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DECEMBER 2007 APPLICATION LEVEL Professional Stage Examination

(Application)

Tuesday 10 June 2008

(2 hours)

FINANCIAL ACCOUNTING

This paper is in two parts.

Instructions for answering are given before each part. Read them carefully.

a. All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

b. Unless otherwise stated all ordinary shares carry one vote each.

IMPORTANT

Question papers contain confidential information and must NOT be removed from
the examination hall.

You MUST submit this question paper with your script and enter your candidate
number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

The Institute of Chartered Accountants in England and Wales 2008. Page 1 of 10


BLANK PAGE

The Institute of Chartered Accountants in England and Wales 2008. Page 2 of 10


June 2008

FINANCIAL ACCOUNTING - PART TWO


(80 marks)

1. Answer all four questions.

2. Answers to questions in this part must begin on separate pages.

3. Submit all workings.

4. Ensure your candidate number is written on the front of your answer folder.

5. Answer each question in pen.

6. The examiner will take account of the way in which material is presented.

The Institute of Chartered Accountants in England and Wales 2008. Page 3 of 10


1. An extract from Thirsk Ltds nominal ledger at 31 March 2008 is as follows:


Balances at 1 April 2007
Inventories 415,000
Retained earnings 978,600
Freehold land and buildings accumulated depreciation 280,000
Plant and equipment accumulated depreciation 326,700
Bad debt provision 36,000
Administrative expenses 316,600
Distribution costs 286,100
Purchases 675,400
Sales 1,403,000
Ordinary share capital (1 shares) 500,000
5% Preference share capital (1 irredeemable shares) 100,000
Cash at bank (debit balance) 15,900
Freehold land and buildings cost (including land of 600,000) 1,300,000
Plant and equipment cost 545,000
Trade and other receivables 419,200
Trade and other payables 348,900

The following additional information is available:

(1) The finance director has estimated that the necessary bad debt provision should be 30,000
at 31 March 2008. Movements in the bad debt provision are taken to administrative expenses.

(2) Inventories on hand at 31 March 2008 were valued at 525,000. Goods with a selling price of
5,000, which had cost 4,000, were despatched to a customer on 15 March 2008. These
goods were rejected by the customer on 30 March 2008 and returned to Thirsk Ltd which
received them on 2 April 2008 and accepted them as a valid return.

(3) On 1 April 2007 Thirsk Ltd entered into a 25 year lease of land and buildings. The building has
a useful life of 25 years and is to be used for additional office space. The lease agreement
provided for annual payments of 20,000, which commenced on the first day of the lease. The
fair value of the leasehold interest has been estimated at 425,000, with half of that relating to
the building. The present value of the minimum lease payments for the land and buildings is
also 425,000. Thirsk Ltd has charged the whole of the 20,000 paid on 1 April 2007 to
administrative expenses and has made no other entries in respect of this lease. Thirsk Ltd
charges finance costs on finance leases on a sum of the digits basis.

(4) On 31 December 2007 the directors decided to sell a machine which had cost Thirsk Ltd
50,000 on 1 April 2005. The machine was expected to sell for 10,000 with selling costs of
500. A buyer was found on 15 March 2008 at that price, although the sale was not completed
until after the year end. No adjustments to the financial statements have been made in
respect of this machine. On 31 December 2007 the machine met the held for sale criteria of
IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.

(5) Depreciation on buildings, plant and equipment has yet to be charged. Thirsk Ltd charges
depreciation on a straight-line basis as follows:

Buildings over 50 years (presented in administrative expenses)


Plant and equipment at a rate of 20% per annum on cost (presented in cost of sales)

The Institute of Chartered Accountants in England and Wales 2008. Page 4 of 10


(6) The preference dividend for the year was declared on 31 March 2008. No ordinary dividend is
to be paid.

(7) The income tax charge for the year has been estimated at 26,500.

Requirements

(a) Prepare an income statement for Thirsk Ltd for the year ended 31 March 2008 and a balance
sheet as at that date in a form suitable for publication. (23 marks)

(b) Explain how the financial statements prepared above would differ under UK GAAP.
(4 marks)

(27 marks)

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

The Institute of Chartered Accountants in England and Wales 2008. Page 5 of 10


2. You are the assistant accountant at Wetherby plc. The financial controller has asked you to prepare
the companys cash flow statement for the year ended 31 March 2008. The companys draft income
statement for that year and its balance sheet as at that date are set out below, together with some
additional information.

Income statement for the year ended 31 March 2008 (extract)


Profit from operations 3,387,100
Finance cost (31,600)
Profit before tax 3,355,500
Income tax expense (1,569,000)
Profit for the period 1,786,500

Balance sheet as at 31 March

2008 2007

ASSETS
Non-current assets
Property, plant and equipment 19,266,000 15,299,900

Current assets
Inventories 1,567,800 1,479,600
Trade and other receivables 540,000 356,000
Cash and cash equivalents 680,600 352,500
2,788,400 2,188,100

Total assets 22,054,400 17,488,000

EQUITY AND LIABILITIES


Capital and reserves
Ordinary share capital (1 shares) 6,000,000 5,000,000
Share premium account 1,750,000 600,000
Revaluation reserve 1,560,000 -
Retained earnings 8,997,800 7,689,500

Equity 18,307,800 13,289,500

Non-current liabilities
Borrowings 500,000 450,000

Current liabilities
Trade and other payables 1,546,600 1,678,500
Dividends payable 250,000 400,000
Income tax payable 1,450,000 1,670,000
3,246,600 3,748,500

Total equity and liabilities 22,054,400 17,488,000

The Institute of Chartered Accountants in England and Wales 2008. Page 6 of 10


Additional information:

(1) The statement of changes in equity for the year showed ordinary dividends declared during
the year. It also showed a transfer from the revaluation reserve to retained earnings of
270,000.

(2) During the year Wetherby plc sold plant and equipment with a carrying amount of 1,356,000
for a profit of 200,500.

(3) Depreciation of 3,560,000 was charged for the year.

(4) Trade and other payables include accrued interest of 5,000 (2007: 4,000).

(5) During the year, Wetherby plc made a 1 for 10 bonus issue of ordinary shares followed by an
issue of further shares at the market price.

(6) No borrowings were repaid during the year.

(7) All revaluations relate to property, plant and equipment.

Requirement

Prepare a cash flow statement for Wetherby plc for the year ended 31 March 2008, including a note
reconciling profit before tax to cash generated from operations, using the indirect method.

(16 marks)

The Institute of Chartered Accountants in England and Wales 2008. Page 7 of 10


3. The financial controller of Doncaster plc has prepared Doncaster plcs own draft income statement for
the year ended 31 March 2008 and its own balance sheet as at that date. She has asked you, as
assistant accountant, to prepare a statement of changes in equity for Doncaster plc before you and
she start on the consolidation process. Notes (1) to (4) below are relevant to this task.

(1) Doncaster plcs draft income statement for the year ended 31 March 2008 showed a profit for
the year of 526,700. Its retained earnings at 1 April 2007 were 2,365,500.

(2) During the year the company revalued a particular class of specialised plant and machinery to a
total of 650,000. At the date of the revaluation, the relevant plant had a cost of 456,000 and
accumulated depreciation of 215,500. Depreciation on the revalued amount of 67,800 was
subsequently charged. If depreciation had been charged on cost the charge would have been
45,600. Doncaster plc wishes to make an annual transfer between the revaluation reserve and
retained earnings in accordance with best practice.

(3) Doncaster plc had 1 million 5% redeemable 1 preference shares in issue at 31 March 2007
and 2008, which were issued and are redeemable at par. The dividend on these shares was
paid on the last day of the year and is not reflected in the profit for the year.

(4) On 31 March 2007 Doncaster plc had 2 million 50p ordinary shares in issue, also issued at par.
On 16 January 2008 the company issued a further 500,000 50p ordinary shares, at a price of
1.10 per share.

Following the preparation of Doncaster plcs statement of changes in equity you have been asked to
calculate certain draft profit figures that will appear in Doncaster plcs consolidated income statement
for the year ended 31 March 2008. Notes (5) and (6) below are relevant.

(5) Doncaster plc has one subsidiary, Redcar Ltd, which was acquired on 1 October 2007, and an
associated company, Catterick Ltd, which has been held for a number of years. The following
information is relevant.

Redcar Ltd Catterick Ltd


Holding of ordinary shares by Doncaster plc 75% 45%
Profit for the year ended 31 March 2008 457,000 103,400
Impairment in goodwill/investment in the year ended
31 March 2008 50,000 10,000

All profits accrued evenly over the year.

(6) On 1 October 2007 Redcar Ltd sold an item of plant to Doncaster plc. The plant had cost
Redcar Ltd 30,000 on 1 October 2006, when its useful life was estimated at five years, and
was sold to Doncaster plc for 40,000. The estimated total useful life of the plant remained
unchanged.

Requirements

(a) Prepare Doncaster plcs own statement of changes in equity for the year ended 31 March
2008. A total column is not required. (5 marks)

(b) Calculate the following figures as they would appear in Doncaster plcs consolidated income
statement for the year ended 31 March 2008.

(i) Profit attributable to the equity holders of Doncaster plc; and


(ii) Profit attributable to the minority interest. (6 marks)
(11 marks)

The Institute of Chartered Accountants in England and Wales 2008. Page 8 of 10


4. York plc prepares its consolidated financial statements in accordance with IFRS and has investments
in two companies, Ripon Ltd and Beverley Ltd.

The draft, summarised balance sheets of the three companies at 31 March 2008 are shown below:

York plc Ripon Ltd Beverley Ltd



ASSETS
Non-current assets
Property, plant and equipment 3,963,900 1,686,900 542,800
Intangibles - 20,000 -
Investments 1,850,000 - -
5,813,900 1,706,900 542,800
Current assets
Inventories 860,000 650,000 490,000
Trade and other receivables 730,000 540,000 356,000
Cash and cash equivalents 29,600 15,500 17,500
1,619,600 1,205,500 863,500

Total assets 7,433,500 2,912,400 1,406,300

EQUITY AND LIABILITIES


Capital and reserves
Ordinary share capital (1 shares) 2,000,000 1,000,000 500,000
Share premium account 1,000,000 500,000 100,000
Retained earnings 3,175,500 625,800 210,800

Equity 6,175,500 2,125,800 810,800

Current liabilities
Trade and other payables 878,000 546,600 445,500
Taxation 380,000 240,000 150,000
1,258,000 786,600 595,500

Total equity and liabilities 7,433,500 2,912,400 1,406,300

Additional information:

(1) York plc acquired 800,000 of Ripon Ltds ordinary shares several years ago, for consideration
of 1 million of its own ordinary shares and 400,000 cash. At the date of acquisition the fair
value of York plcs shares was 1.20 per share. The retained earnings of Ripon Ltd at that
date were 215,000 debit.

(2) Ripon Ltds balance sheet at acquisition included goodwill of 50,000, which had arisen on the
acquisition of a sole trader. At 31 March 2008 this amount had been impaired and a carrying
amount of 20,000 remained in Ripon Ltds own financial statements. All of the carrying
amounts of other assets in Ripon Ltds balance sheet at the date of acquisition were equal to
fair values.

(3) On 1 April 2007 York plc acquired 200,000 of Beverley Ltds ordinary shares for 1.25 per
share. The retained earnings of Beverley Ltd at that date were 56,000 credit.

The Institute of Chartered Accountants in England and Wales 2008. Page 9 of 10


(4) During the year both Ripon Ltd and Beverley Ltd sold goods to York plc at a mark-up of 50%.
The goods cost Ripon Ltd and Beverley Ltd 140,000 and 120,000 respectively. At the year
end half of each set of goods remained in inventory but the invoices for the full amount of
these goods had not been settled.

(5) York plc carries out annual impairment reviews of goodwill. At 3 1 March 2007 cumulative
impairment losses in respect of goodwill arising on the acquisition of Ripon Ltd of 400,000
had arisen. A further loss of 20,000 arose during the current year and needs to be
recognised.

(6) York plc has calculated that an impairment in the carrying amount of its investment in
Beverley Ltd of 50,000 needs to be recognised.

Requirements

(a) Prepare the consolidated balance sheet of York plc as at 31 March 2008. (21 marks)

(b) Explain the concepts underlying the preparation of consolidated financial statements,
illustrating those concepts with reference to the consolidated financial statements of York plc.
(5 marks)

(26 marks)

The Institute of Chartered Accountants in England and Wales 2008. Page 10 of 10


DECEMBER 2007 APPLICATION LEVEL Professional Stage Examination

Tuesday 9 September 2008

(2 hours)

FINANCIAL ACCOUNTING

This paper is in two parts.

Instructions for answering are given before each part. Read them carefully.

a. All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

b. Unless otherwise stated all ordinary shares carry one vote each.

IMPORTANT

Question papers contain confidential information and must NOT be removed from
the examination hall.

You MUST submit this question paper with your script and enter your candidate
number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

The Institute of Chartered Accountants in England and Wales 2008. 1 of 10


September 2008

FINANCIAL ACCOUNTING - PART TWO


(80 marks)

1. Answer all four questions.

2. Answers to questions in this part must begin on separate pages. Use both sides of the paper
in your answer booklet.

3. Submit all workings.

4. Ensure your candidate number is written on the front of your answer booklet.

5. Answer each question in pen.

7. The examiner will take account of the way in which material is presented.

The Institute of Chartered Accountants in England and Wales 2008. 2 of 10


1. An extract from Agate Ltds nominal ledger at 30 June 2008 is as follows:


Administrative expenses 230,000
Distribution costs 145,000
Other operating costs 30,400
Interest paid 19,300
Manufacturing costs 291,300
Ordinary share capital (1 shares) at 30 June 2007 31,000
Share premium account at 30 June 2007 15,000
5% redeemable preference shares 30,000
Freehold land cost 729,000
Plant and equipment cost 287,000
Accumulated depreciation at 30 June 2007 85,800
Patent rights 45,000
Retained earnings at 30 June 2007 22,500
Other operating income 6,700
Revenue 1,925,000
Purchases 367,000
Inventory at 30 June 2007 17,000

The following additional information is available:

(1) Freehold land is to be revalued to 900,000 at 30 June 2008.

(2) Inventory on hand at 30 June 2008 has been counted and valued at 19,500.

(3) During the year Agate Ltd decided to rationalise its business. As a result of the rationalisation, a
rented factory was identified as being surplus to requirements. The plan to shut down
operations at this factory was announced in February 2008 to the local workforce. Those
affected were offered jobs in other areas of Agate Ltds business. A relocation package was
offered to staff affected by the closure who were required to move to take up other jobs within
Agate Ltd.

The total rationalisation cost has been calculated by Agate Ltd as 1,500,000. Of this amount
700,000 relates to staff relocation packages due to be paid on 31 August 2008 and the
remainder is in respect of the non-cancellable rentals due on the factory. The factory was
vacated on 31 March 2008. Rationalisation costs had not been recognised at the year end.

(4) The depreciation charge for the year for plant and equipment has been calculated as 28,700
and should be presented in cost of sales.

Plant and equipment with a carrying amount of 45,000 was classified as held for sale on
1 January 2008. The plant and equipment had originally cost 75,000. On 1 January 2008 the
fair value of the plant and equipment was estimated as 42,000 and costs to sell were
estimated as 1,500. Depreciation was charged at the standard rate of 10% pa on cost for the
held for sale asset as it remained unsold at the year end and is included in the depreciation
charge calculated above. The fair value of the plant and equipment fell to 39,000 at
30 June 2008, costs to sell remained the same.

(5) The patent rights were acquired on 1 October 2007. The patent rights have a five year life and
can be transferred to a third party before the end of the five years.

(6) Agate Ltd issued new shares in February 2008 to raise finance for its planned rationalisation.
75,000 1 ordinary shares were issued for cash at 2.30 each.

The Institute of Chartered Accountants in England and Wales 2008. 3 of 10


(7) During the year an error had been identified in the opening balance of receivables whereby a
customer account had been double counted in the receivables total at that date. The correct
opening balance on the customers account at 1 July 2007 was 7,350.

(8) On 1 September 2007 Agate Ltd entered into a two year contract to provide advertising
services to one of its customers for 30,000, payable in advance. Agate Ltd agreed to display
billboards for the customer on all its main sites over the two years. The 30,000 has been
included in revenue for the current year.

(9) An ordinary dividend of 7 pence per share was declared on 6 May 2008 and was paid before
the end of the year. The preference dividend has not yet been paid.

(10) The income tax liability for the year ended 30 June 2008 has been estimated at 5,000. An
additional payment in respect of prior years of 2,000 was made in September 2008 following
an investigation by HMRC. Neither of these amounts had been recorded as a liability in the
nominal ledger as at 30 June 2008.

Requirement

Prepare an income statement and a statement of changes in equity for Agate Ltd for the year ended
30 June 2008 in a form suitable for publication. (19 marks)

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

The Institute of Chartered Accountants in England and Wales 2008. 4 of 10


2. Prase Ltd is a company operating in the retail sector. The following information relates to Prase Ltds
property, plant and equipment.

The following extracts are from the notes to the 30 June 2007 financial statements:


Land and buildings
Cost freehold land 650,000
Cost buildings 1,075,000
Accumulated depreciation 172,000

Plant and machinery


Cost 160,000
Accumulated depreciation 48,000

Fixtures and fittings


Cost 75,000
Accumulated depreciation 36,000

The finance department of Prase Ltd has provided the following information for the year ended
30 June 2008:

(1) A new building was constructed on a site that Prase Ltd had owned for a number of years. The
total building costs were:


Architects fees 23,000
Legal costs 7,000
Project management fees 30,000
Building costs 375,000
Management costs 72,000

Project management fees represent amounts paid to an independent project management


company whereas management costs are internal costs reallocated to the project. Included in
the building costs is the cost of buying and installing a goods lift. The total cost of the lift was
15,000 and it was thought that it would need replacing every ten years. The lift should be
classified as plant and machinery.

The building was completed on 31 March 2008 and was ready for use on 1 May 2008.

(2) Prase Ltd acquired new fixtures and fittings for an existing property which were installed on
1 October 2007 at a cost of 20,000.

(3) Prase Ltd decided at the beginning of the accounting period that an old machine would be
retired from service. The machine was used until 31 December 2007 and then scrapped. The
machine had originally cost 18,000 and was acquired on 1 January 2003.

(4) A new item of plant was acquired under a lease agreement on 1 July 2007. The lease is for
seven years and the plant is thought that it will have a zero residual value at the end of the
lease. Prase Ltd is responsible for the ongoing maintenance of the plant. A deposit of 25,000
was made on 1 July 2007 and an annual payment of 7,000 is payable on 30 June each year.
The fair value of the plant is 60,000. The company uses the sum-of-the-digits method to
allocate finance charges.

The Institute of Chartered Accountants in England and Wales 2008. 5 of 10


(5) Annual depreciation rates are:

Buildings 4% straight-line
Plant and machinery 15% straight-line
Fixtures and fittings 25% reducing balance

Requirements

(a) Prepare extracts from Prase Ltds income statement for the year ended 30 June 2008 and its
balance sheet as at that date in respect of the transactions above. (20 marks)

(b) Explain how the accounting treatment for finance leases reflects the definitions of elements and
the recognition criteria set out in the IASB Framework. (5 marks)

(c) Identify the main differences between IFRS and UK GAAP in respect of accounting for leases.
(3 marks)

NOTE: Notes to the financial statements are not required.

(28 marks)

The Institute of Chartered Accountants in England and Wales 2008. 6 of 10


3. Spinal plc is a manufacturing company that has recently undertaken an expansion programme.
Spinal plc acquired two target companies, Carnelian Ltd and Diagem Ltd, during the year ended
30 June 2008.

The group also implemented a new manufacturing process during the year which will reduce
manufacturing time whilst increasing quality.

The managing director has asked you to prepare some financial information for the group. The
following information is relevant:

(1) 75% of Carnelian Ltd was acquired on 31 March 2008 for 850,000 when the fair value of its
net assets was 908,000.

30% of Diagem Ltd was acquired on 1 July 2007 for 350,000. There were no fair value
adjustments in respect of the assets and liabilities of Diagem Ltd.

Income statements for the year ended 30 June 2008

Spinal plc Carnelian Ltd Diagem Ltd


000 000 000

Revenue 36,340 15,200 12,900


Cost of sales (33,920) (8,700) (8,500)
Gross profit 2,420 6,500 4,400
Operating costs (1,980) (4,360) (930)
Investment income 60 - -
Profit before tax 500 2,140 3,470
Income tax expense (200) (700) (1,800)
Profit for the period 300 1,440 1,670

Additional information:

Assume that revenue and costs accrue evenly throughout the year.

Spinal plc charged Carnelian Ltd a management fee of 60,000 during the year. This has
been recognised by Spinal plc as Investment income.

An impairment review carried out in the year in relation to the investment in Diagem Ltd
has revealed a loss of 45,000 caused by a competitor entering the market in which
Diagem Ltd operates.

Carnelian Ltd sold goods to Spinal plc at a transfer price of 140,000 on 28 April 2008.
The transfer price was based on a mark-up of 40% on cost. Half of the goods remained in
the inventory of Spinal plc at the year end.

(2) The following information is relevant to the new manufacturing process.

Raw materials

There were 60 tonnes of raw metal in inventory at the year end. Spinal plc uses the first-in-first-
out (FIFO) method to value its raw metal inventory.

Raw metal is bought in batches of 50 tonnes in September, December, March and June. The
price of raw metal in July 2007 was 1,200 per tonne. This had fallen to 950 per tonne in
January 2008 and had risen to 1,050 per tonne in April 2008.

The Institute of Chartered Accountants in England and Wales 2008. 7 of 10


Work in progress and finished goods

5,000 complete units had been manufactured during the year. These units were either sold
during the year or held as finished goods at the year end. Spinal plc had expected to
manufacture 6,000 units but manufacturing had to be suspended during the year due to some
unplanned maintenance being carried out.

Spinal plc uses the weighted average cost method to measure its work in progress and finished
goods.

Total costs incurred in the manufacturing process during the period were:


Raw metal 195,000
Direct labour 253,200
Factory overheads 155,800
Unplanned maintenance cost 18,000
Administrative costs attributable to the process 107,000

Work in progress at the year end there were 500 units still in the manufacturing process.
Work in progress is currently assessed as being all 80% complete.

Finished goods 350 units were held in inventory at the year end. 200 of these were delivered
to a customer shortly after the year end at a price of 135 per unit. This is a special discounted
price (10% discount on selling price) being given to a loyal customer. The remainder of the
inventory is expected to sell at the normal undiscounted price.

Requirements

(a) (i) Prepare the consolidated income statement for Spinal plc for the year ended 30 June
2008.

(ii) Calculate the amount of goodwill that would be recognised in non-current assets in the
consolidated balance sheet of Spinal plc as at 30 June 2008. (9 marks)

(b) For each of the above categories of inventory, calculate the amount that would be included in
current assets in the balance sheet of Spinal plc as at 30 June 2008. (7 marks)

(16 marks)

The Institute of Chartered Accountants in England and Wales 2008. 8 of 10


4. Jet plc has a number of subsidiary companies which it has held for several years. On 30 June 2008,
Jet plc sold one of its wholly owned subsidiary companies, Opal Ltd, for cash of 68,000. The
following are the draft consolidated financial statements for Jet plc for the year ended 30 June 2008.

Balance sheet as at 30 June

2008 2007

ASSETS
Non-current assets
Property, plant and
equipment 1,029,700 948,800
Intangibles 86,000 95,600

1,115,700 1,044,400
Current assets
Inventories 107,730 97,200
Trade receivables 56,340 53,250
Cash and cash equivalents 1,500 400

165,570 150,850
Total assets 1,281,270 1,195,250

EQUITY AND LIABILITIES


Issued 1 ordinary shares 129,000 125,000
Share premium account 372,210 348,700
Retained earnings 292,760 230,460

793,970 704,160

Minority interest 128,600 117,100


Equity 922,570 821,260

Non-current liabilities
Bank loans 25,000 -

Current liabilities
Trade payables 303,000 342,190
Taxation 30,700 31,800

333,700 373,990
Total equity and liabilities 1,281,270 1,195,250

The Institute of Chartered Accountants in England and Wales 2008. 9 of 10


Consolidated income statement for the year ended 30 June 2008

Continuing operations
Revenue 2,842,700
Cost of sales (2,461,680)
Gross profit 381,020
Administrative expenses (160,400)
Distribution costs (87,900)
Profit from operations 132,720
Finance cost (14,400)
Profit before tax 118,320
Income tax expense (51,460)
Profit for the period from continuing operations 66,860

Discontinued operations
Profit for the period from discontinued operations 14,500
Profit for the period 81,360

Attributable to:
Equity holders of Jet plc 69,860
Minority interest 11,500
81,360

Additional information:
(1) At the date of disposal, Opal Ltds net assets were:

Property, plant and equipment 52,000
Inventories 13,000
Trade receivables 9,500
Cash and cash equivalents 2,000
Trade payables (11,700)
64,800

(2) The profit from discontinued operations is analysed as follows:



Profit before tax 15,800
Income tax expense (4,500)
Profit on disposal 3,200
14,500

(3) An analysis of the movement on group property, plant and equipment during the year showed
that assets purchased for cash totalled 200,000.
(4) No new intangible assets were acquired during the year.
(5) Jet plc issued ordinary shares for cash during the year.
(6) A dividend of 7,560 was paid on 16 June 2008. No other dividends were declared or paid
during the year.
Requirement
Prepare a consolidated cash flow statement for Jet plc and the note reconciling profit before tax to
cash generated from operations for the year ended 30 June 2008 in accordance with IAS 7, Cash
Flow Statements, using the indirect method. A note showing the effects of the disposal of Opal Ltd is
not required.
(17 marks)

The Institute of Chartered Accountants in England and Wales 2008. 10 of 10


Professional Stage Examination

Tuesday 9 December 2008

(2 hours)

FINANCIAL ACCOUNTING
This paper is in two parts.

Instructions for answering are given before each part. Read them carefully.

a. All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

b. Unless otherwise stated all ordinary shares carry one vote each.

IMPORTANT

Question papers contain confidential information and must NOT be removed from
the examination hall.

You MUST submit this question paper with your answer booklet and enter your
candidate number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

The Institute of Chartered Accountants in England and Wales 2008. Page 1 of 10


December 2008

FINANCIAL ACCOUNTING - PART TWO


(80 marks)

1. Answer all four questions.

2. Answers to questions in this part must begin on separate pages. Use both sides of the paper
in your answer booklet.

3. Submit all workings.

4. Ensure your candidate number is written on the front of your answer booklet.

5. Answer each question in pen.

6. The examiner will take account of the way in which material is presented.

The Institute of Chartered Accountants in England and Wales 2008. Page 2 of 10


1. Grasmere Ltd supplies bespoke software. It also sells four types of off-the-shelf accounting packages:
Alpha, Beta, Delta and Gamma. It analyses expenses by nature in its income statement.

On 30 September 2008 Grasmere Ltds nominal ledger showed the following balances:


Inventories at 1 October 2007 25,000
Retained earnings at 1 October 2007 132,170
Bad debt allowance at 1 October 2007 15,000
Raw materials and consumables 1,140,500
Other expenses 567,500
Wages and salaries 2,570,000
Sales (including 1,300,000 in respect of off-the-shelf packages
see Note (6)) 5,650,700
Ordinary share capital (50p shares) 100,000
5% Preference share capital (1 shares redeemable in 2012) 200,000
Cash in hand 570
Bank overdraft 2,500
Property
Cost (including land of 500,000) 1,500,000
Accumulated depreciation at 1 October 2007 120,000
Plant and equipment
Cost 676,000
Accumulated depreciation at 1 October 2007 357,500
Trade and other receivables 265,500
Trade and other payables 146,700
Bank interest paid 1,500
Warranty provision at 1 October 2007 22,000

The following additional information is available:

(1) Prepayments in respect of other expenses have been estimated at 15,000. Accruals in
respect of raw materials have been estimated at 17,400. These have not yet been adjusted
for in the above figures.

(2) The finance director has estimated that a charge of 21,500 for the year to 30 September
2008 in respect of a necessary increase in the bad debt allowance needs to be taken to other
expenses.

(3) Inventories on hand at 30 September 2008 were valued at a cost of 32,000, including
20 Alpha packages, valued at a cost of 120 each. On 10 October 2008 the sales director
became aware that a competitor had been selling Alpha packages at the heavily discounted
price of 100 each since September 2008. Grasmere Ltds current price list shows Alpha
packages at 200 each.

(4) On 30 June 2008 the company supplied bespoke software to Ullswater plc, in accordance with
the terms of a contract for 500,000 for supply of the software and for two years of after-sales
support. The finance director has estimated the cost of providing the after-sales support at
100,000 for the two years. Grasmere Ltd charges a mark-up on similar after-sales only
contracts of 20%. The 500,000 has been included in revenue. In accordance with the terms
of the contract Ullswater plc had paid the whole of the 500,000 in September 2008.

The Institute of Chartered Accountants in England and Wales 2008. Page 3 of 10


(5) Depreciation on property, plant and equipment has yet to be charged. Grasmere Ltd charges
depreciation as follows:

Property on a straight-line basis over 50 years


Plant and equipment at a rate of 20% per annum on reducing balance

All property, plant and equipment has previously been held at cost but on 1 October 2007 the
board of directors decided to revalue the companys property. On that date, an independent
valuer valued the property at 2 million (land 944,000, buildings 1,056,000). The total
estimated useful life of the buildings was unchanged at 50 years, giving a remaining useful life
at 1 October 2007 of 44 years. The finance director plans to make an annual transfer between
the revaluation reserve and retained earnings in accordance with best practice.

(6) Grasmere Ltd offers a 12 month warranty on sales of all of its off-the-shelf accounting
packages. Provision is made at each year end based on the anticipated level of returns, which
has habitually been 2% of sales.

(7) A dividend of 20p per ordinary share was declared on 15 September 2008 and paid shortly
after the year end. The preference dividend for the year was paid on 30 September 2008 and
has been included in other expenses.

(8) The income tax charge for the year ended 30 September 2008 has been estimated at
450,000.

Requirement

Prepare an income statement for Grasmere Ltd for the year ended 30 September 2008 and a balance
sheet as at that date in a form suitable for publication. Expenses should be analysed by nature.

(24 marks)

NOTE: Notes to the financial statements are not required.

The Institute of Chartered Accountants in England and Wales 2008. Page 4 of 10


2. You are the assistant accountant at Coniston plc. The financial controller has asked you to prepare
the companys cash flow statement for the year ended 30 September 2008. Extracts from the
companys draft financial statements for that year are set out below, together with some additional
information.

Income statement for the year ended 30 September 2008 (extract)


Profit from operations 729,800
Finance cost (121,000)
Investment income 24,500
Profit before tax 633,300
Income tax expense (255,000)
Profit for the period 378,300

Balance sheet as at 30 September

2008 2007

ASSETS
Non-current assets
Property, plant and equipment 3,566,500 3,299,400

Current assets
Inventories 1,680,220 1,188,400
Trade and other receivables 543,600 556,700
Cash and cash equivalents 101,780 3,450
2,325,600 1,748,550

Total assets 5,892,100 5,047,950

EQUITY AND LIABILITIES


Capital and reserves
Ordinary share capital (1 shares) 1,210,000 1,000,000
Share premium account 740,000 540,000
Revaluation reserve 512,000 435,000
Retained earnings 1,567,500 1,443,200

Equity 4,029,500 3,418,200

Non-current liabilities
Finance lease liabilities 600,000 500,000

Current liabilities
Trade and other payables 444,100 430,950
Finance lease liabilities 123,500 67,800
Warranty provision 420,000 385,000
Income tax payable 275,000 246,000
1,262,600 1,129,750

Total equity and liabilities 5,892,100 5,047,950

The Institute of Chartered Accountants in England and Wales 2008. Page 5 of 10


Statement of changes in equity for the year ended 30 September 2008 (extract)

Retained
earnings

Recognised directly in equity transfer from revaluation
reserve 56,000
Total recognised directly in equity 56,000
Profit for the period 378,300
434,300
Bonus issue of ordinary shares (40,000)
Final dividends on ordinary shares (270,000)
124,300
Balance brought forward 1,443,200
Balance carried forward 1,567,500

Additional information:

(1) The income statement for the year included the following charges:


Loss on sale of plant 25,600
Depreciation 665,600

The carrying amount of the plant sold at the date of the sale was 576,700.

(2) Trade and other receivables include accrued interest of 7,500 (2007: 6,000).

(3) During the year, Coniston plc made a 1 for 25 bonus issue of ordinary shares out of retained
earnings, followed by an issue of ordinary shares for cash.

(4) All finance costs in the income statement relate to finance leases. During the year Coniston plc
entered into finance leases for assets with a cash price of 225,000.

(5) All revaluations relate to property, plant and equipment.

Requirement

Prepare a cash flow statement for Coniston plc for the year ended 30 September 2008, including a
note reconciling profit before tax to cash generated from operations, using the indirect method.

(19 marks)

The Institute of Chartered Accountants in England and Wales 2008. Page 6 of 10


3. Thirlmere plc is a large manufacturing company with a number of subsidiaries. The finance director is
unsure how to deal with certain items in the consolidated financial statements for the year ended
30 September 2008.

The following information is relevant:

(1) On 1 October 2007 Thirlmere plc purchased 40,000 of the 100,000 equity shares of Wastwater
Ltd for consideration of 1 million of its own shares, with a fair value of 1.20 each, and 52,000
cash. Thirlmere plc has the right to appoint a director to the board of Wastwater Ltd and has
significant influence over the financial and operating policies of Wastwater Ltd.

The carrying amounts of Wastwater Ltds assets and liabilities on 1 October 2007 were as
follows:

000
Property, plant and equipment at cost 2,450
Inventories 320
Cash and cash equivalents 15
Other current assets 245
Current liabilities (152)
Non-current liabilities (50)
2,828

All carrying amounts are equal to fair values, with the exception of property which was
purchased ten years ago. This property, which had a cost of 200,000, and a carrying amount
of 160,000, had a fair value of 250,000 at 1 October 2008. This fair value was not
incorporated into Wastwater Ltds books. Wastwater Ltd depreciates property over a 50 year
useful life.

In the year to 30 September 2008, Wastwater Ltd made a profit after tax of 210,000 but neither
paid nor declared any dividends. The finance director has calculated that an impairment loss of
10,000 needs to be recognised in the current year in respect of Thirlmere plcs investment in
Wastwater Ltd.

(2) On 1 August 2008 the production director decided to sell a major piece of plant and machinery.
The machine was correctly classified in accordance with IFRS5, Non-current Assets Held for
Sale and Discontinued Operations, as held for sale at that date. A buyer was identified on that
date and a price of 45,000 agreed. Selling costs are expected to be 1,000 when the sale is
completed in October 2008. Thirlmere plc had paid 150,000 for the machine on 1 April 2005,
made up of a 100,000 part-exchange allowance and 50,000 cash. Thirlmere plc depreciates
plant and machinery on a straight-line basis at a rate of 20%.

An equivalent new machine could be purchased for 175,000. If the machine were to be
retained in the business the finance director has estimated that it would generate future cash
flows with a present value of 40,000.

(3) The finance director has recently been on a course entitled Measurement in financial
statements. On his return he said, I was told that the IASBs Framework for the Preparation
and Presentation of Financial Statements refers to four measurement bases but I am unclear as
to what these are and what each of them means.

Requirements

(a) Prepare extracts from Thirlmere plcs consolidated cash flow statement for the year ended
30 September 2008 and consolidated balance sheet as at that date reflecting amounts in
respect of Wastwater Ltd from (1) above. (5 marks)

The Institute of Chartered Accountants in England and Wales 2008. Page 7 of 10


(b) Calculate the income statement charges or credits in respect of the machine in (2) above and
show how they would be dealt with in Thirlmere plcs income statement for the year ended
30 September 2008. (4 marks)

(c) Prepare brief notes for the finance director in respect of his query in (3) above. You should set
out the four measurement bases and explain each of them with reference to the figures in (2)
above. (5 marks)
(14 marks)

NOTES: Notes to the financial statements are not required.


Ignore taxation.

The Institute of Chartered Accountants in England and Wales 2008. Page 8 of 10


4. At 1 October 2007 Windermere plc had investments in three companies: Rydal Ltd, Derwent Ltd and
Buttermere Ltd.

Extracts from the draft individual financial statements of the four companies for the year ended
30 September 2008 are shown below:

Income statements
Buttermere
Windermere plc Rydal Ltd Derwent Ltd Ltd
000 000 000 000

Revenue 38,700 29,600 21,500 17,860


Cost of sales (26,400) (17,700) (15,750) (14,300)

Gross profit 12,300 11,900 5,750 3,560


Operating expenses (7,450) (7,820) (2,200) (1,560)
Profit on sale of shares in Rydal Ltd
(see note (2)) 140

Profit before taxation 4,990 4,080 3,550 2,000


Income tax expense (1,900) (1,600) (1,400) (850)

Profit for the year 3,090 2,480 2,150 1,150

Balance sheets (extracts)


Buttermere
Windermere plc Rydal Ltd Derwent Ltd Ltd
000 000 000 000

Capital and reserves

Ordinary share capital (1 shares) 5,000 4,000 3,500 2,000


Retained earnings 4,570 3,340 4,600 (350)
9,570 7,340 8,100 1,650

Additional information:

(1) The issued share capitals of Rydal Ltd, Derwent Ltd and Buttermere Ltd have not changed
since Windermere plc acquired its equity holdings in those companies. The fair values of the
assets and liabilities of all three companies at acquisition were the same as their carrying
amounts. Ordinary shares in the three companies were acquired as follows:

Buttermere
Rydal Ltd Derwent Ltd Ltd
Number of ordinary shares acquired 3.2 million 2.1 million 600,000
Date of acquisition 1 October 2005 1 October 2006 31 March 2004

(2) Windermere plc acquired its shares in Rydal Ltd for 2.30 cash per share when the retained
earnings of Rydal Ltd were 1,650,000. On 31 March 2008 Windermere plc sold all of its shares
in Rydal Ltd for 7.5 million. Rydal Ltds profits accrued evenly over the current year.

The Institute of Chartered Accountants in England and Wales 2008. Page 9 of 10


(3) During the year Derwent Ltd sold goods to Windermere plc at a mark-up of 20%. The goods
cost Derwent Ltd 600,000. Half of these goods were still in Windermere plcs inventories at the
year end.

(4) Windermere plc has undertaken annual impairment reviews of goodwill. At 30 September 2007
impairment losses of 100,000 had been recognised in respect of Rydal Ltd. Impairment losses
of 30,000 and 10,000 have been identified in respect of Derwent Ltd and Buttermere Ltd
respectively for the year ended 30 September 2008.

(5) None of the companies declared or paid any dividends during the year ended 30 September
2008.

Requirements

(a) Prepare the consolidated income statement of Windermere plc for the year ended
30 September 2008 and the minority interest column from the consolidated statement of
changes in equity for the same year. You should assume that the disposal of Rydal Ltd
constitutes a discontinued activity in accordance with IFRS 5, Non-current Assets Held for Sale
and Discontinued Operations. (18 marks)

(b) Set out the differences between IFRS and UK GAAP in respect of the preparation of group
financial statements. You are not required to consider the differences in respect of the
accounting treatment of goodwill arising on consolidation. (5 marks)

(23 marks)

NOTE: Work to the nearest 000.

The Institute of Chartered Accountants in England and Wales 2008. Page 10 of 10


DECEMBER 2007 APPLICATION LEVEL Professional Stage Examination

Tuesday 8 September 2009

(2 hours)

FINANCIAL ACCOUNTING

This paper is in two parts.

Instructions for answering are given before each part. Read them carefully.

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

Unless otherwise stated all ordinary shares carry one vote each.

IMPORTANT

Question papers contain confidential information and must NOT be removed from
the examination hall.

You MUST submit this question paper with your answer booklet and enter your
candidate number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

The Institute of Chartered Accountants in England and Wales 2009. 1 of 10


BLANK PAGE

The Institute of Chartered Accountants in England and Wales 2009. 2 of 10


September 2009

FINANCIAL ACCOUNTING - PART TWO


(80 marks)

1. Answer all FOUR questions.

2. Answers to questions in this part must begin on separate pages. Use both sides of your
answer booklet.

3. Submit all workings.

4. Ensure your candidate number is written on the front of your answer booklet.

5. Answer each question in pen.

6. The examiner will take account of the way in which material is presented.

7. Unless otherwise stated, make all calculations to the nearest month and to the nearest .

The Institute of Chartered Accountants in England and Wales 2009. 3 of 10


1. Adeje Ltd has a year end of 30 June 2009 and its assistant accountant has extracted the following list
of balances from the nominal ledger as at that date:


Profit before tax 115,000
Interim dividend paid 21,250
Ordinary share capital 1,050,000
Share premium account 200,000
6% irredeemable preference share capital 60,000
Freehold land and buildings
Cost (land 700,000) 2,500,000
Accumulated depreciation at 30 June 2008 486,000
Plant and equipment
Cost 351,000
Accumulated depreciation at 30 June 2008 97,000
Cash at bank (overdraft) 18,250
Retained earnings at 30 June 2008 982,000
Research and development expenditure capitalised 120,000
Trade and other receivables 32,000
Trade and other payables 58,000
Inventories at 30 June 2009 42,000

The following additional information is available:

(1) Shortly after the year end a warehouse assistant discovered that goods costing 2,500 had
been received on 28 June 2009 but accidently omitted from the year-end inventory count.

(2) On 3 April 2009 a claim was made against Adeje Ltd by one of its customers for supplying
faulty goods. Adeje Ltds lawyers have considered the claim and believe that there is an 80%
chance that the customer will win the case if it is taken to court. The customer is demanding
that a full refund should be given of 10,000 plus damages of 5,000. The lawyers have
advised Adeje Ltds directors that they should settle the claim out of court to avoid adverse
publicity.

The goods were returned to Adeje Ltd for investigation before being scrapped. The production
manager identified that wood that had been purchased from Toscas Ltd, one of its regular
suppliers, had been of a poor quality. This was an isolated problem.

Adeje Ltds lawyers wrote to Toscas Ltd explaining the situation. At the year end, negotiations
were advanced between the two companies, with Toscas Ltd agreeing to pay 10,000 to Adeje
Ltd to cover the customers refund. This amount was received by Adeje Ltd on 13 August 2009,
however discussions continue with regard to recovering the cost of the damages.

(3) Research and development expenditure of 120,000 was incurred and capitalised during the
current year. 40,000 of this expenditure was spent on research activities and 25,000 was
incurred prior to Adeje Ltd gaining the necessary licence to market their new product.

(4) On 1 January 2009 Adeje Ltd entered into a two-year operating lease for some new computer
equipment. A non-returnable deposit of 1,000 was paid on signing the lease and there is
nothing further to pay in 2009. Four quarterly payments of 1,000 are then payable, with the
first payment due on 1 January 2010. The cash deposit was correctly recorded in the cash at
bank account and was also recognised as part of the cost of plant and equipment.

The Institute of Chartered Accountants in England and Wales 2009. 4 of 10


(5) No adjustment has been made for the depreciation charges for the year ended 30 June 2009.
Freehold buildings are depreciated at 3% per annum on a straight-line basis and plant and
equipment is depreciated on a reducing balance basis at a rate of 15% per annum.

(6) Adeje Ltd raised new finance during the period in the form of 6% irredeemable preference
shares. 60,000 1 shares were issued at par on 1 January 2009 and have been correctly
accounted for. The appropriate dividend in respect of these shares was paid on 30 June 2009
and was recognised as a finance cost in arriving at the draft profit before tax for the year.

(7) The income tax liability for the year ended 30 June 2009 has been estimated at 41,000.

Requirement

Prepare the statement of financial position of Adeje Ltd as at 30 June 2009 and the statement of
changes in equity for the year ended 30 June 2009 in a form suitable for publication.
(22 marks)

NOTE: Notes to the financial statements are not required.

The Institute of Chartered Accountants in England and Wales 2009. 5 of 10


2. The following are extracts from the draft financial statements of Caleta plc for the year ended
30 June 2009.

Income statement for the year ended 30 June 2009 (extract)


Profit from operations 297,380
Finance cost (164,000)

Profit before tax 133,380


Income tax expense (30,780)

Profit for the period 102,600

Statement of financial position as at 30 June

2009 2008

ASSETS
Non-current assets
Property, plant and equipment 383,900 366,500
Intangible assets 1,163,300 1,245,000
1,547,200 1,611,500

Current assets
Inventories 123,100 106,000
Trade and other receivables 229,800 216,500
Cash and cash equivalents 88,000 59,300
440,900 381,800

Total assets 1,988,100 1,993,300

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) 680,000 550,000
Share premium account 170,000 110,000
Retained earnings 421,300 352,700

1,271,300 1,012,700

Non-current liabilities
Borrowings 350,000 600,000

Current liabilities
Trade and other payables 334,800 358,600
Income tax payable 32,000 22,000
366,800 380,600

Total equity and liabilities 1,988,100 1,993,300

The Institute of Chartered Accountants in England and Wales 2009. 6 of 10


The following additional information is also relevant:

(1) During the year plant was sold and a loss of 11,000 was recognised in the income statement.
The plant had an original cost of 90,000 and a carrying amount of 35,000 at the date of
disposal. At 30 June 2009, half of the disposal proceeds had not been received and were
included in trade and other receivables.

(2) On 1 July 2008 new equipment was acquired with a fair value of 89,000. An initial deposit of
50,000 was paid at that date and the balance due was included in trade and other payables.
Deferred credit terms of 12 months were granted on the balance. This balance plus accrued
interest of 1,700 was paid on 1 July 2009.

(3) Trade and other payables include accrued interest payable of 6,300 (2008: 7,500) which
includes the 1,700 interest payable referred to in (2) above.

(4) During the year a brand was acquired from Arona Ltd, for 200,000. Cash of 100,000 was
paid and the balance was settled by the issue of 50,000 1 ordinary shares in Caleta plc with
a fair value of 2 each. The remaining movement in intangible assets relates to amortisation
charged during the period.

(5) During the year Caleta plc issued ordinary shares for cash in addition to the shares issued to
Arona Ltd.

(6) During the year Caleta plc declared and paid an interim dividend.

Requirement

Prepare a statement of cash flows for Caleta plc for the year ended 30 June 2009, including a note
reconciling profit before tax to cash generated from operations, using the indirect method.
(19 marks)

The Institute of Chartered Accountants in England and Wales 2009. 7 of 10


3. Cristianos plc designs, builds and installs fixtures and fittings into retail outlets and has a 30 June
2009 year end.

(1) Cristianos plc is in the process of a major shop refit for one of its customers. The shop fitting
contract is for a fixed price of 120,000. At 30 June 2009 a surveyor certified the project as
being 50% complete and costs incurred to date totalled 45,000. The customer paid a deposit
of 40,000 when the contract was signed, with the remaining amount being due when the work
is complete. Costs to complete the work have been reliably estimated at 35,000. Revenue and
profit relating to service contracts are recognised by Cristianos plc based on surveys of work
performed.

On 1 January 2009 Cristianos plc sold fixtures and fittings for 25,000 direct to a customer.
Payment from the customer is due 12 months after the date of sale. At the date of sale the fair
value of the 25,000 receivable was 23,500.

Shop signs are sold by Cristianos plc on behalf of a third party company, Fasnia Ltd. If a
customer orders a shop sign, Cristianos plc orders the sign direct from Fasnia Ltd, then collects
the money from the customer and passes on 85% of its value to Fasnia Ltd. During the year
ended 30 June 2009, Cristianos plc made sales totalling 1,300,000 on behalf of Fasnia Ltd. As
at the year end all amounts owing to Fasnia Ltd had been paid by Cristianos plc.

Cristianos plc installed some high technology fittings for a customer on 1 April 2009 for
85,000. Included in that price is an on-going maintenance contract for two years. The sale
price of providing similar on-going maintenance support is estimated at 4,000 per annum.

(2) Cristianos plc produces consolidated financial statements as it owns a number of subsidiary
companies. On 1 July 2008 Cristianos plc acquired a 35% interest in one of its supplier
companies, Alcala Ltd, for 175,000. Alcala Ltd should be treated as an associate.

The statements of financial position of Alcala Ltd show:

At 30 June 2009 At 1 July 2008


Total assets 721,000 760,000

Ordinary share capital (50p nominal value) 400,000 400,000


Retained earnings 176,000 250,000
Equity 576,000 650,000
Total liabilities 145,000 110,000
721,000 760,000

Alcala Ltd declared an interim dividend of 5p per share in May 2009 and this dividend was paid
shortly after the year end. During the year an impairment review was carried out and an
impairment loss of 20,000 was identified in respect of Alcala Ltd.

(3) Cristianos plc is looking at ways to improve the usefulness of its financial statements. As part of
this process its directors are trying to understand the specific needs of the users of its financial
statements.

The Institute of Chartered Accountants in England and Wales 2009. 8 of 10


Requirements

(a) Calculate the amounts to be included in Cristianos plcs income statement for the year ended
30 June 2009 and its statement of financial position as at the same date for the sales
transactions described in (1) above. Assume that any finance costs accrue evenly unless stated
otherwise. (6 marks)

(b) Prepare extracts from Cristianos plcs consolidated statement of financial position as at 30 June
2009 in respect of its investment in Alcala Ltd as set out in (2) above. (5 marks)

(c) (i) Identify two different user groups of the financial statements. For each user group
identified, state why the financial statements might be useful to them and how they might
use the financial statements. (4 marks)

(ii) Identify and explain the inherent limitations of financial statements that may limit their
usefulness to all user groups. (3 marks)

(18 marks)

PLEASE TURNOVER

The Institute of Chartered Accountants in England and Wales 2009. 9 of 10


4. At 1 July 2008 Galletas plc had investments in two companies: Vilaflor Ltd and Arico Ltd. On 1 April
2009 Galletas plc purchased 85% of the ordinary share capital of Masca Ltd for 3 million.

Extracts from the draft individual financial statements of the four companies for the year ended
30 June 2009 are shown below:

Income statements
Galletas plc Vilaflor Ltd Masca Ltd Arico Ltd

Revenue 1,410,500 870,300 640,000 760,090
Cost of sales (850,000) (470,300) (219,500) (345,000)

Gross profit 560,500 400,000 420,500 415,090


Operating expenses (103,200) (136,000) (95,120) (124,080)

Profit before taxation 457,300 264,000 325,380 291,010


Income tax expense (137,100) (79,200) (97,540) (86,400)

Profit for the year 320,200 184,800 227,840 204,610

Statements of financial position (extracts)


Galletas plc Vilaflor Ltd Masca Ltd Arico Ltd

Capital and reserves
Ordinary share capital (1 shares) 4,000,000 3,500,000 2,000,000 3,000,000
Retained earnings 1,560,000 580,000 605,000 340,000
5,560,000 4,080,000 2,605,000 3,340,000

Additional information:

(1) A number of years ago Galletas plc acquired 2.1 million of Vilaflor Ltds ordinary share capital
and 900,000 of Arico Ltds ordinary share capital. Balances on retained earnings at the date of
acquisition were 195,000 for Vilaflor Ltd and 130,000 for Arico Ltd.

(2) At the date of acquisition the fair value of Masca Ltds assets and liabilities were the same as
their carrying amounts except for its head office (land and buildings) which had a fair value of
320,000 in excess of its carrying amount. The split of the value of land to buildings is 50:50
and the buildings had a remaining life of 40 years at 1 April 2009. Masca Ltds profits accrued
evenly over the current year.

(3) During the year Galletas plc sold goods to Vilaflor Ltd and Arico Ltd at a mark-up of 15%.
Galletas plc recorded sales of 149,500 and 207,000 to Vilaflor Ltd and Arico Ltd respectively
during the year. At the year-end inventory count Vilaflor Ltd was found still to be holding half of
these goods and Arico Ltd still held one third.

(4) Galletas plc has undertaken annual impairment reviews in respect of all its investments and at
30 June 2009 an impairment loss of 10,000 had been identified in respect of Arico Ltd.

Requirement

Prepare the consolidated income statement of Galletas plc for the year ended 30 June 2009 and an
extract from the consolidated statement of financial position as at the same date showing all figures
that would appear as part of equity.
(21 marks)

The Institute of Chartered Accountants in England and Wales 2009. 10 of 10


DECEMBER 2007 APPLICATION LEVEL Professional Stage Examination

Tuesday 8 December 2009

(2 hours)

FINANCIAL ACCOUNTING

This paper is in two parts.

Instructions for answering are given before each part. Read them carefully.

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

Unless otherwise stated all ordinary shares carry one vote each.

IMPORTANT

Question papers contain confidential information and must NOT be removed from
the examination hall.

You MUST submit this question paper with your answer booklet and enter your
candidate number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

The Institute of Chartered Accountants in England and Wales 2009. 1 of 10


December 2009

FINANCIAL ACCOUNTING - PART TWO


(80 marks)

1. Answer all FOUR questions.

2. Answers to questions in this part must begin on separate pages. Use both sides of the paper
in your answer booklet.

3. Submit all workings.

4. Ensure your candidate number is written on the front of your answer booklet.

5. Answer each question in black pen.

6. The examiner will take account of the way in which material is presented.

7. Unless otherwise stated, make all calculations to the nearest month and to the nearest .

The Institute of Chartered Accountants in England and Wales 2009. 2 of 10


1. Set out below is the trial balance of Moreton Ltd as at 30 September 2009.


Sales 2,885,500
Purchases 1,345,600
Administrative expenses 456,700
Distribution costs 234,600
Rent 789,000
Inventories at 30 September 2008 134,000
Retained earnings at 30 September 2008 178,900
Provision for legal claim at 30 September 2008 27,000
Ordinary share capital (1 shares) 100,000
Share premium 20,000
Patent cost 40,000
Patent accumulated amortisation at 30 September 2008 8,000
Cash in hand 820
Cash at bank 13,600
Bank loan (repayable 1 October 2010) 200,000
Interest paid 7,500
Trade and other receivables 978,400
Trade and other payables 578,620
Suspense account 25,000
4,011,620 4,011,620

The following additional information is available:

(1) The finance director has calculated that prepaid administrative expenses of 56,000 and
accrued distribution costs of 75,000 need to be adjusted for at 30 September 2009.

(2) Inventories on hand at 30 September 2009 were valued at 156,000 before any adjustment for
goods held by third parties.

At 30 September 2009, Kingham Ltd, a customer of Moreton Ltd, held inventories which it had
purchased on credit from Moreton Ltd on a sale or return basis for 30,000. This transaction
has been accounted for as a normal credit sale by Moreton Ltd. The goods had cost Moreton
Ltd 20,000. Kingham Ltd has not yet settled its liability with Moreton Ltd in respect of these
goods.

(3) Moreton Ltd rents its premises and all of its equipment under operating leases. Of the
789,000 above, 70% should be allocated to cost of sales and 30% to administrative
expenses.

(4) The patent was acquired on 1 October 2006 and is being amortised over its estimated useful
life of 10 years. Amortisation charges on this patent are presented in cost of sales. On 1 April
2009 the directors decided to sell this patent to a competitor, as the company wishes to move
out of that particular market sector.

The patent was expected to sell for 22,000 with selling costs of 1,000. A buyer was found on
1 September 2009 at that price, although the sale was not completed until after the year end.
No adjustments to the financial statements have been made in respect of this patent. On
1 April 2009 the patent met the held for sale criteria of IFRS 5, Non-current Assets Held for
Sale and Discontinued Operations, and continued to do so as at the year end.

The Institute of Chartered Accountants in England and Wales 2009. 3 of 10


(5) The legal claim provided for at 30 September 2008 was settled during the current year for
25,000. The 25,000 was posted to the nominal ledger by Moreton Ltds accounting clerk
who only made one entry in the ledger, to the bank account when the cheque was despatched
to the claimant. The balance on the suspense account arose because of this oversight.

(6) On 15 October 2009, Moreton Ltd received a separate claim from a different customer in
respect of faulty goods supplied to it by Moreton Ltd on 20 September 2009. The customer is
claiming for the cost of the goods (60,000) and for damages (10,000). Moreton Ltds legal
advisers are of the opinion that there is a 60% chance that the claim will be settled at 60,000
and a 40% chance that the claim will be settled at 70,000.

Moreton Ltd has made a counter claim, against its supplier, for 75% of the amount at which
the above claim is expected to be settled. The legal advisers believe that Moreton Ltd is
virtually certain to recover this from its supplier.

The legal advisers expect both claims to be settled within six months of the year end.

(7) The bank loan was taken out on 1 March 2008 and bears interest at 5%.

(8) The income tax charge for the year has been estimated at 4,000.

Requirement

Prepare an income statement for Moreton Ltd for the year ended 30 September 2009 and a statement
of financial position as at that date in a form suitable for publication.

(19 marks)

NOTES: Notes to the financial statements are not required


Expenses should be analysed by function

The Institute of Chartered Accountants in England and Wales 2009. 4 of 10


2. You are the assistant accountant at Bushley plc, a manufacturing company, and have been asked to
prepare the note showing the movements on property, plant and equipment for inclusion in Bushley
plcs financial statements for the year ended 30 September 2009.

You have extracted the following balances in relation to property, plant and equipment from the
financial statements for the year ended 30 September 2008:

Land and buildings Plant and equipment



Cost 1,300,000 870,000
Accumulated depreciation (180,000) (423,000)
1,120,000 447,000

You have also gathered the following information:

(1) Bushley plc has previously adopted the cost model for all of its property, plant and equipment.
However, on 1 October 2008, the land and buildings were revalued as follows:

Land Buildings

Original cost on 1 October 1978 1,000,000 300,000
Valuation on 1 October 2008 1,800,000 700,000

The buildings were being depreciated over a 50-year useful life. The revised remaining useful
life of the buildings at the date of the valuation was estimated to be 40 years. Bushley plc
wishes to make an annual transfer between the revaluation surplus and retained earnings in
accordance with best practice.

(2) The plant and equipment (cost) nominal ledger account for the year ended 30 September
2009 showed the following movements:


1 Oct 2008 B/f 870,000 1 July 2009 Disposal (Machine 157) 56,000
1 Apr 2009 Bank (Machine 251) 120,000
1 July 2009 Purchases 56,000
1 July 2009 Wages 24,000

The transfers from purchases and wages are in respect of a specialised cutting machine which
Bushley plc started constructing for its own use in the current year. This machine was almost
complete by 30 September 2009.

All plant and equipment is depreciated, on a straight-line basis, over five years. Machine 157,
which was disposed of on 1 July 2009, had been purchased on 1 July 2006.

(3) The directors reviewed a number of the companys machines for possible impairment on
30 September 2009. Machine 132, which had cost 78,000 on 1 October 2006, was found to
be impaired. It was estimated that its fair value at 30 September 2009 was 15,000 and that
costs to sell would be 500. Its value in use was estimated at 20,000.

The Institute of Chartered Accountants in England and Wales 2009. 5 of 10


Requirements

(a) Prepare the note showing the movements on property, plant and equipment, including
accumulated depreciation, which would be included in the financial statements of Bushley plc
for the year ended 30 September 2009. (13 marks)

(b) Calculate the balance on the revaluation surplus at 30 September 2009. (3 marks)

(c) Set out the differences between IAS 16, Property, Plant and Equipment and UK GAAP.
(4 marks)

(d) According to the IASBs Framework for the Preparation and Presentation of Financial
Statements, all users require information regarding financial position, financial performance
and changes in financial position.

Explain how the information contained in a set of single entity financial statements in respect
of property, plant and equipment meets those information needs. (5 marks)

(25 marks)

The Institute of Chartered Accountants in England and Wales 2009. 6 of 10


3. During the year ended 30 September 2009, Bredon Ltd reorganised its resources, selling one of its
subsidiary companies and issuing a number of shares. Details of these transactions and an error
discovered in the course of the audit are set out below:

(1) Bredon Ltd acquired 80% of Longdon Ltds 100,000 1 ordinary shares several years ago.
Goodwill acquired in this business combination was 22,800. Since the acquisition,
impairment losses of 5,000 have been recognised in respect of this goodwill.

Longdon Ltds retained earnings at 30 September 2008 were 717,000. In the year ended
30 September 2009 Longdon Ltd made a profit after tax of 32,000, which accrued evenly
over the year. On 1 April 2009, Bredon Ltd sold all of its shares in Longdon Ltd for 700,000.

(2) During the year ended 30 September 2009, Bredon Ltd made the following share issues, all for
cash.

(i) On 1 October 2008, an issue of 200,000 1 ordinary shares at a price of 1.50 per
share.

(ii) On 31 March 2009, an issue of 100,000 1 redeemable 3% preference shares at par.


These shares are redeemable in 2015.

(iii) On 1 July 2009, an issue of 50,000 1 irredeemable 4% preference shares at a price of


1.10 per share.

As at 30 September 2008, the only shares in issue were 500,000 1 ordinary shares, issued at
par. Retained earnings at that date were 2,560,000.

Dividends due on both types of preference shares were paid on 30 September 2009. On
15 August 2009 an interim dividend of 10p per ordinary share was declared and was paid
shortly after the year end.

(3) During their interim audit for the year ended 30 September 2009 the newly-appointed auditors
drew attention to an error in the financial statements for the previous year. In that year,
expenditure had been capitalised for the first time on an intangible asset which did not meet
the criteria set out in IAS 38, Intangible Assets. No further costs in respect of this asset were
capitalised in the current year. The carrying amount of the asset in Bredon Ltds draft
individual (single entity) statement of financial position as at 30 September 2009 is 45,000,
after charging amortisation for the current year of 5,000.

Total comprehensive income in Bredon Ltds draft individual statement of changes in equity for the
year ended 30 September 2009, before adjusting for (2) and (3) above, was 560,000.

The Institute of Chartered Accountants in England and Wales 2009. 7 of 10


Requirements

(a) Calculate the profit from discontinued operations in respect of Longdon Ltd as it would be
presented in the consolidated income statement of Bredon Ltd for the year ended
30 September 2009, in accordance with IFRS 5, Non-current Assets Held for Sale and
Discontinued Operations. (3 marks)

(b) In respect of the transactions set out in (2) and (3) above:

(i) Prepare the individual statement of changes in equity of Bredon Ltd for the year ended
30 September 2009; and

(ii) In so far as the information is available, prepare extracts from the following
individual financial statements of Bredon Ltd for the year ended 30 September 2009:
income statement
statement of financial position
statement of cash flows. (12 marks)

(15 marks)

NOTE: Notes to the financial statements are not required

The Institute of Chartered Accountants in England and Wales 2009. 8 of 10


4. Stow plc has investments in two companies, Bourton Ltd and Naunton Ltd.

The draft, summarised statements of financial position of the three companies at 30 September 2009
are shown below:

Stow plc Bourton Ltd Naunton Ltd



ASSETS
Non-current assets
Property, plant and equipment 4,175,500 2,678,500 1,457,700
Investments 5,250,000 - -
9,425,500 2,678,500 1,457,700
Current assets
Inventories 1,237,000 1,050,000 790,000
Trade and other receivables 976,500 750,000 756,000
Cash and cash equivalents 9,500 1,500 4,800
2,223,000 1,801,500 1,550,800

Total assets 11,648,500 4,480,000 3,008,500

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) 3,000,000 2,000,000 1,000,000
Share premium account 1,000,000 500,000 100,000
Retained earnings 6,602,500 1,202,200 1,298,100

10,602,500 3,702,200 2,398,100

Current liabilities
Trade and other payables 766,000 637,800 515,400
Taxation 280,000 140,000 95,000
1,046,000 777,800 610,400

Total equity and liabilities 11,648,500 4,480,000 3,008,500

Additional information:

(1) Stow plc acquired its shares in Bourton Ltd and Naunton Ltd as follows:

Bourton Ltd Naunton Ltd

Date of acquisition 1 June 2007 1 April 2009


Nominal value of ordinary shares acquired 1,600,000 400,000
Consideration 4,500,000 750,000
Retained earnings at the date of acquisition 1,575,000 875,000

No shares have been issued by Bourton Ltd or Naunton Ltd since Stow plc acquired its shares
in those companies.

At the date of its acquisition by Stow plc, Bourton Ltd held a piece of land which had an
excess of fair value over carrying amount of 1,000,000. This land is still owned by Bourton
Ltd. The carrying amounts of all other assets and liabilities held by Bourton Ltd and Naunton
Ltd at the dates of acquisition were equal to their fair values.

The Institute of Chartered Accountants in England and Wales 2009. 9 of 10


(2) During the second half of the current year both Bourton Ltd and Naunton Ltd sold goods to
Stow plc at a mark-up of 50%. The goods cost Bourton Ltd and Naunton Ltd 360,000 and
250,000 respectively. At the year end, half of each set of goods remained in Stow plcs
inventory but the invoices for the full amount of these goods had not been settled.

(3) At 30 September 2008 cumulative impairment losses in respect of goodwill acquired in the
business combination with Bourton Ltd of 50,000 had been recognised. A further loss of
20,000 arose during the current year and needs to be recognised.

(4) Stow plc has calculated that an impairment in the carrying amount of its investment in Naunton
Ltd of 10,000 arose in the six months to 30 September 2009 and needs to be recognised.

Requirement

Prepare the consolidated statement of financial position of Stow plc as at 30 September 2009.

(21 marks)

The Institute of Chartered Accountants in England and Wales 2009. 10 of 10


Professional Stage Examination

Tuesday 23 March 2010

(2 hours)

FINANCIAL ACCOUNTING
This paper is in two parts.

Instructions for answering are given before each part. Read them carefully.

Answer each question in black pen only.

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

Unless otherwise stated all ordinary shares carry one vote each.

IMPORTANT

Question papers contain confidential information and must NOT be removed from
the examination hall.

You MUST submit this question paper with your answer booklet and enter your
candidate number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

The Institute of Chartered Accountants in England and Wales 2010 Page 1 of 9


March 2010

FINANCIAL ACCOUNTING - PART TWO


(80 marks)

1. Answer all FOUR questions.

2. Answers to questions in this part must begin on separate pages. Use both sides of the paper
in your answer booklet.

3. Submit all workings.

4. Ensure your candidate number is written on the front of your answer booklet.

5. Answer each question in black pen only.

6. The examiner will take account of the way in which material is presented.

7. Unless otherwise stated, make all calculations to the nearest month and to the nearest .

The Institute of Chartered Accountants in England and Wales 2010 Page 2 of 9


1. Karonga plc is a fitness equipment manufacturer and retailer. On 31 December 2009 Karonga plc
nominal ledger showed the following balances:


Sales 6,208,900
Purchases 3,553,100
Administrative expenses 2,324,000
Inventories at 31 December 2008 1,093,800
Bad debt allowance at 31 December 2008 62,400
Retained earnings at 31 December 2008 28,090
Ordinary share capital (1 shares) 1,325,000
Freehold land and buildings
cost (land cost 350,000) 985,500
accumulated depreciation at 31 December 2008 88,970
Plant and equipment
cost 103,800
accumulated depreciation at 31 December 2008 31,210
Cash at bank 189,500
Bank loan (repayable 1 January 2012) 1,025,300
Interest paid 49,170
Trade and other receivables 1,075,000
Trade and other payables 583,700
Income tax (over-provision re 2008) 8,300
Legal provision 12,000

The following additional information is available:

(1) Inventories on hand at 31 December 2009 were valued at 1,163,500 before any adjustments.
However, in January 2010 the warehouse supervisor identified a batch of inventories that had
been damaged due to incorrect storage during December 2009. 500 items were affected,
which were included in the year-end inventory figure above, at their cost of 20 each. It was
estimated that each item could now be sold for 15, half of its original selling price.

(2) Depreciation on property, plant and equipment has yet to be charged. Karonga plc charges
depreciation as follows:

Type Depreciation policy Depreciation presented in


Freehold buildings Straight-line basis over 50 years 40% in administrative expenses,
60% in cost of sales

Plant and equipment Straight-line basis over 8 years Cost of sales

(3) Karonga plc has recently launched a new state-of-the-art fitness machine. Each machine will
sell for 199. Orders for the new machine were taken during December 2009, although the
machines were not ready for delivery until the end of January 2010. 250 orders were taken
from customers along with a deposit of 50 each. These deposits are included in the total
above for sales.

(4) The finance director initially estimated that the necessary bad debt allowance for specific
receivables at 31 December 2009 should be 53,750. However, Karonga plc was
subsequently notified on 10 January 2010 that one of its customers had gone into liquidation.
This customer owed 7,000 at the year end. Movements in the bad debt allowance are
presented in administrative expenses.

The Institute of Chartered Accountants in England and Wales 2010 Page 3 of 9


(5) The legal provision for 12,000 relates to a claim made on 10 December 2009 against
Karonga plc by one of its customers. The customer claimed that goods of an inferior quality
were delivered to it by Karonga plc. The companys lawyers believe that Karonga plc has a
75% chance of successfully defending the claim.

(6) The income tax charge for the current year has been estimated at 105,700.

Requirement

Prepare an income statement for Karonga plc for the year ended 31 December 2009 and a statement
of financial position as at that date in a form suitable for publication.
(18 marks)

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

PLEASE TURN OVER

The Institute of Chartered Accountants in England and Wales 2010 Page 4 of 9


2. Chitipa plc has a number of subsidiary companies which it acquired several years ago. On 1 July
2009 Chitipa plc sold its entire 80% interest in Thyolo Ltd for cash of 200,000.

An extract from the groups consolidated income statement for the year ended 31 December 2009
and consolidated statement of financial position as at that date are set out below, together with some
additional information.

Consolidated income statement for the year ended 31 December 2009 (extract)

Profit from continuing operations 293,000
Finance cost (71,000)
Profit before tax 222,000
Income tax expense (69,900)
Profit for the year from continuing operations 152,100

Loss for the year from discontinued operations (36,030)


Profit for the year 116,070

Attributable to:
Equity holders of Chitipa plc 85,540
Non-controlling interest 30,530
116,070

Consolidated statement of financial position as at 31 December


2009 2008
ASSETS
Non-current assets
Property, plant and equipment 723,400 695,000
Intangibles 364,200 373,700
1,087,600 1,068,700
Current assets
Inventories 401,300 393,800
Trade and other receivables 496,300 475,200
Cash and cash equivalents 148,500 172,500
1,046,100 1,041,500

Total assets 2,133,700 2,110,200

EQUITY AND LIABILITIES


Equity attributable to the owners of Chitipa plc
Ordinary share capital (1 shares) 550,000 400,000
Share premium account 215,000 140,000
Retained earnings 303,140 295,100
1,068,140 835,100
Non-controlling interest 448,260 490,800
1,516,400 1,325,900
Non-current liabilities
Borrowings 561,700 736,300
561,700 736,300
Current liabilities
Trade and other payables 21,700 11,700
Income tax payable 33,900 36,300
55,600 48,000

Total equity and liabilities 2,133,700 2,110,200

The Institute of Chartered Accountants in England and Wales 2010 Page 5 of 9


Additional information:

(1) On 1 April 2009 Chitipa plc made a 1 for 4 bonus issue of ordinary shares, utilising 50,000
from retained earnings and the remainder from the share premium account. A further issue for
cash was made on 1 September 2009.

(2) Chitipa plc paid an interim ordinary dividend during the year.

(3) An analysis of the movement on group property, plant and equipment during the year showed
that assets purchased for cash totalled 360,000. There were no disposals of non-current
assets other than on the disposal of Thyolo Ltd.

(4) The intangibles balance relates to goodwill arising on acquisition of subsidiaries, in respect of
which certain impairment losses have been written off during the year. Goodwill arising on the
acquisition of Thyolo Ltd had been fully impaired prior to the current year.

(5) The net assets of Thyolo Ltd on 1 July 2009 were as follows:


Property, plant and equipment 308,900
Trade and other receivables 25,400
Cash and cash equivalents 7,900
Trade and other payables (36,100)
306,100

(6) The loss for the period from discontinued operations arose on the sale of Thyolo Ltd and can
be analysed as follows:


Profit before tax 12,600
Income tax expense (3,750)
Loss on disposal (44,880)
(36,030)

(7) Trade and other payables includes accrued interest of 5,000 (2008: 7,000).

Requirement

Prepare a consolidated statement of cash flows for Chitipa plc for the year ended 31 December 2009,
including a note reconciling profit before tax to cash generated from operations, using the indirect
method.

A note showing the effects of the disposal of Thyolo Ltd is not required.

(19 marks)

The Institute of Chartered Accountants in England and Wales 2010 Page 6 of 9


3. Rumphi plc has investments in two companies, Luwa Ltd and Dedza Ltd. Rumphi plc has always
prepared IFRS consolidated financial statements.

On 1 September 2009 Rumphi plc acquired 245,000 of Luwa Ltds 1 ordinary shares. Rumphi plc
acquired 14,175 of Dedza Ltds 1 ordinary shares several years ago.

The draft, summarised statements of financial position of the three companies at 31 December 2009
are shown below:

Rumphi plc Luwa Ltd Dedza Ltd



ASSETS
Non-current assets
Property, plant and equipment 800,300 644,550 161,285
Intangibles 36,000 71,600
Investment in Luwa Ltd 900,000
Investment in Dedza Ltd 107,000
1,843,300 716,150 161,285
Current assets
Inventories 52,960 23,250
Trade and other receivables 120,840 945,600 70,135
Cash and cash equivalents 72,600 189,500 26,390
246,400 1,135,100 119,775

Total assets 2,089,700 1,851,250 281,060

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) 930,000 350,000 56,700
Share premium account 125,000
Retained earnings 751,320 748,260 145,695

1,681,320 1,223,260 202,395

Current liabilities
Trade and other payables 236,380 470,330 65,105
Taxation 172,000 157,660 13,560
408,380 627,990 78,665

Total equity and liabilities 2,089,700 1,851,250 281,060

Additional information:

(1) At the date of acquisition Luwa Ltds retained earnings were 600,710. The intangible asset
shown in Luwa Ltds statement of financial position is goodwill acquired on the acquisition of
net assets and trade of an unincorporated business in 2007.

The fair values of the assets, liabilities and contingent liabilities of Luwa Ltd at the date of
acquisition were the same as their carrying amounts with the exception of a specialist piece of
equipment, which had a fair value 12,000 higher than its carrying amount, but this was not
reflected in Luwa Ltds books. The equipment was assessed as having a remaining useful life
of eight years at 1 September 2009.

(2) At the date of acquisition Dedza Ltd had a balance on its retained earnings of 92,555. There
were no other reserves. The fair values of the assets, liabilities and contingent liabilities of
Dedza Ltd at the date of acquisition were the same as their carrying amounts.

The Institute of Chartered Accountants in England and Wales 2010 Page 7 of 9


(3) During the year Rumphi plc sold goods to Dedza Ltd for 34,000 on which its gross profit
margin was 40%. Dedza Ltd held half of these goods in its inventories at the year end.

(4) On 1 January 2009 Rumphi plc acquired a new machine for 80,000. A deposit of 40,000 was
paid on acquisition and the balance is due on 1 January 2011. On 1 January 2009 Rumphi plc
included the new machine in property, plant and equipment at 40,000, as only 40,000 had
been paid in cash. The machine is being depreciated over five years on a straight-line basis.
(Ignore the impact of discounting).

(5) Cumulative impairment losses at 31 December 2008 of 10,000 had arisen in respect of
Dedza Ltd. An impairment loss of 45,000 has been identified in respect of goodwill arising on
the acquisition of Luwa Ltd for the year ended 31 December 2009 and needs to be recognised.

Requirement

Prepare the consolidated statement of financial position of Rumphi plc as at 31 December 2009.

(22 marks)

PLEASE TURN OVER

The Institute of Chartered Accountants in England and Wales 2010 Page 8 of 9


4. During the year ended 31 December 2009 Blantyre Ltd entered into a number of transactions relating
to non-current assets. The financial controller is preparing the draft financial statements and is unsure
how to treat these transactions. Information relating to these non-current assets is set out below.

(1) On 1 January 2009 Blantyre Ltd entered into an agreement to lease a piece of equipment with
a fair value of 85,000. The terms of the lease required an initial non-refundable deposit of
5,000 on 1 January 2009 followed by four annual instalments of 24,000 commencing on
31 December 2009. Following the primary period of the lease of four years Blantyre Ltd can
continue to lease the equipment at a nominal rent and is likely to do so. Blantyre Ltd is fully
responsible for the insurance and maintenance of the equipment.

The estimated useful life of the equipment is five years, after which the equipment will have a
nil residual value.

Blantyre Ltd uses the sum-of-digits method to allocate interest on its finance leases.

(2) Research costs of 70,000 were incurred from 1 January 2009 to 31 March 2009 on the early
development of a new product. A project review was undertaken on 1 April 2009 and on that
date Blantyre Ltd assessed that the development of the new product would be economically
viable. Subsequently, further costs of 120,000 were incurred to complete the development
phase of the project. This included 15,000 on promotional advertising. Production of the new
product started on 1 January 2010.

(3) On 1 April 2009 Blantrye Ltd acquired some technical know-how which will completely change
the way its manufacturing process operates. The following costs have been incurred:


Original cost of technical know-how 180,000
Legal costs incurred as part of acquisition 4,000
Manufacturing supervisors time to install new process 3,200
Staff training incurred in operating new process 13,000
Testing new manufacturing process 4,800
205,000

The new manufacturing process was available for use on 1 July 2009. It was believed that the
new process would be of benefit for the next four years after which it would be replaced.
Although operation of the new manufacturing process during its first six months went well, a
breakthrough in the development of improved technology by a competitor led to an impairment
review being carried out by Blantyre Ltd. At 31 December 2009 the fair value (less costs to sell)
of the technical know-how was assessed as being 152,000 compared with the present value
of the estimated future cash flows expected to be generated by the technology of 157,000.

Requirements

(a) In respect of the non-current assets above, prepare extracts from Blantyre Ltds statement of
financial position as at 31 December 2009 and a summary of the related costs that would be
recognised in the income statement for the year ended 31 December 2009. (13 marks)

(b) Explain the concept of substance over form as set out in the IASB Framework for the
Preparation and Presentation of Financial Statements with reference to IAS 17, Leases.
(3 marks)

(c) The IASBs Framework for the Preparation and Presentation of Financial Statements identifies
four qualitative characteristics: understandability, relevance, reliability and comparability.
Explain how IAS 17, Leases applies these qualitative characteristics. (5 marks)

(21 marks)

The Institute of Chartered Accountants in England and Wales 2010 Page 9 of 9


Professional Stage Examination

Tuesday 15 June 2010

(2 hours)

FINANCIAL ACCOUNTING
This paper is in two parts.

Instructions for answering are given before each part. Read them carefully.

Answer each question in black pen only.

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential information and must NOT be removed from
the examination hall.

You MUST submit this question paper with your answer booklet and enter your
candidate number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

The Institute of Chartered Accountants in England and Wales 2010. Page 1 of 10


June 2010

FINANCIAL ACCOUNTING - PART TWO


(80 marks)

1. Answer all FOUR questions.

2. Answers to questions in this part must begin on separate pages. Use both sides of the paper
in your answer booklet.

3. Submit all workings.

4. Ensure your candidate number is written on the front of your answer booklet.

5. Answer each question in black pen only.

6. The examiner will take account of the way in which material is presented.

7. Unless otherwise stated, make all calculations to the nearest month and to the nearest .

The Institute of Chartered Accountants in England and Wales 2010. Page 2 of 10


1. Set out below is the trial balance of Dashwood Ltd as at 31 March 2010.


Sales 945,700
Purchases 392,800
Administrative expenses 123,600
Distribution costs 97,400
Cost of developing new production process (Note 2) 75,000
Plant and machinery
Cost 670,500
Accumulated depreciation at 31 March 2009 356,300
Land at cost (Note 4) 750,000
Buildings
Valuation (Note 4) 1,400,000
Accumulated depreciation at 31 March 2009 105,000
Inventories at 31 March 2009 35,600
Retained earnings at 31 March 2009 1,249,930
Revaluation surplus at 31 March 2009 601,250
Ordinary share capital (1 shares) 245,000
Bank account 50,700
Finance lease (Note 5) 48,000
Interest paid 1,230
Trade and other receivables (Note 1) 140,950
Trade and other payables 181,200
3,735,080 3,735,080

The following additional information is available:

(1) One of Dashwood Ltds customers, Willoughby plc, went into liquidation in April 2010. At
31 March 2010, Willoughby plc owed Dashwood Ltd 11,000. The liquidator has indicated that
only half of this debt will be recoverable.

(2) During the year Dashwood Ltd began to develop a new production process. Costs were first
incurred on 1 August 2009 and accrued evenly over the period to 31 March 2010. On
1 December 2009 the production process met the relevant criteria for capitalisation as
development expenditure in accordance with IAS 38, Intangible Assets. The company expects
to introduce the new process in April 2010.

(3) Inventories on hand at 31 March 2010 were initially valued at a cost of 45,000. However, the
production director has estimated their net realisable value to be 41,000.

(4) Dashwood Ltd revalued its buildings to 1.4 million some years ago. At the date of the
revaluation the carrying amount of the buildings was 750,000 and their remaining useful life
was estimated at 40 years. Dashwood Ltd makes an annual transfer between the revaluation
surplus and retained earnings in accordance with best practice. Depreciation on buildings is
presented in administrative expenses.

In February 2010 the directors decided to also revalue the land. A report was received from
the companys surveyor on 4 April 2010 estimating the value of the land at 31 March 2010 at
1 million.

(5) On 1 April 2009 the directors entered into a finance lease agreement for a machine with a
cash price of 225,000. The terms of the agreement required five payments of 48,000
annually, commencing on 31 March 2010. The 48,000 was duly paid on that date and also
posted to the bank and finance lease accounts. No other entries have been made in respect of
this transaction. Dashwood Ltd allocates finance charges on a sum-of-the-digits basis.

The Institute of Chartered Accountants in England and Wales 2010. Page 3 of 10


(6) Plant and machinery is depreciated on a straight-line basis over five years. Depreciation on
plant and machinery is presented in cost of sales.

(7) The companys bank reconciliation at 31 March 2010 to the above nominal ledger balance,
showed that interest for March 2010 of 500 had been taken from the companys bank
account but that the nominal ledger account did not yet reflect this payment.

(8) The income tax charge for the year has been estimated at 10,000.

Requirement

Prepare an income statement and statement of total comprehensive income for Dashwood Ltd for the
year ended 31 March 2010 and a statement of financial position as at that date in a form suitable for
publication. (24 marks)

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

The Institute of Chartered Accountants in England and Wales 2010. Page 4 of 10


2. You are the assistant accountant at Middleton plc. The financial controller has asked you to prepare
the companys statement of cash flows for the year ended 31 March 2010. An extract from the
companys income statement for that year and its statement of financial position as at that date are
set out below, together with some additional information.

Income statement for the year ended 31 March 2010 (extract)


Profit from operations 1,345,600
Finance costs (23,700)
Profit before tax 1,321,900
Income tax expense (265,000)
Profit for the year 1,056,900

Statement of financial position as at 31 March

2010 2009

ASSETS
Non-current assets
Property, plant and equipment 7,677,500 6,345,400
Intangibles 450,000 500,000
8,127,500 6,845,400
Current assets
Inventories 679,000 578,000
Trade and other receivables 547,500 656,800
Cash and cash equivalents 35,600 52,500
1,262,100 1,287,300

Total assets 9,389,600 8,132,700

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) 2,000,000 1,400,000
Share premium account 600,000 200,000
Revaluation surplus - 1,550,000
Retained earnings 5,252,300 3,524,800

7,852,300 6,674,800

Non-current liabilities
Preference share capital (redeemable 1 shares) 500,000 -

Current liabilities
Trade and other payables 567,300 657,900
Provisions 200,000 500,000
Income tax payable 270,000 300,000
1,037,300 1,457,900

Total equity and liabilities 9,389,600 8,132,700

The Institute of Chartered Accountants in England and Wales 2010. Page 5 of 10


Additional information:

(1) During the year Middleton plc made the following sales of property, plant and equipment.

Carrying amount Cash received



Plant and equipment 567,000 600,000
Land 2,000,000 2,200,000
2,567,000 2,800,000

The revaluation surplus in the statement of financial position above relates wholly to the land
which was disposed of during the year.

(2) Depreciation of 1,679,000 was charged for the year.

(3) The intangibles balance in the statement of financial position above relates solely to a patent
purchased in 2007 which is being amortised over its estimated useful life.

(4) Trade and other payables include accrued interest payable of 6,500 (2009: 5,000).

(5) During the year, Middleton plc made a 1 for 5 bonus issue of ordinary shares out of retained
earnings. This was followed by a further issue of shares at market price.

(6) The provisions figure in the statement of financial position relates to a single legal claim. It had
been expected that the claim would be settled during the year ended 31 March 2010.
However, negotiations have been lengthier than anticipated with the result that the estimate of
the amount likely to be payable by Middleton plc has been changed significantly.

Requirement

Prepare a statement of cash flows for Middleton plc for the year ended 31 March 2010, including a
note reconciling profit before tax to cash generated from operations, using the indirect method.

(16 marks)

The Institute of Chartered Accountants in England and Wales 2010. Page 6 of 10


3. You are currently on secondment to Norland Ltd, a manufacturer and retailer of electrical goods. The
company accountant has asked for your assistance in calculating certain figures for the consolidated
statement of financial position as at 31 March 2010 and in preparing the provisions note for Norland
Ltds individual (ie single company) financial statements for the year ended 31 March 2010.

During the year ended 31 March 2010, Norland Ltd acquired shares in two other companies: Delaford
Ltd and Barton Ltd. Details of these acquisitions and issues relating to the year-end provisions are set
out below.

(1) On 1 July 2009 Norland Ltd acquired 75% of the ordinary shares of Delaford Ltd for the
following consideration:

Cash of 200,000 payable immediately


Cash of 400,000 payable in one years time (present value 385,500)
750,000 ordinary 1 shares in Norland Ltd (market value 1.20 per share)

On the same date Norland Ltd acquired 30% of the ordinary shares of Barton Ltd, which it
treats as an associate. The consideration of 500,000 was made up entirely of cash.

The statements of financial position of the two companies at the date of acquisition showed
the following:

Delaford Ltd Barton Ltd



Equity
Ordinary share capital (1 shares) 100,000 50,000
Retained earnings 741,600 643,200

All assets and liabilities included in the companies statements of financial position at the date
of acquisition were stated at their fair values, except for plant held by Delaford Ltd. This plant
had a carrying amount of 220,000 but a fair value of 300,000. On 1 July 2009 this plant had
a remaining useful life of five years.

In the year to 31 March 2010 Delaford Ltd and Barton Ltd reported profits after tax of 235,200
and 123,600 respectively. Profits accrued evenly over the current year.

(2) The following information is relevant to the provisions note:

(i) At 31 March 2010 claims in respect of faulty hair straighteners were in progress from
800 customers. The claims department has advised that 20% of these claims are
invalid. Of the remaining claims, 50% of the straighteners can be repaired at a cost to
Norland Ltd of 20 per item, whilst the other 50% will need to be replaced at a cost of
50 per item. A similar provision was in place at 31 March 2009, amounting to
10,000. 8,500 was paid out in such claims during the year to 31 March 2010.

(ii) During the year to 31 March 2010 Norland Ltd commenced a restructuring of its
domestic appliances division. A formal plan was publicly announced on
1 January 2010 and the six-month programme of restructuring began on
1 March 2010. At 31 March 2010 the anticipated further costs to be incurred were:


Redundancy costs 300,000
Lease termination costs 50,000
Staff retraining and relocation 100,000
450,000

The Institute of Chartered Accountants in England and Wales 2010. Page 7 of 10


(iii) On 1 January 2009, new legislation came into force requiring manufacturers such as
Norland Ltd to fit smoke filters in their factories. At 31 March 2010 Norland Ltd still had
not fitted such smoke filters. The expected cost of fitting these has always been
estimated at 250,000 and Norland Ltd plans to start this work in May 2010. However,
a number of manufacturers which, like Norland Ltd, have failed to implement the
legislation have been fined by the Health and Safety Executive. Norland Ltds lawyers
have advised that there is a 75% chance that Norland Ltd will be fined for failing to
comply with this legislation. Their best estimate of the fine at 31 March 2010 is
40,000. At 31 March 2009 the lawyers equivalent best estimate was 60,000.

Requirements

(a) Using the information in (1) above, calculate the following figures for Norland Ltds consolidated
statement of financial position as at 31 March 2010:

(i) Goodwill
(ii) Non-controlling interest
(iii) Investment in associate. (7 marks)

(b) Using the information in (2) above, prepare the provisions note showing the numerical
movements table and relevant narrative disclosures, for inclusion in the individual financial
statements of Norland Ltd for the year ended 31 March 2010. (8 marks)

(15 marks)

The Institute of Chartered Accountants in England and Wales 2010. Page 8 of 10


4. At 1 April 2009 Jennings plc had investments in three companies: Ferrars Ltd, Brandon Ltd and
Palmer Ltd.

Extracts from the draft individual financial statements of the four companies for the year ended
31 March 2010 are shown below:

Income statements
Jennings plc Ferrars Ltd Brandon Ltd Palmer Ltd
000 000 000 000

Revenue 67,600 56,800 42,500 27,600


Cost of sales (43,700) (41,600) (21,750) (14,300)

Gross profit 23,900 15,200 20,750 13,300


Operating expenses (12,700) (5,400) (13,200) (5,400)

Profit from operations 11,200 9,800 7,550 7,900


Investment income 7,300 - 1,000 -

Profit before taxation 18,500 9,800 8,550 7,900


Income tax expense (4,000) (2,000) (1,700) (1,500)

Profit for the year 14,500 7,800 6,850 6,400

Statements of changes in equity (extracts)

Retained earnings
Jennings plc Ferrars Ltd Brandon Ltd Palmer Ltd
000 000 000 000

At 1 April 2009 23,800 2,700 10,400 4,550


Ordinary dividends paid - - (2,000) (1,000)
Total comprehensive income
for the year 14,500 7,800 6,850 6,400
At 31 March 2010 38,300 10,500 15,250 9,950

Additional information:

(1) The issued share capitals of the four companies at 1 April 2009 and number of shares held by
Jennings plc were as follows:

Issued 1 ordinary Number of ordinary


shares shares held by
Jennings plc
Jennings plc 10 million -
Ferrars Ltd 8 million 6.4 million
Brandon Ltd 6 million 4.2 million
Palmer Ltd 4 million 1.6 million

No company has any reserves other than retained earnings. The fair values of the assets and
liabilities of all three companies at acquisition were the same as their carrying amounts.

The Institute of Chartered Accountants in England and Wales 2010. Page 9 of 10


(2) Jennings plc acquired its shares in Ferrars Ltd several years ago for total consideration of
10 million when the retained earnings of Ferrars Ltd were 550,000. On 30 September 2009
Jennings plc sold all of its shares in Ferrars Ltd for 15 million. Ferrars Ltds profits accrued
evenly over the current year. At 31 March 2009 cumulative impairment losses of 500,000 in
respect of goodwill acquired in the business combination with Ferrars Ltd had been recognised.

(3) Jennings plc acquired its shares in Brandon Ltd on 1 April 2009 when the retained earnings of
Brandon Ltd were 10.4 million. At 31 March 2010 an impairment loss of 700,000 was
identified in respect of goodwill acquired in the business combination with Brandon Ltd and
needs to be recognised.

(4) Jennings plc acquired its shares in Palmer Ltd several years ago when the retained earnings of
Palmer Ltd were 600,000. Jennings plc has calculated that an impairment in the carrying
amount of its investment in Palmer Ltd of 100,000 arose in the current year and needs to be
recognised.

(5) During the year Brandon Ltd sold goods to Jennings plc at a mark-up of 20%. The goods cost
Brandon Ltd 3 million. Half of these goods were still in Jennings plcs inventories at the year
end.

(6) Investment income in Jennings plcs individual income statement includes its profit on the sale
of shares in Ferrars Ltd and dividends received from Brandon Ltd and Palmer Ltd.

Requirements

(a) Prepare the consolidated income statement of Jennings plc for the year ended 31 March 2010.
You should assume that the disposal of Ferrars Ltd constitutes a discontinued activity in
accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
(18 marks)

(b) Calculate consolidated retained earnings brought forward at 1 April 2009. (3 marks)

(c) Explain the concepts underlying the preparation of consolidated financial statements, illustrating
these concepts with reference to the consolidated income statement of Jennings plc. (4 marks)

(25 marks)

NOTE: Work to the nearest

The Institute of Chartered Accountants in England and Wales 2010. Page 10 of 10


PROFESSIONAL STAGE APPLICATION EXAMINATION

TUESDAY 14 SEPTEMBER 2010

(2 hours)

FINANCIAL ACCOUNTING
This paper is made up of FIFTEEN objective test (OT) questions (20 marks) and FOUR written test
questions (80 marks).

1. Ensure your candidate details are on the front of your answer booklet.

2. Answer each question in black pen only.


Objective Test Questions (1 15)
3. Record your OT responses on the separate answer sheet provided: this must not be folded or
creased. Your candidate details are printed on the sheet.
4. For each of the 15 OT questions there are four options: A, B, C, D. Choose the response that
appears to be the best and indicate your choice on the answer sheet with a horizontal line in
the correct box as shown on the answer sheet.
5. Attempt all questions; you will score equally for each correct response. There will be no
deductions for incorrect responses or omissions.

Written Test Questions (1 4)


6. Begin the answer to each written test question on a new page and ensure that each question is
clearly numbered. Use both sides of the paper in your answer booklet.
7. The examiner will take account of the way in which material is presented.

Unless otherwise stated, make all calculations to the nearest month.

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential Place your label here: If you do not have a label you
information and must NOT be removed MUST enter your candidate number in this box
from the examination hall.

DO NOT TURN OVER UNTIL YOU ARE


INSTRUCTED TO BEGIN WORK

The Institute of Chartered Accountants in England and Wales 2010 Page 1 of 9


1. Eyam Ltd is a retailer of outdoor leisure products and has produced the following trial balance as at
30 June 2010.


Sales 3,973,000
Purchases 1,560,000
Administrative expenses 930,000
Research and development expenditure 357,600
Operating lease rentals 1,045,000
Inventories at 30 June 2009 346,500
Retained earnings at 30 June 2009 127,750
Ordinary share capital (1 shares) 152,000
Preference shares 5% Irredeemable 1 shares 180,000
Fixtures and fittings cost 646,000
accumulated depreciation at 30 June 2009 251,150
Cash at bank 21,500
Bank loan (repayable 1 July 2014) 150,000
Trade and other receivables 51,000
Trade and other payables 123,700

4,957,600 4,957,600

The following additional information is available:

(1) The research and development expenditure relates to a new micro-fibre that has been
developed for the latest lightweight waterproof jackets. Of the total amount, 120,000 has
been identified as research and development costs incurred before the product was
considered to be commercially viable. The successful development of the material was
completed during February 2010 and jackets were delivered to shops on 1 March 2010. The
jackets have been popular and it is thought that the micro-fibre technology will have a two-year
life, at which time it is expected that it will be superseded.

(2) On 1 July 2008 repairs costing 25,000 were carried out on some shop fittings. This amount
was incorrectly identified as an item of fixtures and fittings since it did not meet the criteria for
capitalisation under IAS 16, Property, Plant and Equipment.

(3) Eyam Ltd rents all its premises under operating leases. On 10 July 2010 Eyam Ltd received a
demand for 95,000 in relation to rent owed for June 2010. This amount has not been
recognised in the trial balance above. Operating lease rentals should be split 50:50 between
administrative expenses and cost of sales.

(4) Depreciation on fixtures and fittings is charged on a reducing balance basis at a rate of
15% pa and should be presented in administrative expenses.

(5) During the current year, Eyam Ltd introduced an open returns policy whereby goods can be
returned for a full refund within 30 days of purchase. A provision should be recognised based
on 10% of sales made over the last month of the reporting period. Sales in June 2010
amounted to 310,000, all of which were cash sales.

(6) Inventories at 30 June 2010 were valued correctly at 375,600.

(7) The preference dividend for the year was declared on 30 June 2010. No ordinary dividend is to
be paid. The bank loan was taken out at the beginning of 2008 and interest is payable at
4% pa. Interest was paid for the year ended 30 June 2009 but remained unpaid at 30 June
2010.

(8) The income tax charge for the year has been estimated at 35,700.

The Institute of Chartered Accountants in England and Wales 2010 Page 2 of 9


Requirement

Prepare an income statement for Eyam Ltd for the year ended 30 June 2010 and a statement of
financial position as at that date in a form suitable for publication. (19 marks)

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

PLEASE TURN OVER

The Institute of Chartered Accountants in England and Wales 2010 Page 3 of 9


2. Litton plc is a large multinational company in the power industry. You are the assistant accountant
and have been asked to help prepare property, plant and equipment information for the year ended
30 June 2010. The financial controller has provided you with the following information:

Draft information on property, plant and equipment:


Cost/valuation Accumulated Depreciation charge
at depreciation at for the year ended
30 June 2009 30 June 2009 30 June 2010

Land 2,000,000
Plant and machinery 950,000 408,000 115,800
Hydro-electric plants 7,000,000 2,100,000 466,667
Solar power plants 4,200,000 400,000 200,000

The depreciation charges for the year to 30 June 2010 were all calculated before adjusting for the
information contained in the notes below.

(1) On 1 July 2009 a piece of land was acquired as a possible location for a wind turbine farm.
The following costs have been incurred to date in relation to the land:


Purchase price of land 5,000,000
Professional fees 150,000
Site clearance costs 125,000
Planning permission application 15,000
Allocation of general overheads 36,000
Rental income generated (see below) (45,000)
5,281,000
For two months of the current year the site was rented by a local business as a temporary
storage facility.

(2) On 1 July 2009 a decision was made to sell a large piece of machinery when its fair value less
costs to sell was estimated at 90,000. At this date the piece of machinery met the held for
sale criteria of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, and
continued to do so as at the year end. The machine was originally purchased on 1 July 2004
for 300,000 and was assessed as having a useful life of eight years.

(3) Litton plc acquired a hydro-electric power plant on 1 September 2009, at a cost of 10 million.
The plant remained idle for the first month as it needed to be fully tested. Following successful
testing of the plant, an operating certificate was issued on 1 November 2009. At the end of the
power plants estimated useful life of 15 years Litton plc is obliged to clear the site and restore
the environment.

The testing of the plant and certification costs were 100,000 and the estimated restoration
costs at the end of the plants life are 1 million. (Ignore the effect of discounting)

The Institute of Chartered Accountants in England and Wales 2010 Page 4 of 9


(4) Litton plc adopts the revaluation model for its solar power plants but does not make annual
transfers between the revaluation surplus and retained earnings. The following information
relates to the solar power plants:


Cost at acquisition on 1 July 2003 4,500,000
Valuation at 1 July 2007 4,200,000
Valuation at 1 July 2009 5,092,000
Revaluation surplus at 1 July 2007 420,000

Estimated useful life of plant at 1 July 2003 25 years

The draft depreciation charge for the year is based on the valuation as at 1 July 2007. There
has been no change to the estimated useful lives of the solar power plants since acquisition.

(5) On 1 July 2009 Litton plc acquired its first wind turbines at a total cost of 2 million, of which the
battery storage system cost 200,000. The wind turbines have a life of 20 years but the battery
storage system needs replacing every five years.

Requirements

(a) In respect of the information above prepare relevant extracts from Litton plcs statement of
financial position as at 30 June 2010 and a summary of the amounts that should be recognised
in the income statement for the year ended 30 June 2010. (18 marks)

NOTE: Notes to the financial statements are not required.

(b) (i) Historical cost is one of the four measurement bases referred to in the IASB Framework.
Briefly explain how the four bases relate to the measurement of a non-current asset.

(ii) Explain the usefulness and limitations of measuring non-current assets using the cost
model compared to the revaluation model under IAS 16, Property, Plant and Equipment.
(7 marks)

(25 marks)

PLEASE TURN OVER

The Institute of Chartered Accountants in England and Wales 2010 Page 5 of 9


3. Bretby plc is a printing and publishing company which produces a number of magazine titles. As
assistant accountant, you have been asked to prepare some information for the financial statements
for the year ended 30 June 2010.

The following information is relevant:

(1) The current year draft revenue figure is 2,176,900 but an error has been made this year and it
has been arrived at on a cash receipts basis.

Bretby plc sells some of its magazines on a subscription basis direct to the public. Subscriptions
are received in advance on a quarterly basis and delivery of the magazine starts in the month
following receipt. Bretby plc received the following subscriptions between March and June 2010:

Month in which subscription Total quarterly


money was received subscription

March 2010 129,000
April 2010 84,000
May 2010 96,000
June 2010 111,000

In May 2010 Bretby plc offered a one-off promotion on advertising space. Advertisements would
run in June and September 2010 publications, although payment is not due until the end of
September 2010. Bretby plc sold advertising space under this promotion to the value of
17,500.

Bretby plc sells some magazine titles through third party retailers. Magazines are invoiced and
delivered to retailers at the beginning of the month. Invoices totalling 25,000 were sent out on
1 June 2010, all invoices were settled within the normal credit period of 30 days. Any unsold
magazines are returned to Bretby plc at the end of the month and retailers are refunded 2 per
magazine at the start of the following month. Retailers returned 1,500 magazines at the end of
June 2010.

Bretby plc has a one-year contract with an online news service to provide five articles a month
for publication on its website. The contract commenced on 1 October 2009 and has a total value
of 30,000. Bretby plc received half the contract value at the start of the contract and the
remainder will be settled at the end of the contract.

(2) Bretby plc absorbs fixed production overheads into inventories on the basis of units of
production. During the year only 800,000 magazines were printed compared to a budgeted level
of one million because of problems with one of the printing presses.

At 30 June 2010 there were 25,500 magazines in inventories. Of these, 2,000 magazines were
out of date but these can be sold to retailers who specialise in back issues of magazines, at a
reduced selling price of 1 each (selling expenses are immaterial). The normal selling price is
2.50 per magazine.

The following costs were incurred in the year ended 30 June 2010:


Material costs 360,000
Variable production overheads 240,000
Fixed production overheads 450,000
Administrative costs 200,000

The Institute of Chartered Accountants in England and Wales 2010 Page 6 of 9


(3) Bretby plc prepares consolidated financial statements. On 1 October 2008 Bretby plc acquired
40% of the ordinary share capital of Alport Ltd for 300,000. The retained earnings of
Alport Ltd on 1 October 2008 and 30 June 2009 were 250,000 and 295,000 respectively.

Alport Ltd made profit after taxation of 40,000 for the year ended 30 June 2010. Retained
earnings in Bretby plcs draft consolidated statement of financial position as at 30 June 2010
were 1,670,000. This figure was calculated ignoring the investment in, and transactions with,
Alport Ltd.

In April 2010 Alport Ltd sold goods to Bretby plc for 200,000 on which its gross margin was
35%. Bretby plc held half of these goods in its inventories at 30 June 2010.

An impairment loss of 5,000 has been identified in respect of Alport Ltd for the year ended
30 June 2010 and needs to be recognised.

Requirements

(a) Calculate a revised revenue figure for the year ended 30 June 2010 for Bretby plc using the
information in (1) above. (6 marks)

(b) Calculate the inventories figure for inclusion in Bretby plcs statement of financial position as at
30 June 2010 using the information in (2) above. (3 marks)

(c) Calculate the following amounts for inclusion in Bretby plcs consolidated statement of financial
position as at 30 June 2010 using the information in (3) above:

(i) investment in associate; and

(ii) retained earnings. (6 marks)

(15 marks)

PLEASE TURN OVER

The Institute of Chartered Accountants in England and Wales 2010 Page 7 of 9


4. Pinxton plc has investments in two subsidiaries, Hayfield Ltd and Smisby Ltd.

The draft, summarised statements of financial position of the three companies at 30 June 2010 are
shown below:

Pinxton plc Hayfield Ltd Smisby Ltd



ASSETS
Non-current assets
Property, plant and equipment 670,000 140,000 240,000
Intangibles 265,000 20,000
Investments 490,000
1,425,000 160,000 240,000
Current assets
Inventories 135,000 60,000 65,000
Trade and other receivables 96,400 63,000 86,400
Cash and cash equivalents 18,900 14,000 7,950
250,300 137,000 159,350

Total assets 1,675,300 297,000 399,350

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) 950,000 170,000 240,000
Share premium account 310,000 30,000
Retained earnings 292,500 69,300 27,150
1,552,500 239,300 297,150

Current liabilities
Trade and other payables 89,600 51,000 88,300
Taxation 33,200 6,700 13,900
122,800 57,700 102,200

Total equity and liabilities 1,675,300 297,000 399,350

Additional information:

(1) Pinxton plc acquired its shares in Hayfield Ltd and Smisby Ltd as follows:

Hayfield Ltd Smisby Ltd

Date of acquisition 1 July 2005 1 April 2010


Nominal value of ordinary shares acquired 153,000 192,000
Consideration 190,000 300,000
Retained earnings at the date of acquisition 72,000 10,300

(2) The fair values of the assets and liabilities held by Hayfield Ltd at the date of acquisition were
equal to their carrying amounts. A reassessment of Hayfield Ltds assets and liabilities and
consideration transferred took place following acquisition and no adjustments were necessary.

The Institute of Chartered Accountants in England and Wales 2010 Page 8 of 9


(3) At the date of its acquisition by Pinxton plc, the replacement cost of inventories held by
Smisby Ltd was 90,000 but their carrying amount was 75,000. At 30 June 2010 25% of these
inventories were still held by Smisby Ltd, the other 75% having been sold to third parties. The
carrying amounts of all other assets and liabilities held by Smisby Ltd at the date of acquisition
were equal to their fair values.

(4) During the year Hayfield Ltd sold goods to Pinxton plc for 30,000, which was at cost plus a
mark-up of 25%. Pinxton plc held a third of these goods in its inventories at the year end. This
was the only inter-company trading that occurred during the year and the invoice for the full
amount remained unpaid at 30 June 2010.

(5) Pinxton plc has undertaken annual impairment reviews of goodwill. An impairment loss of
10,000 has been identified in respect of Smisby Ltd for the year ended 30 June 2010 and
needs to be recognised.

Requirement

Prepare the consolidated statement of financial position of Pinxton plc as at 30 June 2010.
(21 marks)

The Institute of Chartered Accountants in England and Wales 2010 Page 9 of 9


PROFESSIONAL STAGE APPLICATION EXAMINATION

MONDAY 18 MARCH 2013

(2 hours)

FINANCIAL ACCOUNTING
This paper consists of FIFTEEN objective test (OT) questions (20 marks) and FOUR written
test questions (80 marks).
1. Ensure your candidate details are on the front of your answer booklet.
2. Answer each question in black ball point pen only.
Objective Test Questions (1 15)
3. Record your OT responses on the separate answer sheet provided: this must not be
folded or creased. Your candidate details are printed on the sheet.
4. For each of the FIFTEEN OT questions there are four options: A, B, C, D. Choose the
response that appears to be the best and indicate your choice in the correct box, as
shown on the answer sheet.
5. Attempt all questions; you will score equally for each correct response. There will be no
deductions for incorrect responses or omissions.
Written Test Questions (1 4)
6. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

7. The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2013. All rights reserved.

ICAEW\246\M13 167362
1. The following balances have been extracted from the nominal ledger of Bouvardia Ltd at
30 September 2012.

Sales 1,057,000
Purchases 344,000
Administrative expenses 216,200
Other operating costs 86,900
Ordinary dividend (Note 1) 168,150
Land at cost 400,000
Plant and machinery (Note 2)
cost 385,000
accumulated depreciation at 30 September 2011 144,375
Freehold buildings (Note 3)
valuation 1,644,000
accumulated depreciation at 30 September 2011 192,000
Lease payment (Note 5) 18,000
Retained earnings at 30 September 2011 576,875
Ordinary share capital (1 shares) 672,600
Revaluation surplus at 30 September 2011 518,000
Inventories at 30 September 2011 31,800
Trade and other receivables 61,500
Trade and other payables 199,800
Cash at bank 5,100

The following additional information is available:

(1) The ordinary dividend of 168,150 was paid during the current year in respect of the
year ended 30 September 2011.

(2) On 1 April 2012 Bouvardia Ltd decided to sell one of its machines which had a carrying
amount of 8,200 on 30 September 2011. On 1 April 2012 the machine had a fair value
of 6,500 and met the held for sale criteria of IFRS 5, Non-current Assets Held for
Sale and Discontinued Operations. The machine was still held by Bouvardia Ltd at the
year end, although a buyer had been found. No adjustment to the above balances has
been made in respect of this machine. There have been no other changes to plant and
machinery in the current year.

Plant and machinery is depreciated using the reducing balance method at a rate of
20% pa. Depreciation on plant and machinery should be presented in cost of sales.

(3) Bouvardia Ltd carries its freehold buildings (Property A and Property B) under the
revaluation model. The latest revaluations were on 1 October 2011 but these have not
yet been reflected in the above balances. The following information is available with
regard to these properties:
Property A Property B

Date of purchase 1 October 2002 1 October 1991


Useful life at purchase 40 years 50 years
Cost 400,000 1,000,000
Revaluation surplus at 30 September 2011 62,000 456,000
Carrying amount at 30 September 2011 372,000 1,080,000
Valuation at 1 October 2011 449,500 600,000

ICAEW\246\M13 Page 2 of 9
The useful lives of both properties are unchanged. Where possible, Bouvardia Ltd
makes an annual transfer between the revaluation surplus and retained earnings in
accordance with best practice. Depreciation on buildings should be presented in
administrative expenses.

(4) On 1 October 2011 Bouvardia Ltd moved its head office operations to a different
location, vacating its previous premises on the same date. The previous head office had
been leased under a ten-year non-cancellable operating lease at a cost of 3,000 per
month. At 30 September 2012 Bouvardia Ltd had four years remaining to pay on this
lease. Bouvardia Ltd has found a tenant to rent the building for 2,300 per month for the
remaining four year term commencing on 1 October 2012. The current year rental
payments have correctly been included in other operating costs.

(5) Bouvardia Ltd moved into its newly rented head office building on 1 October 2011. The
building is being leased for 15 years and has a useful life of 50 years. The lease
payment schedule has been negotiated so that Bouvardia Ltd pays less in the early
years and more in the later years to help with cash flow: 18,000 pa is payable for the
first seven years; this will then increase to 36,000 pa for the remaining eight years. At
30 September 2012 the first years rental payment had been made and is included in
the list of balances above.

(6) At 30 September 2012 inventories were valued at 27,300.

(7) The income tax liability for the year has been estimated at 56,000.

Requirements

Prepare the following for Bouvardia Ltd, in a form suitable for publication:

(i) an income statement for the year ended 30 September 2012;

(ii) a statement of financial position as at 30 September 2012;

(iii) an extract from the statement of changes in equity for the year ended 30 September
2012 showing the retained earnings and revaluation surplus columns only.
(25 marks)

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

ICAEW\246\M13 Page 3 of 9
2. Eremurus plc has a number of subsidiary companies and is preparing its consolidated
financial statements for the year ended 30 September 2012. On 1 October 2011
Eremurus plc acquired 75% of Genistra Ltd and 30% of Ixia Ltd. There were no other
changes in the composition of the group during the year ended 30 September 2012.

The following information has been prepared.

Consolidated income statement for the year ended 30 September 2012 (extract)


Profit from operations 601,440
Share of profit of associate 24,700
Profit before tax 626,140
Income tax expense (154,700)
Profit for the year 471,440
Attributable to:
Owners of Eremurus plc 415,640
Non-controlling interest 55,800
471,440

Consolidated statement of financial position as at 30 September

2012 2011
ASSETS
Non-current assets
Property, plant and equipment 805,300 791,500
Intangibles 28,800 33,450
Investment in associate 55,700
889,800 824,950
Current assets
Inventories 57,300 46,900
Trade and other receivables 75,900 51,930
Cash and cash equivalents 27,370 4,400
160,570 103,230
Total assets 1,050,370 928,180
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares) 245,000 170,000
Share premium account 259,000 227,500
Retained earnings 163,920 238,280
Attributable to the equity holders of Eremurus plc 667,920 635,780
Non-controlling interest 180,600 144,800
848,520 780,580
Non-current liabilities
Finance lease liabilities 6,419
Current liabilities
Trade and other payables 48,792 82,600
Finance lease liabilities 2,939
Income tax payable 143,700 65,000
195,431 147,600
Total equity and liabilities 1,050,370 928,180

ICAEW\246\M13 Page 4 of 9
Additional information:

(1) Eremurus plcs shares had a market value of 1.40 on 1 October 2011, the date of
acquisition of Genistra Ltd and Ixia Ltd.

(2) The consideration to acquire the shares in Genistra Ltd consisted of 58,800 cash and
35,000 1 ordinary shares in Eremurus plc.

(3) At the date of acquisition, the statement of financial position of Genistra Ltd showed the
following assets and liabilities. The carrying amounts of all assets and liabilities were
equal to their fair values.


Property, plant and equipment 105,000
Trade and other receivables 6,450
Cash and cash equivalents 8,700
Trade and other payables (9,950)
110,200

(4) The consideration to acquire the shares in Ixia Ltd consisted of 10,000 cash and
15,000 1 ordinary shares in Eremurus plc. The 30% holding in Ixia Ltd gives
Eremurus plc significant influence over that company.

(5) In addition to the issue of shares to acquire Genistra Ltd and Ixia Ltd, a subsequent
share issue was made for cash.

(6) The intangibles balance at 1 October 2011 relates to intangible assets on which
amortisation of 8,200 has been recognised during the year ended 30 September 2012.
The only addition to intangible assets during the year was the goodwill arising on the
acquisition of Genistra Ltd. Eremurus plc sold a licence during the year, at its carrying
amount, for cash.

(7) During the year Eremurus plc acquired plant and equipment for cash of 50,000 but
made no disposals.

In addition, on 1 October 2011 a piece of equipment with a fair value of 12,130 was
acquired under a finance lease. The first of four annual payments of 3,500 was made
on 30 September 2012 and this included interest of 728. The lease liabilities were
correctly recognised at the year-end but the interest charge was recognised as part of
operating costs.

(8) Eremurus plc and Genistra Ltd both paid interim dividends during the year. However,
Ixia Ltd has not paid any dividends since its acquisition by Eremurus plc.

Requirement

Prepare a consolidated statement of cash flows for Eremurus plc for the year ended
30 September 2012, including a note reconciling profit before tax to cash generated from
operations, using the indirect method. A note showing the effects of the acquisition of
Genistra Ltd is not required. (21 marks)

ICAEW\246\M13 Page 5 of 9
3. Caribea Ltd is a publishing company and retailer of magazines and is preparing its draft
financial statements for the year ended 30 September 2012. The following extracts from the
draft financial statements have been prepared.

Caribea Ltd used the cash basis of accounting in error for revenue when preparing these
draft figures.

Draft income statement for the year ended 30 September 2012 (extract)

Revenue 1,160,800
Profit for the year 549,700

Draft statement of financial position as at 30 September 2012 (extract)


Current assets
Other receivables 8,400
Current liabilities
Provisions 145,000

Additional information is as follows:

(1) Caribea Ltd has five customers who advertise regularly in its publications for a fixed
price. These customers each paid 6,600 on 1 January 2012 to reserve advertising
space in monthly publications over the calendar year to 31 December 2012.

(2) Caribea Ltd acts as an agent for other publishers, with commission of 15% earned on all
agency sales. Cash is forwarded to the principals (ie, the third party publishers) one
month after the sale has taken place. The gross amount of cash from agency sales
received in September 2012 amounted to 9,300, all of which had been recognised as
revenue by Caribea Ltd as at 30 September 2012.

(3) Caribea Ltd sells its magazines via kiosks (small stands from which newspapers are
sold) in busy cities across the UK. These kiosks are operated on a franchise basis. The
franchise agreement is such that there is a one-off fee of 5,000 to cover initial set-up
costs and then an annual fee of 12,000 to cover rent, wear and tear and delivery costs
over the year. All fees for the first year are paid in full on the date the franchise
agreement is entered into. The following franchise agreements exist at 30 September
2012:

Franchise agreement Number of


commencing on agreements

1 January 2012 6
1 September 2012 4

(4) Caribea Ltd disclosed a contingent asset of 8,000 in its financial statements at
30 September 2011 in respect of a potential refund for paper that had been returned to
a supplier. The amount disclosed represented the full invoice value that Caribea Ltd
paid in June 2011. The latest correspondence from the supplier confirms that a refund
will be paid for 75% of the invoice amount.

ICAEW\246\M13 Page 6 of 9
(5) At 30 September 2012 Caribea Ltd had an outstanding court case against an employee
who claimed to have been unfairly dismissed. Caribea Ltds lawyers estimated that it will
cost Caribea Ltd 100,000 to settle the case, and therefore this amount was provided
for at 30 September 2012. On 20 October 2012 the case was settled at 115,000.

Requirements

(a) Recalculate the figures included in the draft extracts above to reflect the additional
information given and in accordance with the accrual basis. (7 marks)

(b) Identify and explain the inherent limitations of financial statements to users for decision
making purposes with reference to the two fundamental qualitative characteristics.
(6 marks)

(13 marks)

PLEASE TURN OVER

ICAEW\246\M13 Page 7 of 9
4. Tritoma plc has a number of investments which include a subsidiary, Scabiosa Ltd, and an
associate, Anemone Ltd. Tritoma plc has always prepared consolidated financial statements.

The draft summarised statements of financial position of the three companies at


30 September 2012 are shown below:

Tritoma plc Scabiosa Ltd Anemone Ltd



ASSETS
Non-current assets
Property, plant and equipment 1,174,000 216,200 175,600
Investments 878,000
2,052,000 216,200 175,600
Current assets
Inventories 121,600 78,800 21,000
Trade and other receivables 41,600 49,600 17,800
Cash and cash equivalents 24,800 1,900 3,400
188,000 130,300 42,200

Total assets 2,240,000 346,500 217,800

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) 620,000 80,000 100,000
Share premium account 405,000 40,000
Revaluation surplus 410,800 120,000
Retained earnings 593,200 90,750 84,050
2,029,000 330,750 184,050

Current liabilities
Trade and other payables 148,300 11,700 30,950
Taxation 62,700 4,050 2,800
211,000 15,750 33,750

Total equity and liabilities 2,240,000 346,500 217,800

ICAEW\246\M13 Page 8 of 9
Additional information:

(1) Details relating to the subsidiary and associate are set out below:

Scabiosa Ltd Anemone Ltd


Date of acquisition 1 Oct 2011 1 Oct 2002
Percentage holding acquired 85% 35%
Consideration 300,000 78,000
Retained earnings at the date of acquisition 31,600 52,250
Revaluation surplus at the date of acquisition 70,000

(2) The fair values of the assets, liabilities and contingent liabilities of both Scabiosa Ltd
and Anemone Ltd at the date of acquisition were equal to their carrying amounts, with
the exception of the following two assets:

Scabiosa Ltd at acquisition the replacement cost of inventories was 62,000


but their carrying amount was 53,500. At 30 September 2012 15% of these
inventories were still held by Scabiosa Ltd.

Anemone Ltd at acquisition a property had a fair value 50,000 in excess of its
carrying amount. The property had a remaining useful life of 20 years on
1 October 2002.

(3) On 1 October 2011 Tritoma plc sold a machine to Scabiosa Ltd for 90,000. The
machine had a carrying amount in Tritoma plcs books of 78,000. The estimated
remaining useful life of the machine was reassessed on the date of sale at six years.

(4) During the year Tritoma plc sold goods to Anemone Ltd for 10,000 on which its gross
profit margin was 30%. At the year end Anemone Ltd held a third of these goods in its
inventories.

(5) Physical inventory counts were carried out on 30 September 2012 by all three
companies to determine the inventory figures included in their draft financial statements
set out above. On 10 October 2012 Scabiosa Ltd received an inventory report from one
of its customers showing that at 30 September 2012 that customer held 11,800 (cost to
the customer) of inventories on a sale or return basis. Scabiosa Ltd makes a gross profit
margin of 25% on all sales but has not yet raised any invoices for this transaction.

Requirement

Prepare the consolidated statement of financial position of Tritoma plc as at 30 September


2012. (21 marks)

ICAEW\246\M13 Page 9 of 9
IJFSC
wwwfilc.org

MIX
Paper from
responsible soLl ~es

FSC"' C020438
PROFESSIONAL STAGE APPLICATION EXAMINATION

MONDAY 10 JUNE 2013

(2 hours)

FINANCIAL ACCOUNTING
This paper consists of FIFTEEN objective test (OT) questions (20 marks) and FOUR written
test questions (80 marks).
1. Ensure your candidate details are on the front of your answer booklet.
2. Answer each question in black ball point pen only.
Objective Test Questions (1 15)
3. Record your OT responses on the separate answer sheet provided: this must not be
folded or creased. Your candidate details are printed on the sheet.
4. For each of the FIFTEEN OT questions there are four options: A, B, C, D. Choose the
response that appears to be the best and indicate your choice in the correct box, as
shown on the answer sheet.
5. Attempt all questions; you will score equally for each correct response. There will be no
deductions for incorrect responses or omissions.
Written Test Questions (1 4)
6. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

7. The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2013. All rights reserved. Page 1 of 8


1. Falcon Ltd is a manufacturer of computer hardware. The following balances have been
extracted from the nominal ledger of Falcon Ltd at 31 December 2012.

Sales (Note (1)) 1,418,600
Purchases 744,300
Administrative expenses 235,600
Distribution costs 43,500
Inventories at 1 January 2012 30,200
Plant and equipment
Cost 570,600
Accumulated depreciation at 1 January 2012 (Note (2)) 235,600
Land and buildings
Cost 375,000
Accumulated depreciation at 1 January 2012 (Note (2)) 95,000
Ordinary share capital (1 shares) 200,000
Retained losses at 1 January 2012 19,700
Bank overdraft 34,600
Bank interest paid 12,600
Trade and other receivables 32,800
Trade and other payables 78,500
Income tax (Note (3)) 2,000

Notes

(1) On 1 January 2012 Falcon Ltd supplied a significant amount of computer hardware to a
new customer and undertook to provide after-sales support for a period of three years.
The total contract was for 300,000, with 60,000 of that amount being for the after-
sales support. The whole 300,000 was credited to sales and the customer paid in full
on 2 February 2012. No other contracts for the provision of after-sales support have
been entered into during the current year.

(2) Falcon Ltd measures all of its property, plant and equipment under the cost model.
Depreciation is charged at the following rates:

Buildings 2% pa straight line


Plant and equipment 25% pa reducing balance

Depreciation on buildings should be presented in administrative expenses. Depreciation


on plant and equipment should be presented in cost of sales. The cost of land and
buildings includes land of 100,000.

(3) The income tax balance of 2,000 in the list of balances relates to an overprovision in
respect of the income tax liability estimated at 31 December 2011. The income tax
liability for the current year has been estimated at 35,000.

Copyright ICAEW 2013. All rights reserved. Page 2 of 8


The following additional information is available:

On 30 November 2012, Falcon Ltd announced the sale of its Scottish operations,
which had constituted a separate major line of business. On that date a formal
disposal plan was approved and adopted for full implementation by 31 March 2013. All
the plant and equipment used in Scotland, which had a carrying amount of 120,000
on 1 January 2012, was classified as held for sale. At the date of classification the
plant and equipments fair value was estimated at 85,000 and costs to sell at 5,000.
Other costs flowing from the disposal decision, to be incurred in 2013, are estimated at
55,000. No income tax will be due on the Scottish operations. The list of balances
above includes the following amounts in respect of the Scottish operations (assume
that no inventories were held by the Scottish operations at the beginning or end of the
year):


Sales 114,000
Purchases 160,900
Administrative expenses 17,400
Distribution costs 5,300

On 1 January 2012 Falcon Ltd entered into a 25-year lease of a building, which had a
fair value of 112,500 and a remaining useful life of 25 years, with no residual value.
The lease agreement provided for annual payments of 5,000, with the first payment
being made on 1 January 2012. Falcon Ltd charged the bank account with the 5,000
paid on 1 January 2012 and included the whole amount in administrative expenses,
but has made no other entries in respect of this lease. Falcon Ltd allocates finance
charges on a sum-of-the-digits basis.

Inventories on 31 December 2012 were valued at 35,600.

Requirements

(a) Prepare an income statement for Falcon Ltd for the year ended 31 December 2012 and
a statement of financial position as at that date in a form suitable for publication. You
should assume that the disposal of the Scottish operations constitutes a discontinued
activity in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued
Operations. (25 marks)

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

(b) State the objective of general purpose financial reporting, as set out in the
IASB Conceptual Framework, and discuss the purpose of accounting standards. You
should illustrate your answer by reference to the financial statements of Falcon Ltd.
(5 marks)

(30 marks)

Copyright ICAEW 2013. All rights reserved. Page 3 of 8


2. On 1 January 2012 Eagle plc had a number of subsidiary companies, and one associated
company, all of which it acquired several years ago. The groups consolidated income
statement for the year ended 31 December 2012 and consolidated statement of financial
position as at that date are set out below.

Consolidated income statement for the year ended 31 December 2012 (extract)
Continuing operations
Profit from operations 289,400
Finance costs (22,000)
Share of profits of associate 56,700
Profit before tax 324,100
Income tax expense (64,800)
Profit for the year from continuing operations 259,300
Discontinued operations
Profit for the year from discontinued operations 45,500
Profit for the year 304,800
Attributable to:
Owners of Eagle plc 254,100
Non-controlling interest 50,700
304,800

Consolidated statement of financial position as at 31 December


2012 2011
ASSETS
Non-current assets
Property, plant and equipment 1,024,600 983,500
Investment in associate 185,900 179,800
1,210,500 1,163,300
Current assets
Trade and other receivables 75,700 88,900
Cash and cash equivalents 20,500 14,500
96,200 103,400
Total assets 1,306,700 1,266,700

EQUITY AND LIABILITIES


Equity
Ordinary share capital (50p shares) 220,000 140,000
Share premium account 50,000 20,000
Retained earnings 663,000 675,100
Attributable to the equity holders of Eagle plc 933,000 835,100
Non-controlling interest 140,200 150,800
1,073,200 985,900
Non-current liabilities
Bank loan 125,000 150,000

Current liabilities
Trade and other payables 40,500 52,800
Income tax payable 68,000 78,000
108,500 130,800
Total equity and liabilities 1,306,700 1,266,700

Copyright ICAEW 2013. All rights reserved. Page 4 of 8


Additional information:

(1) During the year ended 31 December 2012 Eagle plc sold all of its 80% holding in one of
its subsidiaries, Owl Ltd, for a cash sum. Goodwill acquired in the business combination
with Owl Ltd had been fully written off by 31 December 2011. The profit from
discontinued operations in the consolidated income statement above relates wholly to
the sale of the shares in Owl Ltd and can be analysed as follows:


Profit before tax 41,400
Income tax expense (6,400)
Profit on disposal 10,500
45,500

The net assets of Owl Ltd at the date of disposal were as follows:


Property, plant and equipment 187,500
Trade and other receivables 13,900
Cash and cash equivalents 1,500
Trade and other payables (8,450)
194,450

(2) On 31 March 2012 Eagle plc issued 100,000 ordinary shares for cash. This was
followed by a bonus issue on 30 September 2012, utilising the share premium account.

(3) Depreciation of 175,600 was recognised during the year ended 31 December 2012.
In addition to the property, plant and equipment disposed of through the sale of
Owl Ltd, plant with a carrying amount of 56,000 was sold for cash of 60,000.

(4) Trade and other payables include 5,000 (2011: 3,000) of unpaid interest due on the
bank loan.

(5) The consolidated statement of changes in equity for the year shows that all group
companies paid ordinary dividends during the year.

Requirement

Prepare a consolidated statement of cash flows for Eagle plc for the year ended
31 December 2012, including a note reconciling profit before tax to cash generated from
operations, using the indirect method. A note showing the effects of the disposal of Owl Ltd is
not required.
(19 marks)

Copyright ICAEW 2013. All rights reserved. Page 5 of 8


3. On 1 January 2012 Kite plc had one subsidiary company, Harrier Ltd, and one associated
company, Buzzard Ltd, holding 80% and 40% respectively of their ordinary shares. On 1 April
2012 Kite plc acquired 70% of the 100,000 1 ordinary shares of Vulture Ltd for consideration
of 300,000 1 ordinary shares in Kite plc, at a market value of 1.30 per share, and cash of
15,000. Professional fees relating to the acquisition amounted to 5,000 and have been
debited to the cost of investment in Vulture Ltd.

Extracts from the individual income statements of the four companies for the year ended
31 December 2012 are set out below:

Income statements for the year ended 31 December 2012

Kite plc Harrier Ltd Vulture Ltd Buzzard Ltd



Revenue 1,579,500 879,500 655,400 356,000
Cost of sales (1,050,600) (598,700) (437,500) (235,900)
Gross profit 528,900 280,800 217,900 120,100
Operating expenses (345,600) (103,800) (156,400) (78,300)
Profit before taxation 183,300 177,000 61,500 41,800
Income tax expense (37,500) (29,400) (12,300) (11,200)
Profit for the year 145,800 147,600 49,200 30,600

Additional information:

(1) The retained earnings of Vulture Ltd on 1 January 2012 were 567,000 and profits,
losses and impairments accrued evenly over the year ended 31 December 2012. On
15 February 2012 Vulture Ltd paid a dividend of 120,000. The fair values of the assets
and liabilities of Vulture Ltd at the date of its acquisition by Kite plc were the same as
their carrying amounts with the exception of a building which had been purchased by
Vulture Ltd for 250,000 on 1 April 1998, with an estimated useful life of 25 years. This
building was assessed as having a fair value on 1 April 2012 of 154,000, with an
unchanged total estimated useful life. Depreciation on buildings is presented in
operating expenses.

Vulture Ltds financial statements for the year ended 31 December 2011 included the
following amounts:

Goodwill of 33,000, which had arisen on the acquisition of an unincorporated


business. This goodwill was comprised of cost of 40,000, less accumulated
impairments of 7,000. In the year ended 31 December 2012 Vulture Ltd wrote
a further 3,600 off this goodwill, recognising this amount in operating
expenses.

A disclosure note showing a contingent liability of 30,000, which had a fair


value of 20,000 at the date of Kite plcs acquisition of Vulture Ltd. This fair
value was unchanged at 31 December 2012.

(2) During the current year Kite plc purchased goods to the value of 132,000 and 54,000
respectively from Harrier Ltd and Buzzard Ltd. All sales between group companies are
at a 20% gross profit margin. Half of all of these goods were still in Kite plcs inventories
at 31 December 2012.

Copyright ICAEW 2013. All rights reserved. Page 6 of 8


(3) During the previous year, on 30 June 2011, Harrier Ltd sold a machine to Kite plc for
275,000. At that date, the machine had a carrying amount in Harrier Ltds books of
234,500 and the estimated remaining useful life was reassessed at five years.
Depreciation on this machine is presented in cost of sales.

(4) At 31 December 2012 impairment losses of 12,000 and 3,000 respectively in respect
of goodwill arising on the acquisition of Harrier Ltd and the carrying amount of
Buzzard Ltd need to be recognised in the consolidated financial statements.

Requirements

(a) Calculate the goodwill acquired in the business combination with Vulture Ltd. (6 marks)

(b) Prepare the consolidated income statement of Kite plc for the year ended 31 December
2012. (16 marks)

(22 marks)

PLEASE TURN OVER

Copyright ICAEW 2013. All rights reserved. Page 7 of 8


4. Hawk Ltds financial statements for the year ended 31 December 2011 included the following
balances.


Ordinary share capital 500,000
Share premium 125,000
Redeemable 3% preference share capital 200,000
Retained earnings 489,700
Property cost 3,370,000
Property accumulated depreciation 770,000

All shares have a nominal value of 1 per share.

Hawk Ltd made a profit for the year ended 31 December 2012 of 137,800, before
accounting for the matters set out below.

(1) An error was discovered showing that inventory at 31 December 2011 had been
overstated by 100,000.

(2) On 1 February 2012 Hawk Ltd issued a further 100,000 ordinary shares at a price of
1.50 per share. An ordinary dividend of 20p per share was paid on 15 March 2012.

(3) No preference dividends were paid during the year and Hawk Ltd has not yet accrued
for the amount payable.

(4) Hawk Ltd has previously measured all of its property under the cost model. However, on
1 January 2012 the directors made the decision to move to the revaluation model and
the property was valued at 3 million. The directors wish to make annual transfers
between retained earnings and the revaluation surplus. No depreciation on property has
yet been recognised for 2012. The remaining useful life of the property was reassessed
on 1 January 2012 as 20 years.

(5) All plant and equipment has previously been depreciated on a reducing balance basis
using a rate of 25% and the depreciation charge for 2012 has been recognised on this
basis. However, when reviewing the depreciation methods, the directors decided that
for one specialised item of plant a straight-line basis over a total estimated life of six
years would more fairly represent usage. This specialised plant was purchased on
1 January 2009 and had a carrying amount of 30,000 on 1 January 2012.

Requirement

Prepare Hawk Ltds statement of changes in equity for the year ended 31 December 2012. A
total column is not required.
(9 marks)

Copyright ICAEW 2013. All rights reserved. Page 8 of 8


PROFESSIONAL LEVEL EXAMINATION

MONDAY 9 SEPTEMBER 2013

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FIVE written test questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet.

2. Answer each question in black ball point pen only.

3. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2013. All rights reserved. Page 1 of 11


1. The following balances have been extracted from the nominal ledger of Temera Ltd at
31 March 2013.

Sales 912,500
Purchases 381,250
Administrative expenses 181,300
Other operating costs 34,500
Finance cost 5,250
Inventories at 31 March 2012 31,700
Research and development expenditure (Note 1) 115,000
Intangible assets patents (Note 2)
Cost 15,000
Accumulated amortisation at 31 March 2012 4,500
Land and buildings (Note 3)
Valuation (land 350,000) 980,000
Accumulated depreciation at 31 March 2012 122,500
Lease liability (Note 4) 70,250
Retained earnings at 31 March 2012 205,300
Ordinary share capital (1 shares) (Note 5) 323,000
Share premium account (Note 5) 67,500
Revaluation surplus 100,000
Trade and other receivables 17,800
Trade and other payables 30,450
Cash at bank 6,900
Suspense account 67,300
1,836,000 1,836,000
The following additional information is available:
(1) The research and development expenditure of 115,000 includes 28,000 incurred up
to 30 June 2012 when a project review was undertaken and Temera Ltd assessed that
the development of the new product was economically viable. The remaining costs were
incurred between 1 July and 1 December 2012, when the new product was launched,
and include 8,000 on staff training, 12,000 on product testing and 10,000 on
promotional advertising. The new product has an estimated useful life of four years. All
expenses relating to research and development should be presented in other operating
costs.

(2) The patents all have an estimated useful life of five years and amortisation is presented
in other operating costs. On 1 October 2012 Temera Ltd sold one of its patents, which
had originally been acquired on 1 April 2010 at a cost of 2,400. The profit on disposal
was correctly calculated as 6,500 but the only accounting entries made were to debit
cash at bank with the sale proceeds and credit a suspense account.

(3) Temera Ltd rents, rather than owns, its plant and equipment. Temera Ltd measures its
land and buildings under the revaluation model. The amount shown in the trial balance
above is for the valuation prior to 31 March 2012 and the balance shown in the
revaluation surplus is split equally between land and buildings.
On 1 April 2012, the date of the most recent valuation, a surveyor valued the buildings
at 400,000 and estimated that the remaining useful life of the buildings at that date was
25 years. This valuation has not yet been reflected in the above figures. There was no
change to the value of the land. Temera Ltd does not make an annual transfer between
the revaluation surplus and retained earnings. Depreciation on buildings should be
presented in administrative expenses.

Copyright ICAEW 2013. All rights reserved. Page 2 of 11


(4) Temera Ltd moved part of its head office function to a new location on 1 April 2012.
The building is being leased at a cost of 10,000 pa for ten years and has a useful life of
40 years. Lease payments are made on 31 March each year. On 31 March 2013 the
first payment was made and this has been correctly reflected in the cash at bank
balance above. As the lease was for a building it was assumed that this was a finance
lease and a closing lease liability of 70,250 was recognised along with a finance
charge of 5,250, both of which are included in the balances given above. The other
side of all of the above entries were recognised in the suspense account.

(5) On 1 May 2012 Temera Ltd issued 10,000 1 ordinary shares for cash of 1.30 each.
The full amount received was debited to cash and credited to ordinary share capital.

Subsequently, a 1 for 4 bonus issue of ordinary shares was made on 1 August 2012. No
accounting entries have been made for the bonus issue although the correct number of
shares were issued. The intention was to utilise the share premium account as far as
possible.

(6) At 31 March 2013 inventories were valued at 36,200. However, Temera Ltd had
purchased some of its inventories from an overseas supplier on 1 January 2013 for
5,000. These inventories were not included in the inventory count as they had been
stored in a different area. The invoice was unpaid at 31 March 2013 and was included in
trade payables at the exchange rate on the date of purchase.

The spot exchange rates are as follows:

1 January 2013 1:0.84


31 March 2013 1:0.80

(7) The income tax liability for the year ended 31 March 2013 has been estimated at
56,000. However, on 5 June 2013 Temera Ltd received a letter from HMRC stating
that the tax previously brought forward and paid for the year ended 31 March 2012 had
been understated and an additional 11,500 including interest was now due.

Requirements

(a) Prepare an income statement for Temera Ltd for the year ended 31 March 2013 and a
statement of financial position as at that date in a form suitable for publication.

Your answer should include a working showing how the suspense account has been
cleared. (23 marks)

(b) Explain the differences between IFRS and UK GAAP in respect of the treatment of the
revaluation model. (3 marks)

(c) The IASBs Conceptual Framework identifies relevance and faithful representation as
the two fundamental qualitative characteristics. Explain how these and the enhancing
characteristics are applied in IAS 38, Intangible Assets. (5 marks)

(31 marks)
NOTES: Notes to the financial statements are not required.
Expenses should be analysed by function.

Copyright ICAEW 2013. All rights reserved. Page 3 of 11


2. Set out below are extracts from Radazul plcs draft financial statements for the year ended
31 March 2013 which have been prepared by the assistant accountant.

Extract from draft statement of cash flows for the year ended 31 March 2013


Net cash from operating activities (42,235)

Cash flows from investing activities


Proceeds from disposal of property, plant and equipment 46,000

Cash flows from financing activities


Dividends paid (96,750)

Extract from statement of financial position as at 31 March


2013 2012

Non-current assets
Property, plant and equipment 808,440 621,500

Equity
Ordinary share capital (1 shares) 342,000 120,000
Share premium account 165,000

Current liabilities
Bank overdraft 34,000 24,700

After reviewing the draft financial statements it became clear that although the figures in the
statement of financial position are calculated correctly, the statement of cash flows is
incomplete and contains a number of errors. Relevant information to correct and complete
the statement of cash flows is given below:

(1) During the year ended 31 March 2013 the following occurred in relation to property,
plant and equipment:

Machinery which had a carrying amount of 38,700 was sold for 46,000. In the
reconciliation of profit before tax to cash generated from operations the only
adjustment the assistant accountant made relating to this transaction was to
deduct the sale proceeds.

A number of new items of plant and equipment were acquired during the year.
Cash was paid for these new items except for one item of plant which was
purchased on credit and cost 8,000.

Total depreciation of 111,475 was charged and has been correctly added back in
calculating net cash from operating activities.

An impairment of an item of equipment was identified and was correctly


recognised in the income statement for the year ended 31 March 2013. The
equipments carrying amount at 31 March 2013 was 9,200 and its recoverable
amount was 4,700. No adjustments have been made in the draft statement of
cash flows for this impairment.

Copyright ICAEW 2013. All rights reserved. Page 4 of 11


(2) After preparing the draft statement of cash flows it was discovered that trade and other
payables at 31 March 2013 included accrued interest of 4,900 (2012: Nil) and the
cost of the plant purchased on credit.

(3) The assistant accountant did not have details of the share issues which had been made
during the year so could not calculate the relevant figure for inclusion in the statement of
cash flows. On further investigation it was discovered that in addition to 165,000
ordinary shares being issued for cash at a price of 2 per share, a bonus issue was
subsequently made out of retained earnings.

(4) The only dividend paid by Radazul plc in the year was an interim dividend. The
assistant accountant calculated the interim dividend of 96,750 included in the draft
statement of cash flows by simply adjusting opening and closing retained earnings by
the loss for the year.

Requirements

(a) Prepare Radazul plcs statement of cash flows for the year ended 31 March 2013.
(8 marks)

(b) Explain the differences between IFRS and UK GAAP in respect of the presentation of
the statement of cash flows. (2 marks)

(10 marks)

Copyright ICAEW 2013. All rights reserved. Page 5 of 11


3. Centellas plc is a listed company and has a year end of 31 March 2013. Centellas plc has
investments in several subsidiaries and associates and uses the equity method of accounting
whenever possible. The following information has been extracted from Centellas plcs draft
consolidated financial statements for the year ended 31 March 2013:

Consolidated income statement (extract)



Profit before tax 690,000

Consolidated statement of financial position (extract)



Equity (prior to non-controlling interest) 1,260,400

Centellas plc is looking to attract new investment and so the board of directors is keen to
report as high a profit as possible in the current year financial statements. As the financial
accountant of Centellas plc, and a recently qualified ICAEW Chartered Accountant, you have
been asked to finalise the following matters which have been provisionally dealt with by the
finance director, Anton Caro. Anton qualified as an ICAEW Chartered Accountant in 1972
and has asked you to finalise the financial statements as he hasnt paid much attention to
new IFRSs issued as he is looking to retire next year. Anton is due to receive a substantial
bonus when he leaves based on the reported profit for the current year, and he has told you
that you could be promoted to his role if you can maximise the reported profit this year.

(1) On 1 April 2012 Centellas plc issued 30,000 6% 100 convertible bonds at par. Each
bond is redeemable at par or convertible into five ordinary shares on 31 March 2015.
The equivalent effective interest rate on similar bonds without conversion rights is
9% pa. The full amount received has been credited to non-current liabilities and the first
interest payment was made and debited to finance costs on 31 March 2013. No other
accounting entries have been made in respect of these bonds.

(2) On 1 April 2012 Centellas plc and an unrelated company, Bermeja Ltd, set up a new
company, Vidrio Ltd. Vidrio Ltd issued its 200,000 1 ordinary shares at par, for cash, to
Centellas plc and Bermeja Ltd in equal proportions. Centellas plc and Bermeja Ltd have
a contractual agreement that they will jointly make all the major operating and financial
decisions concerning Vidrio Ltd. As Centellas plc had 50% ownership of Vidrio Ltd it
believed it had control and has therefore consolidated its investment in Vidrio Ltd.
Vidrio Ltd made a profit of 240,000 for the year ended 31 March 2013.

(3) On 1 July 2012 Centellas plc entered into a new lease for its head office building. The
lease is for five years and lease payments are 1,000 per month payable at the end of
each month. The building is estimated to have a useful life of 25 years. To encourage
Centellas plc to enter into the lease it was given the first quarter rent-free, so the first
payment was made on 31 October 2012. Centellas plc has recognised the lease
payments as they were paid.

(4) On 1 January 2013 Centellas plc decided to outsource its printing operation. As a result,
a specialist machine was no longer needed and the directors decided to sell it. The
machine has been taken out of service and has been advertised in national trade
magazines at a price of 62,500. The machine was originally acquired on 1 April 2002
and was estimated to have a useful life of 20 years. The machine was revalued on
31 March 2010 to 84,000 when its carrying amount was 72,000, although there was

Copyright ICAEW 2013. All rights reserved. Page 6 of 11


no change to its estimated remaining useful life. No transfers were made between
retained earnings and the revaluation surplus.

The machines fair value on 1 January 2013 has been estimated at 62,000 and the
costs to sell at 1,500. No accounting entries have been made in respect of this
machine for the year ended 31 March 2013.

Requirements

(a) Explain the required IFRS financial reporting treatment of the four issues above,
preparing all relevant calculations and discussing the impact on the consolidated
financial statements of Centellas plc for the year ended 31 March 2013. (20 marks)

(b) Calculate revised figures for profit before tax and equity (prior to non-controlling interest)
for the consolidated financial statements of Centellas plc for the year ended 31 March
2013. (3 marks)

(c) Discuss the ethical matters arising from the scenario, referring where appropriate to the
ICAEW Code of Ethics, and explain any action you should take. (4 marks)

(27 marks)

Copyright ICAEW 2013. All rights reserved. Page 7 of 11


4. Gumar Ltd has a number of subsidiary companies and one associated company, Caleta Ltd.
Gumar Ltd has started preparing its draft consolidated financial statements for the year
ended 31 March 2013 but has currently only consolidated the subsidiaries held at the start of
the year. On 1 July 2012 Gumar Ltd acquired 80% of Abrigo Ltds 165,000 ordinary 1
shares when Abrigo Ltds retained earnings were 72,500.

Extracts from Gumar Ltds draft consolidated statement of financial position and Abrigo Ltds
statement of financial position as at 31 March 2013 are as follows:
Gumar Ltd Abrigo Ltd
(consolidated)
Non-current assets
Property, plant and equipment 987,500 210,000
Cost of investment in Abrigo Ltd 100,000
Cost of investment in Caleta Ltd 105,000
Goodwill 27,800 35,000

Current assets
Inventories 62,900
Trade and other receivables 161,300 28,200

Non-current liabilities
Borrowings 200,000

Current liabilities
Trade and other payables 75,000 12,200

The above figures and the draft consolidated profit before tax of 589,200 were arrived at
before making relevant adjustments arising from the information given below.

Outstanding items:

(1) Consideration for the acquisition of Abrigo Ltd consisted of 100,000 paid on 1 July
2012 and a further cash payment of 100,000 which will be paid on 1 July 2014 if
Abrigo Ltd meets a specified earnings target. As at 1 July 2012 the fair value of the
discounted possible cash payment was 85,000. The applicable discount rate was 4.5%
pa, however, for the nine-month period ended 31 March 2013, it was 4%. The
probability of the earnings target being reached was the same at 31 March 2013 as at
1 July 2012.

Abrigo Ltd has made no share issues since acquisition by Gumar Ltd and its retained
earnings have increased by 23,500 since acquisition.

Abrigo Ltds statement of financial position at acquisition included goodwill of 40,000,


which had arisen on the acquisition of the business of a sole trader. At 31 March 2013
this amount had been impaired by 5,000. Abrigo Ltds financial statements disclosed a
contingent liability which had a fair value of 32,000 at the date of acquisition and its fair
value had not changed at 31 March 2013. The fair values of the other assets and
liabilities held by Abrigo Ltd at the date of acquisition were equal to their carrying
amounts.

Gumar Ltd intends to recognise the goodwill and non-controlling interest in Abrigo Ltd at
fair value on 1 July 2012 of 35,000.

Copyright ICAEW 2013. All rights reserved. Page 8 of 11


(2) Gumar Ltd acquired a 30% share in Caleta Ltd for 105,000 a number of years ago. At
the date of acquisition by Gumar Ltd, the fair value of Caleta Ltds assets and liabilities
were the same as their carrying amounts and its retained earnings were 25,600.

During the year ended 31 March 2013 Caleta Ltd made sales of 17,000 to Gumar Ltd.
Caleta Ltd makes a 20% gross profit margin on all its sales. Half of these goods were
still held by Gumar Ltd at 31 March 2013.

Caleta Ltds profit for the year ended 31 March 2013 was 45,200 and its retained
earnings at that date were 63,400.

An impairment loss of 2,000 in respect of Gumar Ltds investment in Caleta Ltd needs
to be recognised for the year ended 31 March 2013.

(3) On 1 April 2012 Gumar Ltd entered into a two year 140,000 fixed priced contract for
the provision of services. The customer is due to pay the full amount of the contract at
the end of the two year period. Costs incurred to date are 30,000, of which 20,000
are recoverable from the customer. The remaining costs to complete the contract
cannot be reliably estimated at 31 March 2013. The only accounting entry made has
been to record the costs incurred.

(4) On 31 March 2013 Gumar Ltd raised 500,000 by selling one of its properties to an
unrelated third party. The property was valued at 700,000 on 31 March 2013 and had
a carrying amount of 350,000 at that date. The contract allows Gumar Ltd to continue
to use the property until 31 March 2016 when it has the right to buy the property back
for 650,000. Gumar Ltd derecognised the property on 31 March 2013 and recorded a
profit on sale of 150,000.

Requirements

(a) (i) Using all the above information, prepare revised assets and liabilities sections
from Gumar Ltds consolidated statement of financial position as at 31 March
2013.

(ii) Calculate a revised figure for consolidated profit before tax for Gumar Ltd for the
year ended 31 March 2013. (12 marks)

(b) Explain, with reference to the single entity concept, how trading between a parent entity
and an associated company is treated in the preparation of consolidated financial
statements. (2 marks)

(14 marks)

PLEASE TURN OVER

Copyright ICAEW 2013. All rights reserved. Page 9 of 11


5. At 1 April 2012 Gaviota plc had investments in two companies: Socorro Ltd and Ramblo Ltd.

Extracts from the draft individual financial statements of the three companies for the year
ended 31 March 2013 are shown below:

Income statements
Gaviota plc Socorro Ltd Ramblo Ltd

Revenue 1,265,600 482,570 531,000


Cost of sales (538,900) (136,700) (296,400)
Gross profit 726,700 345,870 234,600
Operating expenses (168,500) (76,450) (86,300)
Profit from operations 558,200 269,420 148,300
Investment income 197,500
Profit before tax 755,700 269,420 148,300
Income tax expense (192,800) (67,420) (37,100)
Profit for the year 562,900 202,000 111,200

Statements of financial position (extracts)


Gaviota plc Socorro Ltd Ramblo Ltd

Equity
Ordinary share capital (1 shares) 450,000 350,000 300,000
Retained earnings 546,500 489,500 263,200
996,500 839,500 563,200

Additional information:

(1) Ordinary shares in the two companies were acquired several years ago, as follows.

Socorro Ltd Ramblo Ltd


Percentage of ordinary shares acquired 75% 60%
Cost of acquisition 425,000 282,250
Retained earnings at acquisition 152,400 59,000

Gaviota plc always measures goodwill and the non-controlling interest using the
proportionate method.

(2) Gaviota plc acquired its holding in Socorro Ltd on 1 April 2008. The fair values of all
assets and liabilities of Socorro Ltd at the date of acquisition were the same as their
carrying amounts, with the exception of a freehold property which was estimated to
have a fair value of 160,000 in excess of its carrying amount. This property was
assessed as having a remaining useful life of 40 years at 1 April 2008. Depreciation of
freehold property is presented in operating expenses.

(3) On 31 December 2012 Gaviota plc sold all of its shares in Ramblo Ltd for 450,000. At
the date of acquisition of Ramblo Ltd, goodwill was correctly calculated at 66,850 and
the fair values of all assets and liabilities of Ramblo Ltd were the same as their carrying
amounts. On 31 March 2012 an impairment loss of 20,000 in respect of goodwill
arising on the acquisition of Ramblo Ltd was recognised.

Copyright ICAEW 2013. All rights reserved. Page 10 of 11


(4) In the year ended 31 March 2013 Gaviota plc invoiced 85,000 of sales to Socorro Ltd
at a mark-up of 25%. One quarter of these goods were still held by Socorro Ltd at the
year end.

(5) All revenues and costs accrued evenly over the year.

(6) Gaviota plc and Socorro Ltd paid dividends of 25p and 60p per share respectively
during the year ended 31 March 2013.

(7) There were no impairments of goodwill in the year ended 31 March 2013.

Requirement

Prepare, for Gaviota plc for the year ended 31 March 2013:

(i) a consolidated income statement; and

(ii) an extract from the consolidated statement of changes in equity showing the non-
controlling interest column only.

You should assume that the disposal of Ramblo Ltd constitutes a discontinued activity in
accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.

(18 marks)

Copyright ICAEW 2013. All rights reserved. Page 11 of 11


PROFESSIONAL LEVEL EXAMINATION

MONDAY 9 DECEMBER 2013

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR written test questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet.

2. Answer each question in black ball point pen only.

3. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2013. All rights reserved. Page 1 of 11


BLANK PAGE

Copyright ICAEW 2013. All rights reserved. Page 2 of 11


1. Dedlock Ltd is an IT company. Until the current year it operated solely as a service company
providing programming and testing services for its clients. In March 2013 Dedlock Ltd
expanded its operations by manufacturing high-spec laptops, buying in components from
other UK companies.

Richard, the finance director, who is an ICAEW Chartered Accountant, has produced draft
financial statements for the year ended 30 June 2013. However, the managing director has
some concerns about these financial statements as he knows that Richard is due to retire
shortly and plans to sell his shares in the company. The managing director is concerned that
Richards treatment of certain matters has been influenced by Richards desire to make the
companys financial statements appear more attractive, so that he may get a better price for
his shares.

The managing director has asked Clara, an ICAEW Chartered Accountant sole practitioner,
to redraft these financial statements. Clara has had an initial meeting with Richard, who has
hinted that if she makes as few adjustments to the financial statements as possible, he will
recommend her as his replacement.

The draft financial statements, as prepared by Richard, are set out below.

Draft statement of financial position as at 30 June 2013



ASSETS
Non-current assets
Property, plant and equipment (Notes 1 and 2) 567,800

Current assets
Inventories 278,500
Trade and other receivables (Note 3) 105,200
Cash and cash equivalents 15,800
399,500
Total assets 967,300

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) 200,000
Preference share capital (Note 4) 100,000
Share premium 75,000
Retained earnings 484,100
859,100
Current liabilities
Trade and other payables 82,200
Taxation (Note 5) 26,000
108,200
Total equity and liabilities 967,300

Copyright ICAEW 2013. All rights reserved. Page 3 of 11


Draft income statement for the year ended 30 June 2013


Revenue 2,876,500
Cost of sales (1,980,900)
Gross profit 895,600
Administrative expenses (579,200)
Other operating costs (185,300)
Profit before tax 131,100
Income tax (Note 5) (26,000)
Profit for the year 105,100

The following matters have been identified by the managing director for Claras
consideration:

(1) On 1 July 2012 Dedlock Ltd received a government grant of 10,000 to help finance the
acquisition of a machine, purchased on the same date for 25,000. The machine has
been depreciated on a reducing balance basis using a rate of 20% pa. Richard has
credited the 10,000 grant received to revenue in the income statement. Clara has
discussed this matter with the managing director and they have agreed that
Dedlock Ltds accounting policy for government grants will be to use the deferred
income method. Depreciation on plant and machinery is presented in cost of sales.

(2) On 30 June 2013, the directors decided to sell a machine which had cost Dedlock Ltd
20,000. Richard did not adjust the financial statements to reflect this decision on the
grounds that the machine had not been sold during the year. Accumulated depreciation
on this machine at 30 June 2013 is 8,500. The machine is expected to sell for 8,000
with selling costs of 450 and the directors are confident that a buyer will be found by
the end of December 2013.

(3) In August 2013, when the financial statements were drafted, Richard became aware
that one of Dedlock Ltds customers, Fastolfe Ltd, had gone into liquidation.
Dedlock Ltds trade receivables at 30 June 2013 include 55,700 due from Fastolfe Ltd.
Correspondence from the liquidator indicates that this debt will not be paid. Richard has
not made any allowance against this debt as Fastolfe Ltds financial difficulties had not
been known at the year end. Dedlock Ltds managing director also believes that an
allowance of 2% should be made against all other trade receivables. Dedlock Ltd
presents any expenses in relation to irrecoverable debts or movements on allowances
in other operating costs.

(4) On 1 January 2013 Dedlock Ltd issued 200,000 irredeemable preference shares at par,
included in equity above. These shares have a nominal value of 50p each and carry a
coupon rate of 5% pa. The payment of the dividend is mandatory and if it is unpaid at
the end of a period it becomes cumulative the following period. The dividend due was
paid on 30 June 2013 and is shown in the statement of changes in equity for the year
ended 30 June 2013.

(5) Richard has correctly calculated the income tax liability for the year ended 30 June 2013
at 26,000. However, included in revenue in the income statement is an amount of
3,175, which was the amount of the income tax liability at 30 June 2012 which did not
ultimately need to be paid.

Copyright ICAEW 2013. All rights reserved. Page 4 of 11


(6) Laptop sales commenced on 1 April 2013. All laptops were sold with a two year
warranty under which Dedlock Ltd will repair or replace the faulty product at no cost to
the customer. At the date that the financial statements were drafted, no laptops had
been returned as faulty and therefore Richard made no provision in respect of the
warranties provided. The managing director estimates that 5% of all laptops will be
returned. Out of all laptops returned, half will be repaired, at an average cost to
Dedlock Ltd of 190 per laptop. The remaining laptops will have to be replaced. From
April to June 2013 Dedlock Ltd sold 1,000 laptops, generating revenue of 600,000 and
making a gross profit of 20%. (Assume that all returns from laptop sales in the year
ended 30 June 2013 are made on 30 June 2014.)

(7) On 15 June 2013 Dedlock Ltd took delivery of a large order of stationery supplies. The
purchase invoice amounted to 5,300, but was not received until July 2013. Richard has
not made any adjustment for this invoice.

Dedlock Ltd uses a discount rate of 7% pa where necessary to reflect the time value of
money in the preparation of the financial statements.

Requirements

(a) Prepare a revised income statement for Dedlock Ltd for the year ended 30 June 2013
and a revised statement of financial position as at that date, in a form suitable for
publication. Notes to the financial statements are not required. (20 marks)

(b) Identify and explain any ethical issues arising for Clara and Richard and any action that
Clara should take. (4 marks)

(c) Identify those elements of the financial statements, as set out in the IASBs Conceptual
Framework, which are relevant to the statement of financial position. Explain how these
are relevant to the treatment of the irredeemable preference shares and the warranty
provision above. (6 marks)

(30 marks)

Copyright ICAEW 2013. All rights reserved. Page 5 of 11


2. On 1 July 2012 Chuzzlewit plc had a number of subsidiary companies, and one associated
company, all of which it acquired several years ago. An extract from the groups consolidated
income statement for the year ended 30 June 2013 and the consolidated statement of
financial position as at that date are set out below.

Consolidated income statement for the year ended 30 June 2013 (extract)
Continuing operations
Profit from operations 578,400
Finance costs (45,500)
Share of profits of associate 102,800
Profit before tax 635,700
Income tax expense (128,000)
Profit for the year from continuing operations 507,700
Discontinued operations
Profit for the year from discontinued operations 98,500
Profit for the year 606,200
Attributable to:
Owners of Chuzzlewit plc 510,300
Non-controlling interest 95,900
606,200

Consolidated statement of financial position as at 30 June


2013 2012
ASSETS
Non-current assets
Property, plant and equipment 1,746,600 1,549,000
Investment in associate 285,900 287,800
Intangibles 203,000 289,500
2,235,500 2,126,300
Current assets
Inventories 292,900 198,100
Trade and other receivables 151,800 177,800
Cash and cash equivalents 41,500 31,500
486,200 407,400
Total assets 2,721,700 2,533,700
EQUITY AND LIABILITIES
Equity
Ordinary share capital (50p shares) 450,000 300,000
Share premium account 90,000 40,000
Retained earnings 1,435,000 1,326,100
Attributable to the equity holders of Chuzzlewit plc 1,975,000 1,666,100
Non-controlling interest 279,200 301,800
2,254,200 1,967,900
Non-current liabilities
Bank loan 250,000 300,000
Current liabilities
Trade and other payables 82,500 105,800
Income tax payable 135,000 160,000
217,500 265,800
Total equity and liabilities 2,721,700 2,533,700

Copyright ICAEW 2013. All rights reserved. Page 6 of 11


Additional information:

(1) On 1 January 2013 Chuzzlewit plc sold all of its 70% holding in one of its subsidiaries,
Gradgrind Ltd, for a cash sum. Goodwill arising on the acquisition of Gradgrind Ltd was
calculated at 56,000, using the proportionate method, although 10,000 of this amount
had been written off by 30 June 2012. The remaining movement on intangibles relates
to impairment write-offs with respect to goodwill arising on the acquisition of other
subsidiaries. The profit from discontinued operations in the consolidated income
statement above relates wholly to the sale of the shares in Gradgrind Ltd and can be
analysed as follows:


Profit before tax 82,300
Income tax expense (4,400)
Profit on disposal 20,600
98,500

The net assets of Gradgrind Ltd at the date of disposal were as follows:


Property, plant and equipment 314,000
Inventories 56,400
Trade and other receivables 26,800
Cash and cash equivalents 3,500
Trade and other payables (12,200)
388,500

(2) Consolidated trade and other payables include 2,200 (2012: 3,100) of unpaid interest
due on the bank loan.

(3) Depreciation of 351,600 was recognised during the year ended 30 June 2013.
In addition to the property, plant and equipment disposed of through the sale of
Gradgrind Ltd, plant with a carrying amount of 102,000 was sold for cash of 117,000.

(4) On 1 October 2012 Chuzzlewit plc issued 100,000 ordinary shares for cash. This was
followed by a bonus issue on 1 January 2013, utilising the share premium account.

(5) All group companies paid ordinary dividends during the year.

Requirement

Prepare a consolidated statement of cash flows for Chuzzlewit plc for the year ended
30 June 2013, including a note reconciling profit before tax to cash generated from operations,
using the indirect method. A note showing the effects of the disposal of Gradgrind Ltd is not
required. (17 marks)

Copyright ICAEW 2013. All rights reserved. Page 7 of 11


3. Nickleby plc is a UK listed company. Draft financial statements for the year ended 30 June
2013 have been prepared by the financial controller, but the following outstanding issues
have been identified:

(1) On 1 July 2012 Nickleby plc entered into a non-cancellable lease for a specialised
machine. The machine has a list price of 17,500. Lease payments comprise a total of
20,000, payable by an initial deposit of 4,000 on 1 July 2012, followed by four annual
instalments of 4,000, the first of which was paid on 30 June 2013. The financial
controller debited the total amount paid during the year of 8,000 to cost of sales. The
machine has a useful life of four years, and Nickleby plc is responsible for the
maintenance and insurance of the machine during the lease term. The interest rate
implicit in the agreement is 15% pa.

(2) On 1 January 2013 Nickleby plc borrowed 500,000 at an interest rate of 5% pa, solely
to finance the construction of a new building. Work on the building started on 1 January
2013, and the building is expected to take 12 months to complete. During the six
months to 30 June 2013 interest income of 5,400 was earned on surplus funds
invested. The financial controller credited the interest earned to other income and
debited interest paid to finance costs.

(3) In May 2013 Nickleby plc began to deal with an overseas supplier for the first time. A
purchase order was placed on 1 June 2013, and a delivery of goods was made to
Nickleby plc on 10 June 2013. An invoice was received by Nickleby plc for 101,000 on
10 July 2013. Nickleby plc had sold all the goods by 30 June 2013 but no accounting
entries had been made to recognise the outstanding payment as the invoice was not
received until after the year end.

Spot exchange rates were as follows:

1 June 2013 1: 0.80


10 June 2013 1: 0.82
30 June 2013 1: 0.75
10 July 2013 1: 0.73

(4) Nickleby plc measures all of its assets under the revaluation model and undertakes
regular valuations. On 1 July 2012 an independent professional valuation of all
Nickleby plcs property, plant and equipment was carried out, which has not yet been
incorporated into the financial statements. Depreciation for the year ended 30 June
2013 has not yet been recognised. Depreciation on buildings is presented in
administrative expenses, and depreciation on plant and machinery is presented in cost
of sales. Relevant details are as follows:

Estimated Annual
Carrying remaining depreciation
amount at Fair value at useful life at charge based
1 July 2012 1 July 2012 1 July 2012 on historic
cost

Land 800,000 1,000,000
Buildings 1,906,000 2,500,000 40 years 21,500
Plant and machinery 815,700 450,000 4 years 121,300

Copyright ICAEW 2013. All rights reserved. Page 8 of 11


The revaluation surplus contains 150,400 in respect of previous revaluations of plant
and machinery. The fall in value of the plant and machinery is due to a consumption of
economic benefits. Nickleby plc makes annual transfers between the revaluation
surplus and retained earnings.

Requirements

(a) Explain the required IFRS financial reporting treatment of the four issues above in the
financial statements for the year ended 30 June 2013, preparing all relevant calculations
and setting out the required adjustments in the form of journal entries. (26 marks)

(b) Explain any differences between IFRS and UK GAAP in respect of the financial
reporting treatment of all of the above issues. (5 marks)

(31 marks)
NOTES: Ignore the impact of taxation on the above issues.
The preparation of disclosure notes is not required.

Copyright ICAEW 2013. All rights reserved. Page 9 of 11


4. Cratchit plc has investments in two companies, Drummle Ltd and Gargery Ltd. The newly-
appointed assistant accountant has prepared a draft consolidated statement of financial
position as at 30 June 2013, by simply adding together each line of the individual statements
of financial position of the three companies.

This draft consolidated statement of financial position is shown below, together with the
individual statements of financial position of Drummle Ltd and Gargery Ltd:

Cratchit plc Drummle Ltd Gargery Ltd


group
(draft
consolidated)

ASSETS
Non-current assets
Property, plant and equipment 1,697,700 539,300 377,500
Goodwill (Note (2)) 50,000 50,000
Investment in Drummle Ltd 400,000
Investment in Gargery Ltd 150,000
2,297,700 589,300 377,500
Current assets
Inventories 770,900 178,900 246,400
Trade and other receivables 293,000 87,800 99,300
Cash and cash equivalents 23,800 1,700 800
1,087,700 268,400 346,500

Total assets 3,385,400 857,700 724,000

EQUITY AND LIABILITIES


Equity
Ordinary share capital 1,000,000 300,000 200,000
(1 shares)
Revaluation surplus 400,000 150,000
Retained earnings 1,441,200 224,900 365,600
2,841,200 674,900 565,600

Current liabilities
Trade and other payables 315,200 111,800 97,400
Taxation 229,000 71,000 61,000
544,200 182,800 158,400

Total equity and liabilities 3,385,400 857,700 724,000

Additional information:

(1) Cratchit plc acquired 240,000 shares in Drummle Ltd on 1 July 2012, when the retained
earnings of Drummle Ltd were 108,000. The consideration was made up of 400,000
in cash, paid on 1 July 2012, and 200,000 shares in Cratchit plc which were issued on
1 July 2013. At the date of acquisition, the market value of each Cratchit plc share was
1.20 but this had risen to 1.40 by 30 June 2013. No accounting entries have yet been
made for the shares which were issued on 1 July 2013.

Copyright ICAEW 2013. All rights reserved. Page 10 of 11


The fair values of the assets, liabilities and contingent liabilities of Drummle Ltd at the
date of acquisition by Cratchit plc were equal to their carrying amounts except for a
contingent liability disclosed in the notes to Drummle Ltds financial statements for the
year ended 30 June 2012, which had a fair value of 20,000. The fair value of the
contingent liability had not changed by 30 June 2013.

(2) Drummle Ltds statement of financial position as at 30 June 2012 included goodwill of
60,000, which had arisen on the acquisition of the business of a sole trader. At
30 June 2013 the same goodwill was included in Drummle Ltds statement of financial
position at 50,000, due to an impairment of 10,000 having been charged in the
current year.

(3) Cratchit plc acquired 80,000 shares in Gargery Ltd for 150,000 cash on 1 January
2013. Gargery Ltd has made a loss since acquisition of 22,500. The fair values of the
assets, liabilities and contingent liabilities of Gargery Ltd at the date of acquisition by
Cratchit plc were equal to their carrying amounts, with the exception of a machine which
had a fair value 35,000 in excess of its carrying amount. The machine had a remaining
useful life of five years on 1 January 2013. No fair value adjustment has been made in
the books of Gargery Ltd.

(4) No shares have been issued by Drummle Ltd or Gargery Ltd since Cratchit plc acquired
its shares in those companies. All revaluation surpluses arose prior to the formation of
the Cratchit group.

(5) On 31 May 2013 Cratchit plc purchased goods to the value of 60,000 from
Gargery Ltd. Gargery Ltd had charged a 20% mark up on these goods. These goods
were still in Cratchit plcs inventory at the year end.

(6) At 30 June 2013 Cratchit plcs trade receivables included 25,600 due from
Drummle Ltd. Drummle Ltds trade payables included only 18,700 due to Cratchit plc.
The difference was due to cash in transit.

(7) An impairment loss in respect of goodwill arising on the acquisition of Drummle Ltd of
20,000 was identified at 30 June 2013 and needs to be recognised. There has been no
impairment in the carrying amount of Cratchit plcs investment in Gargery Ltd.
Cratchit plc prefers to measure goodwill and the non-controlling interest using the
proportionate method.

Requirements

(a) Prepare a revised consolidated statement of financial position for Cratchit plc as at
30 June 2013. (17 marks)

(b) With reference to the acquisition of Drummle Ltd, and using calculations where
appropriate, explain and justify the two methods of calculating goodwill and the non-
controlling interest allowed by IFRS 3, Business Combinations. You should assume that
the fair value of the non-controlling interest in Drummle Ltd at 1 July 2012 was
100,000. (5 marks)

(22 marks)

Copyright ICAEW 2013. All rights reserved. Page 11 of 11


PROFESSIONAL LEVEL EXAMINATION

MONDAY 17 MARCH 2014

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FIVE written test questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet.

2. Answer each question in black ball point pen only.

3. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2014. All rights reserved. Page 1 of 13


BLANK PAGE
1. Alloa Ltd operates in the electronics and computer software industry. The financial controller
was in the process of preparing the end of year financial statements when he was suddenly
taken ill. You have been passed the partially completed financial statements along with
information on the outstanding issues.

Statement of financial position as at 30 September 2013 (draft)


ASSETS
Non-current assets
Property, plant and equipment (Note 3) 90,800
Research and development (Note 4) 228,000
Patents (Note 5) 47,400
366,200
Current assets
Inventories (Note 6) 23,600
Trade and other receivables 215,000
Cash and cash equivalents 13,700
252,300
Total assets 618,500
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares) (Note 8) 185,000
Share premium (Note 8) 88,750
Preference shares (Note 7) 50,000
Retained earnings 263,950
587,700
Current liabilities
Trade and other payables 30,800
Total equity and liabilities 618,500

Statement of profit or loss for the year ended 30 September 2013 (draft)

Revenue (Note 1) 899,524
Cost of sales (422,590)
Gross profit 476,934
Operating expenses (312,000)
Operating profit 164,934
Investment income (Note 2) 71,200
Profit before tax 236,134
Income tax (Note 9) 3,000
Profit for the year 239,134

The following additional information is available:

(1) Alloa Ltd sold goods on 1 October 2012 for 200,000 with a one year interest-free credit
period and the full amount was included in sales and trade receivables. Alloa Ltd
normally offers credit terms to customers at a rate of 5% pa.

Copyright ICAEW 2014. All rights reserved. Page 3 of 13


(2) Alloa Ltd launched new software in November 2012. The software is sold via third party
companies with Alloa Ltd receiving royalty payments of 15% on all of these sales.
Monthly reports are provided to Alloa Ltd by the third party sellers 30 days after the end
of each month. Alloa Ltd records royalty income as part of investment income when the
reports are received. Third party reports showed total sales of 48,000 for the month of
September 2013, although no amounts have yet been recorded by Alloa Ltd in respect
of these sales.

(3) Property, plant and equipment is measured under the cost model and is depreciated
using the reducing balance method at a rate of 30% pa. Depreciation should be
presented in cost of sales. The balance in the draft statement of financial position is the
carrying amount at 1 October 2012.

(4) During the year 228,000 was spent on research and development of two new software
products, Uig and Brora. The breakdown of expenditure was:

Research into product development 26,000
Development activities Uig 118,000
Brora 68,500
Pre-launch testing of Uig 9,600
Staff training 5,900
228,000

On 1 October 2012 Uig was considered to be commercially viable. Uig was launched on
1 April 2013 and has been selling well. It is estimated that Uig will have a useful life of
two years at which point technological advances are likely to have been made which will
make the product obsolete. Uigs development costs were incurred between 1 October
2012 and 31 March 2013.

Brora has yet to be launched and requires additional development before it can be
reasonably expected to generate probable future economic benefits.

All expenses relating to intangible assets should be presented in cost of sales.

(5) Alloa Ltd acquired the patents early in 2012, all of which are for two years. No new
patents were acquired during the year ended 30 September 2013. A patent which had
cost 3,000 on 1 May 2012 was sold on 30 April 2013 at its carrying amount. The cash
proceeds were debited to cash and credited to cost of sales.

The balance included in the draft statement of financial position is the carrying amount
at 1 October 2012, which consists of cost of 59,000 and accumulated amortisation of
11,600.

(6) Inventories were valued at 25,500 on 30 September 2013. The balance shown in the
draft statement of financial position is opening inventories at 1 October 2012 as the
year-end inventory valuation had not been finalised when the draft financial statements
were prepared. No adjustments for opening or closing inventories have been included in
the draft figure for cost of sales.

Copyright ICAEW 2014. All rights reserved. Page 4 of 13


(7) On 1 October 2012 Alloa Ltd issued 50,000 4% 1 preference shares at par. These
shares are redeemable on 30 September 2018 at a premium. The preference dividend
for the year was paid on 30 September 2013 and has been debited to retained
earnings. The effective interest rate is 4.8% pa.

(8) Alloa Ltd entered into a share buyback scheme in June 2013. It reacquired 15,000
1 ordinary shares for 1.75 cash per share. The total cash paid was debited to share
capital and share premium based on this nominal value and premium per share.

(9) The income tax liability for the year ended 30 September 2013 has now been estimated
at 17,000. The amount shown in the draft statement of profit or loss is the balance
remaining on the nominal ledger after paying the liability at 30 September 2012, which
was settled at less than originally estimated.

The finance director has heard about IFRS 7, Financial Instruments: Disclosures, but is
unsure what the standard is really about.

Requirements

(a) Prepare the following for Alloa Ltd, in a form suitable for publication:

(i) a statement of profit or loss for the year ended 30 September 2013;
(ii) a statement of financial position as at 30 September 2013;
(iii) a note to the financial statements showing the movements on intangible assets for
the year ended 30 September 2013. A total column is not required. No other notes
to the financial statements are required. (23 marks)

(b) Explain to the finance director the objectives of IFRS 7. (2 marks)

(c) The IASBs Conceptual Framework refers to the enhancing qualitative characteristics.
Explain how these ensure that financial statements are useful to users. (5 marks)

(30 marks)

Copyright ICAEW 2014. All rights reserved. Page 5 of 13


2. Limerigg plc has a number of subsidiary companies. On 1 December 2012 Limerigg plc sold
its 70% holding in Brightons Ltd for cash of 62,000. There were no other changes in the
composition of the group during the year ended 30 September 2013.

Extracts from the groups consolidated statement of profit or loss for the year ended
30 September 2013 and consolidated statement of financial position as at that date are set
out below together with some additional information.

Extract from consolidated statement of profit or loss for the year ended 30 September
2013

Profit attributable to:
Owners of Limerigg plc 202,900
Non-controlling interest 42,900
245,800

Extract from consolidated statement of financial position as at 30 September


2013 2012

Non-current assets
Property, plant and equipment 861,405 506,950
Equity
Ordinary share capital (1 shares) 550,000 350,000
Share premium account 78,000 35,000
Retained earnings 132,130 96,430
Revaluation surplus 72,000
Non-controlling interest 73,845 97,600

Additional information:
(1) The reconciliation of profit before tax to cash generated from operations has been
partially completed using the indirect method, giving a draft figure for cash generated
from continuing and discontinued operations of 396,675. This figure has been
calculated making all of the relevant adjustments other than any relating to property,
plant and equipment.
At the date of disposal, Brightons Ltds statement of financial position showed property,
plant and equipment at 76,900, cash and cash equivalents of 2,300 and total net
assets of 77,850.

(2) On 1 February 2013 Limerigg plc made a 1 for 5 bonus issue of ordinary shares,
utilising the share premium account as far as possible. On 31 July 2013 an issue of
ordinary shares for cash at market value was made.

(3) During the year the Limerigg plc group acquired a number of new items of plant and
equipment for cash, made no disposals, other than through the disposal of Brightons
Ltd, and charged depreciation of 101,000. A building was revalued to 325,000 for the
first time on 1 October 2012 and this was the only revaluation to take place in the year.
The building had originally cost 300,000 on 1 October 2007 and is being depreciated
straight-line over its estimated useful life of 30 years. Limerigg plc made an annual
transfer between the revaluation surplus and retained earnings in accordance with best
practice.

(4) Limerigg plc and one subsidiary company paid interim dividends during the year.

Copyright ICAEW 2014. All rights reserved. Page 6 of 13


Requirement

Prepare extracts from Limerigg plcs consolidated statement of cash flows for the year ended
30 September 2013 showing figures under the following headings:

(i) Cash generated from operations


(ii) Cash flows from investing activities
(iii) Cash flows from financing activities
(11 marks)

Copyright ICAEW 2014. All rights reserved. Page 7 of 13


3. Melloch plc operates in the electronics sector and has investments in a number of
subsidiaries. The financial controller has prepared draft consolidated financial statements for
the year ended 30 September 2013.

Draft consolidated profit attributable to Melloch plcs shareholders for the year ended
30 September 2013 was 978,400.

In order to allow the financial statements to be finalised, information on the following issues
has been provided:

(1) On 1 December 2012 Melloch plc received a 540,000 government grant to contribute
towards research expenditure on a new micro-chip which will be used in the latest
medical technology. The conditions of the grant mean that Melloch plc must use the
grant over the next two years from the date of receipt on this specified area of research,
otherwise the grant will become repayable.

The full grant was recognised as revenue at 30 September 2013 as the directors
believe that the full amount will be spent by the end of the two year period and hence no
amount will need to be repaid. The relevant expenditure will be incurred evenly over the
period.

(2) On 1 April 2013 Melloch plc acquired 80% of the ordinary share capital of Sheardale Ltd
for consideration of 480,000 and associated costs of 8,000. The fair value of
Sheardale Ltds net assets at 1 April 2013 was 575,000. This excluded contractual
rights owned by Sheardale Ltd, as these rights are not capable of being sold separately
from the business and therefore have not been recognised by Sheardale Ltd in its
financial statements. These contractual rights have been valued at 75,000 by an
independent valuer and have an estimated useful life of three years.

Sheardale Ltd uses the proportionate method for measuring the non-controlling interest
and goodwill on acquisition.

Sheardale Ltd made a loss for the year ended 30 September 2013 of 180,000, which
accrued evenly over the year.

The only accounting entries made were to recognise the cash paid, so 488,000 was
debited to investments being the cash consideration plus the costs incurred.

(3) In early September 2013 Melloch plc undertook an impairment review of one of its
research centres as a number of its key projects had been superseded by advances
made by one of Melloch plcs key competitors. Melloch plc is unsure whether the centre
should be sold for development or whether different projects should be moved to the
centre.

The carrying amount of the research centre was 1,400,000 at 30 September 2013 and
its estimated value in use at that date was 1,100,000. The research centre is
measured under the revaluation model and to date 100,000 has been credited to the
revaluation surplus in respect of the centre. Melloch plc received an offer for the land on
which the research centre sits of 1,250,000, for development purposes. Legal costs of
5,000 would be associated with the sale.

Copyright ICAEW 2014. All rights reserved. Page 8 of 13


(4) During September 2013 Melloch plc sold one of its vehicles to the marketing director.
The vehicle had a carrying amount of 15,000 at the date of sale and the marketing
director paid the full fair value which was estimated at 17,500. The profit on the sale
was reported as part of profit or loss for the period, although the amount remained
unpaid at 30 September 2013.

Melloch plc had 280,000 1 ordinary shares in issue on 1 October 2012. On 1 December
2012 Melloch plc issued 70,000 ordinary shares for cash at market price. On 1 April 2013 a
1 for 5 bonus issue was made.

Requirements

(a) Explain the required IFRS accounting treatment of the four issues above in the
consolidated financial statements of Melloch plc for the year ended 30 September 2013,
preparing all relevant calculations. (17 marks)

(b) Using your results from Part (a) calculate the revised consolidated profit attributable to
Melloch plcs shareholders for the year ended 30 September 2013. (3 marks)

(c) Using your results from Part (b) calculate basic earnings per share for the year ended
30 September 2013. (3 marks)

(d) Describe any differences between IFRS and UK GAAP in respect of the financial
reporting treatment of the four issues above. Supporting calculations are not required.
(5 marks)

(28 marks)

Copyright ICAEW 2014. All rights reserved. Page 9 of 13


4. Bainsford plc manufactures wooden flooring and has a number of factories across the UK.
Nia, an ICAEW Chartered Accountant, is the financial controller of Bainsford plc.

The financial statements for the year ended 30 September 2013 have been prepared in draft
by Nias assistant, with the help of the finance director, whilst Nia was away on a training
course. Draft profit before tax is 497,300, draft current assets are 275,850 and draft current
liabilities are 141,700.

After a number of discussions with various departments Nia discovered the following
additional information.

(1) A temporary supervisor was appointed at Bainsford plcs Airth factory which has led to a
number of issues over the year-end inventory valuation.

Raw materials
The temporary supervisor used average cost to value the 1,200m2 of hardwood held in
the warehouse at 30 September 2013 although the first-in first-out basis should have
been used to value this inventory.

Invoices show hardwood acquired during the year as follows:

Date Quantity (m2) Price (per m2)


10 October 2012 5,000 74
6 January 2013 6,000 65
15 June 2013 4,000 80

Finished goods
7,500m2 of Grade A flooring held at 30 September 2013 was included in year-end
inventory using a fixed production costs absorption rate of 1.50 per m2. The 1.50 was
calculated based on the following information:


Maintenance of factory 0.40
Salaries of factory personnel 0.50
Depreciation of manufacturing equipment 0.20
Storage costs of the finished goods 0.25
Advertising costs 0.15
1.50

(2) Bainsford plc is having a new manufacturing plant built. On 1 January 2013 to finance
the construction, Bainsford plc sold its current manufacturing facility for 1,150,000
when it had a carrying amount of 900,000 and an estimated fair value of 775,000.
However, while construction takes place, Bainsford plc is continuing to use its existing
facility under a one year lease, paying above market value rentals. The manufacturing
facility was removed from non-current assets and a profit of 250,000 was recognised
(being proceeds less carrying amount). The lease payments were correctly accounted
for.

Nia is worried that there might be some inappropriate accounting taking place as she has
heard rumours that Bainsford plc is looking for new finance through a public listing and
therefore the directors are keen to report an exceptional trading year. Nia also has some
information and she is not sure what she should do with it.

Copyright ICAEW 2014. All rights reserved. Page 10 of 13


She was out with friends when she heard one of them, Sam, talking about his employer, a
listed competitor company to Bainsford plc. The competitor company is likely to fall short of
its earnings target for the current year.

Requirements

(a) (i) Calculate revised figures from Bainsford plcs statement of financial position as at
30 September 2013 for current assets and current liabilities.

(ii) Calculate revised profit before tax for Bainsford plc for the year ended
30 September 2013.
(9 marks)

(b) Discuss the ethical issues arising from the scenario, explaining any action Nia should
take. (5 marks)

(14 marks)

PLEASE TURN OVER

Copyright ICAEW 2014. All rights reserved. Page 11 of 13


5. At 1 October 2012 Cambus plc had investments in two companies: a 65% holding in
Ochill Ltd and a 40% holding in Izat Ltd, which is a joint venture.

On 1 April 2013 Cambus plc purchased 80% of the ordinary shares of Kennet Ltd, which had
retained earnings of 82,500 at this date. Cambus plc measures all non-controlling interest
and goodwill on acquisition using the proportionate method.

Extracts from the draft individual financial statements of the four companies for the year
ended 30 September 2013 are shown below:

Statements of profit or loss

Cambus plc Ochill Ltd Kennet Ltd Izat Ltd



Revenue 1,285,300 579,000 432,500 123,700
Cost of sales (418,200) (236,200) (165,300) (37,920)
Gross profit 867,100 342,800 267,200 85,780
Operating expenses (267,500) (172,000) (122,400) (26,300)
Profit from operations 599,600 170,800 144,800 59,480
Investment income 48,750
Profit before tax 648,350 170,800 144,800 59,480
Income tax expense (130,000) (34,200) (28,900) (14,855)
Profit for the year 518,350 136,600 115,900 44,625

Statements of financial position (extracts)

Cambus plc Ochill Ltd Kennet Ltd Izat Ltd


Equity
Ordinary share capital
(1 shares) 500,000 300,000 280,000 150,000
Retained earnings 461,200 296,400 140,450 225,500
961,200 596,400 420,450 375,500

Additional information:

(1) Cambus plc acquired its holding in Ochill Ltd on 1 October 2007 when Ochill Ltds
retained earnings were 153,700. The fair values of all Ochill Ltds assets and liabilities
at the date of acquisition were the same as their carrying amounts, with the exception of
a freehold property which was estimated to have a fair value of 100,000 in excess of
its carrying amount. This property was assessed as having a remaining useful life of
25 years at 1 October 2007. Depreciation of freehold property is presented in operating
expenses.

(2) Cambus plc acquired its holding in Izat Ltd a number of years ago for 180,000 when
Izat Ltds retained earnings were 96,000.

(3) Between 1 April 2013 and 30 September 2013 Ochill Ltd invoiced 36,000 and 27,000
of sales to Cambus plc and Kennet Ltd respectively at a mark-up of 20%. Half of these
goods were still held by Cambus plc at the year end, although Kennet Ltd had sold all of
the goods which it had purchased.

(4) All revenues and costs accrued evenly over the year.

Copyright ICAEW 2014. All rights reserved. Page 12 of 13


(5) Cambus plc and Ochill Ltd paid dividends of 50p and 25p per share respectively during
the year ended 30 September 2013.

(6) There have been no impairments of goodwill. However, an impairment of 5,000 needs
to be recognised against Cambus plcs investment in Izat Ltd.

Requirement

Prepare, for Cambus plc for the year ended 30 September 2013:

(i) a consolidated statement of profit or loss;

(ii) an extract from the consolidated statement of changes in equity, showing only the
retained earnings and non-controlling interest columns.
(17 marks)

Copyright ICAEW 2014. All rights reserved. Page 13 of 13


PROFESSIONAL LEVEL EXAMINATION

MONDAY 9 JUNE 2014

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR written test questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet.

2. Answer each question in black ball point pen only.

3. Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2014. All rights reserved. Page 1 of 9


1. The following trial balance has been extracted from the nominal ledger of Tipperary plc at
31 December 2013.
Note(s)
Sales (2), (3) 5,709,600
Purchases 3,968,600
Administrative expenses 1,097,900
Distribution costs 562,700
Land and buildings (1)
Valuation (on 1 January 2011) 500,000
Accumulated depreciation at 31 December 2012 80,000
Plant and equipment (1), (2)
Valuation (on 1 January 2011) 175,000
Accumulated depreciation at 31 December 2012 70,000
Retained earnings at 31 December 2012 256,450
Revaluation surplus at 31 December 2012 (1) 209,000
Ordinary share capital (1 shares) (3) 230,000
Redeemable preference share capital 2015
(1 shares) (3) 100,000
Bank account 57,850
Trade and other receivables 363,750
Trade and other payables 233,050
Inventories at 31 December 2012 (4) 278,000
6,945,950 6,945,950

The following additional information is available:

(1) Tipperary plc measures its property, plant and equipment under the revaluation model.
On 1 January 2013 the companys land and buildings were valued at 450,000 (land
100,000) and its plant and equipment at 85,000. This valuation has not been reflected
in the trial balance above.

On 1 January 2013 the remaining useful lives of the buildings and plant and equipment
were reassessed at 20 years and four years respectively. Depreciation on buildings
should be presented in administrative expenses and depreciation on plant and
equipment should be presented in cost of sales. Other than the equipment referred to in
Note (2) below, there were no additions to or disposals of property, plant and equipment
in the year ended 31 December 2013. The revaluation surplus at 31 December 2012
included 200,000 in respect of land and buildings, with the remainder attributable to
plant and equipment.

Tipperary plc has a policy of making an annual transfer between the revaluation surplus
and retained earnings wherever possible. Depreciation charges for the year ended
31 December 2013 on a historical cost basis would have been 15,000 for plant and
equipment and 10,000 for buildings.

(2) On 1 January 2013 Tipperary plc acquired new equipment for 30,000, which is
included in the 175,000 in the trial balance and in the valuation of 85,000 in Note (1)
above. A government grant of 18,000 was received to help finance the purchase of this
equipment as part of the governments drive to encourage investment in new
technology, and was credited to sales. Tipperary plc has an accounting policy of using
the deferred income approach.

Copyright ICAEW 2014. All rights reserved. Page 2 of 9


(3) The redeemable preference shares were issued on 1 January 2013, and the coupon
and effective interest rates are both 5%.

On 15 February 2013 Tipperary plc declared an ordinary dividend of 10p per share in
respect of the year ended 31 December 2012. This was paid one month later and
debited to administrative expenses.

On 30 June 2013 Tipperary plc made a 1 for 4 rights issue of ordinary shares at a price
of 1.20 per share. The rights issue was fully taken up. The nominal value received was
credited to ordinary share capital, but the premium was credited to sales.

No ordinary or preference dividends have been paid or accrued in respect of the current
year.

(4) Inventories at 31 December 2013 have been valued at 192,300. During the inventory
valuation it was discovered that inventories at 31 December 2012 had, in error, been
overvalued by 100,000.

(5) On 15 November 2013 Tipperary plc purchased some inventories from an overseas
supplier for 115,000, correctly recording the transaction at that date, but making no
further adjustments. The invoice was unpaid at 31 December 2013. The spot exchange
rates are as follows:

15 November 2013 1:0.90


31 December 2013 1:0.85

(6) The income tax liability for the current year has been estimated at 10,500.

Requirements

(a) Prepare the following for the financial statements of Tipperary plc for the year ended
31 December 2013, in a form suitable for publication:

(i) a statement of profit or loss


(ii) a statement of financial position
(iii) a statement of changes in equity (a total column is not required). (22 marks)

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

(b) Describe the alternative treatment of the government grant set out in Note (2) above,
comparing this to the treatment adopted by Tipperary plc, and quantifying the effect on
the financial statements of Tipperary plc for the year ended 31 December 2013.
(4 marks)

(c) According to the IASB Conceptual Framework, users require information regarding
financial position, financial performance and changes in financial position.

Explain how the information contained in financial statements in respect of property,


plant and equipment meets those information needs. (5 marks)

(31 marks)

Copyright ICAEW 2014. All rights reserved. Page 3 of 9


2. You are an ICAEW Chartered Accountant employed as the financial controller at
Limerick plc, a UK listed company. You have recently returned from maternity leave to find
that the finance director (another ICAEW Chartered Accountant) has resigned and left the
company, following his concerns over accounting practices he was being asked to
implement. In your absence, the managing director, who is not a qualified accountant, has
drafted financial statements for the year ended 31 December 2013. The managing director
summoned you to his office and explained the situation to you:

As you know, Limerick plc has been in difficulties for some time and after disappointing
results for the year ended 31 December 2012, the board of directors is keen to report as high
a profit as possible for the year ended 31 December 2013. In particular, I want to show the
board that the companys basic earnings per share has improved significantly on last years
figure of 70.3p.

Whilst you were away I have drafted the financial statements for the year ended
31 December 2013 and need you to confirm that they are suitable for publication. Can you
also check that I have correctly calculated basic earnings per share at 500.5p? I based this
on earnings of 500,500 and the 100,000 1 ordinary shares in issue on 1 January 2013. If
you can confirm my figures you could be our next finance director.

On examining the draft financial statements prepared by the managing director, you identify
the following matters of concern:

(1) On 1 January 2013 Limerick plc entered into a 40 year lease for land and buildings.
Ownership of both the land and the buildings passes to Limerick plc at the end of the
lease term. The lease payments are 120,000 pa, paid annually in advance. The
managing director has treated the entire lease as an operating lease on the grounds
that the land has an indefinite economic life and so Limerick plc is not leasing the land
over the majority of its economic life. The buildings have an estimated useful life of 42
years. Limerick plc depreciates buildings on a straight-line basis.

Having made further enquiries you have established that the fair value of the leasehold
interest is 1.3 million, of which 110,000 relates to land. The interest rate implicit in the
lease is 10% pa. The present value of the minimum lease payments in relation to the
buildings is 1,183,265, and in relation to the land is 107,570.

(2) On 1 January 2013 Limerick plc had purchased a recycling plant for 260,000, in order
to process hazardous waste generated as a by-product of its other operations. The
plant has an estimated useful life of five years after which it is expected to be
superseded by new technology. The plant was capitalised at 260,000 and the
managing director has correctly calculated depreciation based on that figure. However,
he has not made any accounting entries in respect of the cost of decommissioning the
plant at the end of the five year period of operation, which was a condition of the
purchase, and which you have established is expected to cost 50,000.

(3) Limerick plcs building division buys land, and builds and fits out retail outlets which are
then sold. On 1 January 2013 this division sold a plot of building land to an unconnected
company for 750,000 when the market value of the land was 1 million. The plot had
originally been acquired for 500,000. Limerick plc retains the right to build on this land
until 31 December 2014 when it has the right to buy the plot back for 858,675. The
managing director has recognised the profit on the sale of the land in the statement of
profit or loss for the year ended 31 December 2013. You have seen emails between the
directors of Limerick plc indicating that the company is likely to repurchase the land.

Copyright ICAEW 2014. All rights reserved. Page 4 of 9


(4) The managing director included a note to the financial statements for the year ended
31 December 2013 regarding a contingent liability relating to a court case against
Limerick plc which was in progress at the year end. On 15 February 2014 the judge in
the case ruled against Limerick plc and the company was ordered to pay damages of
100,000 to the claimants and legal costs of 25,000. The managing director has not
accrued for this amount in the financial statements for the year ended 31 December
2013 on the grounds that the judgment was not made until after the year end.

On 1 July 2013 Limerick plc made a 1 for 4 bonus issue of ordinary shares, and on
1 October 2013 issued a further 80,000 ordinary shares at full market price.

Requirements

(a) Explain the required IFRS financial reporting treatment of the four issues above in the
financial statements for the year ended 31 December 2013, preparing all relevant
calculations. Unless stated otherwise, an applicable discount rate is 7% pa. (18 marks)

(b) Using your results from Part (a) calculate revised earnings and basic earnings per share
for the year ended 31 December 2013. Your answer should include an explanation of
why the managing director was incorrect to base his calculation on the number of
ordinary shares in issue at the beginning of the year. (6 marks)

(c) Discuss the ethical issues arising from the scenario and the steps that you should take
to address them. (5 marks)

(29 marks)

Copyright ICAEW 2014. All rights reserved. Page 5 of 9


3. Laois plc has investments in two companies, Carlow Ltd and Kerry Ltd and recognises
goodwill and non-controlling interest using the fair value method.

The draft, summarised statements of financial position of the three companies at


31 December 2013 are shown below:

Laois plc Carlow Ltd Kerry Ltd



ASSETS
Non-current assets
Property, plant and equipment 2,687,000 2,196,000 591,800
Investments 1,760,000
Goodwill 24,000
4,447,000 2,196,000 615,800
Current assets
Inventories 193,200 53,700 159,000
Trade and other receivables 288,000 92,300 207,000
Cash and cash equivalents 15,800 12,400 1,100
497,000 158,400 367,100

Total assets 4,944,000 2,354,400 982,900

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) 2,000,000 650,000 360,000
Share premium account 750,000 300,000
Retained earnings 1,645,400 1,078,600 176,000
4,395,400 2,028,600 536,000

Current liabilities
Trade and other payables 398,600 220,800 436,400
Taxation 150,000 105,000 10,500
548,600 325,800 446,900

Total equity and liabilities 4,944,000 2,354,400 982,900

Additional information:

(1) Laois plc acquired 80% of the 650,000 ordinary shares of Carlow Ltd for cash of
1,560,000 on 1 January 2009 when the retained earnings of Carlow Ltd were
592,000. The fair values of the assets, liabilities and contingent liabilities of Carlow Ltd
at this date were equal to their carrying amounts, with the exception of a property which
had a fair value 200,000 in excess of its carrying amount. The property had a
remaining useful life of 25 years on the date that Laois plc acquired its shares in
Carlow Ltd. The fair value of the non-controlling interest in Carlow Ltd on 1 January
2009 was 350,000.

Copyright ICAEW 2014. All rights reserved. Page 6 of 9


(2) On 1 January 2013, Laois plc acquired 60% of the 360,000 ordinary shares of Kerry Ltd.
The consideration consisted of cash of 200,000 paid on 1 January 2013 and a further
cash payment of 104,000, deferred until 1 January 2014. An appropriate discount rate
is 4% pa.

On 1 January 2013 Kerry Ltds retained earnings were 240,000 and its statement of
financial position included goodwill of 30,000 which had arisen on the acquisition of a
sole trader. In the year ended 31 December 2013 an impairment of 6,000 was
recognised by Kerry Ltd in relation to this goodwill.

The fair values of the other assets, liabilities and contingent liabilities were equal to their
carrying amounts. The fair value of the non-controlling interest in Kerry Ltd on 1 January
2013 was 235,000. A reassessment of Kerry Ltds assets, liabilities and contingent
liabilities and consideration transferred took place following acquisition and no
adjustments were necessary.

(3) Early in December 2013 Kerry Ltd recorded goods purchased from Carlow Ltd for
50,000. At the year end Kerry Ltd held half of these goods in its inventories. Carlow Ltd
makes all sales at cost plus a mark-up of 25%.

In addition, on 30 December 2013 Carlow Ltd had dispatched goods to Kerry Ltd and
raised the relevant sales invoice. These goods were not received by Kerry Ltd until
3 January 2014 and the related purchase invoice was not accrued for as at the year
end. These goods in transit had originally been purchased by Carlow Ltd at a cost of
12,000.

No intra-group balances had been settled by the year end.

Requirement

Prepare the consolidated statement of financial position of Laois plc as at 31 December


2013.
(19 marks)

PLEASE TURN OVER

Copyright ICAEW 2014. All rights reserved. Page 7 of 9


4. Kildare plc is a UK listed company, and has a number of investments in other companies.
The following information has been extracted from Kildare plcs draft consolidated financial
statements for the year ended 31 December 2013:

Consolidated statement of profit or loss (extract)



Profit attributable to
Owners of Kildare plc 865,800
Non-controlling interest 256,700

Consolidated statement of financial position (extract)



Non-current assets
Property, plant and equipment 2,752,100
Intangibles 356,000

Consolidated statement of cash flows (extract)



Net cash used in investing activities (50,600)

Kildare plcs draft retained earnings (single entity) were 109,700 at 31 December 2013.

The following matters have not yet been accounted for in the draft consolidated financial
statements:

(1) On 1 January 2007 Kildare plc had acquired 70% of the 100,000 ordinary 50p shares of
Sligo Ltd for 225,000 when the retained earnings of Sligo Ltd were 158,900. The fair
values of the assets, liabilities and contingent liabilities of Sligo Ltd at this date were
equal to their carrying amounts, with the exception of inventory, which had a carrying
amount of 29,000 but a fair value of 35,000. The inventory was sold in July 2007.

On 30 June 2013 Kildare plc sold its holding in Sligo Ltd for cash of 300,000, when
Sligo Ltd had cash and cash equivalents of 1,500, crediting the sale proceeds to a
suspense account. On 31 December 2013 the retained earnings of Sligo Ltd were
275,000, including a profit for 2013 of 75,000, which had accrued evenly over the
year. As at 31 December 2012 Kildare plc had recognised cumulative impairment
losses of 40,000 in respect of goodwill acquired in the business combination with
Sligo Ltd.

Kildare plc has not consolidated any amounts in respect of Sligo Ltd for the year ended
31 December 2013. The group accounting policy is to recognise goodwill and non-
controlling interest using the proportionate method.

(2) On 1 January 2012 Kildare plc had entered into a joint venture, purchasing 40% of the
200,000 ordinary 1 shares of Mayo Ltd at par. In the year ended 31 December 2013
Mayo Ltd made a profit of 48,400 (2012 52,800) and made sales of 120,000 to
Kildare plc, at a gross profit margin of 25%. Kildare plc held half of these goods in its
inventory at 31 December 2013. On 31 December 2013 Kildare plc received a dividend
of 10,000 from Mayo Ltd. The dividend was credited to a suspense account.

Copyright ICAEW 2014. All rights reserved. Page 8 of 9


(3) During the year ended 31 December 2013, Kildare plc spent 275,000 on the research
and development of a new product that is believed to be commercially viable, although it
is still currently in its development stage. The 275,000 can be broken down as follows:


Initial research costs 50,000
Evaluation of research findings 20,000
Patent registration costs 5,000
Specialised equipment needed for the development process 90,000
Qualifying development costs 110,000
275,000

Kildare plc has debited these amounts to a suspense account. The useful life of the
specialised equipment is estimated to be three years. The equipment is to be
depreciated on a straight-line basis over that period starting on 1 July 2013, when the
equipment was first used in the development process.

Requirements

(a) Prepare revised extracts from Kildare plcs consolidated financial statements for the
year ended 31 December 2013 showing profit attributable to the owners of Kildare plc
and to the non-controlling interest, non-current assets, and net cash from investing
activities. (12 marks)

(b) Describe any differences between IFRS and UK GAAP in respect of the financial
reporting treatment of all of the above issues. (4 marks)

(c) Calculate the amount of Kildare plcs distributable profits at 31 December 2013,
explaining your calculation. (5 marks)

(21 marks)

NOTES: Ignore the impact of taxation on the above issues.


The preparation of disclosure notes is not required.

Copyright ICAEW 2014. All rights reserved. Page 9 of 9


PROFESSIONAL LEVEL EXAMINATION

MONDAY 8 SEPTEMBER 2014

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet.

2. Answer each question in black ballpoint pen only.

3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2014. All rights reserved. Page 1 of 9


1. The following list of balances has been extracted from the nominal ledger of Barchetta Ltd at
31 March 2014.
Note(s)
Sales 4,521,000
Purchases 3,379,100
Administrative expenses 804,700
Finance costs 83,060
Plant and machinery (1), (2)
Cost 60,500
Accumulated depreciation at 31 March 2013 21,780
Land and buildings (1), (3)
Cost (land 250,000) 2,230,000
Accumulated depreciation at 31 March 2013 144,950
Retained earnings at 31 March 2013 321,370
Ordinary share capital (1 shares) (5) 400,000
Share premium account at 31 March 2013 75,000
Bank loan (repayable 31 March 2016) 1,100,000
Cash at bank 6,800
Inventories at 31 March 2013 27,640
Trade and other receivables 85,400
Trade and other payables 93,100

The following additional information is available:

(1) Property, plant and equipment is measured under the cost model and depreciation is
charged on a straight-line basis over the following estimated useful lives:
Buildings 50 years
Plant and machinery 5 years (unless otherwise specified)
Following a review of useful lives, plant acquired on 1 April 2012 for 22,000 was
estimated to have a remaining useful life of eight years at 1 April 2013. Depreciation on
property, plant and equipment should be presented in cost of sales.

(2) On 1 April 2013 a machine was acquired on a six-year lease, being its estimated useful
life. Six annual amounts of 3,210 are payable, commencing on 31 March 2014. The
machine could have been purchased on 1 April 2013 for 15,300, equivalent at that
date to the present value of the minimum lease payments. By 31 March 2014 the only
accounting entry made had been to credit cash with 3,210 and recognise an equal
expense in cost of sales. The interest rate implicit in the lease is 7%.

(3) On 1 April 2013 Barchetta Ltd began construction on its new head office building, which
was assessed as being a qualifying asset. Barchetta Ltd already had significant
borrowings in place at 1 April 2013 which funded the construction. 300,000 was paid in
advance to the contractor on 1 April 2013 and a second payment of 400,000 was paid
on 1 January 2014. Barchetta Ltd had the following bank loans at 31 March 2013:
600,000 at an interest rate of 6.4% pa
500,000 at an interest rate of 7.5% pa
Accounting entries made were to recognise payments to the contractor as part of
buildings costs and to charge interest on the loans to finance costs. Construction of the
head office building was completed on 31 May 2014.

Copyright ICAEW 2014. All rights reserved. Page 2 of 9


(4) Inventories at 31 March 2014 have been valued at cost of 35,850. However, in April
2014 a review was carried out to assess customer demand. The review identified that
sales of one inventory line, the Camry, were extremely low because a competitor
product had been launched in February 2014 and had been selling very well at a lower
price than the Camry.

At 31 March 2014 Barchetta Ltd had 200 units of the Camry in its inventory. The unit
cost of the Camry was 315 and its sales price was 550. Barchetta Ltd incurs selling
costs of 25 per unit. It is now thought that the Camry will need to be considerably
discounted and that a realistic selling price is 320 with the same selling costs.

(5) On 1 January 2014 Barchetta Ltd made a 1 for 5 bonus issue of ordinary shares. No
accounting entries have been made to reflect this bonus issue. The share premium
account should be utilised for such issues wherever possible.

(6) The income tax liability for the current year has been estimated at 84,500.

Requirement

Prepare the statement of profit or loss for Barchetta Ltd for the year ended 31 March 2014
and a statement of financial position as at that date, in a form suitable for publication.

Total: 20 marks

NOTES: Notes to the financial statements are not required.


Expenses should be analysed by function.

Copyright ICAEW 2014. All rights reserved. Page 3 of 9


2. Impreza plc is a UK company operating in the automotive industry. The financial statements
for the year ended 31 March 2014 have been drafted by your assistant, although there are a
number of outstanding issues which need finalising. Extracts from the draft financial
statements are:

Profit before tax 5,349,000
Equity 6,547,000
Liabilities (current and non-current) 2,986,000

The finance director wishes to review the completed draft financial statements and has asked
you, as financial controller, for assistance with the following outstanding issues:

(1) On 1 June 2013 Impreza plc issued 450,000 5% 1 irredeemable preference shares at
par. When the cash was received the issue proceeds were credited to equity. No
dividend had been paid on the preference shares by 31 March 2014 and no entries had
been made in the accounting records in respect of dividends. The full annual dividend
for the year was subsequently paid on 31 May 2014. It transpires that the dividend
payment on the irredeemable preference shares is mandatory and if it is not paid it
becomes cumulative.

(2) During the year Impreza plc spent 3,570,000 developing a new automotive control
system. The full amount has been recognised as part of non-current assets as it is
thought that the new technology will sell well and that, at present, Impreza plc has a
competitive advantage in the market due to this new technology.

The first 350,000 of this expenditure was incurred investigating alternative processes
and designs. The next 700,000 was used on early development of the control system.
On 1 August 2013 the development was considered to be at a stage where funding was
secured for its completion and it was assessed as being commercially viable.

The remaining expenditure was incurred between 1 August 2013 and the date when the
new control system was ready for sale, being 31 March 2014. On 1 February 2014 an
advertising campaign was launched to market the control system and customers could
place advance orders from that date. 200,000 was spent on launch activities and is
included in the total development expenditure above. By 31 March 2014 320,000 of
cash deposits had been received as advance orders from customers and the cash
receipts have been recognised as part of revenue for the year ended 31 March 2014.

(3) Impreza plc has a number of supplier contracts. One supplier, Murano Ltd, attracted
some adverse publicity. Impreza plc therefore decided to terminate its contract with
Murano Ltd on 1 March 2014 when the contract still had 18 months to run. The contract
has a termination clause which states that a one-off payment of 20,000 is payable to
Murano Ltd if more than six months of the contract term remains on termination. No
additional amounts had been paid to Murano Ltd under the contract by the year end.

(4) During the year ended 31 March 2014 Impreza plc sold parts to a customer, Samuri Ltd,
for 50,000, after giving Samuri Ltd a 20% discount. Impreza plc gives discounts to
many customers varying between 5% and 25%. Rio Yukon is the managing director of
Impreza plc and his daughter Aerio owns 80% of the ordinary share capital of Samuri
Ltd. At 31 March 2014 30,000 was outstanding from Samuri Ltd as part of trade
receivables.

Copyright ICAEW 2014. All rights reserved. Page 4 of 9


(5) On 1 October 2013 Impreza plc sold 500 units of a combined software module and a
two year technical support package to a new customer for 440,000. This sum was
recognised as revenue because the cash had been received before the year end. The
normal selling price of a module is 1,000 and the two year technical support package
is sold for 10% of the modules unit selling price.

Requirements

(a) Explain the required IFRS financial reporting treatment of the five issues above in the
financial statements for the year ended 31 March 2014, preparing all relevant
calculations. (24 marks)

(b) Calculate revised figures for Impreza plcs profit before tax, equity and liabilities for
inclusion in the financial statements for the year ended 31 March 2014. (6 marks)

(c) Explain how the requirements of IAS 18, Revenue, apply the accrual basis and the
IASBs Conceptual Frameworks recognition criteria. (4 marks)

Total: 34 marks

Copyright ICAEW 2014. All rights reserved. Page 5 of 9


3. The following information has been extracted from Vitara plcs draft consolidated financial
statements for the year ended 31 March 2014.

Consolidated statement of profit or loss (extracts)



Depreciation charge 127,200
Profit after tax 496,500

Consolidated statement of financial position (extracts)



Property, plant and equipment 1,156,300
Total assets 1,673,500

Consolidated statement of cash flows (extract)



Net cash from investing activities 316,700

The draft consolidated financial statements of Vitara plc were incomplete due to the following
outstanding issues:

(1) On 1 April 2013 Vitara plc stopped using equipment which had a carrying amount of
20,000 at that date and the equipment was advertised for sale. The equipment had
originally cost 56,000 and had a useful life of seven years. The fair value of the
equipment was estimated at 17,000 on 1 April 2013 and costs to sell were estimated at
500. The equipment is included in the property, plant and equipment figure above and
depreciation was charged at the year end as the equipment had not been sold at this
time.

(2) On 1 January 2014 a piece of plant was no longer used by Vitara plc due to
obsolescence. The plant had been acquired on 1 April 2006 for 15,000 and was being
depreciated at 10% pa on a straight-line basis. The plant is included in the property,
plant and equipment figure above and a full years depreciation was charged at the year
end.

(3) Property, plant and equipment had been acquired during the year and was correctly
included in the property, plant and equipment figure above. The amount included in the
statement of cash flows was 280,000 being the increase in property, plant and
equipment during the period (ie the carrying amount at 31 March 2014 less the carrying
amount at 31 March 2013). There have been no disposals of property, plant and
equipment during the period. All additions were acquired for cash except for the
following:

Early in 2014 Vitara plc acquired a subsidiary which had property, plant and
equipment with a carrying amount of 151,200 at the date of its acquisition by
Vitara plc. There was no difference between the carrying amount and fair value of
these assets.

On 1 April 2013 Vitara plc acquired a piece of plant with a fair value of 72,000 on
two years interest free credit. The plant was correctly included in the property,
plant and equipment figure above and the correct finance cost was recognised in
the statement of profit or loss.

Copyright ICAEW 2014. All rights reserved. Page 6 of 9


(4) On 1 April 2013 equipment with a carrying amount of 24,500 was damaged in one of
Vitara plcs warehouses, although the equipment is still being used and had an
estimated value in use of 18,000 at that date. The equipments fair value at 1 April
2013 was estimated at 18,500 with costs to sell of 800. At 1 April 2013 the equipment
had an estimated remaining useful life of three years. No accounting entries have been
made for the year ended 31 March 2014 in respect of this equipment.

(5) On 1 October 2013 Vitara plc purchased 90% of the ordinary share capital of Tredia Ltd.
Extracts from the draft consolidated statement of profit or loss, excluding the acquisition
of Tredia Ltd, for the year ended 31 March 2014 and the individual statement of profit or
loss of Tredia Ltd for the same period are shown below:

Vitara plc Tredia Ltd


group (draft
consolidated)

Revenue 1,395,600 356,000
Cost of sales (793,200) (193,500)
Gross profit 602,400 162,500

During the period from 1 October 2013 to 31 March 2014, Vitara plc sold goods to
Tredia Ltd for 46,000, at a mark-up of 15% on cost. Half of these goods were still in
Tredia Ltds inventory at the year end.

Requirements

(a) Using the information in (1) to (4) above:

(i) prepare revised extracts from Vitara plcs consolidated statement of financial
position as at 31 March 2014 and consolidated statement of cash flows for the
year then ended showing property, plant and equipment, total assets and net cash
from investing activities.

(ii) calculate the revised consolidated profit after tax and depreciation charge for the
year ended 31 March 2014. (12 marks)

(b) Using the information in (5) above:

(i) prepare a revised extract from Vitara plcs consolidated statement of profit or loss
for the year ended 31 March 2014, showing revenue and cost of sales; and

(ii) explain the required IFRS financial reporting treatment of the goods sold by Vitara
plc to Tredia Ltd in the consolidated financial statements of Vitara plc for the year
ended 31 March 2014. Make reference to the IASBs Conceptual Frameworks
qualitative characteristic of faithful representation, where relevant. (7 marks)

Total: 19 marks

PLEASE TURN OVER

Copyright ICAEW 2014. All rights reserved. Page 7 of 9


4. Altima plc has investments in three companies, Fuego Ltd, Previa Ltd and Tacoma Ltd. A
draft consolidated statement of financial position as at 31 March 2014 has been prepared by
an interim manager, an ICAEW Chartered Accountant, who has little recent experience of
consolidation.

Goodwill was not calculated for any acquisitions and Investments consists of the purchase
consideration for all three acquisitions. Figures for Tacoma Ltd were not available at the date
the interim manager prepared the financial statements, therefore Tacoma Ltd was excluded
from the draft consolidation (Fuego Ltds figures were included). The only figure included for
Previa Ltd in the draft consolidation is the acquisition cost.

Ciera Durango, the financial controller, who is also an ICAEW Chartered Accountant, is
concerned that impairments in relation to all three investments have been identified. Ciera
was involved in the investment decisions and is worried about the impact that showing these
impairments might have on her current position at Altima plc.

An extract from the draft consolidated statement of financial position as prepared by the
interim manager is shown below, together with the individual statement of financial position of
Tacoma Ltd:

Altima plc Tacoma Ltd


group (draft
consolidated)
Non-current assets
Property, plant and equipment 2,140,050 496,000
Investments 1,583,750
3,723,800 496,000
Current assets
Inventories 191,300 49,700
Trade and other receivables 86,600 56,600
Cash and cash equivalents 55,000 5,450
332,900 111,750
Total assets 4,056,700 607,750

Total liabilities 556,050 54,150

Additional information:
(1) Details of Altima plcs three investments are set out below:

Fuego Ltd Previa Ltd Tacoma Ltd


Date of acquisition 1 April 2010 1 July 2011 1 April 2013
Percentage holding acquired 80% 40% 75%
Consideration 820,000 283,500 480,250
Retained earnings at the date of 236,700 67,000 126,800
acquisition
Goodwill and non-controlling interest Proportionate N/A Fair value basis
method basis
Impairment of goodwill for year ended 15,000 21,000
31 March 2014
Impairment of investment for year 24,000
ended 31 March 2014

Copyright ICAEW 2014. All rights reserved. Page 8 of 9


(2) The fair value of the non-controlling interest at the date of acquisition of Tacoma Ltd
was 150,000. There had been no impairments of goodwill or investments prior to
1 April 2013.

(3) An extract from the equity section of the individual financial statements of the four
companies at 31 March 2014 is shown below. No shares have been issued during the
year by any of the four companies.

Altima plc Fuego Ltd Previa Ltd Tacoma


Ltd

Ordinary share capital 1,500,000 420,000 300,000 400,000
Share premium account 500,000 160,000 50,000
Retained earnings 548,900 371,750 96,900 103,600
Total equity 2,548,900 951,750 396,900 553,600

(4) At the date of acquisition the fair values of the assets, liabilities and contingent liabilities
of Fuego Ltd, Previa Ltd and Tacoma Ltd were equal to their carrying amounts, with the
following exceptions:

(i) Previa Ltd had an item of plant which had a fair value 30,000 in excess of its
carrying amount. The plant had a remaining useful life of six years at 1 July 2011,
the date that Altima plc acquired its shares in Previa Ltd.

(ii) Fuego Ltd has internally generated brands which were not recognised in Fuego
Ltds own financial statements and the interim manager did not include them in the
draft consolidated financial statements. An independent expert valued the brands at
150,000, with a useful life of five years, at 1 April 2010, the date of acquisition of
Fuego Ltd by Altima plc.

(5) During the year ended 31 March 2014 Altima plc sold goods to Previa Ltd for 24,000
with a gross profit margin of 15%. At the year end Previa Ltd still held these goods in its
inventories.

Requirements

(a) Prepare the consolidated statement of financial position of Altima plc as at 31 March
2014. (18 marks)

(b) Describe the UK GAAP financial reporting treatment of the goodwill recognised on the
acquisition of Tacoma Ltd and calculate the impact of applying this UK GAAP treatment
on the consolidated financial statements of Altima plc for the year ended 31 March
2014. (5 marks)

(c) Identify and explain any ethical issues arising for Ciera and the interim manager and
explain any action Ciera should take. (4 marks)

Total: 27 marks

Copyright ICAEW 2014. All rights reserved. Page 9 of 9


PROFESSIONAL LEVEL EXAMINATION

MONDAY 8 DECEMBER 2014

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet.

2. Answer each question in black ballpoint pen only.

3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

5. When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2014. All rights reserved. Page 1 of 11


BLANK PAGE

Copyright ICAEW 2014. All rights reserved. Page 2 of 11


1. Trakehner Ltd operates a chain of garden centres in the UK. Jamie, the financial controller of
Trakehner Ltd, has prepared draft financial statements for the year ended 30 June 2014.
These draft financial statements are set out below, along with some outstanding issues.

Draft statement of profit or loss for the year ended 30 June 2014

Revenue 3,879,600
Cost of sales (2,015,300)
Gross profit 1,864,300
Administrative expenses (Note 3) (987,600)
Distribution costs (398,400)
Profit from operations 478,300
Investment income (Note 1) 3,000
Profit before tax 481,300
Income tax (Note 5) (120,000)
Profit for the year 361,300

Draft statement of financial position as at 30 June 2014



ASSETS
Non-current assets
Property, plant and equipment (Notes 1 and 2) 1,982,500

Current assets
Inventories 453,700
Trade and other receivables 241,200
Cash and cash equivalents 14,800
709,700
Total assets 2,692,200

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) (Note 3) 800,000
5% Preference share capital (Note 4) 200,000
Share premium 125,000
Retained earnings 871,600
1,996,600
Non-current liabilities
Loan (Note 1) 250,000

Current liabilities
Trade and other payables 302,600
Income tax (Note 5) 143,000
445,600
Total equity and liabilities 2,692,200

Copyright ICAEW 2014. All rights reserved. Page 3 of 11


The following matters are outstanding:

(1) On 1 October 2013 construction commenced on a new garden centre. On that date
Trakehner Ltd took out a loan of 250,000 specifically to finance this project.
Construction costs to date of 176,000 have been included in property, plant and
equipment. The interest rate on the loan is 4% pa, payable on 1 July annually, and the
loan is repayable on 30 September 2015. The only accounting entries made in respect
of the loan were to recognise its receipt. Interest received on the temporary investment
of surplus funds was 3,000, which Jamie recognised as investment income.
Construction of the garden centre was still in progress at 30 June 2014.

(2) Depreciation on property, plant and equipment has not yet been charged as Jamie was
unsure how to treat the construction costs above. The carrying amount of 1,982,500 in
the draft statement of financial position can be analysed as follows:


New garden centre construction costs (Note 1) 176,000
Land 600,000
Other buildings (cost 950,000) 779,600
Plant and equipment 426,900
1,982,500

Buildings are depreciated on a straight-line basis over 50 years, with the charge being
included in administrative expenses. Plant and equipment is depreciated on a reducing
balance basis using a rate of 25%, with the charge being included in cost of sales.

(3) On 1 January 2014 Trakehner Ltd made a 1 for 4 bonus issue of ordinary shares. No
accounting entries have been made for these shares, although the correct number of
shares was issued. The intention was to use the share premium account as far as
possible.

An interim ordinary dividend of 10p per share, based on the correct number of shares in
issue, was paid on 15 February 2014 and posted to administrative expenses.

(4) On 1 July 2013 Trakehner Ltd issued 200,000 5% redeemable preference shares at
their par value of 1 per share. These shares are redeemable on 30 September 2018 at
a premium. The preference dividend is paid annually in arrears on 1 July and no accrual
has been made for this dividend. The effective interest rate of the preference shares is
5.6% pa.

(5) Income tax of 120,000 in the draft statement of profit or loss is the amount that Jamie
has appropriately estimated will be payable for the current year. The figure of 143,000
in the draft statement of financial position includes the over provision of income tax of
23,000 from the year ended 30 June 2013.

(6) Adjustment needs to be made at 30 June 2014 for prepaid distribution costs of 10,500
and accrued administrative expenses of 12,600.

Copyright ICAEW 2014. All rights reserved. Page 4 of 11


Requirements

(a) Prepare a revised statement of profit or loss for Trakehner Ltd for the year ended
30 June 2014 and a revised statement of financial position as at that date, in a form
suitable for publication. Notes to the financial statements are not required. (22 marks)

(b) Explain the nature and required IFRS financial reporting treatment of redeemable
preference shares. (3 marks)

(c) Describe the differences between IFRS and UK GAAP in respect of the treatment of
borrowing costs. (2 marks)

Total: 27 marks

Copyright ICAEW 2014. All rights reserved. Page 5 of 11


2. Ryan, an ICAEW Chartered Accountant, is the finance director of Holstein Ltd and also owns
20% of the companys ordinary shares. Ryan has just finished preparing the draft financial
statements for the year ended 30 June 2014, which show a profit before tax of 135,400,
total assets of 1,456,000 and total liabilities of 874,300. You are the financial controller of
Holstein Ltd, and a recently qualified ICAEW Chartered Accountant.

You are aware that the financial statements will come under close scrutiny by Holstein Ltds
bank, as it will be looking to ensure that the conditions of a loan covenant are still met. This
covenant requires Holstein Ltd to maintain total assets at a minimum of 150% of total
liabilities. If this condition is not met the bank is likely to call in its loan and the companys
future would be in jeopardy.

Whilst assisting Ryan with the drafting of the financial statements you discovered the
following matters of concern:

(1) Holstein Ltds stated accounting policy has been to depreciate all general machines on
a straight-line basis over four years. However, during the current year, the board of
directors decided that, with effect from 1 July 2013, all general machines should be
depreciated using a reducing balance basis at a rate of 25%, as this better reflects their
economic usage.

Ryan has restated the opening balance of general machines and retained earnings as if
the new policy had always been in existence, on the grounds that this is a change of
accounting policy in accordance with IAS 8, Accounting Policies, Changes in
Accounting Estimates and Errors. As a result, Ryan increased the carrying amount of
property, plant and equipment and retained earnings at 1 July 2013 by 352,100. Ryan
then charged depreciation at 25% on the revised carrying amount of property, plant and
equipment.

(2) On 1 December 2013 Holstein Ltd received a government grant of 200,000,


representing 50% of the cost of a specialised asset that was acquired on 1 October
2013. The asset has a four-year life with no residual value and has been correctly
depreciated in the draft financial statements on a straight-line basis. Holstein Ltds
stated accounting policy is to account for government grants using the netting-off
method. Ryan has shown the full grant of 200,000 within other income in the draft
financial statements as he does not expect the grant to be repaid and the asset has
already been paid for.

(3) On 1 July 2013 Holstein Ltd signed a four-year lease for a machine with a fair value of
350,000. The lessor remains responsible for maintenance and insurance of the
machine. Ryan negotiated a payment holiday so an annual payment of 60,000 is due
on 1 July 2014, 2015 and 2016. Because no payment was made in the year ended
30 June 2014 Ryan has not included any amounts in respect of this lease in the draft
financial statements.

(4) A machine which became surplus to requirements in May 2014 was sold for 170,000
on 15 August 2014, incurring selling expenses of 11,600. On 1 August 2014 Holstein
Ltd incurred reconditioning expenses of 63,500. These expenses were required to
bring the machine into a saleable and usable condition but Holstein Ltd had had to wait
for a suitable specialist to be available to carry out this work.

Copyright ICAEW 2014. All rights reserved. Page 6 of 11


The board of directors had agreed to sell the machine on 1 June 2014 and had duly
advertised it at a price of 300,000. In view of this on 30 June 2014 Ryan revalued the
machine from its carrying amount of 155,000 on 30 June 2014 to its advertised selling
price, posting the difference to the revaluation surplus, disregarding Holstein Ltds
published accounting policy which is to use the cost model.

When you queried this with Ryan he quoted the requirement of IFRS 5, Non-current
Assets Held for Sale and Discontinued Operations to revalue an asset to its fair value
immediately before classification as held for sale. The asset is shown in the draft
statement of financial position as at 30 June 2014 as an asset held for sale at 300,000.
Ryan intends to account for the actual disposal in the financial statements for the year
ended 30 June 2015.

You have discussed these matters with Ryan, who does not accept that any adjustments are
needed to the financial statements.

Requirements

(a) Explain the required IFRS financial reporting treatment of the four issues above in the
financial statements for the year ended 30 June 2014, preparing all relevant
calculations. (21 marks)

(b) Using your results from Part (a) calculate revised figures for profit before tax, total
assets and total liabilities. (4 marks)

(c) Discuss the ethical issues arising from the scenario for you, as financial controller of
Holstein Ltd, and list the steps that you should take to address them. (5 marks)

Total: 30 marks

Copyright ICAEW 2014. All rights reserved. Page 7 of 11


3. On 1 July 2013 Appaloosa plc had a number of subsidiary companies, all acquired several
years ago. Extracts from the groups consolidated financial statements for the year ended
30 June 2014 are set out below.

Consolidated statement of profit or loss for the year ended 30 June 2014 (extract)

Continuing operations
Profit from operations 1,589,600
Finance costs (51,300)
Profit before tax 1,538,300
Income tax expense (385,000)
Profit for the year from continuing operations 1,153,300
Discontinued operations
Profit for the year from discontinued operations 77,500
Profit for the year 1,230,800
Attributable to:
Owners of Appaloosa plc 1,015,300
Non-controlling interest 215,500
1,230,800

Consolidated statement of financial position as at 30 June


2014 2013
ASSETS
Non-current assets 3,214,500 2,478,000
Current assets
Inventories 1,785,900 1,025,100
Trade and other receivables 725,200 699,800
Cash and cash equivalents 101,500 53,500
2,612,600 1,778,400
Total assets 5,827,100 4,256,400
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares) 500,000 400,000
Share premium account 100,000 40,000
Revaluation surplus 779,500 423,000
Retained earnings 2,279,800 1,364,800
Attributable to the equity holders of Appaloosa plc 3,659,300 2,227,800
Non-controlling interest 664,900 742,600
4,324,200 2,970,400
Non-current liabilities
Finance lease liabilities 350,200 270,000
Current liabilities
Trade and other payables 582,500 489,800
Finance lease liabilities 150,200 148,200
Income tax payable 420,000 378,000
1,152,700 1,016,000
Total equity and liabilities 5,827,100 4,256,400

Copyright ICAEW 2014. All rights reserved. Page 8 of 11


Additional information:

(1) On 1 January 2014 Appaloosa plc sold all of its 70% holding in Connemara Ltds
100,000 1 ordinary shares, for cash of 590,000. Appaloosa plc had paid 350,000 for
the shares in Connemara Ltd when the retained earnings of Connemara Ltd were
226,000. Goodwill was calculated using the proportionate method, although 50,000 of
this amount had been written off by 30 June 2013. The profit from discontinued
operations in the consolidated statement of profit or loss above relates wholly to the
sale of the shares in Connemara Ltd and includes an income tax expense of 19,600.

The net assets of Connemara Ltd at the date of disposal were as follows:


Property, plant and equipment 705,200
Trade and other receivables 57,900
Cash and cash equivalents 13,800
Trade and other payables (42,700)
734,200

(2) All finance costs in the consolidated statement of profit or loss relate to finance leases.
In the year ended 30 June 2014 Appaloosa plc entered into finance leases for assets
with a cash price of 550,000.

(3) Non-current assets comprise property, plant and equipment and goodwill which had
arisen on business combinations. The only movement on goodwill during the year
ended 30 June 2014 was with regard to Connemara Ltd. Depreciation of 561,500 was
recognised during the year ended 30 June 2014. No property, plant and equipment was
disposed of during the year other than through the disposal of Connemara Ltd.

(4) The consolidated statement of changes in equity shows the following:

ordinary dividends were paid during the year to both the shareholders of
Appaloosa plc and to the non-controlling interest;
there was a revaluation of property, plant and equipment;
Appaloosa plc made an issue of ordinary shares.

Requirements

(a) Calculate the profit on disposal of Connemara Ltd. (2 marks)

(b) Prepare a consolidated statement of cash flows for Appaloosa plc for the year ended
30 June 2014, including a note reconciling profit before tax to cash generated from
operations, using the indirect method. A note showing the effects of the disposal of
Connemara Ltd is not required. (14 marks)

(c) The IASBs Conceptual Framework identifies a wide range of users who use financial
statements to make economic decisions. Identify five possible user groups and, for
each user group, list the type(s) of decisions they regularly make from information
contained within the financial statements. (5 marks)

Total: 21 marks

PLEASE TURN OVER

Copyright ICAEW 2014. All rights reserved. Page 9 of 11


4. On 1 July 2013 Oldenburg plc had one subsidiary company, Zangersheide Ltd, and one
associated company, Hanoverian Ltd, holding 90% and 30% respectively of their ordinary
shares.

On 1 October 2013 Oldenburg plc acquired 80% of the ordinary shares of Westphalian Ltd.
Initial calculations showed that a gain on bargain purchase (negative goodwill) of 35,000
arose on the acquisition. In accordance with best practice, a reassessment of Westphalian
Ltds assets, liabilities and contingent liabilities and consideration transferred took place
following acquisition and the following discoveries were made:
The consideration transferred used in the goodwill calculation was 500,000, which
included professional fees of 8,000 relating to the acquisition.
A building which had been purchased by Westphalian Ltd for 300,000 on 1 October
1999 was assessed as having a fair value on the date of Westphalian Ltds acquisition
by Oldenburg plc of 154,000. This fair value had not been reflected in the goodwill
calculation. The building has always had a total estimated useful life of 25 years.
Depreciation on buildings is presented in operating expenses.
Westphalian Ltds financial statements for the year ended 30 June 2013 included a
disclosure note showing a contingent liability of 42,000. This contingent liability had a
fair value of 36,500 on 1 October 2013. This fair value was unchanged at 30 June
2014. No allowance was made for this contingent liability in the goodwill calculation.
Oldenburg plc had decided to use the fair value method to measure goodwill and the
non-controlling interest for Westphalian Ltd. However, the original calculation had
incorrectly used the proportionate method. The fair value of the non-controlling interest
at 1 October 2013 was 140,000.

Extracts from the individual statements of profit or loss of the four companies for the year
ended 30 June 2014 are set out below:

Statements of profit or loss for the year ended 30 June 2014

Oldenburg Zangersheide Westphalian Hanoverian


plc Ltd Ltd Ltd

Revenue 2,978,500 1,759,500 1,310,400 713,000
Cost of sales (2,100,600) (1,198,500) (874,600) (471,400)
Gross profit 877,900 561,000 435,800 241,600
Operating expenses (701,600) (203,500) (300,000) (156,300)
Profit before taxation 176,300 357,500 135,800 85,300
Income tax expense (53,000) (107,200) (40,000) (24,200)
Profit for the year 123,300 250,300 95,800 61,100

Copyright ICAEW 2014. All rights reserved. Page 10 of 11


Additional information:

(1) During the current year Oldenburg plc purchased goods to the value of 286,800 and
101,040 from Zangersheide Ltd and Hanoverian Ltd respectively. All sales between
group companies are at a 20% mark up. Half of the goods purchased were still in
Oldenburg plcs inventories at 30 June 2014.

(2) During the previous year, on 31 December 2012, Zangersheide Ltd sold a machine to
Oldenburg plc for 567,000. At that date, the machine had a carrying amount in
Zangersheide Ltds books of 465,500 and the estimated remaining useful life was
reassessed at five years. Depreciation on this machine is presented in cost of sales.

(3) At 30 June 2014 impairment losses of 18,000 in respect of goodwill arising on the
business combination with Zangersheide Ltd and 6,000 in respect of the carrying
amount of Hanoverian Ltd need to be recognised in the consolidated financial
statements. Oldenburg plc used the proportionate method to measure goodwill and the
non-controlling interest for Zangersheide Ltd.

Requirements

(a) Calculate a revised figure for the gain on bargain purchase arising on the business
combination with Westphalian Ltd. (5 marks)

(b) Prepare the consolidated statement of profit or loss for Oldenburg plc for the year ended
30 June 2014. (14 marks)

(c) Describe any differences between IFRS and UK GAAP in respect of the financial
reporting treatment of the issues in Parts (a) and (b) above. (3 marks)

Total: 22 marks

Copyright ICAEW 2014. All rights reserved. Page 11 of 11


PROFESSIONAL LEVEL EXAMINATION

MONDAY 16 MARCH 2015

(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR questions (100 marks).

1. Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2. Answer each question in black ballpoint pen only.

3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4. The examiner will take account of the way in which answers are presented.

5. When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT

Question papers contain confidential You MUST enter your candidate number in this
information and must NOT be removed box.
from the examination hall.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2015. All rights reserved. Page 1 of 11


BLANK PAGE

Copyright ICAEW 2015. All rights reserved. Page 2 of 11


1. You are the financial controller at Coghlan Ltd and an ICAEW Chartered Accountant. You are
finalising the financial statements for the year ended 30 September 2014. Your colleague, a
part-qualified ICAEW Chartered Accountant, has produced the following draft financial
statements with some additional information. He was assisted by the managing directors
son, who was on work experience at Coghlan Ltd.

You are under pressure from the managing director to finalise the financial statements as
quickly as possible as he is about to go on holiday. The managing director has reminded you
that your performance appraisal is due and has hinted that if you finalise the financial
statements quickly he will make sure this is reflected in your appraisal which is linked to your
salary.

Draft statement of profit or loss for the year ended 30 September 2014


Revenue (Note 1) 3,359,200
Cost of sales (2,198,050)
Gross profit 1,161,150
Administrative expenses (Note 2) (1,039,700)
Operating profit 121,450
Other costs (Note 3) (500,000)
Finance costs (Note 4) (38,000)
Loss before tax (416,550)
Income tax (Note 5)
Loss for the year (416,550)

Draft statement of financial position as at 30 September 2014


ASSETS
Non-current assets
Property, plant and equipment (Note 6) 1,110,325

Current assets
Inventories (Note 7) 142,100
Trade and other receivables 125,400
Cash and cash equivalents 1,200
268,700
Total assets 1,379,025

EQUITY AND LIABILITIES


Equity
Ordinary share capital (1 shares) (Note 4) 294,500
Share premium 94,000
Retained earnings 425,825
814,325
Current liabilities
Trade and other payables 31,900
Provision (Note 3) 500,000
Income tax (Note 5) 32,800
564,700
Total equity and liabilities 1,379,025

Copyright ICAEW 2015. All rights reserved. Page 3 of 11


Additional information:
(1) Coghlan Ltd has launched a new monthly technical magazine to its customers on a
subscription basis, based on a calendar year. 36,000 was received in annual
subscriptions in December 2013 for the year commencing 1 January 2014. This was
recognised immediately as revenue as the amount could be measured reliably and the
economic benefit had flowed to Coghlan Ltd.

(2) On 1 October 2013 Coghlan Ltd entered into a new six-year lease for a regional office.
Lease payments are 1,200 per month payable at the beginning of each month. The
building is estimated to have a useful life of 30 years. Coghlan Ltd negotiated a rent
holiday for the first six months. As a consequence, the rent for the final six months of
the lease will be double. The first payment of 1,200 was made on 1 April 2014. The
lease payments were recognised in administrative expenses as they were paid.

(3) The provision of 500,000 shown in the financial statements above relates to
outstanding lawsuits for the supply, prior to the year end, of faulty products by Coghlan
Ltd to a number of customers. This amount has been recognised as a provision based
on advice from Coghlan Ltds lawyers that the claims are very likely to succeed within
the next six months, which has led to some adverse publicity. The product was
withdrawn in August 2014.

Since recognising the above provision, Coghlan Ltd discovered that there are an
additional 50 faulty products still in circulation. Coghlan Ltds lawyers estimated for each
product 350 would need to be paid.

During the year Coghlan Ltd started offering a one-year repair warranty with its luxury
products. If minor repairs were required for all the relevant goods sold the cost would be
65,000, compared to 157,000 if major repairs were required. Coghlan Ltd estimates
that 20% of the goods sold will require minor repairs and 5% will require major repairs.
No provision was recognised in respect of the warranties for the year ended
30 September 2014 as no goods had been returned by this date.

(4) An interim ordinary dividend of 10p per share was paid on 11 May 2014 and recognised
as a finance cost. Shortly after this, Coghlan Ltd entered into a share buyback scheme
to reacquire 45,000 1 ordinary shares for 1.90 cash per share. The total cash paid
was debited to share capital.

(5) The income tax figure shown in the statement of financial position is the balance
remaining on the nominal ledger after paying the liability for the previous year. As a loss
was made for the year ended 30 September 2014 a tax refund of 65,000 has been
appropriately estimated but has not yet been recognised.

Copyright ICAEW 2015. All rights reserved. Page 4 of 11


(6) Depreciation on property, plant and equipment for the year ended 30 September 2014
has not yet been charged. The following information is available:

Land and buildings Fixtures and


fittings
Cost (land 250,000) 1,125,000 236,000
Accumulated depreciation at 187,500 63,175
1 October 2013
Depreciation rate and method 5% pa straight-line 20% pa reducing
(buildings) balance
Recoverable amount (land 600,000 170,000
225,000) at 30 September 2014

Land and buildings consist of Coghlan Ltds head office and main warehouse which are
located together on one piece of land. Local market values decreased following an
announcement that a wind farm is to be built in the area.

All expenses in respect of property, plant and equipment should be recognised in


administrative expenses.

(7) Inventories at 30 September 2013 and 2014 were valued at net realisable value, as this
was higher than cost. The following inventory valuations are relevant.

30 September 2014 30 September 2013



Cost 98,000 79,000
Net realisable value 142,100 114,550

Requirements

(a) Prepare a revised statement of profit or loss for Coghlan Ltd for the year ended
30 September 2014 and a revised statement of financial position as at that date, in a
form suitable for publication. Notes to the financial statements are not required.
(19 marks)

(b) IAS 1, Presentation of Financial Statements, requires financial statements to be


prepared using the accruals basis of accounting and the IASBs Conceptual Framework
refers to going concern as the underlying assumption in the preparation of financial
statements. Explain these two concepts, illustrating their application with reference to
Coghlan Ltd. (6 marks)

(c) Discuss the ethical issues arising from the scenario for you as financial controller and
the steps that you should take to address them. (5 marks)

Total: 30 marks

Copyright ICAEW 2015. All rights reserved. Page 5 of 11


2. The draft financial statements of Porcaro plc, which has a number of wholly-owned
subsidiaries, are being prepared by your trainee, Carmine. A number of outstanding issues
are set out below which require your attention, as financial controller, as Carmine was unsure
of the correct accounting treatment.

The draft consolidated profit for the year ended 30 September 2014 is 483,150.

(1) On 1 October 2013 Porcaro plc borrowed 600,000 at 6% pa, repayable in three years
time, to help fund the construction of an office block. Porcaro plc immediately paid
200,000 to acquire land and gained planning permission on this date but construction
did not start until 31 December 2013. The remaining amount was put into a deposit
account earning interest at 3% pa and was used to make payments to the construction
company of 100,000 on 1 March 2014 and 200,000 on 1 September 2014. The
building was not complete at the year end and a further payment of 100,000 was due
to the construction company after 30 September 2014. All relevant interest was
received and paid on 30 September 2014.

Carmine recognised the net interest paid in the statement of profit or loss and
capitalised all other costs incurred as an asset in the course of construction.

(2) On 1 October 2013 Porcaro plc issued 6,000 5% 100 convertible bonds. Each bond is
redeemable in four years time at par or can be converted into 100 1 ordinary shares.
Interest is payable annually in arrears and the market rate of interest for similar bonds
without the conversion option is 7% pa. Carmine has credited the cash proceeds from
the bond issue to non-current liabilities. The annual interest of 30,000 was paid at the
year end and was recognised as a finance cost.

(3) On 1 April 2014 Porcaro plc paid 72,000 for a licence for the production of a state of
the art microchip. At the end of six years it is thought that the licence will be worthless
due to advances in technology. Carmine has recognised the licence in the draft financial
statements as an intangible asset of 90,000 as this is the amount that a competitor
offered to Porcaro plc for the licence on 30 June 2014 due to its unique nature. Carmine
showed the increase in value as a revaluation surplus in equity.

(4) On 1 May 2014 Porcaro plc and three other unrelated trading companies each
purchased one quarter of the 100,000 1 ordinary shares, at par, of a newly
incorporated company, Barbarossa Ltd. Under a contractual agreement each investor is
entitled to an equal share of the profits and losses and unanimous consent is required
for all key operating decisions. For the period ended 30 September 2014 Barbarossa
Ltd reported a profit after tax of 130,000, no dividends have yet been paid. On
acquisition, Carmine recognised the cost of the 25,000 shares in Barbarossa Ltd as a
current asset. No other accounting entries have been made in respect of Barbarossa
Ltd.

On 1 October 2013 Porcaro plc had in issue 270,000 1 ordinary shares. On 1 February
2014 Porcaro plc made a 1 for 3 rights issue for 1.70 per share. The market price of one
Porcaro plc ordinary share immediately before the rights issue was 2.10.

Copyright ICAEW 2015. All rights reserved. Page 6 of 11


Requirements

(a) Explain the required IFRS financial reporting treatment of the four issues above in the
financial statements for the year ended 30 September 2014, preparing all relevant
calculations and setting out the required adjustments in the form of journal entries.
(27 marks)

(b) Using your results from Part (a) calculate a revised figure for consolidated profit for the
year. (2 marks)

(c) (i) Calculate basic earnings per share for the Porcaro plc group.

(ii) Briefly explain the treatment of the rights issue in the above calculation. (6 marks)

(d) Describe the difference between IFRS and UK GAAP in relation to issue (1) above.
(1 mark)

Total: 36 marks

Copyright ICAEW 2015. All rights reserved. Page 7 of 11


3. Henrit plc has two subsidiary companies, one of which was acquired during the year ended
30 September 2014. Set out below is an extract from all three companies draft statements of
financial position.

Draft statements of financial position at 30 September 2014 (extracts)

Henrit plc (single


company) Bonham Ltd Crago Ltd
ASSETS
Non-current assets
Property, plant and equipment 963,200 469,400 623,150
Investments 475,000

Current assets
Inventories 46,980 18,900 31,300

Additional information:

(1) At 1 October 2013 Henrit plc held property, plant and equipment with a carrying amount
of 729,400, none of which had been acquired under finance leases. During the year
ended 30 September 2014 Henrit plc sold equipment with a carrying amount of
124,000, recognising a profit on disposal of 9,500. Depreciation of 113,000 was
recognised.

Henrit plc acquired new plant during the year; some additions were made under a
finance lease with the remainder for cash. The draft financial statements show a total
finance lease liability of 97,725 at 30 September 2014 and a lease payment of 15,000
was made during the year.

(2) The statement of profit or loss shows finance costs of 25,875 which relate to the
interest due on a bank loan and interest on the finance lease. Interest at 5% pa is
payable on the bank loan. At 1 October 2013 Henrit plc had a bank loan of 290,000,
with additional funding of 160,000 obtained on 1 April 2014.

(3) At 1 October 2013 Henrit plc had an investment in a wholly owned subsidiary, Bonham
Ltd. This investment cost 200,000 and gave rise to goodwill at acquisition of 73,400.

On 1 April 2014 Henrit plc acquired 60% of the ordinary share capital of Crago Ltd for
consideration comprising cash of 230,000 and 45,000 1 ordinary shares in Henrit plc,
with a market value of 3.15 each. The investment in Crago Ltd was recognised in non-
current assets at 275,000 being the cash consideration and the share issue at 1
nominal value. The fair value of the assets and liabilities acquired were 615,000 at the
date of acquisition which was the same as their carrying amount. The non-controlling
interest and goodwill on the acquisition of Crago Ltd were calculated using the fair value
method. The fair value of the non-controlling interest at 1 April 2014 was 261,000.

(4) Immediately after its acquisition by Henrit plc, Crago Ltd sold a machine to Henrit plc for
53,000. The machine had originally been acquired by Crago Ltd for 95,000 on
1 October 2011 and had an estimated five year useful life, which has never changed.

(5) In August 2014 Bonham Ltd sold goods to Crago Ltd for 11,500 at a mark-up of 15%.
All of these goods were still in Crago Ltds inventories at the year end.

Copyright ICAEW 2015. All rights reserved. Page 8 of 11


Requirements

(a) Using the draft financial statements for Henrit plc and the additional information set out
in (1) and (2) above, prepare extracts from Henrit plcs single company statement of
cash flows for the year ended 30 September 2014 showing figures under the headings:

(i) Cash flows from investing activities


(ii) Cash flows from financing activities (6 marks)

(b) Using the draft financial statements of all three companies and the additional
information set out in (3) to (5) above prepare extracts from the consolidated statement
of financial position of Henrit plc as at 30 September 2014 showing:

(i) Non-current assets


(ii) Current assets (5 marks)

Total: 11 marks

PLEASE TURN OVER

Copyright ICAEW 2015. All rights reserved. Page 9 of 11


4. At 1 October 2013 Mantia plc had investments in two companies: an 80% holding in
Appice Ltd and a 65% holding in Starkey Ltd.

On 1 April 2014 Mantia plc sold all of its 91,000 1 ordinary shares in Starkey Ltd, for
427,000. The disposal proceeds were credited to a suspense account. Starkey Ltds
retained earnings at 1 October 2013 were 243,000. Mantia plc measures all non-controlling
interest and goodwill on acquisition using the proportionate method.

The draft individual statements of profit or loss of the three companies are shown below:

Draft statements of profit or loss for the year ended 30 September 2014

Mantia plc Appice Ltd Starkey Ltd


Revenue 2,986,000 768,000 1,672,000


Cost of sales (1,343,700) (345,600) (585,200)
Gross profit 1,642,300 422,400 1,086,800
Operating expenses (419,575) (84,480) (334,100)
Profit from operations 1,222,725 337,920 752,700
Investment income 42,600
Profit before tax 1,265,325 337,920 752,700
Income tax expense (259,000) (68,000) (152,500)
Profit for the year 1,006,325 269,920 600,200

The draft individual statements of financial position at 30 September 2014 for Mantia plc and
Appice Ltd show:

Mantia plc Appice Ltd



Equity
Ordinary share capital (1) 500,000 80,000
Retained earnings 596,300 384,200

Additional information:

(1) Mantia plc acquired its holding in Appice Ltd on 1 October 2012 when Appice Ltds
retained earnings were 136,000. The fair values of all Appice Ltds assets and
liabilities at the date of acquisition were the same as their carrying amounts, with the
exception of a machine which was estimated to have a fair value of 70,000 in excess
of its carrying amount. The machine was assessed as having a remaining useful life of
ten years at 1 October 2012. Depreciation of plant and machinery is recognised in
operating expenses.

(2) Mantia plc acquired its holding in Starkey Ltd several years ago for 230,000 when
Starkey Ltds retained earnings were 162,000. The fair values of all Starkey Ltds
assets and liabilities at the date of acquisition were the same as their carrying amounts.
Starkey Ltds revenue and costs accrued evenly over the current year.

(3) During the year Appice Ltd sold goods to Mantia plc for 32,000 earning a gross margin
of 15%. At the year-end Mantia plc still held a quarter of these goods.

Copyright ICAEW 2015. All rights reserved. Page 10 of 11


(4) Mantia plc and Appice Ltd paid a dividend of 1.20 and 40p per share respectively
during the year ended 30 September 2014.

(5) Mantia plc has undertaken its annual impairment review of goodwill and identified that
an impairment of 25,000 has arisen in relation to Appice Ltd and should be recognised.
No impairment of goodwill arose in the year in respect of the acquisition of Starkey Ltd,
however, cumulative impairments of 18,000 had been recognised at 1 October 2013.

Requirements

(a) Prepare, for Mantia plc for the year ended 30 September 2014:

(i) a consolidated statement of profit or loss;

(ii) the retained earnings column from the consolidated statement of changes in
equity.

You should assume that the disposal of Starkey Ltd constitutes a discontinued activity in
accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued
Operations. (20 marks)

(b) Describe the differences between IFRS and UK GAAP in relation to the acquisition and
disposal of Starkey Ltd. (3 marks)

Total: 23 marks

Copyright ICAEW 2015. All rights reserved. Page 11 of 11