the most likely outcome. In this
case the most likely outcome (with a 65% probability) is damages of 4 $ million.
3
Where measurement of a provision involves a large population of items then an
“expected value” model should be used. The expected value of repair costs on the
sale of a unit is $17 (($0 × 70%) + ($25 × 20%) + ($120 × 10%))
The provision required for the sale of 200,000 units is therefore $3.4 million ($17 ×
200,000).
4
B
The government grant is credited to profit and loss in the same manner as the
depreciation of the related asset. In this case the asset is being depreciated on a
straight line basis over 10 years. Therefore the grant is credited to profit or loss at
$800,000 each year ($8 million ÷ 10).
5
Gain on disposal
Credit other comprehensive income
Cumulative gain
Do not reclassify to profit or loss
Tutorial note: As the asset is classified at fair value through other comprehensive income the
gain on disposal is taken to other comprehensive income. IFRS 9 does not allow the
reclassification of the cumulative gain to profit or loss but a reserve transfer to retained
earnings can be made.
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1013
FINANCIAL REPORTING (F7) – OBJECTIVE TEST QUESTION PRACTICE
Answer 5 CANDY
Item
1
Answer Justification
A
Land
Buildings ($39m × 1/15 years)
Plant and equipment ($60.5m – $36.5m) × 12.5%
Total
2
$000
nil
2,600
3,000
––––––
5,600
––––––
$000
2,300
(1,000)
340
–––––
Estimated expense for current year
Over provision prior year
Increase in deferred tax (2,940 – 2,600)
1640
–––––
3
A
$000
29,000
2,610
(1,500)
––––––
30,110
––––––
Initial amount recognised (30 – 1)
Interest at 9%
Interest paid at 5%
4
Equity shares that are not held for trading
Loan asset held for contractual cash flows and proceeds from sale
Tutorial note: Equity shares that are not held for trading may, on initial recognition, be
designated at fair value through other comprehensive income. Loan assets held for their
contractual cash flows and selling financial assets must be classified at fair value through
other comprehensive income.
5
Taxable temporary difference
Deductible temporary difference
Interest receivable where taxation is assessed
on a cash basis
Financial asset carried at fair value, where
fair value has fallen since acquisition
Provision for warranty charges where tax
authority gives benefit only when cash is
paid
Convertible loan note where tax authority
does not recognise the distinction between
debt and equity for accounting purposes
Tutorial note: Interest receivable, where taxed on a cash basis, will generate a taxable
temporary difference. In the financial accounts the liability element of the loan will be less
than the tax base of the liability as, under financial accounting, some of the loan is classified
as equity.
1014
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