ATC F7 - Rev Kit - June12

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2012 EDITION | Study Question Bank
ACCA
Paper F7 | FINANCIAL REPORTING

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ACCA
PAPER F7
FINANCIAL REPORTING
(INTERNATIONAL)
STUDY QUESTION BANK
JUNE 2012
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(ii)
STUDY QUESTION BANK FINANCIAL REPORTING (F7)

CONTENTS
Question
Page
Answer
Marks Date worked
1
2
3
4
1001
1003
1005
1007
18
22
17
26
6
6
6
6
7
7
7
8
1009
1010
1011
1012
1013
1014
1015
1016
6
8
8
5
16
12
20
8
8
9
10
11
1016
1018
1020
1022
15
12
14
20
11
11
1023
1025
12
8
12
1025
20
13
1027
25
14
15
1030
1033
14
15
15
16
17
1035
1037
1038
15
9
20
18
19
1039
1040
8
13
FINANCIAL STATEMENTS
1
2
3
4
Oscar
Mercury
Sulphur
Cayman
ACCOUNTING CONCEPTS
5
6
7
8
9
10
11
12
Nette (ACCA J04)

Limitations
Framework
Regulatory Framework
Four Concepts (ACCA D98)
IASB (ACCA J98)
Objectives (ACCA Pilot Paper 97)
Comparability (ACCA J04)
TANGIBLE ASSETS AND DEPRECIATION (IAS 16)

13
14
15
16
Adjustments
Sponger
Fam
Stoat (ACCA D99)
ACCOUNTING FOR SUBSTANCE

17
18
Substance over form

Hughes and Custom cars
ACCOUNTING POLICIES etc (IAS 8)

19
Perseus (ACCA J01)
REVENUE (IAS 18)

20
Jenson
ACCOUNTING FOR LEASES (IAS 17)

21
22
XYZ
Snow
INTANGIBLE ASSETS (IAS 38)

23
24
25
Intellectual Individuals
Rovers (ACCA J97)
Lamond (ACCA D00)
INVENTORY (IAS 2)
26
27
Allrights Inc
Sampi (ACCA J98)
(iii)
FINANCIAL REPORTING (F7) STUDY QUESTION BANK

CONTENTS
Question
Page
Answer
20
1041
Marks Date worked
CONSTRUCTION CONTRACTS (IAS 11)

28
William
12
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (IAS 37)

AND EVENTS AFTER THE BALANCE SHEET DATE (IAS 10)
29
30
Earley
Accounting treatment
20
21
1043
1044
13
12
22
23
24
24
25
1045
1046
1047
1048
1048
15
26
28
29
31
32
33
34
35
36
37
38
39
40
1049
1053
1055
1057
1059
1061
1063
1065
1067
1069
1071
1073
1074
19
12
12
12
12
10
15
10
10
13
10
10
16
41
1076
15
41
42
1078
1081
20
20
44
45
46
1083
1085
1088
20
18
10
47
1089
14
INCOME TAXES (IAS 12)

31
32
33
34
35
Shep (I)
Shep (II)
Shep (III)
Shep (IV)
Broken dreams
GROUP ACCOUNTS
36
37
38
39
40
41
42
43
44
45
46
47
48
Consolidations
Honey
Hatton
Haggis
Hammer
Hut
Hat
Humphrey
High
Happy
Haley
Hamish
Hydrogen
PRINCIPLES OF PRICE LEVEL ACCOUNTING

49
Period of inflation
CASH FLOW STATEMENTS (IAS 7)

50
51
Standard
Fallen
ANALYSIS AND INTERPRETATION

52
53
54
Witton Way
Rapido
Not-for-profit
EARNINGS PER SHARE (IAS 33)

55
(iv)
Earnings per share

Question 1 OSCAR
A trial balance has been extracted from the books of account of Oscar as at 31 March 2012 as follows:
$000
210
Administrative expenses
Share capital (ordinary shares of $1 fully paid)
Receivables
Bank overdraft
Income tax (overprovision in 2011)
Provision for pollution costs
Distribution costs
Listed financial asset investments
Investment income
Plant and machinery: Cost
Accumulated depreciation (at 31 March 2012)
Retained earnings (at 1 April 2011)
Purchases
Inventory (at 1 April 2011)
Trade payables
Sales revenue
Interim dividend paid
$000
600
470
80
25
180
420
560
75
750
220
180
960
140
260
2,010
120
3,630
3,630
Additional information
(1)
Inventory at 31 March 2012 was valued at $150,000.
(2)
The following items are already included in the balances listed in the above trial balance:
Depreciation (for the year to 31 March 2012)

Hire of plant and machinery
Auditors remuneration
Directors emoluments
Distribution
costs
$000
27
20
Administrative
expenses
$000
5
15
30
45
(3)
The income tax rate is 33%.
(4)
The income tax charge based on the profits for the year is estimated to be $74,000.
(5)
The provision for pollution costs is to be increased by $16,000.
(6)
Authorised ordinary share capital consists of 1,000,000 ordinary shares of $1 each.
(7)
There were no purchases or disposals of fixed assets during the year.
(8)
The market value of the listed financial asset investments, which are classed as fair value
through profit or loss as at 31 March 2012 was $580,000. There were no purchases or sales
of such investments during the year.
Required:
Insofar as the information permits, prepare the companys statement of profit or loss for the year
to 31 March 2011 and a statement of financial position as at that date in accordance with IAS 1.
(18 marks)

Question 2 MERCURY
The trial balance of Mercury at 30 June 2012 was as follows:
Dr
$000
7% Preferred shares of $1
Ordinary shares of 50 cents
Share premium account
Retained earnings, at 1 July 2011
Inventory, 1 July 2011
Land at cost
Buildings at cost
Buildings, accumulated depreciation, 1 July 2011
Plant at cost
Plant, accumulated depreciation, 1 July 2011
Trade payables
Trade receivables
Allowance for doubtful debts, at 1 July 2011
Purchases
Revenue
Distribution costs
Other expenses
Bank balance
Ordinary dividend paid
10% Loan notes
Cr
$000
500
250
180
70
450
300
900
135
1,020
370
900
600
25
2,030
205
3,000
240
50
110
25
_____
500
_____
5,930
5,930
You are provided with the following additional information:

(i)
Depreciation on buildings is to be provided at 5% per year on cost and allocated to

administrative expenses.
(ii)
Plant is to be depreciated at 20% per year using the reducing balance method and included in
distribution costs.
(iii)
Closing inventory is valued at $500,000.
(iv)
The allowance for doubtful debts is to be maintained at 5% of trade accounts receivable

balances.
(v)
An accrual for distribution wages of $30,000 is required.
(vi)
Interest on the loan notes has not been paid during the year.
(vii)
During June, a bonus (or scrip) issue of two for five was made to ordinary shareholders. This
has not been entered into the books. The bonus shares do not rank for dividend for the
current financial year.
(viii)
Provisions are to be made for the following:
the preferred dividend for the year;

an income tax charge of $55,000 for the year.

Required:
Prepare for Mercury for the year ended 30 June 2012, in accordance with IAS 1 Presentation of
Financial Statements:
(a)
(b)
(c)
a statement of profit or loss; and

a statement of changes in equity; and
a statement of financial position.
(8 marks)
(5 marks)
(9 marks)
Notes to the accounts are NOT required.

(22 marks)
Question 3 SULPHUR
The balances listed below were extracted from the records of Sulphur Co on 30 June 2012:
$
530,650
298,400
1,880
19,230
24,000
350,000
66,420
18,710
12,000
30,000
1,500
24,680
15,690
34,700
44,280
410
4,820
150,000
160,030
Revenue
Purchases
Returns (inwards)
Delivery vehicles (carrying amount)
Factory plant and equipment (carrying amount)
Land and buildings (carrying amount)
Factory overheads
Rent received
Investments (unlisted)
Investment income
Inventory at 1 July 2011
Trade receivables
Trade payables
Distribution costs
Cash in hand
Bank overdraft
Ordinary shares ($1 each)
Retained earnings at 1 July 2011
The following transactions and events occurred on 30 June 2012, after the above balances had been
extracted:
(1)
Sulphur received $460 from a customer.
(2)
Inventory was valued at $29,170 at the close of business.
(3)
Sulphur received an electricity bill for $1,240 relating to the factory for the three months to
30 June 2012. The bill was paid in July 2012.
(4)
Sulphur paid $690 to a supplier in full settlement of an invoice for $700.
(5)
The companys land and buildings were valued by a chartered surveyor at $390,000 and the
new value is to be included in the statement of financial position.
(6)
Depreciation was provided on the reducing balance basis at the following annual rates:
Delivery vehicles
Factory plant and equipment
20%
10%
(7)
Bonus shares were issued on the basis of one for every two held on 29 June 2012.
(8)
Income tax for the financial year ended 30 June 2012 was estimated at $38,100.

Required:
Prepare for Sulphur for the year ended 30 June 2012, in accordance with IAS 1 Presentation of
Financial Statements:
(i)
a statement of total comprehensive income using the cost of sales (i.e. function of
expense) method;
(7 marks)
(ii)
a statement of changes in equity; and
(3 marks)
(iii)
a statement of financial position.
(7 marks)
Notes to the financial statements are NOT required.

(17 marks)
Question 4 CAYMAN
Cayman prepares annual financial statements to 30 September. At 30 September 2011, the companys
list of account balances was as follows:
$000
Revenue
Production costs
Inventory at 1 October 2010
Distribution costs
Loan interest expense
Land at valuation
Buildings cost
7,400
4,140
695
540
730
120
5,250
4,000
accumulated depreciation at 1 October 2010

Plant and equipment
cost
1,065
6,400
accumulated depreciation at 1 October 2010

Trade accounts receivable
Trade accounts payable
Bank overdraft
Issued shares (50 cent ordinary) at 30 September 2011
Share premium account at 30 September 2011
Revaluation surplus
Retained earnings
12% loan (payable 2018)
$000
1,240
2,060
1,120
40
7,000
______
2,000
1,500
1,570
1,000
______
23,935
23,935

The following matters are relevant to the preparation of the financial statements for the year ended 30
September 2011:
(1)
(2)
Inventory at 30 September 2011 amounted to $780,000 at cost before adjusting for the
following:
(i)
Items which had cost $40,000 and which would normally sell for $60,000 were
found to be faulty. $10,000 needs to be spent on these items in order to sell them
for $45,000.
(ii)
Goods sent to a customer on a sale or return basis have been omitted from inventory
and included as sales in September 2011. The cost of these items was $8,000 and
they were included in revenue at $12,000. The goods were returned by the
customer in October 2011.
Depreciation is to be provided on cost as follows:

Buildings:
Plant and equipment:
2% per year
20% per year
80% of the depreciation is to be charged to cost of sales and 10% to each of distribution costs
and administrative expenses.
(3)
Land is to be revalued to $5,000,000.
(4)
Accrued expenses and prepayments were:

Accrued expenses
$000
Distribution costs
95
35
Prepayments
$000
60
30
(5)
During the year 4 million ordinary shares were issued at 75 cents each. The directors of
Cayman declared an interim dividend of 2 cents per share in September 2011. No dividends
were paid during the year.
(6)
Loan interest is paid annually, in arrears, on 30 September each year.
Required:
Prepare for Cayman for the year ended 30 September 2011:
(i)
(ii)
(iii)
a statement of total comprehensive income;

a statement of financial position; and
a statement of changes in equity,
(10 marks)
(10 marks)
(6 marks)
in accordance with IAS 1 Presentation of Financial Statements.

Notes to the financial statements are NOT required.
(26 marks)

Question 5 NETTE
Nette, a public limited company, manufactures mining equipment and extracts natural gas. The
directors are uncertain about the role of the IASBs Conceptual Framework for Financial Reporting
(the Framework) in corporate reporting. Their view is that accounting is based on the transactions
carried out by the company and these transactions are allocated to the companys accounting period by
using the matching and prudence concepts. The argument put forward by the directors is that the
Framework does not take into account the business and legal constraints within which companies
operate.
Required:
Explain the importance of the Framework to the reporting of corporate performance and
whether it takes into account the business and legal constraints placed upon companies.
(6 marks)
Question 6 LIMITATIONS
Financial statements identify position, performance and changes in position over a period of time. The
main statements include Statement of Financial Position, Statement of Comprehensive Income and
Statement of Cash Flows. These statements are intended to show how well a company has performed
and give an indication of the value of the business. However, many accountants feel that the financial
statements are limited in their value to the users of financial statements.
Required:
Identify and discuss the limitations of financial statements.
(8 marks)
Question 7 THE FRAMEWORK
(a)
State the main purpose of the Conceptual Framework for Financial Reporting (The
Framework) adopted by the International Accounting Standards Board (IASB).
(4 marks)
(b)
Explain the status of The Framework.
(c)
State the underlying assumption of financial statements identified by The Framework.

(2 marks)
(2 marks)
(8 marks)
Question 8 REGULATORY FRAMEWORK
Required:
Briefly explain what a regulatory framework is and discuss the reasons why there is a need for a
regulatory framework in financial reporting.
(5 marks)

Question 9 FOUR CONCEPTS
Required:
Define the following accounting concepts and explain for each their implications for the
preparation of financial statements:
(a)
(b)
(c)
(d)
The entity concept

Going concern
Materiality
Fair presentation (true and fair view)
(4 marks)
(4 marks)
(4 marks)
(4 marks)
(16 marks)
Question 10 IASB
Required:
(a)
State the objectives of the International Accounting Standards Board (IASB). (4 marks)
(b)
Explain how the IASB approaches the task of producing a standard, with particular
reference to the way in which comment or feedback from interested parties is obtained.
(8 marks)
(12 marks)
Question 11 OBJECTIVES
The objective of financial statements is to provide information about financial position, performance
and changes in financial position of an entity that is useful to a wide range of users in making economic
decisions.
Required:
(a)
State five potential users of company published financial statements, briefly explaining
for each one their likely information needs from those statements.
(10 marks)
(b)
Briefly discuss whether you think that the company published financial statements,
prepared in accordance with IFRS, achieve the objective stated above, giving your
reasons.
Include in your answer two ways in which you think the quality of the information disclosed
in financial statements could be improved.
(10 marks)
(20 marks)

Question 12 COMPARABILITY
Comparability is an enhancing qualitative characteristic which adds to the usefulness of financial
statements.
Required:
(a)
Explain what is meant by the term comparability in financial statements, referring to

TWO types of comparison that users of financial statements may make.
(4 marks)
(b)
Explain TWO ways in which the IASBs Conceptual Framework for Financial Reporting
and the requirements of accounting standards aid the comparability of financial
information.
(4 marks)
(8 marks)
Question 13 ADJUSTMENTS
Adjustments manufactures items for use in engineering products. You note that amongst its many
tangible non-current assets it has the following:
(a)
A lathe was purchased on 1 January 2005 for $150,000. The plant had an estimated useful
life of twelve years, residual value of nil. Depreciation is charged on the straight line basis.
On 1 January 2011, when the assets carrying amount is $75,000, the directors decide that the
assets total useful life is only ten years.
(b)
A grinder was purchased on 1 January 2008 for $100,000. The plant had an estimated useful
life of ten years and a residual value of Nil. Depreciation is charged on the straight line basis.
On 1 January 2011, when the assets carrying amount is $70,000, the directors decide that it
would be more appropriate to depreciate this asset using the sum of digits approach. The
remaining useful life is unchanged.
(c)
The company purchased a fifty year lease some years ago for $1,000,000. This was being
depreciated over its life on a straight line basis. On 1 January 2011, when the carrying
amount is $480,000 and twenty-four years of the lease are remaining, the asset is revalued to
$1,500,000. This revised value is being incorporated into the accounts.
Required:
As the companys financial accountant, prepare a memorandum for the attention of the board
explaining the effects of these changes on the depreciation charge and indicating what additional
disclosures need to be made in the accounts for the year to 31 December 2011.
(15 marks)

Question 14 SPONGER
Sponger has been having financial difficulties recently due to the economic climate in its industry
sector. However, its financial director Mr Philip Tislid has discovered that there are a number of
schemes by which he can obtain government financial assistance. Details of the assistance obtained are
as follows:
(a)
Sponger has received three grants of $10,000 each in the current year relating to on-going
research and development projects. One grant relates to the Cuckoo project which involves
research into the effect of various chemicals on the pitch of the human voice. No constructive
conclusions have been reached yet.
The second relates to the development of a new type of hairspray which is expected to be
extremely popular. Commercial production will commence in 2013 and large profits are
foreseen. The third relates to the purchase of high powered microscopes.
(b)
In 2010 Spongers premises were entirely isolated from the outside world for four months due
to the renovation of roads by the local council. All production was lost in that period. Mr
Tislid has been assured by the councils officers that a $25,000 compensation grant will be
paid on submission of the relevant triplicate form. Mr Tislid had not yet filled in the form by
31 December 2011.
(c)
Sponger entered into an agreement with the government that, in exchange for a grant of
$60,000, it will provide vocational experience tours around its factory, for twelve young
criminals per month over a five year period starting on 1 January 2011. The grant was to be
paid on the date Sponger purchased a minibus (useful life three years) to take the inmates to
the factory and back. The bus was bought and the grant received on 1 January 2011.
The grant becomes repayable on a pro rata basis for every monthly visit not fulfilled. During
2011 five visits did not take place due to the pressure of work and this pattern is expected to
be repeated over the next four years.
No repayments have yet been made.
Mr Tislid is totally confused as to how to account for these grants.

Required:
Write a memorandum to Mr Tislid explaining to him how he should account for the above grants
in the accounts for the year ended 31 December 2011.
(12 marks)

Question 15 FAM
Fam had the following tangible non-current assets at 31 December 2010:
Cost
$000
500
400
1,613
390
91
2,994
Land
Buildings
Plant and machinery
Fixtures and fittings
Assets under construction
Depreciation
$000
80
458
140
678
Carrying amount
$000
500
320
1,155
250
91
2,316
In the year ended 31 December 2011 the following transactions occur:

(1)
Further costs of $53,000 are incurred on buildings being constructed by the company. A
building costing $100,000 is completed during the year.
(2)
A deposit of $20,000 is paid for a new computer system which is undelivered at the year end.
(3)
Additions to plant are $154,000.
(4)
Additions to fixtures, excluding the deposit on the new computer system, are $40,000.
(5)
The following assets are sold:

Cost
Plant
Fixtures
$000
277
41
Depreciation
brought forward
$000
195
31
Proceeds
$000
86
2
(6)
Land and buildings were revalued at 1 January 2011 to $1,500,000, of which land is worth
$900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on
the basis of existing use value on the open market.
(7)
The useful economic life of the buildings is unchanged. The buildings were purchased ten
years before the revaluation.
(8)
Depreciation is provided on all assets in use at the year end at the following rates:
Buildings
Plant
Fixtures
2% per year straight line

25% per year reducing balance
Required:
Show the disclosure under IAS 16 in relation to non-current assets in the notes to the published
accounts for the year ended 31 December 2011.
(14 marks)
10

Question 16 STOAT
The directors of Stoat, a limited liability company, are reviewing the companys draft financial
statements for the year ended 30 June 2012.
Two matters under discussion are depreciation and non-current asset valuation several directors are of
the opinion that the companys depreciation methods and rates are unsatisfactory, and that the statement
of financial position values of some of the non-current assets are unrealistic.
Required:
Draft a memorandum for the directors dealing with the following matters:
(a)
The purpose of depreciation and the factors affecting the assessment of useful life
according to IAS 16 Property, Plant and Equipment.
(7 marks)
(b)
Three items of evidence obtainable from inside or outside the company, to check
whether the companys depreciation rates are in fact likely to be too low.
(3 marks)
(c)
The disclosures, if any, which would be required in the financial statements if the
company decided to change its depreciation methods.
(4 marks)
(d)
The requirements of IAS 16 Property, Plant and Equipment regarding revaluation of

non-current assets.
(6 marks)
(20 marks)
Question 17 SUBSTANCE OVER FORM

The accounting treatment and disclosure of the vast majority of transactions will remain the same
whether they are accounted for on the basis of substance or form. However, some transactions will
have a commercial effect not fully indicated by their legal form, and where this is the case, it will not be
sufficient to account for them merely by recording that form.
Required:
Discuss the proposal that accounts should always reflect the commercial substance of
transactions.
(12 marks)
Question 18 HUGHES AND CUSTOM CARS
(a)
On 10 December 2011, Hughes sold inventory with a production cost of $30 million to the
Wodwo Bank for $36 million cash. Hughes has a call option (an option to repurchase) on the
goods exercisable on 10 January 2012 at a price of $37.8 million. The Wodwo Bank has a
put option (an option to resell to the seller) exercisable on 10 February 2012 at a price of
$39.7 million.
Required:
Discuss how the transaction should be accounted for in the accounts of Hughes at 31
December 2011.
(4 marks)
11

(b)
Custom Cars customises standard sports cars purchased from a major manufacturer, Sigma,
by fitting extras (spoilers, skirts, tinted windows, etc) at its workshop premises. It sells them
from its showroom on the same site, which it owns. During the year, the showroom was
renovated and enlarged by means of an extension to the existing building. Sigma contributed
many of the interior fitments, such as display stands for the cars, free of charge and also made
a cash payment toward the total costs.
Required:
Discuss whether or not the extension and fittings should be shown in the statement of
financial position of Custom Cars.
(4 marks)
(8 marks)
Question 19 PERSEUS
The list of account balances of Perseus, a limited liability company, contains the following items at 31
December 2011:
Dr
Cr
$
$
Opening inventory
3,850,000
Accounts receivable ledger balances
2,980,000
1,970
Accounts payable ledger balances
14,300
1,210,400
Prepayments
770,000
Cash at bank A
940,000
Overdraft at bank B
360,000
The closing inventory amounted to $4,190,000, before allowing for the adjustments required by items
(2) and (3) below.
In the course of preparing the financial statements at 31 December 2011, the need for a number of
adjustments emerged, as detailed below:
(1)
The opening inventory was found to have been overstated by $418,000 as a result of errors in
calculations of values in the inventory sheets.
(2)
Some items included in closing inventory at cost of $16,000 were found to be defective and
were sold after the end of the reporting period for $10,400. Selling costs amounted to $600.
(3)
Goods with a sales value of $88,000 were in the hands of customers at 31 December 2011 on
a sale or return basis. The goods had been treated as sold in the records and the full sales
value of $88,000 had been included in trade receivables. After the end of the reporting
period, the goods were returned in good condition. The cost of the goods was $66,000.
(4)
Accounts receivable amounting to $92,000 are to be written off.
(5)
An allowance for doubtful debts is to be set up for 5% of the accounts receivable total.
(6)
The manager of the main selling outlet of Perseus is entitled, from 1 January 2011, to a
commission of 2% of the companys profit after charging that commission. The profit
amounted to $1,101,600 before including the commission, and after adjusting for items (1) to
(5) above. The manager has already received $25,000 on account of the commission due
during the year ended 31 December 2011.
12

Required:
(a)
(b)
(i)
Explain how adjustment should be made for the error in the opening
inventory, according to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. (Assume that it constitutes a material error.)
(ii)
State two disclosures required by IAS 8 in the financial statements at 31

December 2011 for the adjustment in (i) above.
(6 marks)
Show how the final figures for current assets should be presented in the statement of
financial position at 31 December 2011.
(14 marks)
(20 marks)
Question 20 JENSON
The timing of revenue (income) recognition has long been an area of debate and inconsistency in
accounting. Industry practice in relation to revenue recognition varies widely; the following are
examples of different points in the operating cycle of businesses that revenue and profit can be
recognised:
on the acquisition of goods;

during the manufacture or production of goods;
on delivery/acceptance of goods;
when certain conditions have been satisfied after the goods have been delivered;
receipt of payment for credit sales;
on the expiry of a guarantee or warranty.
In the past the critical event approach has been used to determine the timing of revenue recognition.
The International Accounting Standards Board in its Conceptual Framework for Financial Reporting
(Framework) has defined the elements of financial statements, and it uses these to determine when a
gain or loss occurs.
Required:
(a)
Explain what is meant by the critical event in relation to revenue recognition and
discuss the criteria used in the Framework for determining when a gain or loss arises.
(5 marks)
(b)
For each of the stages of the operating cycle identified above, explain why it may be an
appropriate point to recognise revenue and, where possible, give a practical example of
an industry where it occurs.
(12 marks)
(c)
Jenson has entered into the following transactions/agreements in the year to 31 March 2012:
(i)
Goods, which had cost of $20,000, were sold to Wholesaler for $35,000 on 1 June
2011. Jenson has an option to repurchase the goods from Wholesaler at any time
within the next two years. The repurchase price will be $35,000 plus interest
charged at 12% per year from the date of sale to the date of repurchase. It is
expected that Jenson will repurchase the goods.
13

(ii)
Jenson owns the rights to a fast food franchise. On 1 April 2011 it sold the right to
open a new outlet to Mr Cody. The franchise is for five years. Jenson received an
initial fee of $50,000 for the first year and will receive $5,000 per year thereafter.
Jenson has continuing service obligations on its franchise for advertising and
product development that amount to approximately $8,000 per year per franchised
outlet. A reasonable profit margin on rendering the continuing services is deemed
to be 20% of revenues received.
(iii)
On 1 September 2011 Jenson received total subscriptions in advance of $240,000.

The subscriptions are for 24 monthly publications of a magazine produced by
Jenson. At the year end Jenson had produced and despatched six of the 24
publications. The total cost of producing the magazine is estimated at $192,000
with each publication costing a broadly similar amount.
Required:
Describe how Jenson should treat each of the above examples in its financial statements
in the year to 31 March 2012.
(8 marks)
(25 marks)
Question 21 XYZ
A lessor, ABC, leases an asset, which it purchased for $4,400, to XYZ under a finance lease. It
estimates that its residual value after five years will be $400 and after seven years will be zero.
The lease is for five years at a rental of $600 per half year in advance, with an option of two more years
at nominal rental. The lease commences on 1 January 2011. The directors of XYZ consider that the
asset has a useful life of seven years. The finance charge is to be allocated using the sum of digits
(rule of 78) method. Title to the asset will pass to XYZ at the end of seven years if the option is
exercised. It is likely that it will be.
Required:
(a)
Show the relevant extracts from the accounts of XYZ at the year-end 31 December 2011.
(9 marks)
(b)
Show the allocation of the finance charge for XYZ using the actuarial before tax method
(using the interest rate implicit in the lease). Compare this with the sum of the digits
allocation in (a) above.
(5 marks)
The rate of interest implicit in the lease is 7.68% per half year.
(14 marks)
14

Question 22 SNOW
On 1 January 2011, Snow entered into the following finance lease agreements:
(a)
Snowplough
To lease a snowplough for 3 years from Ice. The machine had cost Ice $35,000.
A deposit of $2,000 was payable on 1 January 2011 followed by 6 half yearly instalments of
$6,500 payable in arrears, commencing on 30 June 2011. Finance charges are to be allocated
on a sum of digits basis.
(b)
Snow machine
To lease a snow machine for 5 years from Slush. The snow machine cost Slush $150,000 and
is estimated to have a useful life of 5 years.
Snow has agreed to make 5 annual instalments of $35,000, payable in advance, commencing
on 1 January 2011.
The interest rate implicit in the lease is 8.36%.
Required:
Show the relevant extracts from the accounts of Snow for year ended 31 December 2011.
(15 marks)
Question 23 INTELLECTUAL INDIVIDUALS
Intellectual Individuals is a company involved in a wide range of activities. At 31 December 2011 it
provided you with details of the following projects:
Project Rico
This is the idea of the companys flamboyant chairman, Bobby Bobov. The aim is to try and convert
lead into gold. During the year expenditure of $332,000 has been incurred on trying to set up such a
process, with no success to date.
Project Mounsey
The company has for the last few years been trying to devise a miniature radio transmitter for golf balls.
This will enable golfers to locate their balls when they are mis-hit into the rough. The company had no
success until the end of 2008, when a breakthrough was made, although costs of $120,000 had been
incurred to that date. The product went on sale at the end of 2010 after a further $200,000 expenditure
had been incurred on cosmetic changes. The advertising budget is $100,000 a year for the three years
commencing 1 January 2011. The product has achieved spectacular sales and profits. The company
anticipates sales continuing for between five and fifteen more years from the end of the current year.
15

Project Wellington
The company had found that an existing product could be used as a petrol additive which would cut
fuel consumption by 50%. Various oil companies had expressed support for the product, and it was
clear that it would be very popular with the public. Up to the end of 2009 a total of $400,000 had been
spent refining the product to ensure that it works in all types of engine. The product was estimated to
have a shelf life of ten years and has been successful since 2011. However, legislation proposed by the
government during the current year to control exhaust emissions means that the product will have to be
withdrawn from the market.
Required:
(a)
Write a memorandum to the chairman justifying the accounting treatment which the
company should have adopted for each of the projects assuming that the prime aim is to
match revenues to costs.
(8 marks)
(b)
Disclose the note to the financial statements in respect of research development. (An
accounting policy note is not required.)
(7 marks)
(15 marks)
Question 24 ROVERS (IASs 10, 37 & 38)

The directors of Rovers are reviewing the companys most recent draft financial statements and the
following points have been raised for discussion:
(a)
Research and development

This year the company has begun a substantial programme of research and development. To
spread the cost fairly over the years, the draft financial statements have been prepared on the
basis that all such costs are to be capitalised and written off on the straight-line basis over
three years, beginning in the year in which the expenditure is incurred.
(5 marks)
(b)
Provision/Contingent liability
An ex-director of the company has commenced an action against the company claiming
substantial damages for wrongful dismissal. The company lawyers have advised that the exdirector is unlikely to succeed with his claim. The lawyers potential liabilities are:
legal costs (to be incurred whether the claim is successful or not)
settlement of claim if successful
$000
50
500
____
550
At present there is no provision or note for this contingency.

(4 marks)
Required:
State with reasons whether or not you consider the accounting treatments in draft financial
statements, as described above, are acceptable. Include in your answer, where appropriate, an
explanation of the relevant provisions of IFRS.
(9 marks)
16

Question 25 LAMOND
Lamond, a limited liability company, is engaged in a number of research and development projects. Its
accounting policy as regards research and development is to capitalise expenditure as far as allowed by
IAS 38 Intangible Assets. At 30 June 2011 the following balances existed in the companys
accounting records:
Project A
Development completed 30 June 2009. Total expenditure $200,000. Being

amortised over five years on the straight line basis in accordance with the
companys standard policy. Balance at 30 June 2011: $120,000.
Project B
A development project commenced 1 July 2009. Total expenditure in the years

ended 30 June 2010 and 30 June 2011 totalled $175,000. During the year ended 30
June 2012, it became clear that a competitor had launched a superior product and
the project was abandoned. Further development expenditure in the year ended 30
June 2012 amounted to $55,000.
Project C
Development commenced 1 October 2010. Expenditure to date:

Year ended 30 June 2011
$85,000
$170,000
All expenditure on Project C meets the criteria for capitalisation in IAS 38.
Project D
In addition, research project D commenced on 1 July 2011. Expenditure to date (all

research):
$80,000
Required:
(a)
State the conditions which must be met if development expenditure is to be recognised as

an intangible asset.
(6 marks)
(b)
Calculate the amounts which should appear in the companys statement of profit or loss
and statement of financial position for research and development for the year ended 30
June 2012.
(7 marks)
(c)
Prepare the notes which IAS 38 requires in the financial statements for the year giving
supporting figures for the items in the statement of profit or loss and statement of
financial position.
(7 marks)
(20 marks)
17

Question 26 ALLRIGHTS
Allrights is an old established company operating in the highly competitive business of manufacturing
and marketing radios and television sets.
A new board of directors is considering the draft accounts, prepared under the historical cost
convention, for the year ended 31 March 2012.
The main executive directors involved in the policy discussions are
Stevie Striver
Charlie Chatty
Gordon Gloome
(managing)
(sales)
(production)
You are in attendance to give advice.

A standard model radio has the following disclosed costs:
Direct labour and material
Bought-in components
Factory overhead costs
Royalty on sale payable to the owner of a patent
$
38
5
8
2
For 1,000 radio sets, the other overhead costs are $14,000 made up as follows:
Salary and space costs of executive responsible for production planning
General office administration
Selling and distribution costs, including a fixed $4 per set commission
payable to salesmen
$
4,000
2,500
7,500
The advertised selling price of the model has recently been reduced to $60 because of intensive
competition.
The three directors have expressed the following views on the most appropriate method of valuing the
companys closing inventories:
(1)
Stevie Striver
A most prudent approach is necessary, particularly as the company has a cash flow problem
which means that the amount locked up in inventory should be kept as low as possible. I
propose a valuation of $43 per set.
(2)
Charlie Chatty
All the functions of the company are directed towards the production and sale of a good
finished product and therefore I think each set should be valued at the total cost involved,
including the other overhead costs.
(3)
Gordon Gloome
$47 per set, because thats what the production cost would have been if wed been more
efficient and kept in line with budgets.
Required:
Draft, for inclusion in a report, your opinions on the views expressed by each director, stating the
principles involved.
(8 marks)
18

Question 27 SAMPI (IAS 2)
(a)
IAS 2 Inventories requires inventories of raw materials and finished goods to be valued in
financial statements at the lower of cost and of net realisable value.
Required:
(b)
(i)
Describe three methods of arriving at cost of inventory which are acceptable

under IAS 2 and explain how they are regarded as acceptable.
(5 marks)
(ii)
Explain how the cost of an inventory of finished goods held by the

manufacturer would normally be arrived at when obtaining the figure for the
financial statements.
(3 marks)
Sampi is a manufacturer of garden furniture. The company has consistently used FIFO (first
in, first out) in valuing inventory, but it is interested to know the effect on its inventory
valuation of using weighted average cost instead of FIFO
At 28 February 2012 the company had inventory of 4,000 standard plastic tables, and has
computed its value on each side of the two bases as:
Basis
FIFO
Weighted average
Unit
cost
$
16
13
Total
value
$
64,000
52,000
During March 2012 the movements on the inventory of tables were as follows:
Received from factory:
Date
8 March
22 March
Revenue:
12 March
18 March
24 March
28 March
Number
of units
3,800
6,000
Production
cost per
unit
$
15
18
Number of
units
5,000
2,000
3,000
2,000
On a FIFO basis the inventory at 31 March was $32,400.

Required:
Compute what the value of the inventory at 31 March 2012 would be using weighted
average cost
(5 marks)
In arriving at the total inventory values you should make calculations to two decimal
places (where necessary) and deal with each inventory movement in date order.
(13 marks)
19

Question 28 WILLIAM
William, a company which designs and builds racecourses, commenced a four year contract early in
2008. The price was initially agreed at $12,000,000.
Profit, which was reasonably foreseeable from the year ended 31 December 2008, is to be taken on a
costs basis, and revenue is to be taken on a consistent basis.
Relevant figures are as follows:
Costs incurred in year
Anticipated future costs
Work certified and invoiced to date
2008
$000
2,750
7,750
3,000
2009
$000
3,000
7,750
5,000
2010
$000
4,200
1,550
11,000
2011
$000
1,150
12,500
Required:
Show how the above would be disclosed in the statement of profit or loss and statement of
financial position of William for each of the four years ended 31 December 2011.
(12 marks)
Question 29 EARLEY
Earley is finalising its accounts for the year ended 31 December 2011. The following events have
arisen since the year end and the financial director has asked you to comment on the final accounts:
(a)
At 31 December 2011 trade receivables included a figure of $250,000 in respect of Nedengy.

On 8 March 2012, when the current debt was $200,000, Nedengy went into receivership.
Recent correspondence with the receiver indicates that no dividend will be paid to unsecured
creditors.
(b)
On 15 March 2011 Earley sold its former head office building, Whitley Wood, for $2.7
million. At the year end the building was unoccupied and carried at a value of $3.1 million.
(c)
Inventories at the year end included $650,000 of a new electric tricycle, the Opasney. In
January 2012 the European Union declared the tricycle to be unsafe and prohibited it from
sale. An alternative market, in Bongolia, is being investigated, although the current price is
expected to be cost less 30%.
(d)
Stingy, a subsidiary in Outer Sonning, was nationalised in February 2012. The Outer
Sonning authorities have refused to pay any compensation. The net assets of Stingy have
been valued at $200,000 at the year end.
(e)
Freak floods caused $150,000 damage to the Southcote branch of Earley in January 2012.
The branch was fully insured.
(f)
On 1 April 2012 Earley announced a 1 for 1 rights issue aiming to raise $15 million.
Required:
Explain how you would respond to the matters listed above.
(13 marks)
20

Question 30 ACCOUNTING TREATMENT
You have been asked to advise on the appropriate accounting treatment for the following situations
arising in the books of various companies. The year end in each case can be taken as 31 December
2011 and you should assume that the amounts involved are material in each case.
(a)
At the year end there was a debit balance in the books of a company for $15,000, representing
an estimate of the amount receivable from an insurance company for an accident claim. In
February 2012, before the directors had agreed the final draft of the published accounts,
correspondence with lawyers indicated that $18,600 might be payable on certain conditions.
(b)
A company has an item of equipment which cost $400,000 in 2008 and was expected to last
for ten years. At the beginning of the financial year 2011 the carrying amount was $280,000.
It is now thought that the company will soon cease to make the product for which the
equipment was specifically purchased. Its recoverable amount is only $80,000 at 31
December 2011.
(c)
On 30 November a company entered into a legal action defending a claim for supplying faulty
machinery. The companys solicitors advise that there is a 20% probability that the claim will
succeed. The amount of the claim is $500,000.
(d)
An item has been produced at a manufacturing cost of $1,800 against a customers order at an
agreed price of $2,300. The item was in inventory at the year end awaiting delivery
instructions. In January 2012 the customer was declared bankrupt and the most reasonable
course of action seems to be to make a modification to the unit, costing approximately $300,
which is expected to make it marketable with other customers at a price of about $1,900.
(e)
At 31 December a company has a total potential liability of $1,000,400 for warranty work on
contracts. Past experience shows that 10% of this cost is likely to be incurred, that 30% may
be incurred but that the remaining 60% is highly unlikely to be incurred.
Required:
For each of the above situations outline the accounting treatment you would recommend and give
the reasoning of principles involved. The accounting treatment should refer to entries in the
books and/or the year-end financial statements as appropriate.
(12 marks)
21

Assume the following tax rules in respect of questions 31 35:
Transactions are only deductible for tax purposes when they are booked, i.e. double entered
into statutory accounting records. This means that there is often little difference between
accounting profit under local GAAP and the taxable profit. However, it is common practice
for large companies to maintain a parallel set of records and accounts for reporting according
to IFRS rules. These are notably different to the rules in the domestic tax code and as a result
the accounting profit under IFRS can be very different from the taxable profit.
The tax code allows for the general application of the accounting principles of prudence and
accruals, but it does state the following;
Tax allowable depreciation is computed according to rules set out in the tax code.
Allowance for doubtful debts are only deductible under very strict and limited
circumstances.
Interest is taxable/allowable on a cash basis.
Development expenditure is allowable for tax in the period in which it is incurred.
The government operates a system of incentive through the tax system known as Investment
Relief. Under this system a company is able to claim a proportion of the costs of qualifying
fixed assets, as being deductible, in excess of the normal depreciation rates which would
result from adoption of IFRSs.
The tax code defines finance leases but the criteria in the code are stricter than those in IAS
17 with the result that a company may well account for a lease as a finance lease when it is
deemed an operating lease for tax purposes. The tax treatment for operating leases is to
expense the rentals on an accruals basis.
Question 31 SHEP (I)

Shep was incorporated on 1 January 2011. In the year ended 31 December 2011 the company made a
profit before taxation of $121,000
This figure was after a depreciation charge of $11,000.
During the period Shep made the following capital additions:
Plant
Motor vehicles
$
48,000
12,000
Tax allowances for the current year are $15,000.

Corporate tax is chargeable at the rate of 30%.
Required:
(a)
Calculate the corporate income tax liability for the year ended 31 December 2011.
(b)
Calculate the deferred tax balance that is required as at 31 December 2011.
(c)
Prepare a note showing the movement on the deferred tax account and thus calculate
the deferred tax charge for the year ended 31 December 2011
(d)
Prepare the note which shows the compilation of the tax expense for the year ended 31
December 2011.
22

Question 32 SHEP (II)
Continuing from the previous year. The following information is relevant for the year ended 31
December 2012:
(a)
Capital transactions
Depreciation charged
Tax allowances
(b)
$
14,000
16,000
Interest payable
On 1 April 2012 the company issued $25,000 of 8% convertible loan stock. Interest is paid in
arrears on 30 September and 31 March.
(c)
Interest receivable
On 1 April Shep purchased debentures having a nominal value of $4,000. Interest at 15% per
year is receivable on 30 September and 31 March. The investment is regarded as a financial
asset valued at amortised cost.
(d)
Provision for warranty

In preparing the financial statements for the year to 31 December 2012, Shep has recognised a
provision for warranty payments in the amount of $1,200. This has been correctly recognised
in accordance with IAS 37 and the amount has been expensed. Shep operates in a tax regime
where warranty expense is deductible only when paid.
(e)
Fine
During the period Shep has paid a fine of $6,000. The fine is not tax deductible.
(f)
Further information
The accounting profit before tax for the year was $125,000.
Required:
(a)
(b)
(c)
the deferred tax charge for the year ended 31 December 2012.
23

Question 33 SHEP (III)
Continuing from the previous year. The following information is relevant for the year ended 31
December 2013:
(a)
Interest payable/Interest receivable

Shep still has $25,000 of 8% convertible loan stack in issue and still retains its holding in the
debentures purchased in 2012.
(b)
Provision for warranty

During the year Shep had paid out $500 in warranty claims and provided for a further $2,000.
(c)
Development costs
During 2013 Shep has capitalised development expenditure of $17,800 in accordance with the
provisions of IAS 38
(d)
Further information
(e)
Profit before taxation

Depreciation charged
Tax allowable depreciation
Entertainment
$
175,000
18,500
24,700
Shep paid for a large office party during 2013 to celebrate a successful first two years of the
business. This cost $20,000. This expenditure is not tax deductible.
Required:
(a)
(b)
(c)
Question 34 SHEP (IV)

Using the information provided in Shep III answer, assume that the government changed the rate of
tax to 28% during 2013.
Required:
(a)
(b)
(c)
24

Question 35 BROKEN DREAMS
Broken Dreams, a manufacturing company, has consistently adopted a progressive policy towards
deferred taxation. The accountant is, however, unsure of his next move and has turned to you for
advice.
The poor demented man supplies you with the following information in respect of the year ended 30
June 2012:
(a)
The company made an accounting profit of $900,000.
(b)
Freehold properties were revalued from $240,000 to $300,000 in the period. The company
has no intention of disposing of the properties.
(c)
The remaining non-current assets comprised plant and machinery. On 1 July 2011 this
amounted to
Tax written down value
Carrying amount
$
500,000
1,300,000
During the year to 30 June 2012 depreciation amounted to $260,000 and capital allowances of
$175,000 were claimed.
(d)
The company entered into a five year lease on 1 July 2011 for an item of plant with a useful
economic life of ten years. The lease rentals (which have all been paid on time to date) were
to be as follows:
Initial payment (1 July 2011)
Rentals (30 June 2012, 2013, 2014, 2015, 2016)
(e)
$
110,000
50,000 per rental
Broken Dreams now realises that a programme of research and development is essential to set
itself apart from its competition, and has adopted a policy of deferring development
expenditure. In the current year (the first year in which deferrals have occurred) expenditure
of $80,000 was deferred.
Required:
Prepare the note to the statement of financial position at 30 June 2012 for deferred taxation on
the basis of IAS 12 Income Taxes.
(15 marks)
25

Question 36 CONSOLIDATIONS
(a)
Statements of financial position at 31 December 2010
Investment in S
Sundry net assets
Ordinary share capital ($1 shares)

Retained earnings
P
$
65,000
115,000
180,000
S
$
55,000
55,000
140,000
40,000
180,000
30,000
25,000
55,000
P acquired the whole of the issued share capital of S for $65,000 on 31 December 2010.
Required:
Prepare the consolidated statement of financial position at 31 December 2010. (3 marks)
(b)
Investment in S
Sundry net assets

Retained earnings
P
$
65,000
129,000
194,000
S
$
62,000
62,000
140,000
54,000
194,000
30,000
32,000
62,000
Same facts as in part (a) above.

Goodwill has been impaired by $4,000 since acquisition.
Required:
Prepare the consolidated statement of financial position at 31 December 2011, (4 marks)
26

(c)
P acquired 80% of ordinary share capital of S for $52,000 on 31 December 2010

Non-controlling interest is valued at their proportionate share of the subsidiarys identifiable
net assets; it is not credited with its share of goodwill.
Investment in S
Sundry net assets

Retained earnings
P
$
52,000
115,000
167,000
S
$
55,000
55,000
127,000
40,000
167,000
30,000
25,000
55,000
Required:
Prepare the consolidated statement of financial position at 31 December 2010. (4 marks)
(d)
Investment in S
Sundry net assets

Retained earnings
P
$
52,000
129,000
181,000
S
$
62,000
62,000
127,000
54,000
181,000
30,000
32,000
62,000
Same facts as in part (c) above regarding the acquisition..

Goodwill has been impaired by $3,200 since acquisition.
Required:
(i)
Prepare the consolidated statement of financial position at 31 December 2011.

(4 marks)
(ii)
The market price of a share in S on the date of acquisition was $2.15.

Re-calculate consolidated retained earnings, goodwill and non-controlling
interest if P had chosen to value non-controlling interest on acquisition at fair
value.
(4 marks)
(19 marks)
27

Question 37 HONEY
Statements of financial position as at 30 June 2012
Assets
Non-current assets
Tangible assets
Investments: 2,000 ordinary shares in Sugar at cost
Current assets
Equity and liabilities

Equity
Equity shares of $1 each
Retained earnings
Non-current liabilities: 10% Debenture loan
Current liabilities
Honey
$
Sugar
$
27,000
2,000
29,000
25,000
54,000
12,500
12,500
12,000
24,500
20,000
6,000
9,000
35,000
12,000
7,000
54,000
3,000
14,000
17,000
7,500
24,500
Honey acquired its shares in Sugar more than five years ago when the balance on the retained earnings
was $nil. There was no goodwill arising on acquisition.
Statements of profit or loss for the year ended 30 June 2012
Revenue
Cost of sales
Gross profit
Distribution costs
Operating profit
Interest payable and similar charges
Tax
Profit for the financial year
Extract from the statement of changes in equity:
Retained earnings brought forward
Profit for the financial year
Retained earnings carried forward
28
Honey
$
24,000
(9,000)
15,000
(2,300)
(1,500)
11,200
(1,200)
10,000
(3,000)
7,000
Sugar
$
30,000
(11,000)
19,000
(1,300)
(2,700)
15,000
15,000
(5,000)
10,000
2,000
7,000
9,000
4,000
10,000
14,000

Required:
Prepare the consolidated statement of profit or loss and the consolidated statement of financial
position of Honey for the year ended 30 June 2012.
(12 marks)
Question 38 HATTON
The following are the statements of financial position of Hatton and its subsidiary Slap as at
31 December 2011:
Hatton
$
Assets
Non-current assets
Tangible assets
Investments
Current assets
Inventory
Trade receivables
Slap current account
Cash at bank and in hand
$
157,000
70,000
73,200
82,100
14,700
8,000
178,000
405,000

Equity
Retained earnings
Current liabilities
250,000
32,000
282,000
123,000
405,000
29

Slap
$
Assets
Non-current assets
Tangible assets
$
82,000
Current assets
Inventory
Trade receivables
35,200
46,900
25,150
107,250
189,250

Capital and reserves
Equity shares of $1each
Revaluation surplus
Retained earnings
50,000
6,250
15,000
40,000
111,250
20,000
Non-current liabilities: 6% debentures

Current liabilities
Trade payables
Hatton current account
50,000
8,000
58,000
189,250
Notes
(1)
Hatton acquired 40,000 shares in Slap on 1 January 2010 for a cost of $58,000 when the
balances on Slaps reserves were
$
6,250
Revaluation surplus
Retained earnings
10,000
Hatton also acquired $12,000 of Slaps debentures at par on the same date.
(2)
Non-controlling interest is valued at their proportionate share of the subsidiarys identifiable

net assets; it is not credited with its share of goodwill. Half of the goodwill on acquisition has
been impaired by 31 December 2011.
(3)
The current account difference is due to cash in transit.
Required:
Prepare the consolidated statement of financial position as at 31 December 2011 of Hatton.
(12 marks)
30

Question 39 HAGGIS
Assets
Non-current assets
Tangible assets
Investments: Shares in Stovies at cost
Current assets

Retained earnings
Non-current liabilities
8% Debenture loans
Current liabilities
Haggis
$
Stovies
$
33,000
12,500
20,000
4,500
50,000
16,000
36,000
10,000
5,000
6,000
21,000
4,000
13,000
17,000
20,000
9,000
9,000
50,000
10,000
36,000
On 1 January 2009 Haggis acquired 3,000 shares in Stovies. At that date the balance on Stovies
retained earnings was $8,000. Non-controlling interest are valued at fair value, the fair value of the noncontrolling interest on acquisition was $3,800. Goodwill has been impaired by $1,000 since acquisition.
Required:
Prepare the consolidated statement of financial position of Haggis as at 31 December 2011.
(12 marks)
31

Question 40 HAMMER
The summarised statements of financial position of Hammer and Sickle as at 31 December 2011 were
as follows:
Hammer Sickle
$
$
Assets
Non-current assets
Tangible assets
110,000
58,200
Investments
54,000
Current assets
Inventory
Trade receivables
Investments
Current account Hammer
Cash at bank

Revaluation surplus on 1 January 2011
Retained earnings on 1 January 2011
Profit for 2011
Trade payables
Current account Sickle
18,000
12,000
62,700
21,100
2,500
3,200
10,000
3,000

254,700 100,000

120,000
60,000
18,000
23,000
16,000
40,000
8,000
16,000
5,000
35,000
11,000
2,700

254,700 100,000

The following information is relevant:

(1)
On 31 December 2010, Hammer acquired 48,000 shares in Sickle for $54,000 cash.
(2)
The inventory of Hammer includes $4,000 goods from Sickle invoiced to Hammer at cost
plus 25%.
(3)
A cheque for $500 from Hammer to Sickle, sent before 31 December 2011, was not received
by the latter company until January 2012.
(4)
Non-controlling interest is valued at the proportionate amount of the identifiable net assets.
(5)
There has been no movement in the revaluation surplus of either company since the beginning
of the year.
Required:
Prepare the consolidated statement of financial position of Hammer and its subsidiary Sickle as
at 31 December 2011. Any gain on a bargain purchase is to be treated in accordance with IFRS 3.
(12 marks)
32

Question 41 HUT
On 1 July 2010 Hut acquired 128,000 $1 ordinary shares of Shed. The following
financial position have been prepared as at 31 December 2011:
Hut
$
Land at cost
80,000
Plant at cost
120,000
Cost of shares in Shed
203,000
Inventory at cost
112,000
Receivables
104,000
Bank balance
41,000
660,000
statements of
Shed
$
72,000
80,000
74,400
84,000
8,000
318,400
Hut
$
$1 ordinary share capital
Retained earnings
Plant depreciation at 31 December 2011
Payables
Shed
$
400,000 160,000
160,000 112,000
48,000
22,400
52,000
24,000

660,000 318,400

The following information is available:

(1)
At 1 July 2010 Shed had a debit balance of $11,000 on retained earnings.
(2)
In fixing the bid price for the shares of Shed, Hut valued the land at $90,000. All Sheds
plant was acquired since 1 July 2010.
(3)
The inventory of Shed includes goods purchased from Hut for $16,000. Hut invoiced those
goods at cost plus 25%.
(4)
Non-controlling interest is valued at the proportionate share of the identifiable net assets on
acquisition; it is not credited with its share of goodwill. Goodwill has been impaired by
$27,760 since the acquisition occurred.
Required:
Prepare the consolidated statement of financial position of Hut as at 31 December 2011.
(10 marks)
33

Question 42 HAT
On 30 June 2008, Hat acquired 60% of the ordinary share capital and 20% of the preferred share capital
of Shoe for $95,000 and $8,000 respectively. At that date Shoe had a retained earnings balance of
$50,000 and a share premium account balance of $9,000.
The following statements of financial position have been prepared as at 30 June 2012:
Assets
Non-current assets
Tangible assets
Investments: Shares in group undertaking
Current assets

Ordinary shares of $1 each
Retained earnings
Preferred shares of $1 each

Current liabilities
Hat
$
Shoe
$
227,000
103,000
330,000
170,000
170,000
270,000
600,000
186,000
356,000
200,000
25,000
150,000
375,000
90,000
9,000
80,000
179,000
225,000
600,000
40,000
137,000
356,000
During the year to 30 June 2012 Hat transferred a tangible asset to Shoe for $50,000. The asset
originally cost $100,000 three years ago (in the year to 30 June 2009) and had a useful economic life of
five years.
Shoes depreciation policy is 25% per year based on cost. Both companies charge a full years
depreciation in the year of acquisition and none in the year of disposal.
Non-controlling interest is valued at the proportionate share of the subsidiarys identifiable net assets; it
is not credited with its share of goodwill.
Required:
Prepare the consolidated statement of financial position of Hat and its subsidiary as at 30 June
2012. The value of goodwill at the 30 June 2012 is $2,520.
(15 marks)
34

Question 43 HUMPHREY
The following are the statements of profit or loss for the year ended 30 September 2011 of Humphrey
and its subsidiary Stanley:
Humphrey Stanley
$000
$000
Sales
1,100
400
Cost of sales
(600)
(240)
Gross profit
500
160
Distribution costs
(60)
(50)
Administration costs
(65)
(55)
Operating profit
375
55
Investment income
20
5
Interest
(25)
(6)
Profit before tax

370
54
Taxation
(160)
(24)
Profit for year

210
30

Retained profit brought forward
90
30
Retained profit for year
210
30
Dividends paid
(100)
(20)
Retained profit carried forward

200
40

(1)
Humphrey acquired 80% of Stanley many years ago, when the reserves of that company were
$5,000.
(2)
Total intra-group sales in the year amounted to $100,000, Humphrey selling to Stanley.
(3)
At the year end the statement of financial position of Stanley included inventory purchased
from Humphrey. Humphrey had taken a profit of $2,000 on this inventory.
(4)
The investment income of Humphrey includes $16,000 from Stanley.
(5)
Goodwill of $10,000 has been fully written off prior to the current period.
Required:
Prepare a consolidated statement of profit or loss for the year ended 30 September 2011.
(10 marks)
35

Question 44 HIGH
High acquired its 80% interest in the ordinary capital of Speed many years ago when Speeds retained
earnings were $4,000, for $10,000. There were no other reserves at that date.
The following are the draft statements of profit or loss of High and Speed for the year ended 31 March
2012 prepared by an inexperienced bookkeeper:
High
Speed
$
$
$
$
Revenue
274,500
181,250
Less Cost of sales
126,480
86,520
Distribution costs
67,315
42,885
25,555
17,295
(219,350)
(146,700)
55,150
34,550
Bank deposit interest
Profit before tax
Income tax
Profit after tax
Profit for year
250
55,400
(29,000)
26,400
100
34,650
(15,100)
19,550
28,000
26,400
54,400
17,250
19,550
36,800
The following information is also available:

(1)
The inventory of High at 31 March 2012 includes goods purchased from Speed at a profit
to that company of $700. Total intra-group sales for the year amounted to $37,500.
(2)
In October 2011 High sold plant, with a carrying value of $7,000, to Speed for $10,000.
Depreciation has been provided by Speed at 10% on the cost of $10,000 (with a full years
charge in the year of acquisition and none in the year of sale) in line with group policy.
(3)
Included in Speeds administration costs is an amount for $3,500 in respect of management

charges invoiced and included in turnover by High.
(4)
Speeds issued share capital comprises of 10,000 50 cent ordinary shares.
Required:
Prepare the consolidated statement of profit or loss for the year ended 31 March 2012.
Ignore goodwill.
(10 marks)
36

Question 45 HAPPY
The following statements of profit or loss were prepared for the year ended 31 March 2012:
Happy
$
Revenue
Cost of sales
Gross profit
Operating costs
Operating profit
Add: Dividends receivable from quoted investments
Profit before tax
Income tax
Profit after tax
Profit for year
Sleepy
$
303,600
(143,800)
159,800
(71,200)
88,600
2,800
91,400
(46,200)
45,200
217,700
(102,200)
115,500
(51,300)
64,200
1,200
65,400
(32,600)
32,800
79,300
45,200
124,500
38,650
32,800
71,450
On 30 November 2011 Happy acquired 75% of the issued ordinary capital of Sleepy.
Profits of both companies are deemed to accrue evenly over the year.
Required:
(a)
Prepare the consolidated statement of profit or loss for the year ended 31 March 2012.
Ignore goodwill.
(10 marks)
(b)
Explain why only four months of Sleepys results are included in the consolidated
statement of profit or loss.
(3 marks)
(13 marks)
37

Question 46 HALEY
The draft statements of financial position as at 31 December 2011 of three companies are set out below:
Assets
Non-current assets
Tangible assets
Investments at cost
18,000 shares in Socrates

18,000 shares in Aristotle
Current assets

Retained earnings
Non-current loans
Haley
$000
Socrates
$000
Aristotle
$000
300
75
30
100
160
345
750
160
260
80
240
250
400
100
750
30
180
50
260
60
100
80
240
The reserves of Socrates and Aristotle when the investments were acquired were $70,000 and $30,000
respectively. Assume the investments were acquired ten years ago and that goodwill has been fully
written off.
Required:
Prepare the consolidated statement of financial position as at 31 December 2011. Notes are not
required.
(10 marks)
38

Question 47 HAMISH
Hamish holds 80% of the ordinary share capital of Shug (acquired on 1 February 2012) and 30% of the
ordinary share capital of Angus (acquired on 1 July 2011).
A director of Hamish has been appointed to the board of Angus to take an active part in the
management of that company.
Hamish had no other investments, and none of the companies has any preferred capital.
The draft statements of profit or loss for the year ended 30 June 2012 are set out below:
Revenue
Operating expenses
Operating profit
Dividends received
Income tax
Profit after taxation
Dividends paid
Hamish
$000
12,614
(11,318)
1,296
171
1,467
(621)
846
500
Shug
$000
6,160
(5,524)
636
636
(275)
361
120
Angus
$000
8,640
(7,614)
1,026
1,026
(432)
594
250
Included in the inventory of Shug at 30 June 2012 was $50,000 for goods purchased from Hamish in
May 2012 which the latter company had invoiced at cost plus 25%. These were the only goods sold by
Hamish to Shug but it did make sales of $180,000 to Angus during the year. None of these goods
remained in Anguss inventory at the year end.
Required:
Prepare a consolidated statement of profit or loss for Hamish for the year ended 30 June 2012.
There was no impairment of goodwill during the year. Notes are not required.
(10 marks)
39

Question 48 HYDROGEN
The draft statements of financial position of three companies as on 30 September 2011 are as follows:
Hydrogen
$
Sodium
$
Assets
Non-current assets
Tangible assets
697,210
Investments:
160,000 shares in Sodium 562,000
80,000 shares in Aluminium 184,000
495,165
385,717
101,274
349,400

Equity shares
Retained earnings
Non-current liabilities:
Debentures
Current liabilities:
Trade payables
648,010
388,619
320,540
95,010
982,156
2,425,366
648,010
1,443,210
Current assets
Inventory
Trade receivables
Aluminium
$
349,400
286,925
251,065
80,331
804,169
1,452,179
600,000
200,000
1,050,000
850,000
1,650,000 1,050,000
618,321
967,721
200,000
478,000
678,000
400,000
150,000
100,000
375,366
2,425,366
252,179
1,452,179
189,721
967,721
You are given the following additional information:

(1)
Hydrogen purchased the shares in Sodium on 13 October 2006 when the balance on retained
earnings was $500,000.
(2)
The shares in Aluminium were acquired on 11 May 2006 when retained earnings stood at
$242,000.
Included in the inventory figure for Aluminium is inventory valued at $20,000 which had
been purchased from Hydrogen at cost plus 25%.
(3)
(4)
Non-controlling interest is valued at the proportionate share of the identifiable net assets
acquired; it is not credited with its share of goodwill. Goodwill in respect of the acquisition
of Sodium has been impaired by $1,500 since the acquisition.
The recoverable amount of the investment in Aluminium exceeds its carrying value and
therefore there is no impairment to account for.
(5)
40
Included in the current liabilities figure of Hydrogen is $18,000 payable to Aluminium, the
amount receivable being recorded in the receivables figure of Aluminium.

Required:
Prepare the consolidated statement of financial position and notes for Hydrogen as on 30
September 2011, together with your consolidation schedules.
(16 marks)
Question 49 PERIOD OF INFLATION
During a period of inflation many accountants believe that financial reports prepared under the
historical cost convention are subject to the following major limitations:
(a)
(b)
(c)
(d)
(e)
Inventories are undervalued.

Depreciation is understated.
Gains and losses on net monetary assets are undisclosed.
Asset and liability values are unrealistic.
Meaningful periodic comparisons are difficult to make.
Required:
Explain briefly the limitations of historical cost accounting in periods of inflation with reference
to each of the items listed above.
(15 marks)
Question 50 STANDARD
The summarised statements of financial position of Standard at 31 December 2010 and 2011 are as
follows:
2011
2010
$
$
Issued share capital
150,000
100,000
Share premium
35,000
15,000
Retained earnings
41,000
14,000
Non-current loans
30,000
70,000
Payables
63,000
41,500
Bank overdraft
14,000
Tax payable
33,000
21,500
Depreciation
Plant and machinery
54,000
45,000
15,000
13,000
421,000
334,000
Freehold property at cost

Plant and machinery at cost
Fixtures and fittings at cost
Inventories
Trade receivables
Long-term investments
Cash at bank
2011
$
130,000
151,000
29,000
51,000
44,000
4,600
11,400
421,000
2010
$
110,000
120,000
24,000
37,000
42,800
200
334,000
41

Dividends paid in year
7,500
5,000

(a)
There had been no disposal of freehold property in the year.
(b)
A machine tool which had cost $8,000 (in respect of which $6,000 depreciation had been
provided) was sold for $3,000, and fixtures which had cost $5,000 (in respect of which
depreciation of $2,000 had been provided) were sold for $1,000. Profits and losses on those
transactions had been dealt with through the statement of profit or loss.
(c)
The statement of profit or loss charge in respect of tax was $22,000.
(d)
The premium paid on redemption of the non-current loan was $2,000, which has been written
off to the statement of profit or loss.
(e)
Interest received during the year was $450. Interest charged in the statement of profit or loss
for the year was $6,400. Accrued interest of $440 is included in payables at 31 December
2010 (nil at 31 December 2011).
(f)
The government stock is a long term investment.
Required:
Prepare a statement of cash flows for the year ended 31 December 2011, together with notes as
required by IAS 7 Statement of Cash flows.
(20 marks)
Question 51 FALLEN
Fallen has prepared the following rough draft accounts for the year ended 31 December 2011:
Statement of profit or loss
Revenue
Cost of sales
Gross profit
Distribution costs
Administration expenses
Interest payable
Operating profit before tax
Taxation (35%) including deferred tax
Profit after tax
Extract from the statement of changes in equity
Dividends
42
$000
11,563
(5,502)
6,061
(402)
(882)
(152)
4,625
(1,531)
3,094
700

Statements of financial position
31 December
Leasehold premises (net)
Plant, machinery and equipment (net)
Investments at cost
Inventories
Receivables
Bank
2011
$000
6,600
5,040
2,406
2,880
2,586
19,512
2010
$000
5,700
3,780
2,208
1,986
1,992
576
16,242
31 December
Share capital (25 cent ordinary)

Share premium
Retained earnings
Deferred taxation
Non-current loan (10%)
Provision for deferred repairs
Payables
Overdraft
Income tax
2011
$000
2,280
2,112
9,108
202
1,240
1,202
1,416
222
1,730
19,512
2010
$000
1,800
1,800
6,714
138
1,800
1,016
936
2,038
16,242
The following data is relevant:

(1)
The 10% non-current loan was redeemed at par.
(2)
Plant and equipment with a written down value of $276,000 was sold for $168,000. New
plant was purchased for $2,500,000.
(3)
Leasehold premises costing $1,300,000 were acquired during the year.
Required:
Prepare the statement of cash flows and supporting notes in accordance with IAS 7 Statement of
Cash Flows for Fallen for 2011.
(20 marks)
43

Question 52 WITTON WAY
The following information has been extracted from the accounts of Witton Way:
Statements of profit or loss for the year to 30 April
Turnover (all credit sales)
Less Cost of sales
Gross profit
Other expenses
Loan interest
Taxation
Dividends
Statements of financial position at 30 April
Assets
Non-current assets
Tangible assets
Current assets
Inventories
Trade receivables
Cash

Called-up share capital
Retained earnings
Current liabilities
2011
$000
7,650
(5,800)
1,850
(150)
(50)
1,650
(600)
1,050
300
2012
$000
11,500
(9,430)
2,070
(170)
(350)
1,550
(550)
1,000
300
2011
$000
2012
$000
10,050
11,350
1,500
1,200
900
3,600
13,650
2,450
3,800
50
6,300
17,650
5,900
5,000
10,900
350
2,400
13,650
5,900
5,700
11,600
3,350
2,700
17,650
Additional information
During the year to 30 April 2012 the company tried to stimulate sales by reducing the selling price of
its products and by offering more generous credit terms to its customers.
44

Required:
(a)
Calculate six accounting ratios, specifying the basis of your calculations, for each of the
two years to 30 April 2011 and 2012 which will enable you to examine the companys
progress during 2012.
(9 marks)
(b)
From the information available to you, including the ratios calculated in part (a) of the
question, comment upon the companys results for the year to 30 April 2012 under the
heads of profitability, liquidity and efficiency.
(11 marks)
(20 marks)
Question 53 RAPIDO
You are an independent financial advisor and have been given the following details relating to Rapido:
Summary statements of financial position
Assets
Non-current assets
Tangible assets
Current assets
Inventory
Trade receivables
Cash and bank balances
Total assets
Equity shares
Retained earnings
Secured loans
Current liabilities
Trade and other payables
Bank overdraft
Total liabilities and equity
31 December
2010
2011
Actual Budget
$000
$000
2011
Actual
$000
957
1,530
1,620
205
305
175
685
1,642
290
720
1,010
2,540
325
810
1,135
2,755
800
200
280
1,280
800
200
420
1,420
800
200
460
1,460
175
187
362
1,642
(360)
505
255
760
2,540
(360)
545
390
935
2,755
45

Statements of profit or loss
Revenue
Cost of sales
Gross profit
Administration and distribution
Operating profit
Interest payable
Taxation

Dividends
31 December
2010
2011
Actual Budget
$000
$000
2,560
4,500
(1,700) (3,150)

860
1,350
(655)
(880)

205
470
(20)

205
450
(86)
(202)

119
248

82
108
2011
Actual
$000
5,110
(3,580)
1,530
(1,084)
446
(35)
411
(182)
229
49
The opening inventory figure was $135,000 2010 actual and $210,000 2011 budget.
Required:
Using the above information and appropriate ratios, prepare a report for the board of directors
of Rapido assessing the profitability, liquidity and solvency of the company and briefly suggesting
the necessary action to be taken.
(18 marks)
Question 54 NOT FOR PROFIT
Not-for-profit (NFP) organisations share many characteristics with those organisations whose main aim
is to generate profits. NFPs include government bodies, museums and charities.
Required:
(a)
Explain the main aims of an NFP and those of a profit orientated entity.
(5 marks)
(b)
Discuss the different approaches that may be required when assessing the performance
of an NFP organisation.
(5 marks)
(10 marks)
46

Question 55 EARNINGS PER SHARE
(a)
Consolidated statements of profit or loss for the year

2010
$
80,500
(3,500)
(28,000)
6,500
(3,500)
52,000
Profit before finance costs

Preference dividend
Taxation
Share of profit of associate
Non-controlling interest
2011
$
85,400
(3,500)
(31,600)
8,900
(3,900)
55,300
Capital structure
$
Ordinary shares of 50 cents
100,000
Required:
Earnings per share for the year ended 31 December 2011 (with comparative).
(b)
(2 marks)
Bonus issues
Consolidated statements of profit or loss as in part (a). Capital structure as in part (a), except
that a bonus issue (stock dividend) was made on 1 February 2011 of 1 new bonus share for
every 4 shares already held.
Required:
(c)
(2 marks)
New shares to new shareholders

Issued capital to 30 September 2011
$100,000 ordinary 50 cent shares
On 1 October 2011 the company issued 200,000 ordinary shares in order to acquire 90% of
the issued ordinary share capital of S.
Year 2011
Profit after tax
P
$63,000
S
$20,000
Year 2010
P
$50,000
Required:
(2 marks)
47

(d)
Rights issue
Profit after tax
Year ended 31 December 2010
$40,000
$50,000
Capital (before rights issue)

200,000 50 cent ordinary shares
On 1 October 2011 a rights issue of 1 for 4 at $3 per share was made.
The price quoted on the last day cum rights was $3.60.
Required:
(e)
(3 marks)
Convertible debentures/loan stock

Shares in issue throughout
The company issued (in 2011) $100,000 8% loan stock convertible into ordinary shares on
the following alternative bases:
31 December 2015
31 December 2016
$100 stock for 140 shares

$100 stock for 120 shares
Profit after loan interest and tax

$40,000
$50,000
Assume a marginal rate of tax of 33%.

Required:
Basic and diluted earnings per share for the year ended 31 December 2011 (with
comparatives).
(3 marks)
(f)
Options
Shares in issue
Options have been granted to directors and certain senior executives. These give the right to
subscribe for ordinary shares between 2014 and 2016 at 80 cents per share. Options were
available in respect of 50,000 shares during the year ended 31 December 2011.
The average fair value of one ordinary share during the year was $1.00 per share.
Profit after tax for 2011 was $50,000.
Required:
Basic and diluted earnings per share for the year ended 31 December 2011.
(2 marks)
(14 marks)
48

Answer 1 OSCAR
(a)
Profit or loss for the year ended 31 March 2012

$000
Sales
Operating costs $(140 + 960 150 + 420 + 210 + 16)
2,010
(1,596)
414
95
509
(49)
460
Operating profit before interest

Income from investments $(75 + 20)
Income tax
Profit for year
Notes
(2)
(1)
(3)
Extract from statement of changes in equity: (not required by question)

Opening retained earnings
180
Profit for year
460
Dividends
(120)
Closing retained earnings

520
Statement of financial position as at 31 March 2012

$000
Assets
Non-current assets
Tangible assets
Investments
$000
530
580
Notes
(4)
(5)
1,110
Current assets
Inventory
Receivables
150
470
620
1,730

Share capital
Retained earnings
Provisions for liabilities and charges
Current liabilities
600
520
(8)
1,120
196
(7)
414
1,730
(6)
1001

The following notes form part of these accounts:
Notes to the accounts for the year to 31 March 2012
(1)
Included in operating profit are the following items:

$000
Depreciation $(27 + 5)
Directors emoluments
(2)
32
45
Income from financial asset investments

$000
Listed financial asset investments
Gain in value of investment
(3)
75
20
Income tax
$000
Income tax based on the profits for the year at a rate of 33%
Over provision for tax in the previous year
(4)
74
(25)
49
Tangible assets plant and machinery

$000
Cost at 1 April 2011 and 31 March 2012
Accumulated depreciation
At 31 March 2011
Charge for the year $(27 + 5)
188
32
220
At 31 March 2012
(5)
750
Carrying amount at 31 March 2012
530
Investments
$000
The financial asset investments are classed as Fair Value though profit or loss,
their fair value at 31 March 2012 was $580,000. The gain in value of $20,000
has been credited to profit or loss.
(6)
Current liabilities
$000
Trade payables
Income tax
Bank overdraft
1002
260
74
80
414

(7)

$000
Pollution costs
At 1 April 2011
Provided in the year
180
16
196
At 31 March 2012
(8)
Called up share capital
Authorised
$000
Issued
$000
1,000
600
Answer 2 MERCURY
(a)
Statement of comprehensive income for the year ended 30 June 2012

$000
Revenue
Opening inventory
Purchases
Less closing inventory
$000
$000
3,000
450
2,030
_____
2,480
(500)
_____
Cost of sales
1,980
_____
Gross profit
1,020
Distribution costs
(240 + (20% (1,020 370)) + 30)
Administrative expenses (205 + (5% 900))
Other expenses (50+ 5 (W1))
Profit before interest and tax
Finance costs
Loan note interest (10% 500)
Preference dividend (7% 500)
400
250
55
___
315
50
35
(85)
___
Profit before tax

Income tax
230
55
___
Profit after tax
175
___
1003

(b)
Statement of changes in equity for the year ended 30 June 2012

Share
capital
$000
Balance at 1 July 2011
Bonus issue
Profit for the period
Ordinary dividend
Balance at 30 June 2012
(c)
Share
premium
$000
250
100
180
(100)
Retained
earnings
$000
70
______
_____
175
(25)
_____
350
80
220
Total
$000
500
175
(25)
_____
650
Statement of financial position as at 30 June 2012

Cost
Tangible non-current assets
Land
Buildings
Plant
$000
300
900
1,020
_____
Accumulated
depreciation
$000
2,220
_____
Current assets
Inventory
Trade receivables (600 30)
Bank
180
500
___
680
___
500
570
110
_____
Total assets
Net book
value
$000
300
720
520
_____
1,540
1,180
_____
2,720
_____

50 cent ordinary shares (250 + (2/3 250))
Share premium account (180 100)
Retained earnings
350
80
220
_____
650
10% Loan notes
7% Preferred shares of $1
Current liabilities
Trade payables
Income tax
Accrued expenses (50 + 30)
Dividends
Total equity and liabilities
1004
500
500
900
55
80
35
_____
1,070
_____
2,720
_____

WORKING
(1)
Allowance for doubtful debts
5% trade receivables (5% 600)

Brought forward
Expense
$000
30
(25)
__
5
___
Answer 3 SULPHUR
(i)
Statement of total comprehensive income for the year ended 30 June 2012
Profit or loss
$
Revenue (530,650 1,880)
Cost of sales (W1)
528,770
(363,960)
_______
* Gross profit
Other operating income (1,500 + 12,000)
164,810
13,500
_______
Distribution costs (W1)

Administrative expenses (W1)
178,310
(48,126)
(18,710)
_______
* Profit before tax

Income tax expense
111,474
(38,100)
______
* Profit for year
73,374
Other Comprehensive income

Revaluation surplus
40,000
______
Total comprehensive income for year

(ii)
113,374
Statement of changes in equity

Share
capital
$
Comprehensive income
Bonus issue
150,000
Revaluation
surplus
$
Total
$
310,030
113,374
_______
423,404
_______
75,000
_______
______
160,030
73,374
(75,000)
_______
225,000
_______
40,000
______
158,404
_______
40,000
Retained
earnings
$
1005

(iii)
Statement of financial position as at 30 June 2012

$
* ASSETS
* Non-current assets
Land and buildings (at valuation)
Delivery vehicles (carrying amount)
($19,230 $3,846)
Factory plant and equipment (carrying amount)
($24,000 $2,400)
$
390,000
15,384
21,600
_______
426,984
30,000
Investments
* Current assets
Inventories
Trade receivables ($15,690 $460)
Cash
29,170
15,230
410
______
* Total assets
44,810
_______
501,794
* EQUITY AND LIABILITIES

* Capital and reserves
Issued ordinary capital
Revaluation surplus
Retained earnings
225,000
40,000
158,404
_______
423,404
* Current liabilities
Trade payables ($34,700 $700)
Accrued expenses
Bank overdraft ($4,820 + $690 $460)
Income tax
34,000
1,240
5,050
38,100
______
* Total equity and liabilities
78,390
_______
501,794
WORKING
(1)
Cost analysis
Cost of sales
$
Opening inventory
24,680
Purchases
298,400
Discount received
(10)
Closing inventory
(29,170)
Factory overheads (66,420 + 1,240) 67,660
Per trial balance
Depreciation (as calculated in (a))
2,400
_______
363,960
_______
1006
Distribution
$
Administrative
$
44,280
3,846
______
18,710
______
48,126
______
18,710
______

Answer 4 CAYMAN
Statement of total comprehensive income for the year ended 30 September 2011
Profit or loss
$000
* Revenue (7,400 12)
* Cost of sales (W1)
7,388
(5,140)
_____
* Gross profit
* Distribution costs (W2)
* Administrative expenses (W2)
2,248
(711)
(871)
____
* Profit from operations

* Finance cost (12% $1m)
666
(120)
___
* Profit for the year
546
Other comprehensive income

Revaluation deficit
(250)
___
Total comprehensive income
296
WORKINGS
(1)
Cost of sales
$000
Opening inventory
Production costs
Depreciation 80% ([2% $4m] + [20% $6.4m])
Less: Closing inventory (780k 5k + 8k)
695
4,140
1,088
(783)
_____
5,140
(2)
Cost classification
Distribution
$000
Per list of balances
Prepayments
Accrued expenses
Depreciation
buildings (10% 2% $4m)
plant and equipment (10% 20% $6.4m)
Admin
$000
540
(60)
95
730
(30)
35
8
128
___
8
128
___
711
871
1007

Statement of financial position at 30 September 2011
$000
$000
*ASSETS
*Non-current assets
Property, plant and equipment (W3)
11,735
*Current assets
Inventory (W1)
Trade receivables (2,060 12)
Prepayments (60 + 30)
783
2,048
90
___
*Total assets
2,921
______
14,656
*EQUITY AND LIABILITIES
*Capital and reserves

Issued capital
Revaluation surplus
Retained earnings
7,000
2,000
1,250
1,836
______
12,086
*Non-current liabilities
Interest bearing borrowings/12% Loan (2018)
*Current liabilities
Trade payables
Operating overdraft
Accrued expenses (95 + 35)
Interim dividend (14m 2c)
1,000
1,120
40
130
280
___
1,570
______
14,656
Statement of changes in equity

for the year ended 30 September 2011
Share
capital
$000
Share
premium
$000
Balance at 1 October 2010

5,000 () 1,000 ()
Comprehensive income
Dividends (14m 2c)
Issue of share capital
2,000
1,000
_____
_____
(4m 50c and 25c)
Balance at 30 September 2011 7,000
2,000
1008
Revaluation
surplus
$000
Retained
earnings
$000
1,500
(250)
1,570
546
(280)
_____
_____
9,070
296
(280)
3,000
______
1,250
1,836
12,086
Total
$000

WORKINGS
(3)
Property, plant and equipment

$000
Land
Buildings
Plant and equipment
(4,000 1,065 80)

(6,400 1,240 1,280)
5,000
2,855
3,880
______
11,735
Answer 5 NETTE
The Conceptual Framework for Financial Reporting provides a conceptual underpinning for the
International Financial Reporting Standards (IFRS). The framework is in the process of being updated
by the IASB and as at 2011 it is a mixture of the old framework document plus two new chapters that
have been issued by the IASB as a replacement for sections of the old framework.
IFRS are based on the Framework and its aim is to provide a framework for the formulation of
accounting standards. If accounting issues arise which are not covered by accounting standards then the
Framework can provide a basis for the resolution of such issues. The Framework deals with several
areas:
the objective of financial statements

the underlying assumption
the qualitative characteristics of useful financial information
the elements of financial statements
recognition in financial statements
measurement in financial statements
concepts of capital and capital maintenance
The Framework adopts an approach which builds corporate reporting around the definitions of assets
and liabilities and the criteria for recognising and measuring them in the statement of financial position.
This approach views accounting in a different way to most companies. The notion that the
measurement and recognition of assets and liabilities is the starting point for the determination of the
profit of the business does not sit easily with most practising accountants who see the transactions of
the company as the basis for accounting. The Framework provides a useful basis for discussion and is
an aid to academic thought. However, it seems to ignore the many legal and business roles that
financial statements play. In many jurisdictions, the financial statements form the basis of dividend
payments, the starting point for the assessment of taxation, and often the basis for executive
remuneration. A statement of financial position, fair value system which the IASB seems to favour
would have a major impact on the above elements, and would not currently fit the practice of
accounting. Very few companies fit this practice of accounting. Very few companies take into account
the principles embodied in the Framework unless those principles themselves are embodied in an
accounting standard. Some International Financial Reporting Standards are inconsistent with the
Framework primarily because they were issued earlier than the Framework. The Framework is a useful
basis for financial reporting but a fundamental change in the current basis of financial reporting will be
required for it to have any practical application. The IASB seems intent on ensuring that this change
will take place.
1009

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors makes reference to the use
of the Framework where there is no IFRS or IFRIC in issue. The standard says in making the
judgement, management shall refer to, and consider the applicability of, the following sources in
descending order:
the requirements and guidance in Standards and Interpretations dealing with similar and
related issues; and
the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the framework.
Answer 6 LIMITATIONS
The following list includes some of the limitations of financial statements:
Nowadays, financial statements prepared under a financial reporting framework (e.g. IFRS)
contain very complex and detailed information. Most users will not be able to fully
understand what the financial statements are trying to communicate. For example, accounting
for financial instruments encompasses detailed rules, which even accountants may struggle to
understand.
Decision-making processes undertaken by management require timely information on matters

that are not incorporated in financial statements. Therefore financial statements are of limited
use to management.
The values used in financial statements are mixed in nature. Some transactions and balances
are accounted for at historic cost whilst others are incorporated at fair value. Without detailed
knowledge of how these figures have been determined, their meaning can be difficult to
construe.
The financial statements are mainly historic in nature and summarise what has happened, not
what is going to happen. They cannot be used to make predictions about the future.
Many items are excluded from the financial statements. For example, many internallygenerated intangible assets (e.g. a brand name) can never be recognised in the statement of
financial position of the reporting entity. The only way in which such assets can be
recognised is if the entity is acquired, but even then they are recognised only in the
consolidated statement of financial position of the acquiring company.
Management may be very creative in how information is presented in the financial statements.
Much of the information which is required to be disclosed is subjective in nature and
management may interpret the accounting requirements to portray information in a particular
light. Enron is the classic example of management being creative and, in doing so, the
financial statements not showing a realistic picture.
How the financial market perceives an entity cannot be recognised in the financial statements.
The market value of a company is very different to the carrying value presented in the
financial statements because market value reflects, for example, shareholders expectations of
future returns.
It can be quite difficult to judge at what point revenue should be recognised. When complex
contractual agreements are made between parties it may also be difficult to specify an
appropriate amount of revenue to be included. Therefore the statement of comprehensive
income may be inadequate in reflecting the amount of profit made in a period.
1010
Financial statements are drawn up at a specified point in time. A cut-off therefore has to be
established to be able to prepare the financial statements. The point of cut-off could be in the
middle of a very detailed or complex transaction or related transactions which again the
financial statements may not be able to reflect fully.
From the end of the reporting period to when the statements are authorised for publication is
usually a minimum of three months. A lot can happen in that three-month period, so the
statements become out of date very quickly.
Many transactions take place between related parties. Although certain disclosures should be
made regarding related party transactions it is still difficult for the financial statements to fully
reflect the impact of these transactions.
Answer 7 THE FRAMEWORK

(a)
(b)
Main purpose
To assist the Board of IASCF in developing future International Financial Reporting

Standards (IFRSs) and reviewing existing ones
To promote harmonisation of regulations by providing a basis for reducing the

number of alternative accounting treatments permitted by IFRSs
To assist national standard-setting bodies in developing national standards
To assist preparers of accounts in applying IFRSs and in dealing with topics

that have yet to be covered by an IFRS.
To assist auditors in forming an opinion on whether the accounts comply with

IFRS.
To assist users of financial statements in the interpretation of information contained

in those statements.
To provide those who are interested in the work of the IASB with information about
its approach to the formulation of standards.
1 per point to
max 4
Status
The Framework is not an IFRS hence it does not define standards.
Nothing in the framework overrides any specific IFRS.
In a limited number of cases where a conflict between the framework and an

IFRS arises, the IFRS prevails.
1
___
max 2
___
1011

(c)
Underlying assumption
Going concern
Financial statements are normally prepared on the assumption that an enterprise is a

going concern and will continue in operation for the foreseeable future.
Therefore is assumed that the enterprise has neither intention nor need to liquidate
or curtail materially the scale of operations.
If such an intention or need exist, the financial statements may have to be
prepared on a different basis (and the basis used is disclosed).
1
1
1
___
max 2
___
8
___
Answer 8 REGULATORY FRAMEWORK

A regulatory framework has been defined as a system of regulations and the means to enforce them,
usually established by a governing body to regulate a specific activity. Without such a framework the
system would fail to function properly and ad hoc rules and regulations would emerge which
individuals and bodies would not be able to understand fully. There would be no direction or
guidelines governing the content, or rules, that should be followed and parties would devise their own
rules.
A regulatory framework is needed for financial reporting to ensure that all relevant parties understand
exactly what should be reported by the entity, and how. The framework may be a set of rules and
regulations detailing exactly what and to whom an entity should report or it may be a less formal
framework providing guidance for reporting.
Company law and/or accounting standards can be issued to create Generally Accepted Accounting
Practice (GAAP) for reporting entities to follow when preparing their financial statements. There is a
need for some form of regulatory framework in financial reporting to ensure there is consistency in
accounting treatments so that comparisons can be made between financial statements (e.g. year-on-year
and between companies).
Under IFRS the IASB has issued the Conceptual Framework for Financial Reporting. This is a
conceptual framework which is used by the IASB to assist relevant parties in the needs and
requirements of users of financial statements. It is used in conjunction with International Financial
Reporting Standards to form a set of principles with which reporting entities should comply when
preparing and presenting their financial statements. The conceptual framework is not in itself a
regulatory framework as there is no formal means of enforcing the issued standards, and as they are
principles-based they are open to interpretation.
Other GAAPs have formed regulatory frameworks in order to regulate the financial reporting activities
of their members. UK GAAP is formed of company law issued by the UK government and accounting
standards issued by the Accounting Standards Board. The ASB has a body within it, the Financial
Reporting Review Panel, whose function is to police the financial statements issued by UK
companies. It aims to ensure that published financial statements are prepared in conformity with the
UK regulatory framework.
1012

Answer 9 FOUR CONCEPTS
(a)
Entity concept
In accounting, it is necessary to define the boundaries of the entity concerned. In the case of a
limited liability company, only transactions of that company must be included. There must be
no confusion between the transactions of the company and the transactions of its owners and
managers.
If the entity concept is not followed, the profit, financial position and cash flow may all be
distorted to the point where they become meaningless.
A limited liability company is therefore a separate entity which can sue and be sued in its own
name.
(b)
Going concern concept

The going concern is that financial statements are prepared on the basis that the entity will
continue for the foreseeable future that there is no intention or necessity to liquidate or
curtail the scale of operations.
If the going concern concept is followed when it is not appropriate, assets may be overstated,
liabilities may continue to be shown as non-current when the collapse of the going concern
status of the entity renders them current liabilities, and the profit is likely to be overstated.
(c)
Materiality
Information is material if its omission from, or misstatement in, the financial statements could
influence the economic decisions of users. Materiality cannot always be measured in
monetary or percentage terms, but a commonly used measure is 5% of normal pre-tax profit.
Above that level, for example, the transaction would need to be disclosed in the financial
statements.
Materiality is not solely related to the size of a transaction; it would also be necessary to
consider the nature of the transaction and the fact that the nature would give rise to an item
being treated as material and require disclosure.
If the materiality concept is not followed, financial statements could become confused by the
inclusion of unnecessary detail of trivial matters, or could be rendered misleading by the
exclusion of reference to important matters.
(d)
Fair presentation (true and fair view)

Fair presentation really means that all figures in financial statements have been arrived at
accurately when accuracy is possible (true) and that when judgement or estimation is needed
it has been exercised without bias (fair). Compliance with generally accepted concepts and
principles will normally result in fair presentation.
Failure to present information fairly will obviously mean that users may be misled by the
1013

Answer 10 IASB
(a)
(b)
Objectives
To formulate and publish in the public interest accounting standards to be observed

in the presentation of financial statements and to promote their world-wide
acceptance and observance.
To work generally for the improvement and harmonisation of regulations,

accounting standards and procedures relating to the presentation of financial
statements.
Producing an IFRS
A Steering Committee is set up, chaired by a Board representative, and usually

including representatives of at least three other countries.
The Steering Committee identifies and reviews all the accounting issues associated
with the topic. These will include:
The application of the IASB Conceptual Framework for Financial

Reporting
Review of existing national and regional accounting requirements and

practice.
The Steering Committee then submits a Point Outline to the Board.
After receiving comments from the Board, the Steering Committee prepares and
publishes a Draft Statement of Principles. Comments are invited from all interested
parties during an exposure period, usually between four and six months.
The next stage is the preparation of a final Statement of Principles, which is

submitted to the Board by the Steering Committee. This final Statement is used as a
basis for preparing an Exposure Draft of a proposed IFRS. The final Statement of
Principles is available to the public on request, but is not formally published.
The Steering Committee prepares a draft Exposure Draft for approval by the Board.
After revision, and with the approval of at least 9 members of the board, the
Exposure Draft is published. Comments are invited from all interested parties
during an exposure period, usually six months.
The Steering Committee reviews the comments and prepares a draft IFRS for
review by the Board. After revision, and with the approval of at least 9 members of
the board, the IFRS is published.
During the process, the Board may decide to issue a Discussion Paper for comment, or to
issue more than one Exposure Draft.
1014

Answer 11 OBJECTIVES
(a)
Users
Information needs
(1)
(2)
(3)
(b)
Investors and their advisers
Employees
Lenders
performance of management in achieving

profit growth while ensuring the continued
solvency of the company;
the risk inherent in the companys operations.
stability and survival of the company;
ability of the company to provide

remuneration, employment opportunities and
retirement benefits.
the solvency of the company;
profitability, to ensure payment of interest

when due;
asset values.
(4)
Suppliers and other creditors
information as to the solvency of the company

and its ability to pay, probably over a shorter
period than lenders.
(5)
Customers
information about the continuance of the

company, especially if they have a long term
involvement with it.
Achieving objectives
Users of financial statements are interested in three main areas in their use of company
financial statements:
profitability;
solvency/liquidity;
the risk of the operation.
The statement of comprehensive income provides a measure of profitability. However, the

use of historical cost accounting means that the profit is often overstated as depreciation is
often based on historical cost of the assets and inventory tends to be valued at an historic cost
which does not match itself to the current revenue figure.
The statement of financial position details of current assets and liabilities enable users to form
a reasonable assessment of a companys solvency, because they are reasonably reliably
valued. Lack of information about the dates of payments to sundry accounts payable or
receipts from sundry accounts receivable could affect the position. Users would be very
interested in seeing the age analysis of the accounts receivable balances in order that they may
make a more informed judgement on the solvency of the business.
The leverage ratio (percentage of total assets financed by debt) provides a reasonably reliable
assessment of the financial risk of the companys operation.
1015

Two ways in which the quality of information disclosed in financial statements could be
improved:
requiring regular revaluation of non-current assets;

reducing the number of alternative accounting treatments allowed by accounting
standards.
Answer 12 COMPARABILITY
(a)
Meaning and types

Comparability means that users are able to draw conclusions about the performance or
financial position of a business by relating amounts for a particular period to other relevant
amounts. Possible types of comparison are with:
figures for the same business for earlier periods;

figures for other businesses for the same period;
budgets or forecasts.
Tutorial note: Two types only required for full marks.

(b)
Aid to comparability
The IASBs Framework and the requirements of accounting standards aid comparability by:
requiring the disclosure of accounting policies (IAS 1 Presentation of Financial

Statements) and the effect of changes in them (IAS 8 Accounting Policies, Changes
in Accounting Estimates and Errors);
reducing or eliminating the number of possible alternative treatments for similar

items available to businesses;
requiring businesses to treat similar items in the same way in each period and from
one period to the next (unless a change is required to comply with accounting
standards or to ensure that a more appropriate presentation of events or transactions
is provided).
Answer 13 ADJUSTMENTS
Internal memorandum
To
From
Date
Members of the Board

S Bean, Financial Accountant
5 February 2012
Re
Adjustments to depreciation
At the board meeting on 1 January 2011 it was decided to modify the depreciation charge on a
number of assets of the company. Set out below is the effect that these modifications will have on
the accounts for the year to 31 December 2011.
(a)
Lathe
The lathe was purchased in 2005 and was originally being written off over an estimated
useful life of 12 years. As at 1 January 2011 six of the years have elapsed with a further
six years remaining. It was decided that the machine will now only be usable for a further
four years.
1016

IAS 16 Property, Plant and Equipment requires that where the original estimate of useful
life is revised, adjustments should be made in current and future periods (not in prior
periods). I therefore propose that the unamortised cost of the asset should be charged to
revenue over the remaining useful life of the asset. The carrying amount of $75,000
should therefore be charged over the remaining four years of useful life, giving an annual
depreciation charge of $18,750.
The revision is not a change in accounting policy, or an error. It is merely a refinement of
an existing policy to reflect changed circumstances. It is therefore not appropriate to deal
with any excess depreciation by adjusting opening retained earnings.
(b)
Grinder
The grinder was purchased in 2008 and was originally being depreciated on a straight line
basis. It has now been decided to depreciate this on the sum of digits basis.
IAS 16 requires that depreciation methods be reviewed annually and if there is a significant
change in the expected pattern of economic benefits, the method should be changed.
Depreciation adjustments should be made in current and future periods. This change might
be appropriate if, for instance, usage of the machine is greater in the early years of an
assets life when it is still new and consequently it is appropriate to have a higher
depreciation charge.
If the change is implemented, I propose that the unamortised cost (the carrying amount) of
the asset should be written off over the remaining useful life commencing with the period
in which the change is made. The depreciation charge for the remaining life of the asset
will therefore be as follows:
Year
2011
2012
2013
2014
2015
2016
2017
7 (7 + 1)
No of digits
7
6
5
4
3
2
1
28
7/28 $70,000
6/28 $70,000
Depreciation
$
17,500
15,000
12,500
10,000
7,500
5,000
2,500
70,000
Disclosure will need to be made in the accounts of the details of the change, including the
effect on the charge in the year.
(c)
Leasehold land
The revaluation model in IAS 16 allows groups of assets to be subsequently valued at a
revalued amount, which will normally be its fair value.
Where any item of property plant or equipment is revalued, the entire class to which the
asset belongs should be revalued. Revaluations must be kept up to date. Where there are
volatile movements in fair value, the revaluation should be performed annually. Where
there are no such movements, revaluations every three to five years may be appropriate.
1017

Accumulated depreciation at the date of revaluation is either
(i)
restated proportionately with the change in the gross carrying amount so that
the carrying amount after the revaluation equals the revalued amount (e.g.
where revaluations are made to depreciated replacement cost using indices)
(ii)
eliminated against the gross carrying amount of the assets and the net amount
restated to the revalued amount of the asset (e.g. where buildings are revalued
to their market value).
IAS 16 requires that the subsequent charge for depreciation should be based on the
revalued amount. The annual depreciation will therefore be $62,500 (i.e. $1,500,000
divided by the 24 years of remaining life).
There will then be a difference between the revalued depreciation charge and the historical
depreciation charge.
The resulting excess depreciation may be dealt with by a movement in reserves (i.e. by
transferring from the revaluation surplus to retained earnings a figure equal to the
depreciation charged on the revaluation surplus each year).
Additional disclosures required under IAS 16 include the following:
(i)
the basis used to revalue the assets (e.g. market value based on existing use)
(ii)
the date of the revaluation
(iii)
whether an independent valuer was involved
(iv)
the nature of any indices used
(v)
the carrying amount of each class of property plant and equipment that would
have been included at historical cost
(vi)
the revaluation surplus, indicating movements for the period and any
restrictions on the distribution of the balance to shareholders (many countries
prohibit the distribution of revaluation surpluses to shareholders as they are
unrealised profits).
Answer 14 SPONGER
MEMORANDUM
To
From
Date
Philip Tislid, Sponger

Bill Smith, Accountant
27 January 2012
Subject Accounting for government assistance received by Sponger

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance requires that
no grant should be recognised until there is reasonable assurance that the entity will comply with the
conditions attaching to them and that the grants will actually be received. The IAS covers forgivable
loans and non-monetary grants.
1018

(a)
Research and development grants

The general principle of IAS 20 is that grants should be matched in the statement of
comprehensive income with the expenditure to which they are intended to contribute. They
should not be credited directly to shareholders interests.
Cuckoo project
The expenditure on the Cuckoo project is research and therefore is written off as incurred
under IAS 38 Intangible Assets. Accordingly the grant of $10,000 should be credited to
profit or loss in the years in which the expenditure to which it relates is incurred.
Hairspray project
The Hairspray project appears to satisfy the criteria of IAS 38 for deferral of development
expenditure, and thus may be carried forward as an intangible fixed asset until commercial
production commences (2013). It will then be amortised to profit or loss over the period of
successful production. Technological and economic obsolescence create uncertainties that
restrict the time period over which development costs should be amortised.
The grant of $10,000 relating to it will therefore also be carried forward as deferred
income, and will be released to profit or loss in line with the amortisation of the
development expenditure. The balance of $10,000 will appear in the statement of financial
position at 31 December 2011 under current and non-current liabilities as appropriate.
Grants relating to assets can either be:
(b)
set up as deferred income and recognised in profit or loss over the useful life of
the asset (to match the depreciation charge), or
deducted from the carrying amount of the asset in the statement of financial
position (i.e. being recognised over the useful life of the asset by means of a
reduced depreciation charge).
Compensation grant
IAS 20 states that grants receivable as compensation for expenses or losses already
incurred should be recognised as income when they become receivable. They cannot be
taken back to prior periods, as their receipt does not constitute correction of a prior period
error or a change in accounting policy. Disclosure may be appropriate.
However, in order to apply the prudence concept, the standard requires grants not to be
recognised until conditions for receipt have been satisfied and receipt is reasonably
assured.
In this situation the conditions for receipt, namely filling out the triplicate form, have not
been fully satisfied and therefore the grant should not be recognised in the accounts at 31
December 2011.
1019

(c)
Vocational experience grant

(i)
General accounting
This grant relates not to specific expenditure but to a non-financial objective.
The terms of the grant suggest that it is effectively earned at a rate of $1,000
per visit, and therefore it should be credited to income at that rate. In the year
to 31 December 2011 the credit will be $7,000. Amounts to be recognised in
future periods will be carried forward as deferred income.
The grant is not spread over the life of the bus as it does not specifically
contribute to its cost.
(ii)
Repayments
A repayment of $5,000 is due relating to unfulfilled visits in the current year
and should be provided for. However, as this is expected to recur in each of the
next four years, provision also needs to be made in total for repayments relating
to 20 further unfulfilled visits.
A contingent liability should be disclosed relating to the potential repayment of
the grant relevant to the visits in future periods which are expected to take
place.
(iii)
Amounts for the financial statements

Profit or loss
$
7,000
Grants received (7 $1,000)

Statement of financial position
Current liabilities (1 7 $1,000)
Non-current liabilities (3 7 $1,000)
Provision for grant repayment (5 5 $1,000)
$
7,000
21,000
25,000
Note to the financial statements

There is a contingent liability in respect of potentially repayable government grants of
$28,000.
Answer 15 FAM
Accounting policies
(a)
Property, plant and equipment is stated at historical cost less depreciation, or at valuation.
(b)
Depreciation is provided on all assets, except land, and is calculated to write down the cost
or valuation over the estimated useful life of the asset.
The principal rates are as follows:
Buildings
Plant and machinery
1020

25% per year reducing balance

Non-current asset movements
Cost/valuation
Cost at 1 January 2011
Revaluation adjustment
Additions
Reclassifications
Disposals
Cost at 31 December 2011
2011 valuation
Depreciation
At 1 January 2011
Revaluation adjustment
Provisions for year (W2)
Disposals
At 31 December 2011
Carrying amount
At 31 December 2011
At 31 December 2010
Land
Plant
Fixtures, Payments on
and
and
fittings, account and
buildings machinery tools and assets in the
equipment course of
construction
$000
$000
$000
$000
900
1,613
600
154
100
(277)

100
1,490
1,500

$000
91
2,994
600
73 (W1) 267
(100)
(318)
64
2,043
1,500
140
70
(31)
179
1,583
929

210
64
2,786
820
1,155

250
91
2,316
80
(80)
17
17
458
298
(195)
561
390
40
(41)
389
Total
678
(80)
385
(226)
757
Land and buildings have been revalued during the year by Messrs Jackson & Co on the basis of an
existing use value on the open market.
The corresponding historical cost information is as follows:
Land and buildings
$000
Cost
Brought forward
Reclassification
Carried forward
Depreciation
Brought forward
Provided in year
Carried forward
Carrying amount
900
100
1,000
80
10
90
910
1021

WORKINGS
(1)
(2)
$000
53
20
73
Additions to assets under construction

Deposit on computer
$000
600
17
+ (100 2%)
Depreciation on buildings
40
2% straight line depreciation is equivalent to a 50-year life.
The buildings are 10 years old at valuation and therefore have 40 years remaining.
Depreciation on plant (1,613 + 154 277) 20%

Depreciation on fixtures (390 + 40 41 140 + 31) 25%
298
70
Answer 16 STOAT
To:
Directors of Stoat
From:
Financial adviser
Depreciation and non-current asset valuation
You asked me to explain certain aspects of the accounting regulations governing depreciation and noncurrent asset valuations, and I have set out the information you need below.
(a)
Purpose of depreciation and factors affecting its assessment
The purpose of depreciation is to spread the cost of a non-current asset with a life of several
years as fairly as possible over the periods expected to benefit from its use.
The factors affecting the assessment of the useful life of an asset are:
(b)
expected usage;
expected physical wear and tear;
technological obsolescence;
legal or similar limits on the use of the asset, such as the expiry dates of related
leases.
Evidence that depreciation rates might be too low
[Three from]
1022
Substantial losses on sale of non-current assets;

Frequent scrapping of assets before end of useful lives assessed;
Advice from auditors;
Information from other companies financial statements;
Information from trade associations.

(c)
(d)
Disclosures if depreciation methods are changed
The effect, if material, in the year of change;
The reason for the change.
Revaluation of non-current assets
IAS 16 Property, Plant and Equipment allows the revaluation of non-current assets other
than goodwill if a policy of revaluation is adopted.
IAS 16 requires that if any asset of a class is revalued, all assets of that class must be
revalued. Once revaluation is adopted, values must be kept up to date.
Any change in value will be recognised in equity as a revaluation surplus, after being
included in other comprehensive income. Any surplus, or loss, cannot be reclassified when
the asset is disposed, although a reserve transfer can be made from the revaluation surplus
to retained earnings.
There are extensive disclosure requirements, including the basis of valuation, whether an
independent valuer was involved and the date and amounts of valuations.
Answer 17 SUBSTANCE OVER FORM
Preparing accounts on a substance over form basis means that they should reflect the commercial
effect of transactions rather than their legal form.
The arguments for and against this treatment are discussed below.
Framework
The IASBs Conceptual Framework for Financial Reporting notes that financial statements are
frequently described as showing a true and fair view (as in the UK), or as presenting fairly the
financial position (as in the US).
Many other countries adopt similar requirements for financial statements, particularly in Europe
where the requirements of directives state that all member states financial statements should give a
true and fair view. This is, for example, translated as donner une image fidele in France. Some
countries interpret this as meaning in accordance with their own legislation, particularly in Germany,
but generally speaking, legislatures and accounting standard setters increasingly recognise an
overriding notion of truth and fairness.
One of the fundamental qualitative characteristics required by the Framework is that of Faithful
Representation. To faithfully represent a transaction the entity must reflect the economic reality
(substance) rather than its legal form, if there is a difference. It gives the example of an entity
disposing of an asset in such a way that the documentation purports to pass legal ownership to a third
party, but where agreements exist to ensure that the entity continues to enjoy the future economic
benefits embodied in the assets. In such circumstances the reporting of a sale would not represent
faithfully the transaction entered into.
1023

Application of the principle
IAS 17 Leases requires that finance leases be capitalised in the statement of financial position where
certain conditions are met. In such cases the legal form of the transaction is that the lessor retains the
legal title to the assets. The economic substance of the transaction however is that the lessee is the
true owner of the asset as the lease transfers substantially all the risks and rewards incident to the
ownership of the asset. The lessee therefore includes it in its financial statements. Not to do so would
distort gearing ratios.
IFRS 10 Consolidated Financial Statements requires that group accounts be prepared to show
information about the group as that of a single entity, without regard for the legal boundaries of the
separate legal entities.
IAS 32 Financial Instruments: Presentation recognises that some financial instruments take the legal
form of equity, but are liabilities in substances and requires that classification of an instrument is
made on the basis of an assessment of its substance when it is first recognised.
IAS 1 Presentation of Financial Statements states the importance of prudence, substance over form
and materiality in the selection and application of accounting policies and the preparation of
Other areas where the principle applies include the factoring of receivables and the sale and
repurchase of inventories. Factored debts are sold to a third party in exchange for a proportion of
the carrying amount of the debt. Such agreements vary considerably in their nature and some leave
the entity with most of the risks associated with the collection of the receivables. In such
circumstances it may be appropriate to keep the receivables on the face of the statement of financial
position and recognise the cash received from the factor as a liability, rather than accounting for the
transaction as a sale of the receivable.
Consistency, comparability and subjectivity
Another argument put forward against the use of substance over form is that it introduces yet more
subjectivity into accounts (the judgment of the true substance). It is argued that if transactions were
accounted for on a legal basis, there would be greater certainty and objectivity in the preparation of
accounts and hence more comparability.
It may be true that the certainty of legal form would increase, but this does not mean the
comparability. In fact most accountants would say that it is the substance over form principle which
is designed to increase comparability by making transactions of a similar nature treated in similar
ways.
It may introduce another element of subjectivity, but accounts preparation inevitably does involve
many judgmental decisions. It is these judgments that make accounts fair as well as true, and hence
duly comparable.
Accounting or extra disclosure
A further argument against the proposal is that it may not be essential to account on the basis of
substance over form, but merely to provide additional disclosure.
The argument here rests on whether any amount of disclosure can compensate for a transaction
which is fundamentally misleadingly treated in the accounts. If additional disclosure is not so much
addition as contradictory to the accounting treatment, then surely the result is confusing the user and
hence still misleading and not true and fair.
1024

Conclusion
Broadly speaking, the Anglo-Saxon world regards economic substance as being more important than
legal form. This is at least in part due to the historical separation of fiscal and financial accounting.
Countries with civil, as opposed to common law legal traditions place more emphasis on the fiscal
correctness of financial statements. With increasing globalisation of capital markets the trend, at the
moment seems to be away from legal form, and towards economic substance. However, the inherent
uncertainties in the notion of economic substance mean that there is an ever increasing volume of
accounting standards on what exactly is meant by substance as it is very easily abused.
Answer 18 HUGHES AND CUSTOM CARS
(a)
Hughes
The Conceptual Framework for Financial Reporting states that financial statements should
show the economic substance of transactions over their legal form.
Hughes has entered into a sale and repurchase agreement with the Wodwo Bank. Hughes
has received $36 million now. If Hughes exercises its call option after one month, it will
repurchase the inventory at a premium of $1.8 million which represents a finance charge of
5% for the month. If the Wodwo Bank exercises its put option after two months, Hughes
will repurchase the inventory at a premium of $3.7 million which represents a finance
charge of 5% for each of the two months.
It is highly likely that one or other of the options will be exercised. Taking the transactions
as a whole, the commercial substance is that of a short-term loan secured on the inventory.
The inventory should remain in inventory at $30 million at year end. $36 million should
be shown in current liabilities. The interest payable to 31 December 2011 of $1.2 million
($1.8m 21/31) should be charged to profit or loss and added to the liability in the
statement of financial position.
(b)
Custom Cars
Unless Sigmas cash contribution is very substantial (say 80% as opposed to 20% of the
expenditure incurred by Custom Cars), there should be no doubt that Custom Cars owns
the extension (and has the risks and rewards of ownership).
The fittings supplied free of charge by Sigma could be excluded from the statement of
financial position on the grounds that they are not owned by Custom Cars. Also their
economic benefit is primarily to Sigma in promoting Sigmas product.
Answer 19 PERSEUS
(a)
Adjustments to be made
(i)
For inventory
The opening balance of retained earnings should be adjusted in the statement of

changes in equity.
Comparative information should be restated, unless it is impracticable to do so
1025
(b)
(ii)
IAS 8 required disclosure
The nature of the error.
The amount of the correction for the current period and for each prior period
presented.
The fact that comparative information has been restated or that it is impracticable to
do so.
Current assets
$
4,249,800
2,674,300
773,400
940,000
Inventory (W1)
Trade receivables (W2)
Prepayments
Cash at bank
WORKINGS
(1)
Inventory
$
As originally taken
(i)
(ii)
Reduction to net realisable value

Original cost
Net realisable value (10,400 600)
Goods on sale or return at cost
16,000
9,800
$
4,190,000
(6,200)
66,000
_________
4,249,800
_________
(2)
Trade receivables
As originally stated
Accounts receivable ledger
Less:
Goods on sale or return
Less:
Debts written off
2,980,000
88,000
_________
2,892,000
92,000
_________
2,800,000
Less: Allowance for doubtful debts

5% $2,800,000
Accounts payable ledger balances
140,000
_________
2,660,000
14,300
_________
2,674,300
_________
1026

(3)
Prepayments
$
As originally stated
Payments on account
Less: Commission due
2/102 $1,101,600
$
770,000
25,000
21,600
______
3,400
_______
773,400
_______
Answer 20 JENSON
(a)
Critical event
Problems of revenue recognition in accounting arise from the requirement to produce

financial statements for specific periods of reporting. Consequently accounting principles and
practices have evolved which focus on when and at what value transactions should be
recognised in financial statements. Annual reporting creates artificial periods that are not
related to the natural operating cycle of an entity. A typical operating cycle (for a
manufacturing company) would comprise of acquiring goods or raw materials from which a
saleable product is manufactured, at some stage orders would be obtained for these goods and
they would then be delivered to and accepted by customers. The collection of cash for these
sales is often considered to be the end of this process, but it should be borne in mind that in
some cases further risks can exist in relation to product warranties or other after-sale
commitments. The critical event theory argues that there comes a stage in the operating cycle,
beyond which there is either no further significant risks or uncertainties or that they can be
estimated with sufficient accuracy to enable revenue to be recognised. The point at which
there remain no further risks is referred to as the critical event. For most transactions the
critical event is synonymous with full performance, but in theory, the critical event could
occur at almost any point in the operating cycle.
The traditional view of determining profit involves matching revenues earned with the related
cost of earning those revenues. This involves the use of the accruals, matching and prudence
concept, with prudence being closely related to the principle of realisation. Under this
approach the statement of financial position is effectively a statement of unexpired costs and
un-discharged liabilities.
In its Framework, the IASB advocates a different approach; it takes a balance sheet
approach to the process of revenue recognition. It chooses to define the elements of financial
statements, principally assets and liabilities, and uses these to determine income (gains) and
expenses (losses). Recognition of gains and losses takes place when there is an increase or
decrease in equity other than from contributions to, or withdrawals of, equity. Thus increases
in economic benefits in the form of enhancements of assets or decreases in liabilities result in
income, and decreases in economic benefits in the form of outflows or depletions of assets or
incurrences of liabilities results in losses (expenses). Recognition is the incorporation of an
item in the financial statements. It involves the depiction of the item in words and at a
monetary amount. For a transaction to be recognised as giving rise to a new asset or liability,
or to add to an existing one, it must meet the following recognition criteria:
(i)
it is probable that any future economic benefit associated with the item will flow to
the entity; and
(ii)
the item has a cost or value that can be measured with reliability.
1027

(b)
Acquisition of goods or raw materials:
For most industries this event is a routine occurrence that could not be considered as critical.
However where this is a very difficult task, perhaps due the rarity or scarcity of materials,
then it may be critical. A rare practical example of this is in the extraction of precious metals
e.g. gold mining. Because gold is a valuable and readily marketable commodity the real
difficulty in deriving income from it is obtaining it, so this is the critical event. A logical
progression of this point would be to say that any industry whose products are normally sold
on a commodities market could consider the obtaining of the product to be the critical event.
Such industries may include, for example, growing coffee beans.
During the manufacture or production of goods:
Again for most industries this is not the critical event. Normally there would be far too many
uncertainties remaining in the operating cycle. For example the manufacturing process could
be flawed and therefore not produce saleable goods. Even if the goods are manufactured
properly, it does not necessarily mean someone will buy them. It could be argued that where
there is a firm order for the goods this would overcome some of the uncertainties, but it would
still be imprudent to recognise firm orders as sales. There are however some industries where,
due to a long production period, revenues are recognised during the production or
manufacturing period. The most common example of this is the percentage of completion
method of profit recognition for construction contracts under IAS 11 Construction
Contracts. Where companies adopt this approach to revenue (and profit) recognition it is
generally referred to as the accretion approach.
Delivery/acceptance of the goods:
For the vast majority of businesses this is the point at which revenue is recognised, and it
usually coincides with the transfer of the legal title to the goods and represents the point of
full performance. Although there may be some uncertainties beyond this point (for example,
the goods may prove to be faulty or the customer may not be able to pay for them), these can
usually be quantified and provided for with reasonable accuracy based on past experience.
When a condition has been satisfied after the goods have been delivered:
The most common occurrence of this type of sale is where the customer has the right to return
goods and not incur a liability for them. In most cases the condition is the passage of time
(e.g. goods may be returned within three months of delivery), but it may also occur in relation
to some other event such as their subsequent resale to another party. Traditionally with this
type of sale, its recognition is delayed until the condition has been met, however one could
argue that the substance of these transactions should be considered. Although a customer may
have the right to return goods, if it can be demonstrated that in practice this never actually
occurs, then recognising the sale before the expiry of the return period could be justified.
Another example of this type of condition is where the terms of a sale of say an item of
equipment required the seller to install and test the equipment. If this involves significant
expense or risk then recognition of this type of sale would be deferred until completion of the
installation.
1028

Collection of cash:
For most (credit) sales the risk of non-payment is relatively low. Revenue recognition would
only be delayed to the point of receipt of cash if its collection was perceived to be particularly
difficult or risky. Revenues (and profits) from high risk credit sale agreements may be
examples of this. Another possibility is sales made to risky overseas countries/customers,
particularly if they are in non-convertible currencies or the country has strict exchange
controls.
Expiry of guarantees/warranties:
This serves as a reminder that not all the risks and associated costs are resolved when cash is
received. For some products such costs can be significant (e.g. with the supply of new motor
vehicles or rectification work on construction contracts); however it is normally possible to
reliably estimate these costs and provide for them at the time of the sale. It would be
unrealistic, and may cause distortions, if revenues were not recognised until such obligations
had elapsed.
(c)
Transactions
(i)
Although this agreement may be worded as a sale, and even if the title to the goods
passes to Wholesaler, it seems clear that this is not a sale it is a secured loan.
Therefore Jenson should not treat the income from Wholesaler as revenue, but
instead as a loan in its statement of financial position. The goods should continue to
be recognised as inventory, and accrued interest of $3,150 ($35,000 12% 9/12)
should be provided for against profit or loss.
(ii)
It appears that the on-going fees after the first initial payment are insufficient to
cover Jensons servicing cost and provide a reasonable profit.
In these
circumstances IAS 18 Revenue requires part of the initial fee of $50,000 to be
deferred and recognised in future periods as the servicing costs are incurred. As
there is a requirement to earn a (reasonable) profit of 20% on revenues, with ongoing servicing costs of $8,000, revenues of $10,000 would need to be recognised
in the next four years. The actual fees receivable are $5,000; therefore Jenson will
have to defer $20,000 ($5,000 four years) of the initial fee. Thus in the year to 31
March 2012 Jenson would recognise $30,000 ($50,000 $20,000) of the initial
franchise fee.
(iii)
An accruals/matching approach to this problem would be to say that the profit on

each publication would be $2,000 (($240000 $192,000)/24). In the year to 31
March 2012, as six of the 24 publications have been produced and delivered, the
profit or loss would include:
Sales (6 240,000/24)
Cost of sales (6 192,000/24)
Profit
$
60,000
(48,000)
12,000
Deferred income on the statement of financial position would be $180,000 ($240,000

$60,000).
1029
The problem with the above approach is that the deferred income does not seem to fit the
definition of liability in the Framework and IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. A liability is defined as an obligation of an entity to transfer economic
benefits as a result of past transactions or events. The Framework effectively says that a
statement of financial position comprises only of assets, liabilities and equity. Deferred
income does not satisfy the definition of any of the elements. The liability of Jenson is to
produce and deliver the next 18 publications. The cost of this liability is $144,000 ($192,000
18/24). Thus adopting the balance sheet approach to revenue recognition advocated in the
Framework would mean recognising only $144,000 as a liability on the statement of financial
position instead of $180,000 as deferred income under the accruals approach. The balance
sheet approach would mean that Jenson would recognise all of the profit on the publications
on receipt of the subscriptions. Many commentators have criticised the Framework for its lack
of prudence in reporting profit and being contrary to existing accounting practice and, in
some cases IFRS.
A similar argument to the above could be applied to the deferred franchise fees in (ii) above.
Answer 21 XYZ
(a)
Extracts from the financial statements of XYZ at 31 December 2011

(i)
Tangible non-current assets held under finance leases

Plant and machinery
$
Cost
At 1 January 2011
Additions
At 31 December 2011
At 1 January 2011
Charge for the year
At 31 December 2011
Carrying amount
At 31 December 2011
At 1 January 2011
1030
x
4,400
4,400
x
629
629
3,771

(ii)
Finance lease payables
Amounts payable:
$
Within one to five years ($600 8 $284)
Less future finance charges
4,516
996
3,520
Accruals
$
Finance leases ($667 + $284)
951
Profit or loss
Profit is stated after charging
$
Finance charges
Depreciation $4,400 7
(b)
604 (W2)
629
Table
Period ended
30 June 2011
31 December 2011
30 June 2012
31 December 2012
30 June 2013
31 December 2013
30 June 2014
31 December 2014
30 June 2015
31 December 2015
Amount
borrowed
$
4,400
4,092
3,760
3,403
3,018
2,604
2,158
1,677
1,160
600
Repaid
$
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)
Capital due 7.68%

for period interest
$
$
3,800
292
3,492
268
3,160
243
2,803
215
2,418
186
2,004
154
1,558
119
1,077
83
560
40
Amount due
at period end
$
4,092
3,760
3,403
3,018
2,604
2,158
1,677
1,160
600
Comparison
Period
1
2
3
4
5
6
7
8
9
10
Sum of digits (W2)

$
320
284
249
213
178
142
107
71
36
1,600
Actuarial (as above)

$
292
268
243
215
186
154
119
83
40
1,600
1031
WORKINGS
(1)
Calculation of finance charge
$
6,000
(4,400)
1,600
Minimum lease payments 5 $600 2

Fair value of asset
Finance charge
(2)
Allocation of finance charge

Period ended
Digits
30 June 2011
31 December 2011
9
8
9/45 $1,600
8/45 $1,600
30 June 2012
31 December 2012
30 June 2013
31 December 2013
30 June 2014
31 December 2014
30 June 2015
31 December 2015
7
6
5
4
3
2
1
7/45 $1,600
6/45 $1,600
5/45 $1,600
4/45 $1,600
3/45 $1,600
2/45 $1,600
1/45 $1,600
n ( n + 1)
9(9 + 1)
=
2
2
45
1,600
(3)
Finance charge
$
320
284
604
249
213
178
142
107
71
36
Lease obligation
Period ended
Amount
borrowed
Repaid
$
4,400
4,120
3,804
3,453
$
(600)
(600)
(600)
(600)
30 June 2011
31 December 2011
30 June 2012
31 December 2012
Capital due Interest

for period
$
3,800
3,520
3,204
2,853
$
320
284
249
213
Amount
due at
period end
$
4,120
3,804
3,453
3,066
$3,804
Interest
$284
Capital
$3,520
During 2011
$667
1032
End 2011
$2,853

Answer 22 SNOW
Extracts from the financial statements of Snow for year ended 31 December 2011
Profit or loss
Profit is stated after charging

Finance charges
Depreciation
$(1,714 + 1,429 + 9,614) (W1 and 2)
$
12,757
41,667

Tangible non-current assets held under finance leases
Cost
At 1 January 2011
Additions $(35,000 + 150,000)
At 31 December 2011
At 1 January 2011
35,000 150,000
Charge for year $
+
5
3
At 31 December 2011
Carrying amount
At 31 December 2011
At 1 January 2011
Plant and
machinery
$
185,000
185,000
41,667
41,667
143,333
Finance lease payables
Amounts payable:
Within one to five years
Less future finance charges
$
166,000 ($6,500 4 + $35,000 4)
18,243 ($2,857 + $15,386 *)
147,757
* $35,000 5 = $175,000 $150,000 $9,614 = $15,386

Accruals
Finance leases
$
46,000 ($11,000 + $35,000)
1033
WORKINGS
(1)
Snowplough
(a)
Calculation of finance charge
$
2,000
39,000
(35,000)
6,000
Deposit
MLP (6 $6,500)
Fair value of asset
Finance charge
(b)
Allocation of finance charge

Period
ended
Digits
30 Jun 2011
31 Dec 2011
30 Jun 2012
31 Dec 2012
30 Jun 2013
6
21
5
21
4
21
3
21
2
Finance
charge
$
$6,000
1,714
$6,000
1,429
$6,000
1,143
$6,000
857
$6,000
571
$6,000
286
21
31 Dec 2013
1
21
21
6,000
n(n + 1)
6( 7 )
= 21
=
2
2
(c)
Period
ended
30 Jun 2011
31 Dec 2011
30 Jun 2012
31 Dec 2012
1034
Capital
O/S at start
$
33,000
28,214
23,143
17,786
Interest
$
1,714
1,429
1,143
857
Amount Repayment Capital

O/S at end
O/S at end
$
$
$
34,714
(6,500)
28,214
29,643
(6,500)
23,143
24,286
(6,500)
17,786
18,643
(6,500)
12,143
$23,143
Interest
Capital
$23,143
During 2011
$11,000
(2)
End 2011
$12,143
Snow machine
Amount Repayment Capital
O/s at start
O/S at start
$
$
$
150,000
(35,000)
115,000
124,614
(35,000)
89,614
Period
Ended
31 Dec 2011
31 Dec 2012
Interest
at 8.36%
$
9,614
7,492
Amount
O/S at end
$
124,614
97,106
$124,614
Capital
$115,000
During 2011
$25,386
Interest
$9,614
End 2011
$89,614
Answer 23 INTELLECTUAL INDIVIDUALS

(a)
Memorandum
To
From
Date
Subject
Bobby Bobov, Chairman, Intellectual Individuals

Amelia Bobouka
22 February 2012
Accounting treatment of research projects
I would advise you of the means by which the accounting department is dealing with
current research projects.
(i)
Project Rico
This research falls within the IAS 38 Intangible Assets definition of research as
being original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge. The work being performed is
experimental in nature, and to date there are not indications that it will be
successful. It would thus be imprudent to capitalise such expenditure, and
accordingly it should be written off in the year incurred.
1035
(ii)
Project Mounsey
The expenditure since 2008 has been classified as development expenditure

which should be capitalised. IAS 38 requires that development costs be
capitalised and amortised when all of the following criteria are met:
the costs can be separately identified and measured reliably

the product or process is technically feasible
the entity intends to produce, market or use the product/process
the market or usefulness to the entity of the product or process can
be demonstrated
the entity can demonstrate how it can generate future economic
benefits from the sale or use of the asset
adequate resources are available to complete the project.
The amount capitalised should not exceed recoverable amounts net of

production, selling and administrative costs directly incurred in marketing the
product.
Prior to 2008 there was insufficient certainty as to the recoverability of costs to
warrant capitalisation.
IAS 38 requires that development costs initially recognised as an expense
should not be recognised as an asset in subsequent periods.
Accordingly, the expenditure of $200,000 between 2008 and 2010 has been
correctly classified as an intangible non-current asset.
(iii)
Project Wellington
The costs incurred refining Project Wellington have been capitalised since
Department S discovered its extra properties. These costs should have been
prudently amortised over a period of five years. IAS 38 requires that capitalised
development costs be reviewed for impairment if any factors occur that may
lead to the asset being impaired.
The recent legislation changes mean that the carrying value of the development
costs capitalised should be written off immediately as they are no longer
recoverable.
If, however, the proposed legislation is not approved by Parliament, then the
provision for write-down in value can be written back.
(b)
Notes to the financial statements

(6)
Intangible assets
Deferred
development
costs
$
Cost
1 Jan 2011 and 31 Dec 2011
1036
600,000
$
Amortisation
1 Jan 2011 (2
200,000
400,000
) + (3
)
5
5
For year
Provision for diminution in value
40,000
160,000
520,000
At 31 Dec 2011
(10)
320,000
Carrying amount 1 Jan 2011
280,000
Carrying amount 31 Dec 2011
80,000
Statement of profit or loss disclosures
$
Costs incurred in year
Development costs amortised
$
332,000
200,000
532,000
Answer 24 ROVERS (IASs 10, 37 & 38)

(a)
The companys policy as regards research and development is contrary to the requirements of
IAS 38. All research expenditure should be written off to profit or loss as it is incurred. The
only exception is capital expenditure on research facilities.
All development expenditure should also be written off immediately unless the criteria in
IAS 38 can be demonstrated:
technical feasibility;
intention to complete the product;
ability to use or sell the product;
confidence that the product will make a profit if it is sold, or will be useful if for
internal purposes;
availability of technical, financial and other resources needed to complete the

product;
measurable expenditure.
If all of these conditions are met the company must capitalise the development costs, to be
written off systematically in the periods during which the product is used or sold. As the
substantial program has only been begun this year all these conditions may have still to be
met. Even if the conditions for capitalisation are met it is too soon to amortise the costs
(before there is a product to use of sell).
In order to capitalise any costs as development Rover must have a costing system that
distinguishes development expenditure from research.
1037

(b)
Provision/Contingent liability
IAS 37 defines a provision as a liability of uncertain timing or amount and a contingent

liability as either a possible obligation which will be confirmed only by the occurrence or
non-occurrence of a future event or a present obligation that is not recognised because it is
unlikely that there will be an outflow of future economic benefits or the amount of the
obligation cannot be measured reliably.
As it is felt that the claim is unlikely to succeed this would seem to fall into the definition of a
contingent liability and IAS 37 requires the estimated amount of damages to be disclosed by
note. However, as the legal costs are to be incurred whatever the outcome of the case, IAS 37
requires that a provision should be made for them in the companys financial statements.
Answer 25 LAMOND
(a)
Conditions to be met
An entity must be able to demonstrate all of the following:
The technical feasibility of completing the project so that it will be available for use
or sale.
The intention to complete the project and use or sell the result.
Its ability to use or sell the product.
The ability of the product to generate future economic benefits.
The availability of adequate technical, financial and other resources to use or sell
the product.
The ability to measure the expenditure attributable to the project reliability during
its development.
Tutorial note: These points are broadly worded as they appear in IAS 38. Answers using
the candidates own words to express them are obviously acceptable.
(b)
Amounts to appear
Statement of Statement of
Profit or loss financial
position
$
$
Project A
Amortisation
Project B
Expenditure written off
Project C
Development expenditure to date
Project D
Research expenditure
1038
40,000
80,000
230,000
255,000
80,000
_______
_______
350,000
_______
335,000
_______

(c)
Disclosure requirements
(i)
Total research and development expenditure recognised as an expense was

$350,000 analysed as follows:
Expenditure during the year
Amortised or written off from deferred expenditure
$
135,000
215,000
_______
350,000
_______
(ii)
Movements on unamortised development costs

Expenditure recognised as an asset in current year
$
380,000
225,000
_______
Amortised during year

Expenditure on abandoned project written off
605,000
(40,000)
(230,000)
_______
Balance at 30 June 2012
335,000
_______
Answer 26 ALLRIGHTS
Directors views on inventory valuation
Striver. A prudent approach is necessary, but the concept of accruals is also important. It is not
acceptable to undervalue inventories. Valuing inventories at low figures will not of itself help cash
flow although, as profit will be reduced, the outgoings for bonuses, taxation and dividends may also
be reduced.
Chatty. It is not acceptable to include selling costs or costs not related to production in the cost
calculation.
Gloome. Budgeted cost is not acceptable.
Opinion
Inventories should be valued at the lower of cost and net realisable value under IAS 2 Inventories.
Cost means all costs of purchase, of conversions and other costs incurred in bringing inventories to
their present location and condition. They include a systematic allocation of fixed and variable
production overheads including depreciation and maintenence of factory buildings and the cost of
factory management and administration. The allocation of these overheads must however be based
on the normal capacity of production facilities such that the value of inventories is not increased as a
result of inefficiencies.
In this case, Gloom indicates that there may have been some inefficiencies and these should be noted
carefully before any final decision is made.
1039
Costs to be included are therefore as follows:

Direct labour and materials
Bought-in components
Factory overheads
Production planning ($4,000 1,000)
$
38
5
8
4
55
Net realisable value means the selling price to be obtained on sale in the normal course of business
less any costs inevitably incurred on sale (i.e. $60 less royalty $2 and commission $4 = $54).
Inventories therefore should be valued at $54.
Answer 27 SAMPI (IAS 2)
(a)
IAS 2 treatment
(i)
Three acceptable methods
(1)
Unit cost
Inventory is priced at the actual amount paid for each individual item of inventory
held
(2)
First in first out

Inventory is assumed to be composed of the items most recently purchased,
regardless of whether this is actually the case. Inventory is therefore valued
according to the price paid for the most recent purchase. If this purchase is
insufficient to cover the quantity in inventory, the price of the next most recent
purchase is taken as necessary.
(3)
Average cost
Inventory is priced at the moving weighted average price at which each inventory
line was purchased during the accounting period, or brought forward from the
previous period.
All three of these methods are acceptable under IAS 2 because they are either the
actual cost of the inventory (method 1) or a reasonably close approximation to that
actual cost (methods 2 and 3).
(ii)
Finished goods valuation
The cost of the inventory of finished goods would normally be arrived at by taking the labour
and materials consumed in manufacturing the items plus an allocation of overheads. The
overhead allocation should be based on the normal level of production and should exclude
selling expenses and general management expenses.
1040

(b)
Computation of value of inventory

Value using weighted average basis
Number
of units
Weighted
Total value
average
of closing
cost
inventory
$
$
13.00
15.00
Opening inventory
8 March
4,000
3,800
_____
Balance
12 March
7,800
(5,000)
_____
13.97
2,800
(2,000)
_____
13.97
18 March
22 March
800
6,000
_____
13.97
18.00
6,800
(3,000)
_____
17.53
24 March
3,800
(2,000)
_____
17.53
28 March
1,800
_____
17.53
31,554
_____
Tutorial note: Or 31,558 without rounding differences.

Answer 28 WILLIAM
(a)
Statement of profit or loss (extracts)
Revenue(W3)
Cost of sales
Gross profit /(loss) (W1)
for the year ended 31 December

2008
2009
2010
2011
$000
$000
$000
$000
3,143
1,968
5,272
2,117
(2,750) (3,861) (3,339) (1,150)
393
(1,893) 1,933
967
1041

(b)
Statement of financial position (extracts)

2008
$000
as at 31 December
2009
2010
$000
$000
2011
$000
Contract revenue recognised as revenue

in the period:
3,143
1,968
5,272
2,117
3,143
4,250
10,383
12,500
143
Nil
Nil
Nil
Nil
750
617
Nil
Contract costs incurred and recognised profits

( less recognised losses ) to date
Gross amounts due from customers for
contract work (W2)
Gross amounts due to customers for
contract work (W2)
WORKINGS
(1)
Expected profit
2008
$000
Contract price
12,000
Less Costs to date (2,750) (2,750+3,000)
Est. future costs (7,750)
1,500
Allocate on
costs basis
393
(loss in full)
(see W3 for fraction)
Less prior periods
393
(2)
2009
$000
12,000
(5,750) (5,750+4,200)
(7,750)
(1,500)
2010
2011
$000
$000
12,000
12,500
(9,950)(9,950+1,150) (11,100)
(1,550)
500
1,400
(1,500)
433
(393)
(1,893)
1,500
1,933
1,400
(433)
967
Disclosure workings
Contract costs incurred

Profits /losses
2008
2,750
393
3,143
2009
2010
2011
5,750
9,950 11,100
(1500)
433
1,400

4,250 10,383 12,500
Billings
(3000) (5,000) (11,000) (12,500)

*
143
(750)
(617)
nil

*Positive = a receivable; Negative = a payable.
1042

(3)
Revenue
Allocate on a costs basis

2008
$000
Costs to date
Total costs
% complete
tender value
Revenue to date
Less taken
in prior periods
Revenue in year
2,750
(2,750+7,750)
2009
$000
2010
$000
5,750
(5,750+7,750)
9,950
(9,950+1,550)
11,000
11,000
26%
12,000
43%
12,000
3,143
5,111
10,383
12,500
(3,143)
1,968
(5,111)
5,272
(10,383)
2,117
3,143
86%
12,000
2011
$000
100%
Actual (12,500)
Answer 29 EARLEY
(a)
IAS 10 Events After the Reporting Period states that assets and liabilities should be
adjusted for events occurring after the end of the reporting period that provide additional
evidence relating to conditions existing at the end of the reporting period. It specifically
includes the example of bad debts, where evidence of bankruptcy of a debtor occurs after
the year end.
In this case, Nedengy appears to have recovered part of the debt and as such only $200,000
needs to be provided. It may be argued that the receivership has occurred as a result of
events occurring after the end of the reporting period, as a result of a change in legislation
for example, but this is unlikely.
IAS 18 Revenue states that when uncertainty arises about the collectability of an amount
already included in revenue, the amount should be recognised as an expense.
(b)
It is likely that the fall in the value of the property will fit the IAS 10 definition of
adjusting events noted in (a) above, unless, again, it can be argued that the decline in the
property market occurred after the year-end.
IAS 36 Impairment of assets and IAS 16 Property, Plant and Equipment require that the
carrying amount of property, plant and equipment should be reviewed periodically in order
to assess whether the recoverable amount has fallen below the carrying amount. Where it
has, the property, plant and equipment should be written down to the recoverable amount,
through the statement of comprehensive income as an expense, or within the other
comprehensive income section, if the asset had previously been revalued upwards and a
surplus still exists for that asset.
(c)
IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable
value. Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale.
1043
Unless Earley was making a significant margin on the tricycles, it is likely that the
reduction in selling price of 30% will necessitate a write- down to net realisable value,
especially considering the transportation costs to Bongolia which must be included. If the
Bongolia option is unlikely to proceed, it may be necessary to write the tricycles down to
scrap value.
(d)
Under IAS 10, the nationalisation is likely to be regarded as a non-adjusting event that
merely requires disclosure in the financial statements. IAS 27 Separate Financial
Statements, requires that an investment in a entity should be accounted for as an
investment (under IFRS 9: Financial Instruments) from the date that it ceases to fall within
the definition of a subsidiary and does not become an associate. It seems here that Earley
has neither control nor significant influence, nor even an investment as the assets have
been in fact, expropriated. The loss of the investment should be accounted for in the year
in which it occurred, but disclosed in the current year.
If the loss of the subsidiary results in Earley no longer being a going concern, then the
event becomes an adjusting event.
(e) & (f) Both of the events described are non-adjusting event which should be disclosed, but not
adjusted for in the current year financial statements.
Answer 30 ACCOUNTING TREATMENTS
(a)
IAS 37 Provisions contingent liabilities and contingent assets states that contingent gains
should not be recognised as income in the financial statements. The company has a debit
balance already in its books which indicates that it must be reasonably certain that at least
part of the claim will be paid. This element of the claim then is probably not a contingency
at all. The remaining part (the difference between the $15,000 and the $18,600) is, and
should be disclosed and not accrued.
(b)
IAS 16 Property, Plant and Equipment requires that the carrying amount of property, plant
and equipment should be reviewed periodically in order to assess whether the recoverable
amount has fallen below the carrying amount. Where it has, the property, plant and
equipment should be written down to the recoverable amount through the profit or loss as
an expense. It may be the case that the amounts involved are so significant as to warrant
separate disclosure under IAS 1 Presentation of Financial Statements.
(c)
IAS 37 states that contingent liabilities should not be recognised. Though a provision
should be made for amounts where the company has an obligation to pay them.
The question in this case is whether or there is an obligating event within the meaning of
IAS 37. On balance it seems inappropriate to recognise a provision in respect of this
amount but the possible liability should be disclosed as a contingent liability.
(i)
(ii)
(iii)
(d)
the nature of the contingency

the uncertainties surrounding the ultimate outcome
the likely effect (i.e. $500,000 loss less likely tax relief).
IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable
value. Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale.
In this case, cost is $1,800 and net realisable value is $1,600
1044

(e)
The company should set up a provision for $100,040 (i.e. should accrue for the 10%
probable liability). It should disclose the possible liability under contingent liabilities.
The disclosure is as noted in (c) except that the financial effect is $300,120 (30%
$1,000,400). The balance should be ignored as it is a remote contingent liability.
Tutorial note:
In (c) above it is not appropriate to provide for 20% receivable $500,000 (i.e. $100,000). This
would only be appropriate where the event is recurring many times over.
In (e) it is appropriate to use the percentages provided, as warranty work is provided for.
Answer 31 SHEP (I)
(a)
Corporate income tax liability year ended 31 December 2011
$
Profit per accounts
Add Depreciation
Less tax allowance
Taxable profits
Tax payable @ 30%
(b)
121,000
11,000
132,000
(15,000)
117,000
35,100
Deferred tax liability
$
Tax base
Carrying amount (60,000 11,000)
Temporary difference
Deferred tax provision required @ 30%
(c)
45,000
49,000
(4,000)
(1,200)
Movement on the deferred tax liability
$
Balance b/f
Profit or loss (balancing figure)
Balance c/f
(d)
1,200
1,200
Tax note
Current tax expense

Deferred tax expense
Tax expense
$
35,100
1,200
36,300
1045

Answer 32 SHEP (II)
(a)
$
Profit per accounts
Add Depreciation
Interest payable
Provision
Fine
125,000
14,000
500
1,200
6,000
146,700
(16,000)
(150)
130,550
Less tax allowance (given)

Interest receivable
Taxable profits
Tax payable @ 30%
(b)
39,165

Carrying
amount
$
Tangible assets
Carrying amount (49bf 14)
Tax base (45bf 16)
Interest payable (25,000 8% 3/12)
Interest receivable (4,000 15% 3/12)
Provision
Deferred tax @30%

(c)
Tax
base
$
Temporary
difference
$
29,000
29,000
6,000
(500)
150
(1,200)
4,450
35,000
(500)
150
(1,200)
33,450
1,335
$
Balance b/f
Balance c/f
1046
1,200
135
1,335

Answer 33 SHEP (III)
(a)
$
Profit per accounts
Add Depreciation
Interest payable (note)
Provision
Entertainment
175,000
18,500
1,500
20,000
215,000
(24,700)
(17,800)
172,500
Less tax allowance (given)

Interest receivable (note)
Development costs
Taxable profits
Tax payable @ 30%
(b)
51,750

Carrying
amount
$
Tangible assets
Carrying amount (35bf 18.5)
Tax base (29bf 24.7)
Interest payable
Interest receivable
Provision
Development expenditure
Deferred tax @30%

(c)
Tax
base
$
Temporary
difference
$
4,300
4,300
12,200
(500)
150
(2,700)
17,800
26,950
$8,085
16,500
(500)
150
(2,700)
17,800
31,250
$
Balance b/f
Balance c/f
1,335
6,750
8,085
Note
There is no adjustment to profit for the interest paid and the interest receivable.
Consider the interest payable. The tax authority will disallow the closing accrual but will allow last
years accrual (that has been paid in this year) as a deduction. These amounts are equal so there is no
net effect.
Similar comments can be made about the interest receivable.
1047

Answer 34 SHEP (IV)
(a)
(b)
Taxable profits (as before)
172,500
Tax payable @ 28%
48,300
(c)
Temporary difference (as before)
26,950
Deferred tax @28%
7,546
$
Balance b/f
Adjustment due to change in rate
1,335
(89)
1,246
6,300
7,546
Opening balance restated to 28% (1,335 28/30)

Balance c/f
Answer 35 BROKEN DREAMS
Notes to the accounts
Amounts
provided
(a)
$
Deferred taxation
Relating to
Tangible assets
Other temporary differences
(b)
235,950
55,440
291,380
Shareholders equity
$
Share capital
Revaluation surplus
Provision for deferred tax (60 @ 33%)
1048
60,000
(19,800)
______
40,200
WORKINGS
(1)
Standard deferred tax working

C/f Total
$
(2)
Tangible assets (W2)

Operating lease (W3)
Deferred development expenditure
715,000
88,000
80,000
883,000
Deferred tax @ 33%
291,390
Provision at 30 June 2012
Full basis (800,000 260,000 + 175,000) = $715,000

(3)
Operating lease
$
At 30 June 2012
Profit or loss charge to date
Rentals paid to date
72,000
160,000
88,000
Temporary difference
Answer 36 CONSOLIDATIONS
(a)
Consolidated statement of financial position at 31 December 2010
$
10,000
170,000
180,000
Goodwill
Sundry net assets (115,000 + 55,000)
Equity capital
Retained earnings
(1)
140,000
40,000
180,000
Net assets
S
Share capital
Retained earnings
Reporting
date
$
30,000
25,000
55,000
Acquisition
$
30,000
25,000
55,000
Postacquisition
$
1049

(2)
Goodwill
$
65,000
Cost of shares
Net assets acquired
S (100% 55,000) (W1)
(b)
(55,000)
10,000
$
6,000
191,000
197,000
Goodwill (10,000 4,000)

Equity capital
Retained earnings
(1)
140,000
57,000
197,000
Net assets
S
Share capital
Retained earnings
(2)
1050
Acquisition
$
30,000
25,000
55,000
Postacquisition
$
7,000
Goodwill
Cost of shares
Net assets acquired
S (100% 55,000) (W1)
(3)
Reporting
date
$
30,000
32,000
62,000
Retained earnings
P
S (100% 7,000 (W2))
Goodwill impaired
S
$
65,000
(55,000)
10,000
$
54,000
7,000
(4,000)
57,000

(c)
$
8,000
170,000
178,000
Goodwill
Equity capital
Retained earnings
127,000
40,000
167,000
11,000
178,000
(1)
Net assets
S
Share capital
Retained earnings
(2)
Acquisition
$
30,000
25,000
55,000
Postacquisition
$
Goodwill
Cost of shares
Net assets acquired
S (80% 55,000) (W1)
(3)
Reporting
date
$
30,000
25,000
55,000
S (20% 55,000 (W1))
S
$
52,000
(44,000)
8,000
$
11,000
1051

(d)
(i)
Non-controlling interest valued at proportionate share of idenftifiable net assets
$
4,800
191,000
195,800
Goodwill (8,000 3,200)

Equity capital
Retained earnings
127,000
56,400
183,400
12,400
195,800
(1)
Net assets of S
Share capital
Retained earnings
(2)
Reporting
date
$
30,000
32,000
62,000
Acquisition
$
30,000
25,000
55,000
Postacquisition
$
7,000
Goodwill
Cost of shares
Net assets acquired
S (80% 55,000) (W1)
$
52,000
(44,000)
8,000
(3)
S (20% 62,000 (W1))
$
12,400
(4)
Retained earnings
P
S (80% 7,000 (W2))
Goodwill impaired
$
54,000
5,600
(3,200)
56,400
1052

(ii)
Non-controlling interest valued at fair value
(1)
Goodwill
Cost of shares
Fair value of non-controlling interest (6,000 $2.15)
Net assets acquired (100%)
$
52,000
12,900
(55,000)
9,900
(2)
Fair value on acquisition
Share of post-acquisition profits (7,000 20%)
Share of goodwill impairment (3,200 20%)
$
12,900
1,400
(640)
13,660
(4)
Retained earnings
P
S (80% 7,000 (W2))
Goodwill impaired (3,200 80%)
$
54,000
5,600
(2,560)
57,040
Answer 37 HONEY
Consolidated statement of financial position as at 30 June 2012
Assets
Non-current assets
Tangible assets (27,000 + 12,500)
Current assets (25,000 + 12,000)

Shareholders equity
Retained earnings (9,000 + ( 14,000))
Non-controlling interest ( 17,000)

Current liabilities
$
39,500
37,000
76,500
20,000
6,000
18,333
44,333
5,667
50,000
12,000
14,500
76,500
1053

Consolidated statement of profit or loss for the year ended 30 June 2012
$
54,000
(20,000)
34,000
(3,600)
(4,200)
26,200
(1,200)
25,000
(8,000)
17,000
Revenue (24,000 + 30,000)

Cost of sales (9,000 + 11,000)
Gross profit
Distribution costs (2,300 + 1,300)
Administrative expenses (1,500 + 2,700)
Operating profit
Interest payable and similar charges
Tax (3,000 + 5,000)
Non-controlling interest ( 10,000)
Profit for the financial year attributable to the members of Honey
Profit for year
Extract from statement of changes in equity:
Retained earnings brought forward (2,000 + ( 4,000))
Profit for the financial year attributable to the members of Honey
1054
3,333
13,667
17,000
4,666
13,667
18,333

Answer 38 HATTON
Consolidated statement of financial position as at 31 December 2011
$
Assets
Non-current assets
Tangible assets
Goodwill (5,000 2,500)
Current assets
Inventories
Trade receivables

Called up share capital $1 ordinary shares, fully paid
Revaluation surplus (W6)
Retained earnings (W5)
Non-controlling interest (W4)

6% Debenture loan (20,000 12,000)
Current liabilities
Trade payables
239,000
2,500
108,400
129,000
39,850
241,500
277,250
518,750
250,000
12,000
53,500
315,500
22,250
337,750
8,000
173,000
518,750
WORKINGS
(1)
Group structure
Hatton
80%
Slap
1055

(2)
Net assets of Slap

Reporting
Acquisition Post
date
date acquisition
$
$
$
$
50,000 50,000
6,250
6,250
15,000
15,000
40,000 10,000
30,000

111,250 66,250

Share capital
Share premium
Revaluation surplus
Retained earnings
(3)
Goodwill
$
58,000
(53,000)
5,000
Cost of shares
Net assets acquired (80% 66,250) (W2)
Half of the goodwill has been impaired, therefore half remains at 31 December 2011.
(4)
Non-controlling interest (20% 111,250) (W2)
(5)
Retained earnings
Hatton
Slap (80% 30,000 (W2))
Goodwill impaired
(6)
$
32,000
24,000
(2,500)
53,500
Revaluation surplus
Slap (80% 15,000 (W2))
1056
22,250
$12,000

Answer 39 HAGGIS
$
Assets
Non-current assets
Intangible assets goodwill
53,000
3,300
56,300
20,500
76,800
Current assets (4,500 + 16,000)

10,000
5,000
9,000
24,000
4,800
28,800

8% Debenture loans (20,000 + 9,000)
29,000
Current liabilities (9,000 + 10,000)
19,000
76,800
WORKINGS
(1)
Group structure
Haggis
75%
Stovies
(2)
Net assets of Stovies
Share capital
Retained earnings
Reporting
date
$
4,000
13,000
17,000
Acquisition
$
4,000
8,000
12,000
Post
acquisition
$
5,000
1057

(3)
Goodwill
Cost of shares
Fair value of non-controlling interest on acquisition
Less
Fair value of net assets acquired (W2)
$
12,500
3,800
(12,000)
4,300
Goodwill of $1,000 has been impaired since the acquisition occurred, therefore $3,300
remains and is included in the consolidated statement of financial position. Of the
impairment loss 75% ($750) will be charged to retained earnings and 25% (250) will be
charged to non-controlling interest.
(4)
(5)
Fair value on acquisition
Share of post-acquisition profits (5,000 25%)
Goodwill impaired (W3)
Retained earnings
Haggis
Stovies (75% 5,000 (W2))
Less: Goodwill (W3)
1058
3,800
1,250
(250)
4,800
$
6,000
3,750
(750)
9,000

Answer 40 HAMMER
$
Assets
Non-current assets
Tangible assets
Current assets
Inventory
Receivables
Investments
$
168,200
29,200
83,800
2,500
13,500
129,000
297,200

Called up share capital $1 ordinary shares, fully paid
Revaluation surplus
Current liabilities
120,000
18,000
23,000
72,560
233,560
17,640
251,200
46,000
297,200
1059
WORKINGS
(1)
Group structure
Hammer
80%
Sickle
(2)
Net assets of Sickle

Reporting
date
$
$
Share capital
Revaluation surplus
Retained earnings
Per Q (8,000 + 5,000)
Provision for unrealised profit
(3)
Acquisition Post
acquisition
$
$
60,000 60,000
16,000 16,000
13,000
8,000
(800)

88,200 84,000

5,000
(800)
Goodwill (negative)
Cost of shares
Less
Net assets acquired (80% 84,000 (W2))
$
54,000
(67,200)
(13,200)
Any gain on a bargain purchase is to be credited to consolidated profits immediately.

(4)
(5)
Share of net assets (20% 88,200 (W2))
Retained earnings
Hammer (40,000 + 16,000)

Sickle
(80% 4,200 (W2))
Excess (W3)
1060
$17,640
$
56,000
3,360
13,200
72,560

Answer 41 HUT
(a)
$
Assets
Non-current assets
Tangible
Land (80,000 + 72,000 + 18,000 (W2))
Plant at cost (120,000 + 80,000)
Accumulated depreciation (48,000 + 22,400)
170,000
200,000
(70,400)
129,600
41,640
341,240
Intangible goodwill
Current assets
Inventory (112,000 + 74,400 3,200 (W6))
Receivables (104,000 + 84,000)
Bank (41,000 + 8,000)
183,200
188,000
49,000
420,200
761,440

Retained earnings
Current liabilities (52,000 + 24,000)
400,000
227,440
627,440
58,000
685,440
76,000
761,440
WORKINGS
(1)
Group structure
Hut
128
160
= 80% ords
Shed
1061

(2)
Net assets of Shed

ReportingAcquisition Post
date
acquisition
$
$
$
160,000 160,000
Share capital
Fair value adjustment on non-current assets
(90,000 72,000)
Retained earnings
(3)
18,000
112,000
290,000
18,000
(11,000) 123,000
167,000
Goodwill
Cost of shares
Less
Net assets acquired (80% 167,000 (W2))
$
203,000
(133,600)
69,400
Goodwill to the extent of $27,760 has been impaired since acquisition; therefore $41,640 will be
included in the consolidated statement of financial position.
(4)
(5)
Share of net assets (20% 290,000 (W2))
Retained earnings
Hut
Less
Goodwill (W3)
Provision for unrealised profit (W6)
Shed (80% 123,000 (W2))
(6)
$
160,000
(27,760)
(3,200)
129,040
98,400
227,440
Unrealised profits
SP
Cost
GP
1062
$58,000
%
$
125
16,000
(100) (12,800)

25
3,200


Answer 42 HAT
Consolidated statement of financial position as at 30 June 2012
$
Assets
Non-current assets
Tangible assets (227 + 170 17.5 (W6))
Intangible assets goodwill
Current assets (270 + 186)

Shareholders equity
Preference shares (40,000 8,000)

Current liabilities
379,500
2,520
382,020
456,000
838,020
200,000
25,000
147,420
372,420
71,600
444,020
32,000
362,000
838,020
WORKINGS
(1)
Group structure
Hat
60%
Shoe
1063

(2)
Net assets of Shoe

30 June 30 June
2012
2008
$
$
90,000 90,000
9,000
9,000
80,000 50,000

179,000 149,000


Retained earnings
(3)
Goodwill
Shares in Shoe
Ordinary
Net assets acquired
Ordinary shareholders (60% 149,000) (W2)
$
95,000
(89,400)
5,600
Goodwill is valued at $2,520 at the end of the reporting period, therefore $3,080 has been
impaired since acquisition.
(4)
NA at reporting date (40% 179,000) (W2)

(5)
Retained earnings
Hat
Less
Profit on disposal (W6)
Shoe (60% 30,000 (W2))

Goodwill
Depreciation adjustment
1064
$
71,600
$
150,000
(10,000)
140,000
18,000
(3,080)
(7,500)
147,420

(6)
Provision for unrealised profit on non-current assets
Hats books:
$
Remove profit on disposal
Proceeds
carrying amount
Dr
Profit or loss
Cr
Non-current assets
Shoes books:
Adjust depreciation
Is
Should be
Dr
Profit or loss
Cr Non-current assets
50,000
(40,000)
10,000
10,000
10,000
12,500
20,000
7,500
7,500
7,500
Answer 43 HUMPHREY
Consolidated statement of profit or loss for the year ended 30 September 2011
Revenue
Cost of sales
Gross profit
Distribution costs
Operating profit
Investment income
Interest
Profit before tax
Taxation
Profit for the year
Shareholders of parent
$000
1,400
(742)
658
(110)
(120)
428
9
(31)
406
(184)
222
6
216
222
1065

Retained earnings at 1 October 2010 (W4)
Profit for year attributable to parent
Dividends
100
216
(100)
216
Retained earnings at 30 September 2011

WORKINGS
(1)
Group structure
Humphrey
80%
Stanley
(2)
Consolidated statement of profit or loss
Revenue
Cost of sales per Q
Provision for unrealised profit
Distribution
Administration
Investment income (20 16)
Interest payable
Tax
Profit after tax
(3)
Humphrey Stanley Adjustment Consolidated

$000
$000
$000
$000
1,100
400
(100)
1,400
(600)
(240)
100
(2)
(742)
(60)
(50)
(110)
(65)
(55)
(120)
4
5
9
(25)
(6)
(31)
(160)
(24)
(184)
30
20% 30,000 (W2) or as per profit after tax in question

(4)
Reserves brought forward
Humphrey
Stanley (80% (30 5))
Goodwill impaired
1066
$000
6
$000
90
20
(10)
100

(5)
Inter-company dividend
Check consistency between companies.

Payable by Stanley
Receivable by Humphrey (80% 20)
$000
20
16
Answer 44 HIGH
Consolidated statement of profit or loss for year ended 31 March 2012
Revenue
Cost of sales
Gross profit
Distribution costs
Operating profit
Investment income
Profit before tax
Taxation
Profit after tax
Attributable to:
Shareholders of P

Retained earnings at 1 April 2011 (W4)
Profit attributable to P
Retained earnings at 31 March 2012
$
414,750
(178,900)
235,850
(110,200)
(39,350)
86,300
350
86,650
(44,100)
42,550
3,830
38,720
42,550
38,600
38,720
77,320
WORKINGS
(1)
Group structure
High
80% ords
Speed
1067

(2)
Consolidation schedule
High Speed Adjustment Consolidated
$
$
$
$
274,500 181,250 (37,500)
(3,500) 414,750
Sales revenue
Cost of sales
Per Q
(126,480) (86,520) 37,500
Inventory provision for unrealised profit
(700)
Non-current asset provision for unrealised profit
(3,000)
300
Depreciation (10% 3,000)
Distribution
Administration
Investment income interest
Tax
(67,315) (42,885)
(25,555) (17,295)
250
100
(29,000) (15,100)
19,150
Profit after tax

(3)
$
19,150
Profits after tax

(4)
(178,900)
(110,200)
3,500 (39,350)
350
(44,100)
%
20%
$
3,830
Retained profits brought forward
$
28,000
10,600
38,600
High
Speed (80% (17,250 4,000))
Tutorial note:
Alternative calculation for profit after tax of Speed (W2):
Per question
Inventory provision for unrealised profit
Depreciation adjustment
1068
$
19,550
(700)
300
19,150

Answer 45 HAPPY
(a)
Consolidated statement of profit or loss for the year ended 31 March 2012
Revenue
Cost of sales
Gross profit
Operating costs
Operating profit
Investment income
Profit before tax
Income tax
Profit after tax
Attributable to:
Shareholders of P
Profit
Retained earnings at 1 April 2011
Retained profit for the year
Retained earnings at 31 March 2012
(b)
$
376,167
(177,867)
198,300
(88,300)
110,000
3,200
113,200
(57,067)
56,133
2,733
53,400
56,133
79,300
53,400
132,700
Time apportionment
The results of a subsidiary are included in the consolidated accounts from the date control
is achieved.
Happy acquired 75% of the issued ordinary capital of Sleepy on 30 November 2011. This
is the date on which control passed and hence the date from which the results of Sleepy
should be reflected in the consolidated statement of profit or loss.
All reserves earned by Sleepy in the four months since that date are post-acquisition
reserves.
The remaining previous eight months profit from 1 April 2011 to 30 November 2011 are
all pre-acquisition reserves and will be included in the calculation of goodwill on
consolidation.
1069
WORKINGS
(1)
Group structure
Happy
75% (acq 30 November 2011
4
12
in )
Sleepy
(2)
Happy
Sleepy Adjustment Consolidated

4
12
$
Sales revenue
Cost of sales
Operating costs
Investment income
Tax
303,600
72,567
(143,800) (34,067)
(71,200) (17,100)
2,800
400
(46,200) (10,867)
10,933
Profit after tax

(3)
376,167
(177,867)
(88,300)
3,200
(57,067)
25% 10,933
2,733
Tutorial note:
Alternative calculation for profit after tax of Sleepy (W1)
Per question 32,800
4
12
$10,933
1070

Answer 46 HALEY
$000
Assets
Non-current assets
Tangible assets
Interest in associated undertaking
$000
400
48
448
505
953
Current assets
Total assets
Called up share capital $1 ordinary shares
Retained earnings (note 2)
250
469
719
84
803
150
953

WORKINGS
(1)
Group structure
Haley
60%
30%
Aristotle
Socrates
1071

(2)
Net assets
Socrates
Share capital
Retained earnings
Reporting
date
$000
30
180
210
Acquisition
$000
30
70
100
Reporting
date
$000
60
100
160
Acquisition
$000
60
30
90
Postacquisition
$000
110
Aristotle
Share capital
Retained earnings
(3)
Post
acquisition
$000
70
Goodwill
Cost of investment
Share of net assets acquired (60% 100 (W2))/(30% 90 (W2))
Socrates
$000
75
(60)
15
Aristotle
$000
30
(27)
All fully written off to retained earnings.

(4)
Socrates (40% 210)

(5)
Retained earnings
Haley
Socrates (60% 110 (W2))
Aristotle (30% 70 (W2))
Goodwill (15 + 3)
(6)
$000
84
$000
400
66
21
(18)
469
Investment in associate
Aristotle (30% 160)
$000
48
All goodwill in respect of Aristotle has been impaired; therefore the value of investment in the
associate is based upon the net assets of the associate at the end of the reporting period.
1072

Answer 47 HAMISH
Consolidated statement of profit or loss for the year ended 30 June 2012
$000
15,131
(13,580)
1,551
178
(736)
993
Revenue
Cost of sales and expenses
Operating profit before tax
Share of income from associated company
Tax
Profit after tax
Attributable to:
Shareholders of P
30
963
993
Profit for the year

Dividends
Only the dividend of the P will be included in the statement of changes in equity.
500
WORKINGS
(1)
Group structure
Hamish
80%
30%
Angus
Shug
(2)
Hamish
Shug
5
12
Sales revenue
Cost of sales
per Q
provision for unrealised profit
(50
25
$000
12,614
(11,318) (2,302)
(10)
Income from associate (594 30%)

Tax group
(621)
125
$000
2,567
Angus Adjustment Consolidated
30%
$000
$000
(50)
$000
15,131
50
(13,580)
(115)
150
178
(736)
1073

(3)
$000
30
Shug (20% 150,000)

(4)
Profit retained by
$000
346
Hamish
Shug (80% ((
361) 120))
24
12
370
(10)
103
463
Less
Unrealised intra-group profit
Angus (30% 344)
Answer 48 HYDROGEN
Consolidated statement of financial position as at 30 September 2011
$
Assets
Non-current assets
Goodwill (W3)
Interest in associate (W5)
1,345,220
500
276,800
1,622,520
Current assets
Inventory (495,165 + 388,619)
Receivables (385,717 + 320,540 )
Cash at bank and in hand (101,274 + 95,010)
Total assets
883,784
706,257
196,284
1,786,325
3,408,845
$
$

Debenture loans (400,000 + 150,000)
Current liabilities
Trade payables (375,366 + 252,179)
1074
600,000
1,421,300
2,021,300
210,000
2,231,300
550,000
627,545
3,408,845
WORKINGS
(1)
Group structure
Hydrogen
80%
Sodium
(2)
40%
Aluminium
Net assets
Sodium
Original share capital

Retained earnings
Reporting
date
$
$
200,000
850,000
1,050,000
Post
Acquisition
acquisition
$
$
$
200,000
500,000 350,000
700,000
Aluminium
Share capital
Retained earnings
Unrealised profit
(3)
Reporting
date
Acquisition
$
$
$
200,000 200,000
478,000 242,000
(4,000)

674,000 442,000

Post
acquisition
$
236,000
(4,000)
Goodwill
Sodium
Cost of shares
Share of net assets acquired (80% 700,000) (W2)
$
562,000
(560,000)
2,000
Aluminium
Cost of shares
Share of net assets acquired (40% 442,000) (W2)
$
184,000
(176,800)
7,200
Goodwill of $1,500 is written off in respect of Sodium. The goodwill of Aluminium is

included in the value of investment in associate in the consolidated statement of financial
position.
1075

(4)
Share of net assets (20% 1,050,000) (W2)

(5)
$210,000
Investment in associate
$
184,000
92,800
276,800
$
1,050,000
(1,500)
280,000
92,800
1,421,300
Cost of investment
Aluminium post-acquisition (40% 232,000 (W2))
(6)
Retained earnings
Hydrogen
Goodwill written off Sodium
Sodium (80% 350,000 (W2))
Aluminium (40% 232,000 (W2))
Answer 49 PERIOD OF INFLATION

(a)
Inventories undervalued
Inventory is stated at historical cost (or net realisable value if lower). Historical cost is
normally below the current value in times of general inflation.
The major weakness of historical cost is the effect of charging the historical cost of
inventory against sales. Cost of sales will be lower than if current values had been
charged, leading to higher profits and higher dividend payments. There may be
insufficient funds to purchase replacement inventory, the price of which will equate to
current value of inventory.
(b)
Depreciation understated
Depreciation is usually based on the historical cost of non-current assets. Replacements

will normally increase in price during a period of inflation. The annual depreciation
charge, therefore, may not reflect the amount needed to be able to replace the assets.
Consequently, the accounting profit will be overstated, and this may mean that too much
profit is withdrawn from the business. The cash resources may then prove insufficient to
replace the assets at the end of their useful life and the business may not be able to operate
at the same level of activity as it has previously experienced.
(c)
Gains and losses on net monetary assets undisclosed
Net monetary assets are monetary assets less monetary liabilities. The term monetary
refers to all liabilities of a business repayable in money and those assets which are stated in
historical cost accounts at the amount of money expected to be received (e.g. receivables
are stated at sales value less allowances for irrecoverable debts).
In a time of inflation gains can arise on monetary liabilities and losses on monetary assets.
For example, loans to or from a company are monetary items. A loan made to a company
may produce a gain to the company as, although the amount originally borrowed will be
repaid at its face value, its purchasing power will have been reduced.
1076
The person lending the money to the company will have charged interest to cover:
(i)
(ii)
the risk of making the loan, and

compensation for the fall in the purchasing power of the investment.
The interest cost will thus be charged against profits of the company, but also there should
be a gain recorded in the statement of profit or loss(that of eventually having to repay
only the same monetary amount).
(d)
Asset and liability values unrealistic
Values for inventory and non-current assets are stated at historical cost (i.e. below their
current value). Many would argue that a statement of financial position should record not
only the assets in the possession of a company at the end of the reporting period but also
their current worth. To show the amount at which the company originally bought the asset
is not useful information and would never be used for decision-making purposes.
(e)
Difficulty of meaningful periodic comparisons
A meaningful comparison of financial reports prepared under historical cost accounting

over several accounting periods may be misleading.
Many figures disclosed in accounts are not comparable. For example, profits of $100,000
in 2007 are not equivalent to profits of $100,000 in 2012 if there has been inflation
between the two dates. The worth of the 2012 profits is less than the worth of the 2007
profits. The comparison is just as meaningless as comparing financial reports prepared in
Japanese yen with reports prepared in euros.
In order to be able to make a meaningful comparison between financial reports prepared in
different time periods, it is desirable therefore to translate them into the same currency (i.e.
to use units of a constant purchasing power). The adjustments are similar in principle to
that used in translating dollars into euros or euros into dollars. Figures are often adjusted
for changes in a price index to achieve a measure of constant purchasing power. In many
countries, government departments issue indices in accordance with which companies must
adjust their financial statements, particularly where there is high inflation.
1077

Answer 50 STANDARD
Cash flows from operating activities
Profit before tax (W7)

Adjustments for:
Depreciation, loss on sale (W1-5)
Interest receivable
Interest and premium payable
Operating profit
Increase in inventories
Increase in receivables
Increase in payables (63,000 (41,500 440))
Cash generated from operations
Interest paid
Tax paid (W6)
$
56,500
20,000
(450)
8,400
84,450
(14,000)
(1,200)
21,940
91,190
(6,840)
(10,500)
Net cash from operating activities
73,850
Cash flows from investing activities
Acquisition of long-term investment

Purchase of property plant and equipment
Receipt from sale of NCA (3,000 + 1,000)
Interest received
(4,600)
(69,000)
4,000
450
Net cash used in investing activities
(69,150)
Cash flows from financing activities
Proceeds from issuance of shares

Redemption of loan
Dividends paid
70,000
(42,000)
(7,500)
Net cash used in financing activities
20,500
25,200
(13,800)
11,400
Net increase in cash and cash equivalents

Opening cash and cash equivalents
Closing cash and cash equivalents
Notes to statement of cash flows

(1)
Cash payments of $69,000 were made to purchase property, plant and equipment
1078

(2)
Cash and cash equivalents as shown in the statement of financial position
Cash and cash equivalents consist of cash on hand and balances with banks.
2011
$
11,400
11,400
Cash at bank
Bank overdraft
2010
Change in
year
$
$
200
11,200
(14,000)
14,000
(13,800)
25,200
WORKINGS
(1)
Plant and machinery account at cost
Balance b/d
Additions
(2)
$
120,000
39,000
159,000
Disposals account
Balance c/d
$
8,000
151,000
159,000
Fixtures and fittings account at cost
Balance b/d
Additions
$
24,000
10,000
34,000
Disposals account
Balance c/d
$
5,000
29,000
34,000
Non-current assets additions summary
$
20,000
39,000
10,000
69,000
Freehold property $(130,000 - 110,000)

Plant and machinery
(3)
Plant and machinery account depreciation
Disposals account
Balance c/d
$
6,000
54,000
60,000
Balance b/d
Charge for year
$
45,000
15,000
60,000
1079

(4)
Fixtures and fittings account depreciation
Disposals account
Balance c/d
(5)
$
2,000
15,000
17,000
Balance b/d
Charge for year
NCA disposals account
Plant cost
Fittings cost
$
8,000
5,000
Plant depreciation
Fittings depreciation
Cash proceeds
Plant
Fittings
Depreciation underprovided
(bal fig)
13,000
(6)
$
6,000
2,000
3,000
1,000
1,000
13,000
Tax account
Cash paid (bal fig)

Balance c/f
(7)
$
13,000
4,000
17,000
$
10,500
33,000
43,500
Balance b/f
Profit of loss
$
21,500
22,000
43,500
Net profit before tax

Note:
As profit before tax is required, reconstruct the statement of profit or loss up to

this figure.
$
Profit before tax
56,500
Taxation
(22,000)
34,500
Dividends
(7,500)
Retained profit for year

27,000
Balance b/f
14,000
Balance c/f
41,000
1080

Answer 51 FALLEN
Cash flows from operating activities
Profit before tax

Adjustments for:
Depreciation, (W1-3)
Interest payable
Operating profit
Increase in deferred repairs provision
Increase in inventories
Increase in receivables
Increase in payables
Cash generated from operations
Interest paid
Tax paid (W5)
$
4,625
1,472
152
6,249
186
(894)
(594)
480
5,427
(152)
(1,775)
Net cash from operating activities
3,500
Cash flows from investing activities
Acquisition of long-term investment

Purchase of property plant and equipment
Receipt from sale of non-current assets
(198)
(3,800)
168
Net cash used in investing activities
(3,830)
Cash flows from financing activities
Proceeds from issuance of shares (W6, W7)

Redemption of loan
Dividends paid
792
(560)
(700)
Net cash used in financing activities

Net decrease in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
(468)
(798)
576
(222)
Notes to the statement of cash flows

(1)
Cash payments of $3,800 were made to purchase property, plant and equipment.
1081

(2)
Analysis of the balances of cash and cash equivalents
Cash and cash equivalents consist of cash on hand and balances with banks.

Bank overdrafts
2011
2010
$000
(222)
(222)
$000
576
576
Change in
year
$000
576
(222)
(798)
WORKINGS
(1)
Leasehold premises (net)
Brought forward
Additions
(2)
$000
5,700
1,300
7,000
Depreciation (to balance)

Carried forward
Plant (net)
Brought forward
Additions
$000
3,780
2,500
Disposals
Depreciation (to balance)
Carried forward
6,280
(3)
$000
276
964
5,040
6,280
Disposals
Plant
$000
276
Cash
Loss on sale (to balance)
276
(5)
$000
168
108
276
Taxation
Cash (to balance)

Carried forward
Deferred tax
Current tax
$000
1,775
202
1,730
$000
Brought forward
Deferred tax
Current tax
P&L account
3,707
1082
$000
400
6,600
7,000
138
2,038
1,531
3,707

(6)
Share capital
$000
Carried forward
(7)
2,280
2,280
Brought forward
Cash (to balance)
$000
1,800
480
2,280
Share premium
Carried forward
$000
2,112
Brought forward
Cash (to balance)
2,112
(8)
$000
1,800
312
2,112
Non-current loan
Cash (to balance)

Carried forward
$000
560
1,240
1,800
$000
1,800
Brought forward
1,800
Answer 52 WITTON WAY

(a)
Accounting ratios
2011
2012
1,850
100
7,650
2,070
100
11,500
= 24.2%
= 18.0%
Profitability
Gross profit : Sales
Gross profit
100
Sales
Return on capital employed
Profit before interest + tax

1,650 + 50
1,550 + 350
100
100
100
Share cap + reserves + LTL
(5,900 + 5,000 + 350)
(5,900 + 5,700 + 3,350)
= 15.1%
= 12.7%
1083

Liquidity
Current ratio
Current assets
Current liabilities
3,600
2,400
6,300
2,700
= 1.5 :1
= 2.3 : 1
3,600 1,500
2,400
6,300 2,450
2,700
= 0.9 : 1
= 1.4 : 1
1,200
365
7,650
3,800
365
11,500
= 57 days
= 121 days
5,800
1,500
= 3.9 times per year
9,430
2,450
= 3.8 times per year
Acid test
Current assets Inventories

Current liabilities
Efficiency
Trade receivables collection period
Trade receivables
365
Credit sales
Inventory turnover
Cost of sales
Year - end inventory
(b)
Comments on the companys results

Profitability
The trading profitability to sales has significantly decreased from 24% to 18%.
Profitability to capital employed has also decreased from 15% to 12.7%. The decline in
the first ratio is not surprising given the reduction in selling prices. Sales have
significantly increased a growth of 50%:
11,500 - 7,650
7,650
The overall effect is an actual increase in gross profitability from $1,850,000 to
$2,070,000. However, loan interest has eliminated this favourable result. Presumably the
additional finance was raised for the sales expansion, to date, therefore, the expansion
policy has not been successful but the additional finance may not be invested efficiently as
yet. A more favourable result may be forthcoming next year.
1084

Liquidity
Due to the expansion cash balances have disappeared by the year-end.

been a large increase in other elements of working capital. Provided
receivables simply represents the extended credit terms being offered
than problem payers, liquidity is healthy. Both ratios in fact show an
to 2012.
However, there has

that the increase in
to customers rather
increase from 2011
Efficiency
There has been no change in the inventory turnover ratio. This may be a sign of
inefficiency as, if the company is selling the same range of goods as before, the inventory
turnover ratio should increase if sales volume has been increased due to lower prices. The
receivables collection period, however, has been greatly extended from 57 days to 121
days. 57 days was a long period in the first place, and it may be that the more generous
credit terms are being abused by customers.
Payables have not increased in line with the expansion of sales volume (and the purchases
volume), thus increasing the pressure on funding working capital.
Answer 53 RAPIDO
To
From
Date
Directors, Rapido
AN Advisor
(a)
Introduction
This report intends to conclude on the profitability, liquidity, and solvency of Rapido and
to suggest any necessary action. The report has been based on statements of
comprehensive income for 2011 and 2010 together with 2011 budgets.
(b)
(c)
Summary of conclusions and recommendations
The company has achieved expansion in the current year, and has improved
profitability, although below that budgeted.
The expansion has been financed by increases in borrowings, a substantial

proportion being short-term overdrafts.
To improve the liquidity and solvency position the company needs to raise
further long-term finance and reduce overdrafts.
The level of overheads should be investigated to identify reasons for increases.
Trading performance
(i)
Overall
The company aimed for, and has achieved, a large increase in both
operations level and profitability.
The expansion in turnover was greater than budgeted but

profitability has not matched expectations.
1085

(ii)
(iii)
(d)
(e)
1086
Margins
Expansion was budgeted to be achieved at the expense of margins.

However, the net margin has fallen below the budgeted level.
The reason for this is a growth in overheads above that budgeted,

which should be investigated.
Asset utilisation
Improved asset turnover, also above budgeted levels, has partly

compensated for the below-budget margins.
The primary areas of improvement are inventories and tangible

assets.
Liquidity
The liquidity position was budgeted to decrease in the year, but the position is
slightly worse than anticipated.
The main reason is the level of the overdraft which is rather higher than
budgeted.
The overdraft limit may present an obstacle to future activities.
The liquidity position has also been worsened by substantial extra credit being
allowed to customers.
Cash balances have also deteriorated, and the company is in need of an

injection of capital for liquidity purposes.
The poor liquidity position has resulted in a low dividend being paid in spite of
good profits.
Gearing
Gearing has increased dramatically in order to finance new equipment, but is

still at acceptable levels.
A large amount of the debt is short-term, which does not help the long-term
stability of the company and should be replaced by further raising of long-term
capital.
The extra capital should be debt due to the low level of dividend cover, and also
because of increased tangible assets available as security.

Appendix
Ratios
(1)
Net profit %
Operating profit
Revenue
Asset turnover
Revenue
Net operating assets
Gross profit
Gross profit
Revenue
2011
Actual
205
1,280 + 187
470
1,420 + 255 + 360
446
1,460 + 390 + 360
= 14%
= 23%
= 20%
205
2,560
470
4,500
446
5,110
= 8%
= 10.4%
= 8.7%
2,560
1,280 + 187
4,50
1,420 + 255 + 360
5,110
1,460 + 390 + 360
= 1.75
= 2.21
= 2.31
860
2,560
= 33.6%
1,350
4,500
= 30%
1,530
5,110
= 30%
187
1,280 + 187
255 + 360
1,420 + 255 + 360
= 12.7%
= 30.2%
= 34%
720
760
810
935
= 1.33
= 0.95
= 0.87
305
365
2,560
720
365
4,500
810
365
5,110
= 43
= 58
= 58
1,700
(135 + 205)
3,150
(210 + 290)
3,580
(205 + 325)
= 10
= 12.6
= 13.5
Solvency
Gearing
(3)
2011
Budget
Profitability
ROCE
Operating profit
Net operating assets
(2)
2010
390 + 360
1,460 + 390 + 360
Liquidity
Quick ratio
Current assets less inventory 305 + 175

362
Current liabilities
(4)
Working capital
Receivables days
Receivables
365
Sales
Inventory turnover
Cost of sales
Inventory
1087

Answer 54 NOT FOR PROFIT
(a)
Main aims
A profit-orientated entity will have a primary aim of increasing the wealth of its owners. The
best way of increasing this wealth is to be profitable and thereby increase the entitys share
price and also distribute the profits to the owners by way of a dividend payment. In fulfilling
this primary aim the entity will also have to consider other stakeholders of the entity,
employees, the local environment and government bodies to name a few. The considerations
of these other stakeholders may well have an impact on the entitys primary aim, employees
will want a satisfactory return for the labour they provide and governments will want a share
of the entitys profits by way of taxation. So as well as maximising profits an entity will have
to consider, maybe as secondary objectives, the other stakeholders that have a say in the
business. An entity will make profits by selling its goods or services to its customers and
thereby earn revenues.
An NFP does not have the primary objective of making profits; the main objective of an NFP
will be to provide a service for the community it serves. A government body is responsible
for providing a policing service in the local community; a museum will have one of its
primary objectives to educate the people by allowing them to see the various exhibits. There
are no specific owners of an NFP, so there is no need to make profits; that is not to say that an
NFP can continually make losses. An NFP must work within a given budget and must
recognise if it exceeds that budget there will be consequences to the future income and costs.
Income for an NFP may be in the form of government funding or donations from sponsors or
by asking the public to make a contribution to the running costs of the organisation.
(b)
Assessing performance
Assessing the performance of a profit-orientated entity is generally done by analysing the

financial statements of the entity. Calculating various ratios and comparing those ratios with
budget, prior years or other similar entities will give the analyst an idea of how the entity has
performed. The analyst will consider whether the entity has made adequate returns on funds
invested, that the entity is able to meet its commitments and that the market perceives that the
entity is meeting expectations through various stock market ratios.
Some of the ratios used in assessing a profit based entity will still be useful in assessing a
NFP organisation. However, as the main aim of an NFP is to provide a service, and not be
profitable, then profit-based ratios may not be as relevant. One of the most critical ways of
assessing an NFP is to ensure it has met its budget. The budget of an NFP is far more
relevant is assessing performance than the budget of a profit based entity. The NFP must stay
within budget and analysts of an NFP will be focusing more on this factor than its income
statement. Assessment of an NFP tends to be based upon the 3 Es:
1088
(i)
Efficiency is measured by considering what inputs have been used to generate the
respective output, and managers should be trying to minimise the level of inputs to
perform the task.
(ii)
Effectiveness considers whether the objectives and targets have been met.
Management must give clear objectives to the workforce so that those objectives can
be seen and attained.
(iii)
Economy is considered by looking at the cost of the resources consumed against the
value of the output delivered. Economy is very much linked to the efficiency of the
task.
An NFP must ensure that it can meet any obligations that it may have and so liquidity is just
as important for an NFP as it is for a profit orientated entity. If an NFP has borrowed monies
then it must be in a situation that will allow it to repay those funds on the due date. Cash is
possible more important for an NFP than profit, so an assessment of the cash flow statement
of an NFP will be extremely important when considering its performance. Considerations
will include, have cash inflows met budgeted expectations, have funds been used for the
correct purpose.
For both types of entities it is very important to assess performance so that if the entity is not
performing as expected then steps can be taken to ensure that in the future the entity is able to
meet its objectives, whether they be making a profit or providing a service.
Answer 55 EARNINGS PER SHARE
(a)
Basic EPS
Earnings
Number of shares
$100,000
$0.50
EPS
(b)
2010
$
52,000
2011
$
55,300
200,000
200,000
26.0c
27.7c
Bonus issue
Comparative EPS original (as above)
26.0c
200,000
250,000
20.8c
Restated 26c
Current EPS
Earnings (as above)
No of shares
EPS
$55,300
250,000
22.1c
1089

(c)
Takeover
2010
$
50,000
50,000
50,000
200,000
Earnings
S post-acquisition only 3/12 $20,000
Less Non-controlling interest 10% $5,000
No of shares
Weighted average (200,000 9/12) + (400,000 3/12)
EPS
(d)
25c
250,000
27c
Rights issue
(i)
(ii)
Cents
Compute theoretical ex rights price

4 shares quoted cum rights at 360c
1 share at rights price
1,740c
TERP =
5
1,440
300
1,740
348c
EPS
Comparative
$40,000
Original
200,000
348c
Restated 20c
360c
Current
Earnings
Date
1 January
1 October
EPS
1090
2011
$
63,000
5,000
68,000
(500)
67,500
20.0c
19.3c
$50,000
No
Rights
Weighted
average
200,000 9/12 x 360/348

50,000
250,000 3/12
= 155,172
$50,000
217,672
Time
= 62,500
217,672
23.0c

(e)
Diluted Convertible debentures
Earnings
Basic
Add Interest on debentures
Less Tax at 33%
8,000
(2,640)
Diluted
No of shares
Basic
Convertible debentures
EPS
Basic
Diluted
(f)
$100,000 140
2010
$
2011
$
40,000
50,000
5,360
45,360
5,360
55,360
400,000
140,000
540,000
400,000
140,000
540,000
10.0c
12.5c
8.4c
10.3c
2011
$
Diluted Options
Earnings
Basic and diluted
EPS
Basic (50,000/400,000)
Diluted (50,000/410,000)
50,000
12.5c
12.19c
Number of shares under option

(50,000 80c)
Number of shares that would have been issued at fair value
100c
Number of shares outstanding
50,000
(40,000)
10,000
400,000
410,000
1091
1092
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ATC International became a part of Becker

Professional Education in 2011. ATC International

2012 EDITION | Study Question Bank

Paper F7 | FINANCIAL REPORTING

BECKER PROFESSIONAL EDUCATIONS ACCA STUDY MATERIALS

make copies of all or any part of the Materials;

create derivative works of the Materials.

STUDY QUESTION BANK

2012 DeVry/Becker Educational Development Corp. All rights reserved.

Copyright 2012 DeVry/Becker Educational Development Corp. All rights reserved.

2012 DeVry/Becker Educational Development Corp. All rights reserved.

STUDY QUESTION BANK FINANCIAL REPORTING (F7)

Marks Date worked

Nette (ACCA J04)

TANGIBLE ASSETS AND DEPRECIATION (IAS 16)

ACCOUNTING FOR SUBSTANCE

Substance over form

ACCOUNTING POLICIES etc (IAS 8)

Perseus (ACCA J01)

REVENUE (IAS 18)

ACCOUNTING FOR LEASES (IAS 17)

INTANGIBLE ASSETS (IAS 38)

2012 DeVry/Becker Educational Development Corp. All rights reserved.

FINANCIAL REPORTING (F7) STUDY QUESTION BANK

Marks Date worked

CONSTRUCTION CONTRACTS (IAS 11)

PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (IAS 37)

INCOME TAXES (IAS 12)

PRINCIPLES OF PRICE LEVEL ACCOUNTING

CASH FLOW STATEMENTS (IAS 7)

ANALYSIS AND INTERPRETATION

EARNINGS PER SHARE (IAS 33)

Earnings per share

2012 DeVry/Becker Educational Development Corp. All rights reserved.

STUDY QUESTION BANK FINANCIAL REPORTING (F7)

Inventory at 31 March 2012 was valued at $150,000.

Depreciation (for the year to 31 March 2012)

The income tax rate is 33%.

The provision for pollution costs is to be increased by $16,000.

Authorised ordinary share capital consists of 1,000,000 ordinary shares of $1 each.

There were no purchases or disposals of fixed assets during the year.

2012 DeVry/Becker Educational Development Corp. All rights reserved.

FINANCIAL REPORTING (F7) STUDY QUESTION BANK

You are provided with the following additional information:

Depreciation on buildings is to be provided at 5% per year on cost and allocated to

Closing inventory is valued at $500,000.

The allowance for doubtful debts is to be maintained at 5% of trade accounts receivable

An accrual for distribution wages of $30,000 is required.

Provisions are to be made for the following:

the preferred dividend for the year;

2012 DeVry/Becker Educational Development Corp. All rights reserved.

STUDY QUESTION BANK FINANCIAL REPORTING (F7)

a statement of profit or loss; and

Notes to the accounts are NOT required.

Sulphur received $460 from a customer.

Inventory was valued at $29,170 at the close of business.

Sulphur paid $690 to a supplier in full settlement of an invoice for $700.

2012 DeVry/Becker Educational Development Corp. All rights reserved.

FINANCIAL REPORTING (F7) STUDY QUESTION BANK

a statement of changes in equity; and

a statement of financial position.

Notes to the financial statements are NOT required.

accumulated depreciation at 1 October 2010