2013 FR

~~AC3091 ZA d0
This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON AC3091 ZA
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diplomas in Economics and Social Sciences and Access Route
Financial Reporting
Wednesday, 15 May 2013 : 2.30pm to 5.45pm
Candidates should answer FOUR of the following SIX questions: including AT LEAST ONE EACH
from section A and Section B. All questions will carry equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
PLEASE TURN OVER
© University of London 2013

UL13/0005 Page 1 of 10 D1
SECTION A
Answer one question and no more than two further questions from this section.
1. The statements of financial position for Apple Plc, Kiwi Ltd and Orange Ltd as at 31December 2012
are given below:
Apple Kiwi Orange

£ £ £
Non-current assets 580,000 1,900,000 1,400,000
Investments 1,800,000
Inventory 200,000 600,000 1,120,000
Trade receivables 340,000 500,000 280,000
Cash 140,000 140,000 180,000
Inter co receivable from Kiwi 80,000
Interco receivable from Orange 320,000
Total assets 3,460,000 3,140,000 2,980,000
Share capital 2,000,000 600,000 400,000

Retained earnings 1,380,000 1,740,000 2,000,000
Bonds (10%) 20,000 150,000 40,000
Interco payable to Apple 80,000 320,000
Trade payables 60,000 570,000 220,000
Capital, reserves and liabilities 3,460,000 3,140,000 2,980,000
Apple Plc acquired 75% of Kiwi Ltd on 1 January 2006 for £920,000 when Kiwi Ltd's share capital and
reserves were £640,000. The fair value of Kiwi Ltd’s non-current assets on 1 January 2006 was
£1,980,000 and this revaluation has not been incorporated into Kiwi Ltd’s accounts.
Apple Plc acquired 20% of the bonds of Kiwi Ltd for £60,000 on 1 January 2006.
Apple Plc acquired 40% of Orange Ltd on 1 January 2007 for £400,000 when Orange Ltd’s share capital
and reserves were £600,000. The fair value of Orange Ltd’s non-current assets on 1 January 2007 was
£1,600,000 and this revaluation has not been incorporated into Orange Ltd’s accounts.
Apple Plc’s policy is to capitalise goodwill. Impairment of 15% of the goodwill of Kiwi Ltd is seen in
2012 and impairment of 20% of the goodwill of Orange Ltd is seen in 2012.
In 2012, Apple Plc acquired inventory from Kiwi Ltd for £40,000 and inventory from Orange Ltd for
£100,000. This inventory has not been sold as at 31 December 2012. All companies earn a gross profit
percentage of 10% on these transactions.
Apple Plc has not accounted for the interest payable on the bonds which was due on the last day of the
period
Required:
(a) Define the following:
i. Non-controlling interest
ii. Provision for unrealized profit on inventory
iii. Impairment (6 marks)
(b) Prepare the consolidated statement of financial position for Apple Plc as at 31 December 2012.
(19 marks)

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2. Company X enters into a project, expecting annual cashflows of £8,000 per annum to be generated in
perpetuity with interest rates remaining at 10% in perpetuity. The company receives £8,000 at the end
of year 1 but then revises its expectations in relation to future cashflows to £16,000 per annum in
perpetuity. The rate of interest also changes at the end of year 1 to 20% in perpetuity. These revised
estimates are not expected to change in the future. All cashflows arise at the end of the year.
Required:
(a) Discuss Hicks’ concepts of income and their implications for accountants. (13 marks)
(b) Calculate the following:
i. Hicks’ income number 1 ex ante

ii. Hicks’ income number 1 ex post
iii. Hicks’ income number 2 ex post version A and reconcile this income number to that
calculated in i.
iv. Hicks’ income number 2 ex post version B and reconcile this income number to that
calculated in i. (12 marks)
3. On 1 January 2001, Rice Ltd acquired 80% of the ordinary shares of a subsidiary, Cream Org. Cream
Org trades in the currency ‘potts’. On 1 January 2001 the balance on the accumulated profits of
Cream Org was 160,000 ‘potts’ and the share capital of Cream Org was 1,200,000 ‘potts’.
The summary income statements and statements of financial position of Cream Org are given as
follows:
Statement of financial position as at 31 December 2012
Cream
‘potts’
Non-current assets 1,800,000
Inventories 75,000
Cash 305,000
Total assets less liabilities 2,180,000
Share capital 1,200,000
Retained profit 980,000
2,180,000
Income statement Cream Cream
year ended 31 December 2012 ‘potts’ ‘potts’
Sales 380,000
Opening inventory 50,000
Purchases 200,000
Closing inventory (75,000)
(175,000)
Gross profit 205,000
Depreciation (20,000)
Other expenses (5,000)
Profit before tax 180,000
Tax (30,000)
Profit after tax 150,000
Dividends (5,000)
Net profit for the year 145,000
Question continues on next page

UL13/0005 Page 3 of 10 D1
The following information is also available:
1 Non-current assets were acquired on 1 January 2001.
2 Opening inventories were acquired on 12 November 2011 and closing inventories were acquired
on 15 December 2012.
3 Exchange rates:
1 January 2001 £1 = 10 ‘potts’
12 November 2011 £1 = 5 ‘potts’
1 January 2012 £1 = 6 ‘potts’
average for 2012 £1 = 4 ‘potts’
15 December 2012 £1 = 2 ‘potts’
20 December 2012 £1 = 2.5 ‘potts’
31 December 2012 £1 = 3 ‘potts’
4 The translated profit and loss account reserve brought forward for Cream Org is £99,500 under
the temporal method and £219,167 under the closing rate method.
5 Dividends are paid on 20 December 2012.
Required:
(a) Outline the temporal and closing rate methods and discuss when each of these methods should
be used. (8 marks)
(b) Translate the income statement and statement of financial position of Cream Org using the
temporal method. (10 marks)
(c) Translate the income statement and statement of financial position of Cream Org using the
closing rate method. (7 marks)

UL13/0005 Page 4 of 10 D1
4. Answer all parts of the question
(a) Discuss the problems that may arise when defining the return on assets ratio. (5 marks)
(b) Outline the main differences between the merger and acquisition accounting methods and
discuss the reasons why merger accounting has been discontinued. (5 marks)
(c) On 1 January 2007, Honey Ltd receives £1,671,000 on the issue of 8% debentures with a
nominal value of £2,000,000. The debentures are redeemable at the end of 2012 at par.
Required:
Show in tabular form how the debentures should be recorded in the financial statements of
Honey Ltd from 2007 to 2012. (5 marks)
(d) During 2012, a lawsuit was filed against Jam Ltd. The lawsuit relates to faulty products sold to
customers. Jam Ltd intend to fight the lawsuit but they have received legal advice indicating that
there is a 50% chance that they will lose the case.
Required:
What are contingent liabilities? Outline how the lawsuit would be treated in the financial
statements of Jam Ltd. (5 marks)
(e) Make Ltd started a new business selling widgets and entered into the following transactions:
100 widgets were bought on 1 January 2012 for £50 each.

10 widgets were sold on 1 June 2012 for £75 each
60 widgets were sold for £90 each on 1 December 2012.
On 1 June 2012, the replacement cost of widgets was £60 each, on 1 December 2012, the
replacement cost of widgets was £80 each and on 31 December 2012 the replacement cost of
widgets was £85 each. Make Ltd uses current value accounting based on replacement cost for
this business and has a 31 December year end.
Required:
Prepare the current value (replacement cost) income statement for the year ending 31 December
2012 using physical capital maintenance and identify the value of closing inventory as at 31
December 2012. (5 marks)

UL13/0005 Page 5 of 10 D1
SECTION B
Answer one question and no more than one further question from this section.
5. Answer either:
Discuss the aims and objectives of conceptual frameworks of accounting. Outline the desirable
characteristics of accounting information and discuss the advantages and limitations of these
qualitative characteristics for financial reporting. (25 marks)
Or:
Critically assess the need for regulating financial reporting. Your answer should cover both traditional
and economic arguments. (25 marks)
6. Answer either:
Compare and contrast current purchasing power financial statements and current value financial
statements. To what extent do these types of financial statements address the criticisms of historic cost
accounting? (25 marks)
Or:
What is goodwill? Discuss the reasons why it has been difficult to account for goodwill. Outline three
different methods for accounting for goodwill, showing how goodwill would be accounted for in the
financial statements for each of the methods and critically assess each of the methods. (25 marks)

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UL13/0005 Page 10 of 10 D1
~~AC3091 ZB d0
This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON AC3091 ZB
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diplomas in Economics and Social Sciences and Access Route
Financial Reporting
Wednesday, 15 May 2013 : 2.30pm to 5.45pm
Candidates should answer FOUR of the following SIX questions: including AT LEAST ONE EACH
from section A and Section B. All questions will carry equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
PLEASE TURN OVER

UL13/0006 Page 1 of 10 D1
SECTION A
Answer one question and no more than two further questions from this section.
1. The income statements for Duck Ltd, Cat Ltd and Bird Ltd for the year ended 31 December 2012 are
given as follows:
Duck Ltd Cat Ltd Bird Ltd
£ £ £
Sales 6,000,000 3,400,000 2,400,000
Cost of sales (2,360,000) (1,180,000) (920,000)
Gross profit 3,640,000 2,220,000 1,480,000
Dividends receivable 120,000 - -
Administration costs (379,000) (284,000) (140,000)
Distribution costs (160,000) (452,000) (70,000)
Interest receivable 100,000 - -
Interest payable (20,000) (36,000) -
Profit before tax 3,301,000 1,448,000 1,270,000
Tax (200,000) (140,000) (40,000)
Profit after tax 3,101,000 1,308,000 1,230,000
Dividends payable (360,000) (100,000) (148,000)
Profit for the year 2,741,000 1,208,000 1,082,000
Retained profit brought forward 3,200,000 1,200,000 800,000
Retained profit carried forward 5,941,000 2,408,000 1,882,000
Duck Ltd acquired 60 % of Cat Ltd on 1 January 2003 for £300,000 when Cat Ltd's retained profits were
£160,000. The share capital of Cat Ltd totals £80,000
Interest payable by Cat Ltd is in respect of a bond issue of which 70% was acquired by Duck Ltd. No
goodwill arose on the acquisition of these bonds.
During the year Cat Ltd sold goods costing £8,000 to Duck Ltd for £28,000. 20% of this inventory is
included in Duck Ltd’s inventory at the year end.
Duck Ltd acquired 25% of Bird Ltd for £400,000 when Bird Ltd’s share capital and reserves were
£150,000 on 1 January 2005. The share capital of Bird Ltd is 40,000 50p shares.
During the year Bird Ltd sold goods costing £12,000 to Duck Ltd for £16,000. 50% of this inventory is
still in Duck Ltd’s inventory at the year end.
Goodwill is capitalised. Impairment of 50% of the value of the goodwill of Cat Ltd was seen in 2010 and
impairment of 20% of the value of the goodwill in Bird Ltd is seen in 2012.
At the year end Duck Ltd charges both Cat Ltd and Bird Ltd a management fee of 5% of turnover. None
of the companies has accounted for this management fee.
Required:
(a) What are subsidiaries and associates? Compare and contrast accounting for subsidiaries with
accounting for associates. (6 marks)
(b) Prepare the consolidated income statement for Duck Ltd for the year ended 31 December 2012.
(19 marks)

UL13/0006 Page 2 of 10 D1
2. Company Z enters into a project, expecting annual cashflows of £10,000 per annum to be generated in
perpetuity with interest rates remaining at 10% in perpetuity. The company receives £10,000 at the
end of year 1 but then revises its expectations in relation to future cashflows to £20,000 per annum in
perpetuity. The rate of interest also changes at the end of year 1 to 20% in perpetuity These revised
estimates are not expected to change in the future. All cashflows arise at the end of the year.
Required:
(a) Discuss Hicks’ concepts of income and their implications for accountants. (13 marks)
(b) Calculate the following:

iii. Hicks’ income number 2 ex post version A and reconcile this income number to that
calculated in i.
iv. Hicks’ income number 2 ex post version B and reconcile this income number to that
calculated in i. (12 marks)
3. Fizz Ltd started trading on 1 January 2012. The income statement and the statement of financial
position for the first year of trading are given as follows:
Income statement £
Sales 4,400,000
Cost of sales
Purchases 3,280,000
(3,200,000)
Gross profit 1,200,000
Sundry expenses (616,000)
Retained profit for year 488,000
Statement of financial position

£
Non-current assets (net book value) 864,000

Inventory 560,000
Cash 24,000
584,000
Net assets 1,448,000
Share capital (£1 shares) 800,000

Share premium 160,000
Share capital and reserves 1,448,000
Question continues on next page

UL13/0006 Page 3 of 10 D1
On 1 January 2012, Fizz Ltd issued 800,000 ordinary shares with a nominal value of £1 for £1.20 and
acquired inventory for £480,000.
Non-current assets were acquired on 1 February 2012.
Sales and purchases accrue evenly throughout the year.
Closing inventory was acquired on 31 October 2012 and the interim dividend was also paid on 31
October 2012.
Movements in the RPI and other specific indices are given as follows:
Indices RPI Inventory Non-current assets
1 January 2012 120 200 100

1 February 2012 125 210 105
30 June 2012/average 130 230 108
31 October 2012 135 245 112
31 December 2012 140 265 116
Required:
(a) Discuss the limitations of historic cost accounting. What are current purchasing power financial
statements and how do they address the limitations of historic cost accounting? (12 marks)
(b) Prepare the income statement for the year ended 31 December 2012 and statement of financial
position as at 31 December 2012 under current purchasing power accounting. (10 marks)
(c) Explain how the loss or gain on net monetary assets arises. (3 marks)

UL13/0006 Page 4 of 10 D1
4. Answer all parts of the question
(a) Window Ltd has seen an increase in its return on capital employed between 2011 and 2012.
Discuss possible reasons for return on capital employed increasing. (5 marks)
(b) Outline the main differences between the merger and acquisition accounting methods and
discuss the reasons why merger accounting has been discontinued. (5 marks)
(c) On 1 January 2007, Honey Ltd receives £6,684,000 on the issue of 8% debentures with a
nominal value of £8,000,000. The debentures are redeemable at the end of 2012 at par.
Required:
Show in tabular form how the debentures should be recorded in the financial statements of
Honey Ltd from 2007 to 2012. (5 marks)
(d) Pass Ltd’s year end is 31 December 2012. On 1 February 2013, there is a fire at Pass Ltd’s
factory, destroying the factory completely. The loss to the company due to the fire is £900,000
which is material for the company.
Required:
What are post balance sheet events? How should Pass Ltd account for the fire? (5 marks)
(e) A non-current asset (building) has been acquired by a company and it wishes to account for this
as an investment property. The non-current asset cost £1,400,000 on 1 January 2012 and its
market value on 31 December 2012 is £1,800,000. The company’s depreciation policy for
similar non-current assets is the reducing balance method using a rate of 10%.
Required:
What are investment properties and how are they accounted for? Show how the non-current asset
would be accounted for in the income statement for the year ended 31 December 2012 and in the
statement of financial position as at 31 December 2012 if it could be classed as an investment
property using both the fair value model and the cost model. (5 marks)

UL13/0006 Page 5 of 10 D1
SECTION B
Answer one question and no more than one further question from this section.
5. Answer either:
For a conceptual framework of accounting of your choice, discuss the main arguments for and against
conceptual frameworks in general and critically assess the particular framework that you have chosen.
(25 marks)
Or:
What are accounting standards and how are they promulgated? Critically assess standard setting.
(25 marks)
6. Answer either:
Compare and contrast the temporal and closing rate methods for translating overseas operations
including the reasoning behind why the methods produce different outcomes. (25 marks)
Or:
What is goodwill? Discuss the reasons why it has been difficult to account for goodwill. Outline three
different methods for accounting for goodwill, showing how goodwill would be accounted for in the
financial statements for each of the methods and critically assess each of the methods. (25 marks)

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UL13/0006 Page 10 of 10 D1
Examiners’ commentaries 2013

AC3091 Financial reporting
Important note
This commentary reflects the examination and assessment arrangements
for this course in the academic year 2012–13. The format and structure
of the examination may change in future years, and any such changes
will be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading

references
Unless otherwise stated, all cross-references will be to the latest version
of the subject guide (2012). You should always attempt to use the most
recent edition of any Essential reading textbook, even if the commentary
and/or online reading list and/or subject guide refers to an earlier
edition. If different editions of Essential reading are listed, please check
the VLE for reading supplements – if none are available, please use the
contents list and index of the new edition to find the relevant section.
General remarks
Learning outcomes
At the end of this course, and having completed the Essential reading and
activities, you should be able to:
• explain and apply a number of theoretical approaches to financial
accounting
• record and analyse data
• prepare financial statements under alternative accounting conventions
• describe a number of regulatory issues relating to financial accounting
• critically evaluate theories and practices of, and other matters relating
to, financial accounting.
What are the Examiners looking for?

The combined questions in Section A will require you to prepare
calculations on a variety of topics as well as showing a critical grasp of
the theories underlying the techniques. To do well, you need to be able
both to explain and evaluate the theories and prepare a range of financial
statements and calculations.
For quantitative parts of questions, Examiners are looking for the accurate
preparation of financial statements that follow generally accepted formats
with clear headings and accurate application of accounting techniques to
specific areas within financial reporting. Workings should always be clearly
provided.
Written components of combined questions require clear and coherent
explanations of theories, techniques and practices. You must critically
evaluate theories and practices.
1
Good answers to essay-based questions in Section B will be structured

coherently and logically. They should include an introduction, a main body
and conclusion, and cover all parts of the question.
Typically, an essay-based question will require an explanation of an issue
within financial reporting and a critical analysis of the issue. Explanations
should be clear and include a discussion of key definitions, with examples
if appropriate. The analysis should show critical awareness of both sides
of an argument or the application of a theory or concept to financial
reporting, with an assessment of its appropriateness to financial reporting.
Planning your time in the examination

All questions in the examination paper carry equal marks and equal time
should be devoted to each question. It is important that you attempt four
questions and all parts of each question you answer. Marks for each section
are shown and should be used to guide your work and time allocation.
Where questions are in parts, you should avoid excessively long answers to
some parts and missing out other parts.
Key steps to improvement

You can improve your performance by improving the presentation of
your work, providing clear workings, answering the required number
of questions and attempting all sections of a question. Often candidates
seem to focus attention on the preparation of financial statements and the
financial calculations without being able to explain, discuss and evaluate
the theories and practices central to financial reporting.
2
Question spotting
Many candidates are disappointed to find that their examination
performance is poorer than they expected. This can be due to a number
of different reasons and the Examiners’ commentaries suggest ways
of addressing common problems and improving your performance.
We want to draw your attention to one particular failing – ‘question
spotting’, that is, confining your examination preparation to a few
question topics which have come up in past papers for the course. This
can have very serious consequences.
We recognise that candidates may not cover all topics in the syllabus in
the same depth, but you need to be aware that Examiners are free to
set questions on any aspect of the syllabus. This means that you need
to study enough of the syllabus to enable you to answer the required
number of examination questions.
The syllabus can be found in the Course information sheet in the
section of the VLE dedicated to this course. You should read the
syllabus very carefully and ensure that you cover sufficient material in
preparation for the examination.
Examiners will vary the topics and questions from year to year and
may well set questions that have not appeared in past papers – every
topic on the syllabus is a legitimate examination target. So although
past papers can be helpful in revision, you cannot assume that topics
or specific questions that have come up in past examinations will occur
again.
If you rely on a question spotting strategy, it is likely
you will find yourself in difficulties when you sit the
examination paper. We strongly advise you not to adopt
this strategy.
3

AC3091 Financial reporting – Zone A
Important note

references
Comments on specific questions

Candidates should answer FOUR of the following SIX questions:
including AT LEAST ONE EACH from Section A and Section B. All
questions will carry equal marks.
Section A
Answer one question and no more than two further questions from this
section.
Question 1
The statements of financial position for Apple Plc, Kiwi Ltd and Orange Ltd as at
31 December 2012 are given below:
Apple Kiwi Orange

£ £ £
Non-current assets 580,000 1,900,000 1,400,000
Investments 1,800,000
Inventory 200,000 600,000 1,120,000
Trade receivables 340,000 500,000 280,000
Cash 140,000 140,000 180,000
Inter co receivable from Kiwi 80,000
Interco receivable from Orange 320,000
Total assets 3,460,000 3,140,000 2,980,000
4
Share capital 2,000,000 600,000 400,000

Retained earnings 1,380,000 1,740,000 2,000,000
Bonds (10%) 20,000 150,000 40,000
Interco payable to Apple 80,000 320,000
Trade payables 60,000 570,000 220,000
Capital, reserves and liabilities 3,460,000 3,140,000 2,980,000
Apple Plc acquired 75% of Kiwi Ltd on 1 January 2006 for £920,000 when Kiwi
Ltd’s share capital and reserves were £640,000. The fair value of Kiwi Ltd’s non-
current assets on 1 January 2006 was £1,980,000 and this revaluation has not
been incorporated into Kiwi Ltd’s accounts.
Apple Plc acquired 20% of the bonds of Kiwi Ltd for £60,000 on 1 January 2006.
Apple Plc acquired 40% of Orange Ltd on 1 January 2007 for £400,000 when
Orange Ltd’s share capital and reserves were £600,000. The fair value of Orange
Ltd’s non-current assets on 1 January 2007 was £1,600,000 and this revaluation
has not been incorporated into Orange Ltd’s accounts.
Apple Plc’s policy is to capitalise goodwill. Impairment of 15% of the goodwill of
Kiwi Ltd is seen in 2012 and impairment of 20% of the goodwill of Orange Ltd is
seen in 2012.
In 2012, Apple Plc acquired inventory from Kiwi Ltd for £40,000 and inventory
from Orange Ltd for £100,000. This inventory has not been sold as at 31
December 2012. All companies earn a gross profit percentage of 10% on these
transactions.
Apple Plc has not accounted for the interest payable on the bonds which was
due on the last day of the period
Required:
a. Define the following:
i. Non-controlling interest
ii. Provision for unrealized profit on inventory
iii. Impairment (6 marks)
b. Prepare the consolidated statement of financial position for Apple Plc as at
31 December 2012. (19 marks)
Reading for this question
Subject guide, Chapter 5.
Alexander, D., A. Britton and A. Jorissen International financial reporting
and analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition
[ISBN 9781408032282], Chapter 24.
Approaching the question
Part a
You need to provide definitions of subsidiaries and associates covering
control, significant influence and partial influence with percentage
shareholdings that are relevant for both relationships. You also need to
provide a comparison of the main similarities and difference in accounting
for subsidiaries and associates. This may include line by line versus single
line consolidation, goodwill, reserves and inter-company transactions.
Part b
Solutions for the consolidated statement of financial position are given
below. You must provide workings for each item. Note workings are in £’000.
5
Non current assets 2,560,000 580 + 1980

Investments 420,000 1,800 – 920 – 60 – 400
Goodwill 348,500
Share in A 1,098,400
Inventories 796,000 200+600-4
Trade receivables 840,000 340+500
Interco receivables from a 320,000
int rec from s 0
Cash 280,000 140+140
6,662,900
P+L reserves 3,278,650
Bonds 140,000 20 + (80%*150)
NCI 600,250
int pay 14,000 .1*20+(.8*.1*150)
Trade payables 630,000 60 +570
6,662,900
Goodwill
S shares = 920,000 – 75% (640,000 + 80,000) = 380,000
S bonds = 60,000 – 20% * 150,000 = 30,000
A shares= 400,000 – 40% (600,000 + 200,000) = 80,000
Goodwill of S = 380 + 30 – .15*(380 + 30) = 410 – 61.5 = 348.5
reserves
H S A
P+L 1,380,000 1,740,000 2,000,000
Purp (4,000) (10,000)
Int pay (2,000) (15,000) (4,000)
Int rec s 3,000
1,381,000 1,721,000 1,986,000
Share cap 2,000,000 600,000 400,000
Revaln 80,000 200,000
3,381,000 2,401,000 2,586,000
P + L = 1,381 + 75% (1,721 – 40) + 40% (1,986 – 200) – 61.5 – 16 =

1,381 + 1,260.75 + 714.4 – 77.5 = 3,278.65.
Share in a = 400 + 40% (1,986 – 200) – 16 = 1,098.4

16 = impairment = 20% of goodwill of A = 20% * 80
Nci (mint) = 2,401*25% = 600.25
6
Question 2
Company X enters into a project, expecting annual cashflows of £8,000 per
annum to be generated in perpetuity with interest rates remaining at 10% in
perpetuity. The company receives £8,000 at the end of year 1 but then revises its
expectations in relation to future cashflows to £16,000 per annum in perpetuity.
The rate of interest also changes at the end of year 1 to 20% in perpetuity. These
revised estimates are not expected to change in the future. All cashflows arise at
the end of the year.
Required:
a. Discuss Hicks’ concepts of income and their implications for accountants.
(13 marks)
b. Calculate the following:
iii. Hicks’ income number 2 ex post version A and reconcile this income
number to that calculated in (i)
iv. Hicks’ income number 2 ex post version B and reconcile this income
number to that calculated in (i) (12 marks)
Alexander et al. (2011), Chapter 4.
Part a
You need to provide an explanation of Hick’s version of economists view
of income and capital with explanations and examples of different income
numbers, both ex ante and ex post. You must provide explanations and
not just list the equations. The implications for accountants should be
addressed clearly and may cover issues such as future assumptions,
expectations of performance, ex post and ex ante perspectives and decision
making perspectives. Other issues may also be discussed.
Part b
The workings for each version required are given below. You must provide
workings for each calculation.
d1 t1 = = 8,000
v1 t1 = 16,000/0.2 80,000
v0 t1 = 8,000/1.1 + 80,000/1.1 = 80,000
d1 t0 = 8,000
v1 t0 = 8,000/0.1 80,000
v0t0 =
income (ex ante) = 8,000/0.1 80,000
i. Income number 1 ex ante = 8,000
ii. Income number 1 ex post = 8,000
iii. Income number 2 ex post version a = 48,000
7
Reconciliation
Budgeted income for the year ex ante 8,000
Change in forecasted cash flows 8,000/0.1 80,000
Change in interest rate 8,000/0.2 – 8,000/0.1 (40,000)

Income for the year ex post version a 48,000
iv. Income number 2 ex post version b = 14,667.
Change in forecasted cash flows 8,000/0.2  1/1.2 = 33,333
Interest on revised capital 0.2 * 33,333 6,667

Question 3
On 1 January 2001, Rice Ltd acquired 80% of the ordinary shares of a subsidiary,
Cream Org. Cream Org trades in the currency “potts”. On 1 January 2001 the
balance on the accumulated profits of Cream Org was 160,000 “potts” and the
share capital of Cream Org was 1,200,000 “potts”.
The summary income statements and statements of financial position of Cream
Org are given as follows:
Statement of financial position as at 31 December 2012

Cream “potts”
Non-current assets 1,800,000
Inventories 75,000
Cash 305,000
Total assets less liabilities 2,180,000

2,180,000
8
Income statement year ended 31 December 2012

Cream “potts” Cream “potts”
Sales 380,000
Purchases 200,000
(175,000)
Gross profit 205,000
Other expenses (5,000)
Profit before tax 180,000
Tax (30,000)
Profit after tax 150,000
Dividends (5,000)
Net profit for the year 145,000
The following information is also available:

1. Non-current assets were acquired on 1 January 2001.
2. Opening inventories were acquired on 12 November 2011 and closing
inventories were acquired on 15 December 2012.
3. Exchange rates
1 January 2001 £1 = 10 potts
12 November 2011 £1 = 5 potts
1 January 2012 £1 = 6 potts
average for 2012 £1 = 4 potts
15 December 2012 £1 = 2 potts

20 December 2012 £1 = 2.5 potts
31 December 2012 £1 = 3 potts
4. The translated profit and loss account reserve brought forward for Cream
Org is £99,500 under the temporal method and £219,167 under the closing
rate method.
5. Dividends are paid on 20 December 2012.
Required:
a. Outline the temporal and closing rate methods and discuss when each of
these methods should be used. (8 marks)
b. Translate the income statement and statement of financial position of
Cream Org using the temporal method. (10 marks)
c. Translate the income statement and statement of financial position of
Cream Org using the closing rate method. (7 marks)
9

Part a
You need to outline the key elements of both the temporal and closing rate
methods including translation currencies, goodwill, where the reserves are
recorded and functional currency. You need to discuss when each method
is used.
Part b
The solutions for the income statement and statement of financial position
are given below. You must provide workings for each calculation.
SFP
Nca 1,800,000 10 180,000
Inventories 75,000 2 37,500
cash 305,000 3 101,667
2,180,000 319,167
Share cap 1,200,000 10 120,000

P+L bfwd 835,000 99,500
P+L for year 145,000 Bal 99,667
2,180,000 319,167
Income statement
Sales 380,000 4 95,000
Cost of sales
Opening inventory 50,000 5 10,000
Purchases 200,000 4 50,000
Closing inventory (75,000) 2 (37,500)
(175,000) (22,500)
Gross profit 205,000 72,500
Other expenses (5,000) 4 (1,250)

depreciation (20,000) 10 (2,000)
fx 39,917
Profit before tax 180,000 109,167
Tax (30,000) 4 (7,500)
Profit after tax 150,000 101,667
Dividends (5,000) 2.5 (2,000)
net profit for year 145,000 99,667
10
Part c
The solutions for the income statement and statement of financial position
are given below. You must provide workings for each calculation.
SFP
Nca 1,800,000 3 600,000
Inventories 75,000 3 25,000
Cash 305,000 3 101,667
2,180,000 726,667
Share cap 1,200,000 10 120,000

P + L bfwd 835,000 219,167
P + L for year 145,000 Bal 35,500
FX 352,000
2,180,000 726,667
Income statement
Sales 380,000 4 95,000
Cost of sales
Opening inventory 50,000 4 12,500
Purchases 200,000 4 50,000
Closing inventory (75,000) 4 (18,750)
(175,000) (43,750)
Gross profit 205,000 51,250
Other expenses (5,000) 4 (1,250)

depreciation (20,000) 4 (5,000)
Profit before tax 180,000 45,000

Tax (30,000) 4 (7,500)
Profit after tax 150,000 37,500
Dividends (5,000) 2.5 (2,000)
net profit for year 145,000 35,500
Question 4
Answer all parts of the question
a. Discuss the problems that may arise when defining the return on assets ratio.
(5 marks)
b. Outline the main differences between the merger and acquisition accounting
methods and discuss the reasons why merger accounting has been
discontinued. (5 marks)
c. On 1 January 2007, Honey Ltd receives £1,671,000 on the issue of 8%
debentures with a nominal value of £2,000,000. The debentures are
redeemable at the end of 2012 at par.
11
Required:
Show in tabular form how the debentures should be recorded in the financial
statements of Honey Ltd from 2007 to 2012? (5 marks)
d. During 2012, a lawsuit was filed against Jam Ltd. The lawsuit relates to faulty
products sold to customers. Jam Ltd intend to fight the lawsuit but they have
received legal advice indicating that there is a 50% chance that they will lose
the case.
Required:
What are contingent liabilities? Outline how the lawsuit would be treated in
the financial statements of Jam Ltd. (5 marks)
e. Make Ltd started a new business selling widgets and entered into the
following transactions:
100 widgets were bought on 1 January 2012 for £50 each.
10 widgets were sold on 1 June 2012 for £75 each.
60 widgets were sold for £90 each on 1 December 2012.
On 1 June 2012, the replacement cost of widgets was £60 each, on 1
December 2012, the replacement cost of widgets was £80 each and on 31
December 2012 the replacement cost of widgets was £85 each. Make Ltd
uses current value accounting based on replacement cost for this business
and has a 31 December year end.
Required:
Prepare the current value (replacement cost) income statement for the year
ending 31 December 2012 using physical capital maintenance and identify
the value of closing inventory as at 31 December 2012. (5 marks)
Reading for this question (a)
Alexander et al. (2011), Chapters 11, 30 and 31.
You must provide a definition of return on assets and discuss possible
reasons for its change relating to both return and assets.
Reading for this question (b)
You must outline the key differences between the two methods which
may include goodwill, reserves, asset values, merger reserve and value of
shares. The reasons for the discontinuation of merger accounting should
be clearly explained.
Reading for this question (c)
The solutions are given as follows:
interest = 160,000
rate of interest implicit in lease = 12%
Debt liability and finance charges:
12
Opening balance Finance charge at 12% payment Closing balance

2007 1,671,000 200,520 160,000 1,711,520
2008 1,711,520 205,382 160,000 1,756,902
2009 1,756,902 210,828 160,000 1,807,730
2010 1,807,730 216,928 160,000 1,864,658
2011 1,864,658 223,759 160,000 1,928,417
2012 1,928,417 231,410 160,000 2,000,000
Reading for this question (d)

You need to define contingent liabilities and their treatment.
You then need to identify the type of contingent liability in the example
and discuss its treatment.
Reading for this question (e)
The solutions for the replacement cost income statement and closing
inventory are given below. You need to give workings for all items.
Workings
Sales 6,150 10*75  60*90
Cos (5,400) 10*60  60*80
G profit 750
Cl inventory 2,550 30*85
Section B
Answer one question and no more than one further question from this
section.
Question 5
Answer either:
Discuss the aims and objectives of conceptual frameworks of accounting.
Outline the desirable characteristics of accounting information and discuss the
advantages and limitations of these qualitative characteristics for financial
reporting. (25 marks)
You need to briefly define a conceptual framework. This may include a
brief summary of each chapter but detailed repetition of all the chapters
is not required. The aims and objectives of conceptual frameworks need
to be discussed. For example you may discuss decision making, common
framework of reference, the need for many detailed standards and benefits
of principles over rules. You may also discuss other issues.
13
You then need to discuss the qualitative characteristics (e.g. relevance,

reliability, comparability, understandability, materiality, conservatism/
prudence) giving examples as appropriate.
The advantages and limitations of the qualitative characteristics for
financial reporting must be clearly outlined. Some advantages include
clear identification of key characteristics, the identification of the most
important characteristics, consistency, and debate on fundamental
concepts. You may also discuss other issues.
Some disadvantages include trade off between different characteristics,
definitional issues and judgement in application. You may also discuss
other issues.
You must present your answer in essay style.
Or
Critically assess the need for regulating financial reporting. Your answer should
cover both traditional and economic arguments. (25 marks)
You need to define accounting regulation and may give brief summary of
the different types of regulation seen and links to functioning of markets.
Arguments for and against regulation from both traditional and economic
arguments (e.g. Baxter) must be discussed. You must provide a critical
assessment of these arguments and discuss which arguments, in your
opinion, are the most persuasive.
Question 6
Answer either:
Compare and contrast current purchasing power financial statements and
current value financial statements. To what extent do these types of financial
statements address the criticisms of historic cost accounting? (25 marks)
You need to outline current purchasing power financial statements and
current value financial statements and the key concepts underlying these
types of financial statements must be clearly explained. Examples to
illustrate the different types of financial statements should be given.
You need to clearly discuss the limitations of historic cost financial
statements and may include issues such as inflation, subjectivity, relevance,
company value, additivity and holding gains. Other issues may also be
discussed.
You need to discuss the advantages and limitations of both types of
financial statements and discuss which criticisms of historic cost are
addressed and which are not.
14
Or
What is goodwill? Discuss the reasons why it has been difficult to account for
goodwill. Outline three different methods for accounting for goodwill, showing
how goodwill would be accounted for in the financial statements for each of the
methods and critically assess each of the methods. (25 marks)
You must provide a definition of goodwill and give examples of different
types of goodwill (e.g. purchased, internally generated). You may also
cover negative goodwill.
You must present a clear discussion of why goodwill is hard to account
for. For example you may wish to discuss the nature of goodwill, the many
differing accounting policies and the impact on financial statements.
You can choose any three methods for accounting for goodwill. For each
method, you must discuss the accounting concepts, reasons for the policy,
impact on financial statements and give a critical assessment of the
method.
15

AC3091 Financial reporting – Zone B
Important note

references
Comments on specific questions

Candidates should answer FOUR of the following SIX questions:
including AT LEAST ONE EACH from Section A and Section B. All
questions will carry equal marks.
Section A
Answer one question and no more than two further questions from this
section.
Question 1
The income statements for Duck Ltd, Cat Ltd and Bird Ltd for the year ended 31
December 2012 are given as follows:
Duck Ltd Cat Ltd Bird Ltd

£ £ £
Sales 6,000,000 3,400,000 2,400,000
Cost of sales (2,360,000) (1,180,000) (920,000)
Gross profit 3,640,000 2,220,000 1,480,000
Dividends receivable 120,000 – –
Administration costs (379,000) (284,000) (140,000)
Distribution costs (160,000) (452,000) (70,000)
Interest receivable 100,000 – –
Interest payable (20,000) (36,000) –
Profit before tax 3,301,000 1,448,000 1,270,000
Tax (200,000) (140,000) (40,000)
16
Profit after tax 3,101,000 1,308,000 1,230,000

Dividends payable (360,000) (100,000) (148,000)
Profit for the year 2,741,000 1,208,000 1,082,000
Retained profit brought forward 3,200,000 1,200,000 800,000
Retained profit carried forward 5,941,000 2,408,000 1,882,000
Duck Ltd acquired 60% of Cat Ltd on 1 January 2003 for £300,000 when Cat Ltd’s
retained profits were £160,000. The share capital of Cat Ltd totals £80,000.
Interest payable by Cat Ltd is in respect of a bond issue of which 70% was
acquired by Duck Ltd. No goodwill arose on the acquisition of these bonds.
During the year Cat Ltd sold goods costing £8,000 to Duck Ltd for £28,000. 20%
of this inventory is included in Duck Ltd’s inventory at the year end.
Duck Ltd acquired 25% of Bird Ltd for £400,000 when Bird Ltd’s share capital
and reserves were £150,000 on 1 January 2005. The share capital of Bird Ltd is
40,000 50p shares.
During the year Bird Ltd sold goods costing £12,000 to Duck Ltd for £16,000.
50% of this inventory is still in Duck Ltd’s inventory at the year end.
Goodwill is capitalised. Impairment of 50% of the value of the goodwill of Cat
Ltd was seen in 2010 and impairment of 20% of the value of the goodwill in Bird
Ltd is seen in 2012.
At the year end Duck Ltd charges both Cat Ltd and Bird Ltd a management fee of
5% of turnover. None of the companies has accounted for this management fee.
Required:
a. What are subsidiaries and associates? Compare and contrast accounting for
subsidiaries with accounting for associates. (6 marks)
b. Prepare the consolidated income statement for Duck Ltd for the year ended
31 December 2012. (19 marks)
Alexander, D., A. Britton and A. Jorissen International financial reporting
and analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition
[ISBN 9781408032282], Chapter 24.
Part a
You need to provide definitions of subsidiaries and associates covering
control, significant influence and partial influence with percentage
shareholdings that are relevant for both relationships. You also need to
provide a comparison of the main similarities and difference in accounting
for subsidiaries and associates. This may include line by line versus single
line consolidation, goodwill, reserves and inter-company transactions.
Part b
Solutions for the consolidated income statement are given below. You must
provide workings for each item. Note workings are in £’000.
£
Sales (6,000  3,400  28) 9,372,000
Cost of sales(2,360 1,180  28 4) (3,516,000)
17
Administration costs (379 284) (663,000)

Distribution costs(160 452) (612,000)
Investment income (120  60  37) 23,000
Management fee from a 120,000
Interest receivable 100  (0.7*36) 74,800
Interest payable 20 0.3*36 (30,800)
Share of Associate’s earnings 0.25* (1,270  2  120) 287,000
Goodwill impairment (72,500)
Profit before tax 4,982,500
Tax 200 140 25%*(40) (350,000)
Profit after tax 4,632,500
NCI / Mint 40% (1,308  170  4) (453,600)
Dividends payable (360,000)
Profit for the year 3,818,900
Retained profit brought forward 3,913,500
Retained profit carried forward 7,732,400
Workings
Goodwill S 300 0.6 * (160  80) = 156
impairment = 78,000 = against P  L bfwd
Goodwill A 400 0.25*150 = 362,500
impairment = 72,500
Retained Profit brought forward = 3,200  60% (1,200 160) + 25%
(800 130) 78 = 3,200  624  167.5 78 = 3,913.5
Question 2
Company Z enters into a project, expecting annual cashflows of £10,000 per
annum to be generated in perpetuity with interest rates remaining at 10%
in perpetuity. The company receives £10,000 at the end of year 1 but then
revises its expectations in relation to future cashflows to £20,000 per annum
in perpetuity. The rate of interest also changes at the end of year 1 to 20% in
perpetuity These revised estimates are not expected to change in the future. All
cashflows arise at the end of the year.
Required:
a. Discuss Hicks’ concepts of income and their implications for accountants.
(13 marks)
b. Calculate the following:
iii. Hicks’ income number 2 ex post version A and reconcile this income
number to that calculated in (i)
iv. Hicks’ income number 2 ex post version B and reconcile this income
number to that calculated in (i) (12 marks)
18

Part a
You need to provide an explanation of Hicks’ version of economists view
of income and capital with explanations and examples of different income
numbers, both ex ante and ex post. You must provide explanations and
not just list the equations. The implications for accountants should be
addressed clearly and may cover issues such as future assumptions,
expectations of performance, ex post and ex ante perspectives and decision
making perspectives. Other issues may also be discussed.
Part b
The workings for each version required are given below. You must provide
workings for each calculation.
d1 t1 = = 10,000
v1 t1 = 20,000/0.2 100,000
v0 t1 = 10,000/1.1  100,000/1.1 = 100,000
d1 t0 = 10,000
v1 t0 = 10,000/0.1 100,000
v0 t0 =
income (ex ante) = 10,000/0.1 100,000
i. Income number 1 ex ante = 10,000

ii. Income number 1 ex post = 10,000
iii. Income number 2 ex post version a = 60,000
Reconciliation
Change in forecasted cash flows 10,000/0.1 100,000
Change in interest rate 10,000/0.2– (50,000)

10,000/0.1
iv. Income number 2 ex post version b = 18,340

Reconciliation
Change in forecasted cash flows 10,000/0.2  1/1.2 = 41,667
Interest on revised capital 0.2 * 41,667 8,333

19
Question 3
Fizz Ltd started trading on 1 January 2012. The income statement and the
statement of financial position for the first year of trading are given as follows:
Income statement £
Sales 4,400,000
Cost of sales
Purchases 3,280,000
(3,200,000)
Sundry expenses (616,000)
Retained profit for year 488,000
Statement of financial position £

Non-current assets (net book value) 864,000
Inventory 560,000
Cash 24,000
584,000
Net assets 1,448,000
Share capital (£1 shares) 800,000

Share premium 160,000
Share capital and reserves 1,448,000
On 1 January 2012, Fizz Ltd issued 800,000 ordinary shares with a nominal
value of £1 for £1.20 and acquired inventory for £480,000.
Non-current assets were acquired on 1 February 2012.
Sales and purchases accrue evenly throughout the year.
Closing inventory was acquired on 31 October 2012 and the interim dividend
was also paid on 31 October 2012.
Movements in the RPI and other specific indices are given as follows:
Indices RPI Inventory Non-current assets

1 January 2012 120 200 100
1 February 2012 125 210 105
30 June 2012/average 130 230 108
31 October 2012 135 245 112
31 December 2012 140 265 116
Required:
a. Discuss the limitations of historic cost accounting. What are current
purchasing power financial statements and how do they address the
limitations of historic cost accounting? (12 marks)
20
b. Prepare the income statement for the year ended 31 December 2012 and
statement of financial position as at 31 December 2012 under current
purchasing power accounting. (10 marks)
c. Explain how the loss or gain on net monetary assets arises. (3 marks)
Part a
You need to clearly discuss the limitations of historic cost financial
statements and may include issues such as inflation, subjectivity, relevance,
company value, additivity and holding gains. Other issues may also be
discussed.
CPP outlined and discussion of how CPP addresses/does not address
limitations of historic cost accounting.
Part b
Solutions for the financial statements are provided below. You must
provide workings for each calculation.
SFP £ Rate CPP

Nca 864,000 140/125 967,680
Invent 560,000 140/135 580,741

cash 24,000 24,000
Net assets 1,448,000 1,572,421
Share cap 800,000 140/120 933,333

Share premium 160,000 140/120 186,667
Ret profit 488,000 Bal 452,421
1,448,000 1,572,421
Income statement
£ Cpp
sales 4,400,000 140/130 4,738,462
Op invnt 480,000 140/120 560,000
Purch 3,280,000 140/130 3,532,308
Cl invnet (560,000) 140/135 (580,741)
(3,200,000) (3,511,567)
G profit 1,200,000 1,226,895
Exp (616,000) 140/130 (663,385)
Depn (96,000) 140/125 (107,520)
Loss on nmwc (3,569)
Net profit 488,000 452,421
21
Part c
You must explain how the loss or gain on net monetary working capital
adjustment arises and refer to the value of current assets and liabilities
in times of increasing inflation. You must discuss this issue and not just
provide a numerical calculation of the net monetary working capital
adjustment.
Question 4
Answer all parts of the question
a. Window Ltd has seen an increase in its return on capital employed between
2011 and 2012. Discuss possible reasons for return on capital employed
increasing. (5 marks)
b. Outline the main differences between the merger and acquisition accounting
methods and discuss the reasons why merger accounting has been
discontinued. (5 marks)
c. On 1 January 2007, Honey Ltd receives £6,684,000 on the issue of 8%
debentures with a nominal value of £8,000,000. The debentures are
redeemable at the end of 2012 at par.
Required:
Show in tabular form how the debentures should be recorded in the financial
statements of Honey Ltd from 2007 to 2012? (5 marks)
d. Pass Ltd’s year end is 31 December 2012. On1 February 2013, there is a fire at
Pass Ltd’s factory, destroying the factory completely. The loss to the company
due to the fire is £900,000 which is material for the company.
Required:
What are post balance sheet events? How should Pass Ltd account for the
fire? (5 marks)
e. A non-current asset (building) has been acquired by a company and it wishes
to account for this as an investment property. The non-current asset cost
£1,400,000 on 1 January 2012 and its market value on 31 December 2012 is
£1,800,000. The company’s depreciation policy for similar non-current assets
is the reducing balance method using a rate of 10%.
Required:
What are investment properties and how are they accounted for? Show how
the non-current asset would be accounted for in the income statement for
the year ended 31 December 2012 and in the statement of financial position
as at 31 December 2012 if it could be classed as an investment property
using both the fair value model and the cost model. (5 marks)
You must answer all parts of this question.
Reading for this question (a)
You must provide a definition of return on capital employed and discuss
possible reasons for its increase relating to both return and capital.
Reading for this question (b)
22

You must outline the key differences between the two methods which
may include goodwill, reserves, asset values, merger reserve and value of
shares. The reasons for the discontinuation of merger accounting should
be clearly explained
The solutions are given as follows;
interest = 640,000
rate of interest implicit in lease = 12%
Debt liability and finance charges:
Opening balance Finance charge at 12% payment Closing balance

2007 6,684,000 810,000 640,000 6,846,080
2008 6,845,000 821,528 640,000 7,027,608
2009 7,027,608 843,312 640,000 7,230,920
2010 7,230,920 867,712 640,000 7,458,632
2011 7,458,632 895,036 640,000 7,713,668
2012 7,713,668 925,640 640,000 8,000,000

You must define post balance sheet events, both adjusting and non
adjusting events
You must decide on the type of event in the question and discuss its
treatment. In this case, the events indicate a non adjusting post balance
sheet event which must be disclosed.
Reading for this question (e)
You must define investment properties and show the calculations for the
non–current asset under both the fair value and the cost model. These are
shown below.
fair value model
In SFP non current asset £1,800,000
revaluation = £400,000 recorded in income statement
cost model
In SFP, non current asset at net book value = £1,260,000, depreciation =
£140,000 income statement
23
Section B
Answer one question and no more than one further question from this
section.
Question 5
Answer either:
For a conceptual framework of accounting of your choice, discuss the main
arguments for and against conceptual frameworks in general and critically
assess the particular framework that you have chosen. (25 marks)
You must provide a brief definition of a conceptual framework and its key
components. A brief summary only is required not repetition of all the
chapters.
For any conceptual framework chosen, the advantages and limitations
of conceptual frameworks in general must be discussed. In addition, the
advantages and limitations of the chosen conceptual framework must also
be discussed.
Advantages may include discussion of clarification of conceptual
underpinnings, consistency, understanding of accounting and standard
setting, limiting bounds of judgment and government intervention. Other
issues may also be included.
Disadvantages may include discussion of generality, cost, choices, focus on
investors and trade off between different qualitative characteristics. Other
issues may also be included.
Or
What are accounting standards and how are they promulgated ? Critically assess
standard setting. (25 marks)
Alexander et al. (2011), Chapters 1 and 3.
You must define accounting standards and discuss the standard setting
process. You may outline the process from 1970’s and changes or just focus
on the current system. The standard setting process should be assessed by
discussing advantage and disadvantages.
Advantages may include reduction in the number of options, consistency
comparability, increase debate, improvement in accountants work, defence
for accountants, and credibility of profession and improvement of the
discipline. Other issues may be discussed.
Limitations /disadvantages may include cost, overly bureaucratic,
reduction of judgment to the detriment of financial accounting, political
pressures and standard, overload. Other issues may also be discussed.
24
Question 6
Answer either:
Compare and contrast the temporal and closing rate methods for translating
overseas operations including the reasoning behind why the methods produce
different outcomes. (25 marks)
You must outline both the temporal and closing rate method, give
numerical examples. You must compare and contrast both methods and
include a definition of functional currency. You may discuss goodwill,
translation rates, where the foreign exchange gain or loss is recorded and
when each method is used. Other comparison may also be provided.
A clear explanation of the basis of the methods should be provided
and how the different methods impact financial statements should be
discussed.
Or
What is goodwill? Discuss the reasons why it has been difficult to account for
goodwill. Outline three different methods for accounting for goodwill, showing
how goodwill would be accounted for in the financial statements for each of the
methods and critically assess each of the methods. (25 marks)
You must provide a definition of goodwill and give examples of different
types of goodwill (e.g. purchased, internally generated). You may also
cover negative goodwill.
You must present a clear discussion of why goodwill is hard to account
for. For example you may wish to discuss the nature of goodwill, the many
differing accounting policies and the impact on financial statements.
You can choose any three methods for accounting for goodwill. For each
method, you must discuss the accounting concepts, reasons for the policy,
impact on financial statements and give a critical assessment of the
method.
25

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Apple Kiwi Orange

Share capital 2,000,000 600,000 400,000

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i. Hicks’ income number 1 ex ante

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1 Non-current assets were acquired on 1 January 2001.

5 Dividends are paid on 20 December 2012.

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100 widgets were bought on 1 January 2012 for £50 each.

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(b) Calculate the following:

i. Hicks’ income number 1 ex ante

Statement of financial position

Non-current assets (net book value) 864,000

Share capital (£1 shares) 800,000

Share capital and reserves 1,448,000

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Non-current assets were acquired on 1 February 2012.

Sales and purchases accrue evenly throughout the year.

Indices RPI Inventory Non-current assets

1 January 2012 120 200 100

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Examiners’ commentaries 2013

Information about the subject guide and the Essential reading

What are the Examiners looking for?

Good answers to essay-based questions in Section B will be structured

Planning your time in the examination

Key steps to improvement

Examiners’ commentaries 2013

Information about the subject guide and the Essential reading

Comments on specific questions

Apple Kiwi Orange

Share capital 2,000,000 600,000 400,000

Non current assets 2,560,000 580 + 1980

Goodwill of S = 380 + 30 – .15*(380 + 30) = 410 – 61.5 = 348.5

P + L = 1,381 + 75% (1,721 – 40) + 40% (1,986 – 200) – 61.5 – 16 =

Share in a = 400 + 40% (1,986 – 200) – 16 = 1,098.4

Nci (mint) = 2,401*25% = 600.25

Budgeted income for the year ex ante 8,000

Change in forecasted cash flows 8,000/0.1 80,000

Change in interest rate 8,000/0.2 – 8,000/0.1 (40,000)

iv. Income number 2 ex post version b = 14,667.

Budgeted income for the year ex ante 8,000

Change in forecasted cash flows 8,000/0.2  1/1.2 = 33,333

Interest on revised capital 0.2 * 33,333 6,667

Statement of financial position as at 31 December 2012