PRIFYSGOL ABERTAWE : SWANSEA UNIVERSITY

DEGREE EXAMINATIONS: JANUARY 2012

COLLEGE OF BUSINESS, ECONOMICS AND LAW

EBF351 Advanced Financial Accounting 1
Duration: 2 hours

YOU ARE NOT PERMITTED TO READ THE CONTENTS OF THIS QUESTION
PAPER UNTIL INSTRUCTED TO DO SO BY AN INVIGILATOR.

Answer ONE compulsory question in Section A.
Answer ONE question from the two questions in Section B.


Dictionaries: Candidates may only refer to the English and Welsh language
dictionaries available at the examination venue.
Calculators: Candidates may only use the electronic calculators available at the
examination venue.

COMPLETE ALL ROUGH WORKINGS IN THE ANSWER BOOK AND CROSS
THROUGH ANY WORK WHICH IS NOT TO BE ASSESSED.

QUESTION PAPERS CANNOT BE REMOVED FROM THE EXAMINATION ROOM

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EBF351 (2012) Page 2

Section A
Question 1 This question is compulsory
On 01 January 2009, Paddle plc bought 70% of the share capital of Sweep plc for
$20 million and half of Sweeps loan notes at par. It also bought 5,600,000 shares in
Action plc on the same date. Paddle paid $5 for each Action share.
The statements of financial position for the three companies as at 31 December
2010 can be summarised as follows:
Paddle Sweep Action
$000 $000 $000
Non-current assets
Property, plant and equipment 40000 17000 33000
Investments 52000 3000
92000 17000 36000
Current assets
Inventories 5000 2000 3000
Receivables 6000 6000 8000
Due from Sweep 4000
Cash 15000 8000 11000
30000 16000 22000

Current liabilities
Trade payables 15000 3000 8000
Tax payable 5000 1000 2000
Due to Paddle 3000
20000 7000 10000

Net current assets 10000 9000 12000
Total assets less current liabilities 102000 26000 48000

Non-current liabilities 8000 4000
94000 22000 48000

Equity
Share capital (50p shares) 8000 2000 8000
Share premium 12000 4000
Retained earnings 74000 16000 40000
94000 22000 48000

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EBF351 (2012) Page 3

Additional information:

1. The fair value of Sweeps assets at the date of acquisition by Paddle was
equal to their book value except for
(a) land which had a fair value in excess of book value of $800,000; and
(b) plant which had a fair value of $2.4 million in excess of its book value.

2. The plant has a remaining useful life of 6 years from the date of acquisition.

3. It is group policy to value the non-controlling interest at fair value. The non-
controlling interest in Sweep has been valued at $9 million.

4. The retained earnings of Sweep and Action can be summarised as follows:
$000 31.12.10 31.12.09 31.12.08
Sweep 16000 14000 10000
Action 40000 30000 25000

5. Sweep made a payment of $1 million to Paddle prior to the year end but this
had not been received by Paddle at the time the statement of financial
position was prepared.

6. During the year ended 31 December 2010 Paddle sold goods worth $12
million to Sweep. Paddle sells these goods at a mark-up of 20%. Sweep had
sold 45% of these goods before the year end.

7. An impairment review at the year end indicated that the investment in Sweep
had been impaired by $1,000,000.

8. No dividends were paid by any of the companies.

9. The non-current liability reported by Sweep relates to loan notes.

Required:
a. Prepare the consolidated statement of financial position for the Paddle Group
as at 31 December 2010.
[45 marks]
The International Accounting Standards Board defines four qualitative characteristics
in the Framework for the Preparation and Presentation of Financial Statements.

Required:
b. Identify and define the four qualitative characteristics and explain how these
help to make financial statements useful to the various users.
[10 marks]
TOTAL 55 marks
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EBF351 (2012) Page 4

Section B Answer EITHER question 2 OR question 3

Question 2 This question has two parts
On 01 January 2010, Pamper acquired 20 million shares in Sample. Pamper paid
$3 for each Sample share. You have been provided with the following draft financial
statements for the year ended 31 December 2010, the year end for both companies.
Pamper Sample
$000 $000
Revenue 21000 15000
Cost of sales 12000 10000
Gross profit 9000 5000
Distribution costs 2000 1000
Administration expenses 1000 1000
Investment income 8000
Finance costs 2000 1000
Profit before tax 12000 2000
Taxation 2000 500
Profit for the year 10000 1500
Other comprehensive income
Revaluation 3000 2000
Total comprehensive income 13000 3500

Additional information:
Sample has ordinary $1 share capital of $25 million and share premium of $14
million. There have been no share issues in the year and the retained earnings at 01
January 2010 were $15 million. The revaluation was carried out on the 31
December 2010.
The fair values of the net assets of Sample were equal to their carrying values
except for one machine which had a carrying value of $2 million and a fair value of
$2.5 million. The machine has a remaining useful economic life of 5 years at the
date of acquisition. Depreciation on machinery is charged to cost of sales.
Sample sold $1.2 million of goods to Pamper during the year. These goods were
sold at a mark-up of 20% and 60% of them had been sold by the year end.
Sample paid out a dividend of $500,000 during the year. Pamper has recorded the
dividend received.
Following the loss of a key customer in 2010, the investment in Sample has been
reviewed for impairment and an impairment loss of $100,000 is required. No
previous impairment had been recorded.
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EBF351 (2012) Page 5

Required:
(a) Prepare the statement of comprehensive income for the Pamper Group for
the year ended 31 December 2010.
[30 marks]
Details of Pampers non-current assets as at 01 January 2010 are provided below:
Property Plant Licence
$m $m $m
Cost/valuation 840 450 10
Accumulated depreciation (180) (220) (3)
NBV b/f 660 230 7

Land is valued at $300 million. The buildings are depreciated over 60 years straight
line. The recent recession has made it difficult to let out empty offices and so
Pamper carried out an impairment review at the year end. The value of the land had
not been impaired but at 31 December 2010 the building had a value in use of $290
million. The directors have received a market valuation for the building at that date
of $297 million with estimated of selling costs of $1 million.
Plant is depreciated 20% reducing balance. On 01 May 2010 the company bought
new plant for $20 million. It cost a further $2 million to transport, install and test the
equipment before it could be brought into use.
The licence is an exclusive licence to transmit programming across a specific
geographic area which the company acquired 3 years ago. It is being amortised
over 10 years. Recently there has been a lot of interest in similar licences for other
geographic areas due to a change in government regulation and several have been
traded. The directors believe that the market value of the licence is $12 million at the
31 December 2010.
The company policy is to provide a full years depreciation in the year of purchase
and nothing in the year of disposal.
Required:
(b) Explain how the property, plant and equipment should be recognised,
measured and presented in the financial statements of Pamper for the year
ended 31 December 2010. You should refer to the requirements of
International Accounting Standards and International Financial Reporting
Standards as appropriate.
[15 marks]
TOTAL 45 marks
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EBF351 (2012) Page 6

Question 3 This question has 2 parts
The Chief Accountant at Georgia plc has been unable to return to work and the
junior accountant of Georgia plc has been asked to prepare the first draft of the
financial statements. The junior accountant is unsure how to treat the following
transactions in the financial statements for the year ended 31 December 2010.

Required:
(a) Explain to the junior accountant how each of the transactions below should be
recognised, measured and presented in the financial statements of Georgia
for the year ended 31 December 2010. You should refer to the requirements
of International Accounting Standards and International Financial Reporting
Standards as appropriate.

i. Georgia bought a machine in March 2010. The manufacturers selling price
was $4.8 million but Georgia gets a trade discount of 20% on this selling
price. The supplier has also offered a settlement discount of 2% for prompt
payment within 7 days which Georgia took advantage of. The shipping costs
of the machine were $25,000 and pre-production testing cost $45,000. The
machine has to be operated within strict temperature limits so the company
spent $30,000 installing temperature controls. The expected useful life of
the machine is 10 years with a residual value of $500,000. Georgia spent
$15,000 installing new electrical wiring. When the machine arrived the
supplier pointed out an error on the thickness of one section of the wiring.
This had to be corrected at a cost of $3,000 before the machine could be
switched on. It is company policy to provide a full years depreciation in the
year of acquisition and nothing in the year of sale.
[10 marks]

ii. Georgia entered into a two year contract with the supplier to provide cleaning
and maintenance for the machine. The maintenance and training contract
started on installation of the machine on 01 June 2010 and the full $21,000
cost was paid on that date.
[4 marks]

Question continued overleaf
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EBF351 (2012) Page 7


iii. Georgia owned another large machine which was damaged when part of the
roof was blown off in storms on 31 March 2010. The damage was repaired at
a cost of $20,000 but now operates more slowly. At the start of the year, 01
January 2010, the machine had a carrying value of $250,000, a residual of
$30,000 and a remaining useful life of 5 years. Following the damage the
value in use was calculated at $170,000 and the directors estimated that the
machine could be sold for $165,000 but would cost $20,000 to take apart and
deliver to a potential buyer. The useful life of the asset was reduced to 3
years from the date of the accident with a residual of $20,000.
[12 marks]
iv. The company has spent 2 years and $10 million developing a product. Of the
$10 million total spend, $7 million has been spent in the year to 31 December
2010. The directors are satisfied that the product is technically strong and
tests to date have not identified any operational problems with the materials or
design. The company expects the product to be launched within the next year
the directors are still unsure at what price they will be able to sell the product
due to new competitors entering the market. The product is expected to have
a 5 year life.
[4 marks]

On 01 April 2010, Georgia bought 32 million ordinary 50p shares in Acrobat plc, a
company in the same industry and with the same year end as Georgia. Acrobat
results show profit of $10 million for the year, with no other comprehensive income.
The company has a share capital of $40 million and its retained earnings at the 31
December 2010 were $50 million. Georgia paid $2.70 for each share and appointed
one director to the Board of Acrobat. Unfortunately due to a downturn in Acrobats
market, an impairment review has indicated that the investment should be impaired
by $1 million.
Required:
(b) Explain to the junior accountant how the above transaction should be
recognised, measured and presented in the financial statements of Georgia
for the year ended 31 December 2010. You should refer to the requirements
of International Accounting Standards and International Financial Reporting
Standards as appropriate.
[15 marks]
TOTAL 45 marks

End of Paper