Sei sulla pagina 1di 20
CORPORATE REPORTING PROFESSIONAL 1 EXAMINATION - APRIL 2011 NOTES: You are required to answer Questions

CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - APRIL 2011

NOTES:

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

Note: Students have optional use of the Extended Trial Balance, which if used, must be included in the answer booklet.

PRO-FORMA STATEMENT OF COMPREHENSIVE INCOME BY NATURE, STATEMENT OF COMPREHENSIVE INCOME BY FUNCTION AND STATEMENT OF FINANCIAL POSITION ARE PROVIDED.

TIME ALLOWED:

3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:

During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted.

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION – APRIL 2011

Time allowed 3.5 hours, plus 10 minutes to read the paper. You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

You are required to answer Questions 1, 2 and 3.

1. Muscle PLC, an Irish listed company, acquired 24 million ordinary shares in Oyster Ltd on 1 January 2010. Details of the purchase consideration are as follows:

(i)

A share exchange of two shares in Muscle PLC for three shares in Oyster Ltd. The market price of Muscle PLCʼs shares at 1 January 2010 was 2 per share.

(ii)

A cash payment at the date of acquisition of 10 million.

(iii)

A cash payment of 12 million payable on 1 January 2012.

Based on Muscle PLCʼs cost of capital at 1 January 2010, 1 received in 2012 can be taken to have a present value of 0.80 (taken as 12% cost of capital per annum). Muscle PLC has only recorded the cash payment made at date of acquisition.

The Draft Statements of Financial Position of the two companies at 31 December 2010 are shown below:

Muscle PLC

Oyster Ltd

Non-current assets Property, plant and equipment Intangibles (note 3) Investment in Oyster Ltd

m

m

m

m

242

54

45

10

10

 

297

64

Current assets

Inventory

19

24

Trade receivables

24

20

Bank

8

51

12

56

Total assets

348

120

Equity and Liabilities Equity Ordinary shares of 1 each Share premium Retained earnings

 

200

30

25

10

25

5

 

250

45

Non-current liabilities 12% loan note

60

40

Current liabilities Trade payables Taxation Total Equity and Liabilities

18

21

20

38

14

35

348

120

Page 1

The following information is relevant:

1. The profit after tax of Muscle PLC and Oyster Ltd for the year to 31 December 2010 were 10 million and 4 million respectively.

2. Muscle PLC have a policy of revaluing property to fair value. At the date of acquisition, Oyster Ltdʼs property had a fair value of 6 million higher than the book value. Additional depreciation of 500,000 needs to be recognised in the post-acquisition period. The fair value has not been reflected in the Oyster Ltdʼs Statement of Financial Position.

3. Included in Oyster Ltdʼs intangibles is a development project with a capitalised cost of 3 million. Muscle PLCʼs Directors are of the opinion that this development project, at 31 December 2010, does not meet the criteria set out in IAS 38 Intangible Assets for recognition as an asset.

4. Oyster Ltd sold goods to Muscle PLC during the year totalling 4m. One quarter of these goods are still in the inventory of Muscle PLC at 31 December 2010. Goods are sold at cost plus one third.

5. A cheque for 2m from Muscle PLC sent to Oyster Ltd before the end of the financial year was not received until January 2011.

6. Muscle PLCʼs policy is to value the non-controlling interest using fair value at the date of acquisition. The market price of Oyster Ltdʼs shares at the date of acquisition was 1.

7. 12% Present Value Factor:

Year 1 - 0.8929 Year 2 - 0.7972

REQUIREMENT:

(a)

Prepare the Consolidated Statement of Financial Position of the Muscle Group as at 31 December 2010. (19 marks) Presentation (1 mark)

(b)

Explain the treatment of a ʻgain on a bargain purchaseʼ under IFRS 3 (revised) Business Combinations. (4 marks)

(c)

Lobster PLC operates in the same market as Muscle PLC and holds the following investments:

(i)

6,000 of the 20,000 1 ordinary shares in Shrimp Ltd. These were recently acquired, as the Directors of Lobster PLC believe that Shrimp Ltd has excellent growth prospects for the future. However, the market in which Shrimp Ltd operates is very small and specialised and, therefore, Lobster PLC has decided not to take part in the running of Shrimp Ltd. Lobster PLC intends to hold its shares for a couple of years but not to influence the board in any way.

(ii)

8,500 of the 20,000 1 ordinary shares in Prawn Ltd, a manufacturing company with nine Directors on the Board, five of whom have been appointed by Lobster PLC. 4,000 of the remaining shares are held by Clam Ltd. Lobster PLC is a major supplier to Clam Ltd and the Board of Directors of Clam Ltd have agreed to vote with Lobster PLC on all matters concerning Prawn Ltd.

Discuss the nature of each of the above holdings and state the method of accounting that should be used in the group accounts of Lobster PLC under IAS 27 Consolidated and Separate Financial Statements and IAS 28 Investments in Associates.

Page 2

(6 marks)

[Total: 30 MARKS]

2.

After closing off the ledger accounts for the year ended 31 December 2010, the following balances were extracted from the nominal ledger of Peter Ltd.

 

Dr

Cr

000

000

Land at valuation Buildings at cost Equipment at cost Accumulated depreciation at 1 January 2010 on:

Buildings Equipment Inventory 1 January 2010 Investment property –valuation at 1 January 2010 Trade receivables Trade payables Other receivables Income tax Deferred taxation 8% loan stock (redeemable 2018) Revenue Purchases Wages and salaries Administrative expenses Selling and distribution expenses Operating expenses Allowance for doubtful debts Grants Bank Warranties - 1 January 2010 Interest paid Investment income Preference share capital -7% irredeemable 1 shares Ordinary share capital Revaluation reserve Retained earnings 1 January 2010

4,200

6,300

1,400

 

1,900

430

2,100

10,000

830

 

612

64

10

 

12

890

14,600

4,193

90

42

32

140

 

70

5

622

 

20

18

 

60

300

10,000

690

452

 

30,041

30,041

The following notes are relevant:

1. Buildings are to be depreciated over the next 50 years. At 1 January 2010 they were revalued to 5 million. This has not been reflected to date in the balances above. Depreciation is to be charged at 30% to administration expenses and 70% to cost of sales.

2. Peter Ltd adopts a fair value method for its investment property. Its value at 31 December 2010 has been assessed by a quantity surveyor at 11m.

3. Equipment is depreciated at 15% on the reducing balance basis. Depreciation is to be charged to cost of sales. Included in the above figures is an item of equipment that was disposed of on 1 July 2010 for 20,000 and which had a cost of 75,000 on 1 January 2008. A government grant was received on its purchase and was being recognised in the Statement of Comprehensive Income in equal amounts over four years. In accordance with the terms of the grant, Peter Ltd is to repay 3,000 of the grant on the disposal of the equipment. No record of the disposal or repayment of part of the grant has been made to date. A full yearʼs depreciation is to be charged in the year of acquisition and none in the year of disposal.

4. The estimated income tax liability for the year ended 31 December 2010 is 82,000.

5. The loan stock was issued on 1 July 2010. Interest is payable half-yearly on 30 September and 31 March. The interest payable on 30 September 2010 was paid on the due date. Accrued interest at 31 December 2010 has not yet been accounted for.

Page 3

6.

Peter Ltd provides a two year warranty on all its products. The balance on the warranties account represents the provision for future warranty costs as estimated at 1 January 2010. The balance as at 31 December 2010 should be increased to 28,000.

7. Inventories held at 31 December 2010 are valued at a cost of 790,000. This includes 50,000 of Product A which has been discontinued due to lack of demand. The expected realisable value of Product A is 19,000.

8. Included within operating expenses is 25,000 that the company spent on exhibiting its product range at a major trade fair in London in June 2010. No orders have been received as a result of the fair, although the Sales Director has argued that attendance at this particular fair will generate sales over the next three years.

9. Peter Ltdʼs revenue includes 1.2m of revenue for credit sales on a “sale or return” basis at 31 December 2010. Customers, who had not paid for the goods at the year end, have the right to return goods costing 400,000. Mark up on cost is 25%. In the past, customers have sometimes returned goods under this type of arrangement.

10. Peter Ltd is to make an allowance for doubtful debts amounting to 8% of year-end receivables. On 19 January 2011 the company received notification that one of its customers, owing 85,000 at 31 December 2010, had gone into receivership and would only realise twenty cents per euro on outstanding balances.

11. Provision has not yet been made for the preference dividend.

REQUIREMENT:

(a)

Prepare Peter Ltdʼs Statement of Comprehensive Income for the year ended 31 December 2010 and a Statement of Financial Position as at that date. Your answer should be presented in accordance with IAS1 (revised) Presentation of Financial Statements. (Notes to the financial statements are not required but you should show any workings).

 

(21 marks) (1 mark presentation)

(b)

Explain, and justify, your accounting treatment in relation to items 6, 8 and 9 above.

(8 marks)

Page 4

[Total: 30 MARKS]

3.

The following multiple choice question contains eight sections, each of which is followed by a choice of answers. Only one of each set of answers is strictly correct.

REQUIREMENT:

Give your answer to each section in the answer sheet provided.

[Total: 20 MARKS]

1. On 1 January 2009 Star Ltd entered into a finance lease for a machine with a fair value of 140,000. Lease payments of 40,000 per annum are payable in advance for five years, starting on 1 January 2009. Star Ltd allocates finance charges on a sum-of-the-digits basis.

According to IAS 17 Leases what is Star Ltdʼs non-current liability in respect of this finance lease as at 31 December 2010?

(a)

96,000

(b)

74,000

(c)

102,000

(d)

62,000

2. Jonathon Ltdʼs Statement of Comprehensive Income for the year ended 31 December 2010 showed a profit before tax of 840,000. In early 2011, before the financial statements were authorised for issue, the following events arose:

(i)

An insurance claim by Jonathon Ltd for 40,000 was agreed on 14 January 2011 for compensation for a flood in May 2010 which damaged part of the inventory.

(ii)

The Directors declare a dividend of 15 cents per ordinary share on 9 February 2011. Jonathon Ltd has 2m ordinary 1 shares in issue.

(iii)

Inventory valued at 85,000 in the Statement of Financial Position was sold for 60,000.

(iv)

A customer, with an outstanding balance of 12,000 was declared bankrupt.

In accordance with IAS 10 Events After the Reporting Period, what is Jonathon Ltdʼs profit for 2010 after making appropriate adjustments for the above events?

(a)

880,000

(b)

843,000

(c)

855,000

(d)

870,000

3. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following statements are correct?

(i)

A legal claim for compensation filed against the business should be recognised when legal advice states that there is a high probability of a successful claim.

(ii)

Provisions should be made for legal obligations only.

(iii)

A contingent asset should be disclosed as a note, if it is probable that it will arise.

(iv)

A provision for restructuring assets should not include retraining costs for existing staff.

(a)

All statements are correct.

(b)

(i), (iii) and (iv) are correct.

(c)

(i), (ii) and (iii) are correct.

(d)

(i), (ii) and (iv) are correct.

Page 5

4.

Sean Ltd prepares financial statements to 31 December. At 31 December 2009, it had 200,000 8% preference shares and 800,000 1 ordinary shares in issue.

In 2009 Sean Ltdʼs profit after tax was 300,000, and in 2010 it was 400,000. On 1 July 2010, Sean Ltd issued 200,000 1 ordinary shares at full market price.

Calculate the EPS for 2010 and the corresponding figure for 2009 as per IAS 33 Earnings Per Share.

 

2010

2009

(a)

42.67 cents

31.5 cents

(b)

40.00 cents

31.5 cents

(c)

42.67 cents

35.5 cents

(d)

38.40 cents

35.5 cents

5. Marian Ltd prepares financial statements to 28 February each year. There was an overprovision of 125,000 tax for the year ended 28 February 2009. During the year to 28 February 2010, 750,000 was paid in respect of tax for 2010. The tax due for the year ended 28 February 2010 is 940,000.

What is the current tax expense that should be shown in the Statement of Comprehensive Income and the current tax liability to be included in the Statement of Financial Position for the year to 28 February 2010?

Tax Charge

Liability

(a)

940,000

65,000

(b)

815,000

65,000

(c)

1,065,000

190,000

(d)

815,000

190,000

6. Parkside Ltd sells three different products and you have been provided with the following information at the companyʼs year end.

Product

XY

Z

€€

Cost price of inventory

10,000

6,000

14,000

Estimated selling price of inventory

9,800

8,200

14,600

Further selling and distribution costs to be incurred to sell

1,000

600

400

In accordance with IAS 2 Inventories, at what amount should inventories be stated in the Statement of Financial Position at the end of the year?

(a)

28,800

(b)

30,600

(c)

30,000

(d)

29,600

7. Happy PLC acquired 25% of the shares of Glum Ltd several years ago and this investment has been accounted for as an associate in Happy PLCʼs consolidated financial statements. Both Happy PLC and Glum Ltd have an accounting year end of 31 December. Happy PLC has no other investments in any other associated companies. Glum Ltdʼs Statement of Comprehensive Income for the year ended 31 December 2010 showed a net profit for the year of 150,000. Happy PLCʼs Consolidated Statement of Financial Position at 31 December 2010 recorded investments in associates of 390,000 (2009 360,000).

In accordance with IAS 7 Statement of Cash Flows, what amount will be recorded as dividends received from associates in the Statement of Consolidated Cash Flows for year ended 31 December 2010?

(a)

7,500

(b)

37,500

(c)

120,000

(d)

35,500

Page 6

8.

Harpenden Ltd has a current ratio of 0.3. The Managing Director is of the opinion that this is too low and has instructed the Financial Controller to borrow more short term funds which will increase current liabilities by 50%. The loan funds are to be lodged to the companyʼs bank account.

What will happen to the current ratio of Harpenden Ltd.?

(a)

It will be affected only in the following financial period.

(b)

It will increase.

(c)

It will remain unchanged.

(d)

It will decrease.

Page 7

Answer either Question 4 or Question 5

4. IAS 16 Property, Plant and Equipment and IAS 40 Investment Property deals with the accounting treatment of tangible non-current assets.

You have recently been appointed as the Financial Accountant of Norfolk PLC, and are currently involved in the preparation of the financial statements for the year ended 31 October 2010. You have been provided with the following information in relation to transactions relating to property, plant and equipment which took place during the year:

(1)

New factory premises were completed and ready for occupation on 1 April 2010. Production was not transferred to the factory until 30 September 2010 due to an industrial dispute arising from a decision by the company to make some compulsory redundancies. Capital expenditure in relation to the new factory premises is recorded in the Statement of Financial Position for the year ended 31 October 2009 at 1.4 million (including land of

800,000). The following costs, which also relate to the new factory premises, have been incurred during the year

to 31 October 2010:

 

ʼ000

 

Additional construction costs

104

Professional fees (legal and architects)

20

General and administrative overheads

55

Relocation of staff to new factory

15

(2)

On 1 April 2010, new machinery for a highly automated production line became available for use within the factory. Costs of the new machinery amounted to 620,000 and, in addition, the company also incurred the following:

• Allocated supervisory costs of 9,500.

25,000 was incurred in testing the new process. 10,000 of this was incurred in relation to putting on an ʻopen dayʼ for customers to view the new machinery.

• Installation costs of 50,000 were incurred. These were 10% higher than originally budgeted due to an unofficial strike action.

• Fees of 3,000 were paid to Casement Haulage for the cost of transporting the machinery to the factory.

(3)

Norfolk PLCʼs headquarters building was acquired on 1 November 2003 for 2.5 million and depreciated at 4% per annum. On 1 November 2007, it was revalued to 3 million. Following this revaluation, the company did not make any reserve transfers for additional depreciation. As a consequence of the recent financial downturn, professional valuers have advised that as at 31 October 2010, the building was worth 2 million.

(4)

Norfolk PLC also has a leasehold property held under a finance lease and leased out under an operating lease. The carrying value of the property at 1 November 2009 was 2 million and during the year Norfolk PLC spent

300,000 in extending the rented floor capacity of the property. An independent valuer valued the property at

3.2 million on 31 October 2010.

(5)

Norfolk PLC uses the straight line method of depreciation, and depreciates buildings at 4% per annum and machinery at 20%. The company values investment properties using the fair value model.

REQUIREMENT:

(a)

Distinguish between the ʻcost modelʼ and the ʻrevaluation modelʼ for the measurement of property, plant and equipment subsequent to its initial recognition.

 

(3 marks)

(b)

Prepare extracts from the Statement of Financial Position in relation to the above transactions as at 31 October

2010

and draft the note showing movements on property, plant and equipment for the year ending 31 October

2010

(working to the nearest 000).

 

(14 marks)

(c)

Comment briefly on your accounting treatment in relation to item (4) above.

(3 marks)

Page 8

[Total: 20 MARKS]

OR

5. An important business issue arises when an entity closes or discontinues a part of its overall business activity. IFRS 5 Non Current Assets Held for Sale and Discontinued Operations provides guidance on the accounting treatment in such circumstances.

Archway PLC, a company that prepares its financial statements to 31 December each year, manufactures light fittings which it sells to the European market. The company has three manufacturing plants based in Limerick, Dublin and Barcelona. Due to increased competition and a change in consumer buying patterns within the Spanish market, the performance of the Barcelona operation has deteriorated over the last twelve months. At a Board meeting on 14 December 2010, the Directors of Archway PLC decided, reluctantly, to cease manufacturing at the Barcelona site and sell the factory. Immediately after the meeting the staff, suppliers and key customers were notified and an announcement was made to the press. You are employed as the Financial Accountant for the company and the Managing Director has let it be known that that the Barcelona operationsʼ results should be shown as a discontinued operation in the financial statements for the year ending 31 December 2010. Due to the declining business performance of the Barcelona site on 1 October 2010, Archway PLC increased production capacity at its Limerick site. The following are the extracts from Archway PLCʼs Statement of Comprehensive Income:

 

31 December 2010

 

31 December 2009 Total ʼ000

 

Dublin

Barcelona

Limerick

Total

ʼ000

ʼ000

ʼ000

ʼ000

Revenue Cost of sales Gross profit/(loss) Operating expenses Profit/(loss) before tax

30,000

19,000

4,500

53,500

61,000

(23,500)

(23,180)

(3,375)

(50,055)

(51,800)

6,500

(4,180)

1,125

3,445

9,200

(1,800)

(1,100)

(225)

(3,125)

(2,400)

4,700

(5,280)

900

320

6,800

The year ending 2009 figures for the Barcelona operation were: revenue 21.5 million, cost of sales 19 million and operating expenses of 1.5 million.

REQUIREMENT:

(a)

Explain what is meant by a ʻnon-current asset for saleʼ and a ʻdiscontinued operationʼ.

(5 marks)

(b)

Explain whether the Managing Directorʼs wish to show the results of the Barcelona operation as a discontinued operation is justifiable.

 

(4 marks)

(c)

Assuming the Barcelona operation is to be treated as a discontinued operation, re-draft the extracts from the Statement of Comprehensive Income for the year ended 31 December 2010 (including comparatives) in accordance with the requirements of IFRS 5, and draft a suitable note relating to discontinued operations which would appear in the notes to the financial statements.

 

(8 marks)

(d)

On 1 October 2010 the Directors of Archway PLC decided to sell a machine, used within the Dublin operation and which was now surplus to requirements. The machine had a cost of 60,000 on 1 January 2008 and was expected to sell for 25,000. A buyer was found on 20 December 2010 at that price, although the sale was not completed until after the year end. On 1 October 2010, the machine met the ʻheld for saleʼ criteria of IFRS 5. The company charges depreciation on plant and equipment at 20% on cost.

Explain how the above transaction should be treated in the financial statements for the year ending 31 December

2010.

END OF PAPER

Page 9

(3 marks)

[Total: 20 MARKS]

SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION – APRIL 2011

Solution 1

(a)

Consolidated statement of financial position of Muscle Group as at 31 December 2010

 

m

m

Assets Non- current assets Tangible assets (242+54+6-.5) Development costs (45+10-3) Goodwill (3)

301.50

52.00

10.60

 

364.10

Current Assets Inventory (19+24 - 0.25) Accounts Receivables (24+20-2)

42.75

42

Bank(8+12+2)

22

106.75

 

470.85

Equity and Liabilities Ordinary share capital (200+16) Share premium (25+16) Retained earnings (w5)

 

216.00

41.00

24.048

 

281.048

Non-controlling interest (w4)

6.05

287.098

Non-current liabilities Loan stock Deferred consideration (9.60+1.1152) (w6)

100.00

10.752

110.752

Current Liabilities Accounts payables (18+21) Taxation (20+14)

39

34

73

W1

Group structure

Muscle

1 January 2010

80%

Oyster

Page 10

470.85

W2

Net Assets at fair value

 

At acquisition

At reporting period end m

m

Share capital Share premium Retained earnings

30

30

10

10

1

5

Fair value adjustment Land and buildings Depreciation Research and development Unrealised profit on inventory

41

45

6

6

(.5)

-

(3)

-

(0.25)

 

47

47.25

W3

Goodwill on acquisition

 

m

 

Cost of investment Cash at acquisition Shares (24/3 * 2)* 2 Cash 12 * .80

10

32

9.6

 

51.60

 

Non controlling interest 6m* 1

6

 

57.60

 

Fair value of subsidiary net assets Goodwill

47

10.60

W4

Non-controlling interest at reporting period end Fair value of non- controlling Interest NCI of post acquisition Profits (47.25 - 47) 20%

6.0

0.05

 

6.05

W5

Retained earnings Muscles Plc Subsidiary {(47.25 – 47 }* 80%

25

0.2

 

25.20

 

Less Unwinding of Deferred consideration

(1.152)

 

24.048

W6

Unwinding of Deferred consideration

Dr

Consolidated retained earnings 9.6*12%

1.152

Cr

Deferred consideration

1.152

Marks are awarded for altenative methods

(b) IFRS 3 (revised) any excess of the consideration transferred plus the value of any non-controlling interest over the fair value of any net assets acquired should be described as goodwill and recognised as an asset.

A gain on a bargain purchase arises if the fair value of the net assets acquired exceeds the total of the consideration transferred and the value of any non-controlling interest, i.e. there is ʻnegative goodwillʼ.

Page 11

IFRS 3 (revised) is based on the assumption that this usually arises because of errors in the measurement of the acquireeʼs net assets and or/consideration transferred. So the first action is always to reassess the identification and measurement of the net assets and the measurement of the consideration transferred, checking in particular whether the fair values of the net assets acquired correctly reflect future costs arising in respect of the acquiree.

If the gain still remains once these reassessments have been made, then it is attributable to a bargain purchase. The gain must be recognised as part of equity via recognition within profit/loss for the period. (4 marks)

(c) Lobster PLC holds 30% of the ordinary shares in Shrimp Ltd. Under IAS 28 significant influence is deemed to exist when a holding reaches 20%; however, this can be rebutted in the light of further evidence. Lobster takes no part in the decision making of Shrimp Ltd. The holding company is purely held for its investment potential and the substance of the holding is better reflected as a trade investment. On consolidation, Lobster PLCʼs investment would be shown at cost as a non-current asset investment.

Lobster holds 42.5% of the equity shares in Prawn Ltd which carry significant influence, suggesting that Prawn Ltd is an associate. However, the following indicates that Prawn Ltd is in fact a subsidiary of Lobster PLC:

• Lobster controls the board of Prawn Ltd, appointing five of the board members, and can therefore control the operating and financial decision making within the company.

• Furthermore, Clam Ltd has agreed to vote its 20% alongside Lobster PLC, thus giving Lobster effective voting control.

In the absence of any evidence to the contrary, Prawn Ltd should be accounted for as a subsidiary and consolidated using the acquisition method of accounting.

(6 marks)

Page 12

[Total: 30 Marks]

SOLUTION 2

Peter Ltd Statement of Comprehensive Income for the year ended 31 December 2010

 

ʼ000

Revenue (14,600-400) Cost of sales Gross profit Operating expenses Distribution costs Administrative expenses Profit from operations Finance costs Investment income Grant Gain on investment Loss on disposal of equipment Profit before taxation Income tax expense Profit for the year Other comprehensive income Revaluation gain Total comprehensive income

 

14,200

(5,519.40)

8,680.60

(115)

(84)

(72)

8,409.60

(35.60)

60

2

1,000

(34)

9,402

(92)

9,310

600

9,910

Peter Ltd Statement of Financial Position for the year ended 31 December 2010

 

ʼ000

ʼ000

ASSETS Non-current assets Property, plant and equipment (4,200+4,900+778.60) Investment property

9,878.60

11,000.00

 

20,878.60

Current assets Inventories Trade and other receivables (333+64) Bank (622-3+20)

1,079

397

639

2,115.00

 

22,993.60

Total assets EQUITY AND LIABILITIES Equity Ordinary share capital Preference share capital (irredeemable) Revaluation surplus (690+600) Retained earnings

10,000

300

1,290

9,741.00

21,331.00

Non-current liabilities 8% loan stock Deferred tax Current liabilities Trade and other payables (612+17.6) Preference dividend payable Warranty Taxation

890

12

902.00

629.6

21

28

82

760.60

Total equity and liabilities

22,993.60

Page 13

 

Workings Allocation of costs Cost of sales

Admin

Selling &

 

Distribution

 

ʼ000

ʼ000

ʼ000

Admin/Selling Opening inventory Purchases Warranty Wages and salaries Trade fair Bad and doubtful debts (68 -41) Depreciation:

42

32

2,100

4,193

8

90

 

25

27

Buildings W

70

30

Equipment

137.40

Closing inventory

(1,079)

5,519.40

72

84

W1

Cost

Acc. Dep

NBV

Balance

6,300

1,900

Revaluation

600

6,900

1,900

5,000

Depreciation charge

100

6,900

2,000

4,900

Depreciation on buildings 5,000,000/50=100,000 pa

 

W2

Cost

Acc. Dep

NBV

Equipment

1,400,000

430,000

Disposal

(75,000)

(20,812.50)

1,325,000

409,187.50

916

916 @ 15%

=

137,400

Depreciation on disposal

75,000 – 11,250 = 63,700 – 9,562.50 = 54,187.50 Accumulated depreciation = 75,000 – 54,187.50 = 20,812.50 Loss on disposal:

NBV

Proceeds = 20,000

=

54,187.50

34,187.50

W3

Inventory Plus sale or return* Less write off

790,000

320,000

31,000

 

1,079,000

(*would accept 400,000)

W4

Bad and doubtful debts Accounts receivable Less sale or return

830,000

400,000

 

430,000

Less bad debt

68,000

(80 cent per euro)

362,000

Provision @ 8%

28,960

70,000-28,960 =

41,040

Page 14

W3

SCI taxation

Income tax

82,000

Under-provision

10,000

92,000

W4

Interest accrual

8% of 890,000

71,200

6 months

35,600

Paid

18,000

Therefore accrue 17,600 at 31 December 2010.

W6

Retained earnings

Brought forward Preference dividend Profit for the year At 31 December 2010

ʼ000

452

(21)

9,310

9,741

(21 Marks) Presentation 1 mark

(b) Candidates should describe and justify their accounting treatment.

The warranty provision meets the criteria for recognition as set out in IAS 37:

• There is a present obligation

• It is probable that a payment will have to be made; and

• It is possible to estimate the obligation reliably.

The increase in the warranty of 8,000 should be recognised as an expense in the SCI under cost of sales.

There are no specific accounting rules in relation to the trade fair. However, it is unlikely that the company could justify doing anything other than writing off the cost because the there is no reason to believe that the costs will be fully recovered. It would be a different matter if the company had obtained firm orders from the fair. The 25,000 should be treated as selling and distribution expenses as opposed to cost of sales.

The unsold element of inventory held on a ʻsale or returnʼ basis should be excluded from sales and accounts receivable and recognised as closing inventory. This is in accordance with the prudence and realisation conventions.

Page 15

(8 marks)

[Total: 30 Marks]

SOLUTION 3

1. (d)

Year ended

B/F

Payment

Capital

Interest

C/F

31.12.2009

140,000

(40,000)

100,000

24,000

124,000

31.12. 2010

124,000

(40,000)

84,000

18,000

102,000

31.12.2011

102,000

(40,000)

62,000

12,000

74,000

31.12.2012

74,000

(40,000)

34,000

6,000

40,000

31.12.2013

40,000

(40,000)

---

---

---

SOTD:

4+3+2+1= 10

40,000* 5= 200,000-140,000= 60,000 interest.

2009 : 4/10 * 60,000=24,000

2010:

3/10*60,000= 18,000

 

2.

(b) 840,000 – 25,000 + 40,000 – 12,000 = 843,000

 

3.

(b) incorrect as provisions for constructive obligations are also required.

 

4.

(c)

2010

2009

Profit

400,000

300,000

Preference dividend

(16,000)

(16,000)

 

384,000

284,000

 

Shares

Opening balance

800,000

800,000

Issued

200,000* 6/12

100,000

---

 

900,000

800,000

 

EPS

384,000

284,000

 

900,000

800,000

42.67 cents

35.5 cents

5.

(d)

Tax charge:

 

940,000 - 125,000 = 815,000

Liability:

940,000 – 750,000=190,000

 

6.

(a)

7.

(a)

 

Investments in Associates

 
 

ʼ000

ʼ000

Bal b/d

 

360

Dividends from associates (bal)

7.5

IS (150 x 25%)

37.5

Bal c/d

390

 

397.5

397.5

8.

(b) Increase – if current liabilities are 100 and current assets 30 then an increase of 50% in current liabilities will increase the current ratio to 0.53 (80/150).

Page 16

SOLUTION 4

(a)

Under cost model, an item of PPE is carried at cost (i.e. initial cost plus subsequent expenditure) less

accumulated depreciation.

Under the revaluation model (fair value model), an item of PPE is carried at revalued amount, being fair value less accumulated depreciation.

The choice of model is an Accounting Policy choice, which must be applied across an entire class of PPE. (3 marks)

(b)

Financial Statement Extracts Statement of financial position as at 31 October 2010

ʼ000

Non current assets Property, plant and equipment (see note) Investment property

4,110

3,200

Equity Revaluation surplus ( 900 - 640)

260

Notes to the financial statements

Property plant and equipment

Assets in the course of construction/factory premises

 
 

Head

Plant and

office

equipment

Total

ʼ000

ʼ000

ʼ000

ʼ000

Cost/valuation At 1 November 2009 Additions (W2 & W3) Revaluation loss (W1) At 31 October 2010

3,000

-

1,400

4,400

-

683

124

807

(1,000)

-

-

(1,000)

2,000

683

1,524

4,207

Depreciation At 1 November 2009 Charge for year (W4) Revaluation loss At 31 October 2010

Carrying amount At 31 October 2010 At 1 November 2009

240

-

-

240

120

80

17

217

(360)

-

-

(360)

-

80

17

97

2,000

603

1,507

4.110

2,760

-

1,400

4,160

Workings

W1

Head office revaluation

 

ʼ000

Original cost Depreciation (4 years at 4%) Carrying value 1 November 2007 Revaluation gain Revalued amount 1 November 2007 Depreciation (2 years at 4%) Balance at 1 November 2009 Depreciation (4%) Revaluation loss

 

2,500

(400)

2,100

900

3,000

(240)

2,760

(120)

(640)

 

2,000

Page 17

W2

ʼ000

Construction costs Professional fees

104

20

 

124

W3

Additions to plant and equipment Invoice costs Labour- installation ( 50,000 x 100/110) Testing costs Transport costs

620

45

15

3

 

683

W4

Depreciation Head office (W1) New factory ( 1,524 - 800) x 4% x 7/12) Plant and equipment ( 683 x 20% x 7/12)

120

17

80

 

(14 marks)

(c) This property is an investment property under IAS 40 and should be included within the SFP at its fair value of 3.2 million. The gain of 900,000 should be recognised within the SCI for the year ending 31 October

2010.

Page 18

(3 marks)

[Total: 20 Marks]

SOLUTION 5

(a) IFRS 5 Non Current Assets Held for Sale and Discontinued Operations defines non current assets held for sale as those assets (or a group of assets) whose carrying amounts will be recovered principally through a sale transaction rather than through continuing use. For this to be the case the assets must be available for immediate sale and sale must be highly probable (e.g. completed within next 12 months).

A discontinued operation is a component of an entity that has either been disposed of, or is classified as ʻheld for re-saleʼ and

(i)

Represents a separate major line of business or geographical area of operations

(ii)

Is part of a single co-ordinated plan to dispose of such

(iii)

or is a subsidiary acquired exclusively for sale.

IFRS 5 says that a ʻcomponent of an entityʼ must have operations and cash flows that can be clearly distinguished from the rest of the entity and will in all probability be cash generating unit whilst held for use. This definition also means that a discontinued operation will also fall to be treated as a ʻdisposal groupʼ as defined in IFRS 5.

(5 marks)

(b) Timing of the board meeting and consequent actions and notifications is within the accounting period ended 31 December 2010. Notification of suppliers and the press is indicative that a sale will be highly probable and the directors are committed to a plan to sell assets and are actively locating a buyer. From the financial information provided in the question it appears that Barcelonaʼs operations and cash flows can be clearly distinguished from its other operations. The assets of the Barcelona operation appear to meet the definition of non current assets held for sale. The major issue is a ʻseparate geographical area of operationsʼ, and it is clear that the Barcelona operation meets this criteria. So the closure does meet the definition of a discontinued business.

(4 marks)

(c) Archway plc statement of comprehensive income year ended

31 December 2010

31 December 2009

 

ʼ000

ʼ000

Continuing operations Revenue Cost of sales Gross profit Operating expenses Profit/(loss) from continuing operations Discontinued operations Profit/(loss) from discontinued operations Profit for the period

Analysis of discontinued operations Revenue Cost of sales Gross profit (loss) Operating expenses Profit/(loss) from discontinued operations

34,500

39,500

(26,875)

(32,800)

7,625

6,700

(2,025)

(900)

5,600

5,800

(5,280)

1,000

320

6,800

19,000

21,500

(23,180)

(19,000)

(4,180)

2,500

(1,100)

(1,500)

(5,280)

1,000

(9 marks)

(d) Work out depreciation for year and include at carrying value under non-current assets held for sale in the statement of financial position. No gain/loss to be included in current year.

Page 19

(2 marks)

[Total: 20 Marks]