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December 2012 examination
P1. Financial Accounting and IFRS for SMEs
Instructions to candidates
1. Time allowed is 3 hours and 10 minutes, which includes 10 minutes
reading time.
2. This is a closed book examination.
3. Use of a silent, non-programmable calculator, which is NOT part of a
mobile phone or any other device capable of communication, is allowed.
4. Put your candidate number on the top of each answer page.
5. Start each new question on a new page.
6. Include any workings.
Answer ALL QUESTIONS
Section A: 3 questions with 10 marks available per question (total 30 marks)
Section B: 2 questions with 20 marks available per question (total 40 marks)
Section C: 1 question with 30 marks available
©IFA Financial accounting and IFRS for SMEs December 2012
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Section A
Question 1
Required:
(a) Explain the concept of deferred tax.
(3 marks)
PQR made a profit of $2 million in its first year of trading. It also bought assets worth
$5 million when it commenced trading. During the year it provided depreciation on these
assets of $0.5 million. The tax allowance on these assets is $1.2 million for the year and the
rate of income tax to be applied is 25%.
Required:
(b) Using the above information, calculate the total tax to be charged in the Statement of
Comprehensive Income for the year and the balance of deferred tax to be shown in the
Statement of Financial Position at the end of the year.
(7 marks)
(Total 10 marks)
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Question 2
You are the Finance Director of Low company which is carrying out a construction contract for
High company. The following information in respect of this contract is available for Low
company.
Date work commenced on contract
Expected completion date
01.01.2011
31.12.2012
$
Final contract price
Costs to 30.09.2012
Value of work certified to 30.09.2012
Progress billings 30.09.2012
Cash received 30.09.2012
Estimated costs to completion
570,000
460,000
515,150
500,000
485,000
38,560
Required:
Using the above information show the entries in the Statement of comprehensive income
and Statement of financial position for the year ended 30 September 2012.
(Total 10 marks)
©IFA Financial accounting and IFRS for SMEs December 2012
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Question 3
You are the Finance Director of LLY company and your Chief Executive has asked you to
explain to the Board of Directors the four qualitative characteristics of useful information
identified in the IFRS for SMEs.
Required:
Explain, using examples, the four qualitative characteristics of useful information: relevant,
reliable, understandable and comparable.
(Total 10 marks)
©IFA Financial accounting and IFRS for SMEs December 2012
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©IFA Financial accounting and IFRS for SMEs December 2012
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Section B
Question 4
On 1 October 2011 QRS company acquired an 80% holding in LMN company. The draft
Statements of financial position of QRS and LMN at 30 September 2012 are as follows:
QRS Co
$000
Non-current assets:
Patents
Land
Property, plant and equipment
Investment in LMN
Current assets:
Inventory
Trade receivables
Bank
Total assets
Equity:
Ordinary $1 shares
Revaluation reserve
Retained earnings
Non-current liabilities:
Loan notes
Current liabilities
©IFA Financial accounting and IFRS for SMEs December 2012
1,500
2,215
640
4,355
LMN Co
$000
325
133
412
870
856
892
375
2,123
6,478
395
381
156
932
1,802
2,500
490
1,824
4,814
750
655
1,405
250
1,414
100
297
6,478
1,802
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The following information is also available:
(a) The retained earnings of LMN at the acquisition date were $495,000.
(b) The consideration paid by QRS for the 80% share of LMN comprised cash $640,000 and
800,000 50c shares with a fair value at 1 October 2011 of $1.30. The Accountant has not
yet entered this share issue to acquire LMN in QRS’s Statement of financial position as at
30 September 2012.
(c) The fair value of the net assets of LMN was equal to their carrying value with the
exception of land and property, plant and equipment. The fair value of land at the date of
acquisition was $50,000 in excess of its carrying value and property, plant and equipment
was $77,000 in excess of its carrying value. These fair values have not yet been reflected
in LMN’s draft Statement of financial position as at 30 September 2012.
(d) The share capital of LMN has not changed since QRS acquired its holding.
(e) LMN’s land is not depreciated but property, plant and equipment is depreciated on a
straight line basis and the remaining life of the property, plant and equipment at the
acquisition date was estimated to be seven years.
(f) An impairment test was carried out on the goodwill on consolidation at
30 September 2012 and it was concluded that it should be written down by 25%.
Required:
Prepare for the QRS Group the consolidated Statement of financial position at
30 September 2012.
(Total 20 marks)
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Question 5
Oligrove company has obtained industry average ratios. The industry average ratios obtained
for the period 1 October 2011 to 30 September 2012 are as follows:
Return on capital employed
Net assets turnover
Gross profit margin
Net profit before tax margin
Current ratio
Quick ratio
Debt to equity (gearing) ratio
Inventory holding period
Trade receivables collection period
Trade payables payment period
22.3%
1.5 times
27%
12.2%
1.4:1
0.8:1
31%
45 days
43 days
51 days
The following summarised information is available for Oligrove for the period 1 October 2011
to 30 September 2012:
000$
Sales revenue
5,120
Gross profit
1,120
Interest paid
34
Profit before tax
360
Non current assets net book value
980
Inventory
520
Trade receivables
610
Share capital and reserves
650
Non current liabilities 5% loan notes
500
Bank overdraft
90
Trade payables
680
Other payables
190
Non current assets were originally bought at $6.5 million.
Required:
Write a report for the Directors of Oligrove commenting on its financial performance and
position as at 30 September 2012. Include an appendix to your report showing the equivalent
ratios for Oligrove to those of the industry averages.
(Total 20 marks)
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Section C
Question 6
The following trial balance and additional information is available for Jonshar Co as at
30 September 2012:
Trial balance for Jonshar Co as at 30 September 2012
Revenue and purchases
Property at cost
Property, accumulated depreciation at 1 October 2011
Plant & equipment at cost
Plant & equipment accumulated depreciation at 1 October 2011
Payments for the year for leased asset
Finance costs
Trade receivables and payables
Bank
Equity share capital shares of 50c each
Share premium account
5% loan notes redeemable 2020
Income tax
Interim dividend paid
Revaluation reserve 1 October 2011
Inventories at 1 October 2011
Administrative expenses
Distribution costs
Land at valuation 1 October 2011
Retained earnings 1 October 2011
$000
31,560
29,000
$000
62,300
9,230
62,740
10,150
30
280
15,260
9,650
130
60,000
18,000
10,000
540
6,000
8,000
4,580
5,230
4,620
38,000
197,300
9,300
197,300
The following additional information is also available:
(a) At 30 September 2012 the company’s inventory valued at cost was $4,720,000. A review
of inventory has revealed the following:
(i) Items costing $240,000 that had been included in inventory at 30 September 2012
were found to have deteriorated. Their normal selling price was $320,000 but even
after remedial work of $50,000 these items could only be sold for $275,000.
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(ii) Items sold on a sale or return basis had been omitted from the inventory as at
30 September 2012 and included in sales for the month of September 2012. The cost
of these items was $50,000 and their sale price was $68,000. All these items were
returned to Jonshar in good condition in October 2012.
(b) The balance on the trial balance on the income tax account represents the amount
remaining after Jonshar settled all its outstanding tax for the previous years. The
estimated income tax liability for the year ended 30 September 2012 is $850,000.
(c) Land is to be revalued to $45 million as at 30 September 2012.
(d) The interest on the loan has only been paid for the first half of the year.
(e) The lease payment for the year of $30,000 is in respect of the first annual payment in
arrears for a leased asset. The asset is to be leased for five years and the cash price for
the asset if bought on 1 October 2011 would have been $113,720. The interest rate
implicit in the lease is 10%. The leased asset is to be depreciated on a straight line basis
over five years and charged to administration costs.
(f) Property is to be depreciated at 2% on a straight line basis and charged to administration
costs.
(g) Plant and equipment is to be depreciated at 20% on the reducing balance method and
charged 50% to cost of sales, 30% distribution and 20% administration.
(h) Adjustments for accruals and prepayments are required as follows:
Distribution
Administration
Accruals
$
68,000
35,000
Prepayments
$
50,000
27,000
Required:
Using the IFRS for SMEs prepare Jonshar Co’s Statement of comprehensive income for the
year ended 30 September 2012 and its Statement of financial position at 30 September 2012.
(Total 30 marks)
©IFA Financial accounting and IFRS for SMEs December 2012