2-5int 2001 Dec Q

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Paper 2.5(INT)
Financial
Reporting
(International Stream)
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PART 2
THURSDAY 6 DECEMBER 2001
QUESTION PAPER
Time allowed 3 hours
This paper is divided into two sections
Section A This ONE question is compulsory and MUST be

answered
Section B THREE questions ONLY to be answered
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Section A This ONE question is compulsory and MUST be attempted
1 Hanford acquired six million of Stopples ordinary shares on 1 April 2001 for an agreed consideration of $25 million.
The consideration was settled by a share exchange of five new shares in Hanford for every three shares acquired in
Stopple, and a cash payment of $5 million. The cash transaction has been recorded, but the share exchange has not.
The draft balance sheets of the two companies at 30 September 2001 are:
Hanford Stopple
$000 $000 $000 $000
Assets
Non-current assets
Property, plant and equipment 78,540 27,180
Investment in Stopple 5,000 nil
83,540 27,180
Current assets
Inventory 7,450 4,310
Accounts receivable 12,960 4,330
Cash and bank nil 20,410 520 9,160
Total assets 103,950 36,340
Equity and Liabilities

Capital and Reserves
Ordinary shares of $1 each 20,000 8,000
Reserves
Share Premium 10,000 2,000
Accumulated profits:
At 1 October 2000 51,260 6,000
For the year to 30 September 2001 12,000 73,260 8,000 16,000
93,260 24,000
Non-current liabilities
8% Loan notes 2004 nil 6,000
Current liabilities
Accounts payable and accruals 5,920 4,160
Bank overdraft 1,700 nil
Provision for taxation 1,870 1,380
Proposed final dividend 1,200 10,690 800 6,340
Total equity and liabilities 103,950 36,340
The following information is relevant:

(i) The fair value of Stopples land at the date of acquisition was $4 million in excess of its carrying value. Stopples
financial statements contain a note of a contingent asset for an insurance claim of $800,000 relating to some
inventory that was damaged by a flood on 5 March 2001. The insurance company is disputing the claim. Hanford
has taken legal advice on the claim and believes that it is highly likely that the insurance company will settle it in
full in the near future.
The fair value of Stopples other net assets approximated to their carrying values. Hanford uses the benchmark
treatment in IAS 22 Business Combinations to recognise the fair values of acquired assets and liabilities.
(ii) At the date of acquisition Hanford sold an item of plant that had cost $2 million to Stopple for $2·4 million. Stopple
has charged depreciation of $240,000 on this plant since it was acquired.
(iii) Hanfords current account debit balance of $820,000 with Stopple does not agree with the corresponding balance
in Stopples books. Investigations revealed that on 26 September 2001 Hanford billed Stopple $200,000 for its
share of central administration costs. Stopple has not yet recorded this invoice. Inter company current accounts are
included in accounts receivable or payable as appropriate.
2
(iv) Stopple paid an interim dividend of $400,000 on 1 March 2001. The profit and total dividends (interim plus final)
of Stopple are deemed to accrue evenly throughout the year. Stopples retained profit of $8 million for the year to 30
September 2001 as shown in its balance sheet is after the deduction of both its interim and final dividends.
Hanfords policy is to credit to income only those dividends received or receivable from post acquisition profits.
Hanford has not yet received or accounted for any dividends from Stopple. All proposed dividends were declared by
the directors before the relevant year ends.
(v) Consolidated goodwill is written off on a straight-line basis over a five-year life, with time apportionment in the year
of acquisition.
Required:
(a) Prepare the consolidated balance sheet of Hanford at 30 September 2001. (20 marks)
(b) Suggest reasons why a parent company may not wish to consolidate a subsidiary company, and describe the
circumstances in which non-consolidation of subsidiaries is permitted by International Accounting Standards.
(5 marks)
(25 marks)
3 [P.T.O.
Section B THREE questions ONLY to be attempted
2 The following trial balance relates to Telenorth at 30 September 2001:

$000 $000
Sales revenue 283,460
Inventory 1 October 2000 12,400
Purchases 147,200
Distribution expenses 22,300
Administration expenses 34,440
Loan note interest paid 300
Interim dividends ordinary 2,000
preference 480
Investment income 1,500
25 year leasehold building cost 56,250
Plant and equipment cost 55,000
Computer system cost 35,000
Investments at valuation 34,500
Depreciation 1 October 2000 (note (ii)) leasehold 18,000
plant and equipment 12,800
computer system 9,600

Trade accounts receivable (note (iii)) 35,700
Bank overdraft 1,680
Trade accounts payable 17,770
Deferred tax (note (iv)) 5,200
Ordinary shares of $1 each 20,000
Suspense account (note (v)) 26,000
6% Loan notes (issued 1 October 2000) 10,000
8% Preference shares 12,000
Revaluation reserve (note (iv)) 3,400
Accumulated profits 1 October 2000 14,160
435,570 435,570
The following notes are relevant:
(i) An inventory count was not conducted by Telenorth until 4 October 2001 due to operational reasons. The value of
the inventory on the premises at this date was $16 million at cost. Between the year-end and the inventory count
the following transactions have been identified:
normal sales at a mark up on cost of 40% $1,400,000
sales on a sale or return basis at a mark up on cost of 30% $650,000
goods received at cost $820,000
All sales and purchases had been correctly recorded in the period in which they occurred.
(ii) Telenorth has the following depreciation policy:

leasehold straight-line;
plant and equipment five years straight line with residual values estimated at $5,000,000;
computer system 40% per annum reducing balance.
Depreciation of the leasehold and plant is treated as cost of sales; depreciation of the computer system is an
administration cost.
(iii) The outstanding account receivable of a major customer amounting to $12 million was factored to Kwikfinance on
1 September 2001. The terms of the factoring were:
Kwikfinance paid 80% of the outstanding account to Telenorth immediately;
the balance will be paid (less the charges below) when the account is collected in full. Any amount of the
account outstanding after four months will be transferred back to Telenorth at its full book value.
4
Kwikfinance will charge 1·0% per month of the net amount owing from Telenorth at the beginning of each
month. Kwikfinance had not collected any of the amounts receivable by the year-end.
Telenorth debited the cash from Kwikfinance to its bank account and removed the account receivable from its sales
ledger. It has prudently charged the difference as an administration cost.
(iv) A provision for income tax of $23·4 million for the year to 30 September 2001 is required. The deferred tax liability
is to be increased by $2·2 million, of which $1 million is to be charged direct to the revaluation reserve.
(v) The suspense account contains the proceeds of two share issues:
the exercise of all the outstanding directors share options of four million shares on 1 October 2000 at $2 each;
a fully subscribed rights issue on 1 July 2001 of 1 for 4 held at a price of $3 each. The stock market price of
Telenorths shares immediately before the rights issue was $4.
(vi) On 20 September 2001, the company declared a final ordinary dividend of 15 cents per share.
Required:
Prepare:
(a) (i) The income statement of Telenorth for the year to 30 September 2001; and (8 marks)
(ii) A balance sheet as at 30 September 2001 in accordance with International Accounting Standards as far
as the information permits. (12 marks)
Notes to the financial statements are not required.
(b) Calculate the Earnings per Share in accordance with IAS 33 for the year to 30 September 2001 (ignore
comparatives). (5 marks)
(25 marks)
5 [P.T.O.
3 The broad principles of accounting for tangible non-current assets involve distinguishing between capital and revenue
expenditure, measuring the cost of assets, determining how they should be depreciated and dealing with the problems
of subsequent measurement and subsequent expenditure. IAS 16 Property, Plant and Equipment has the intention of
improving consistency in these areas.
Required:
(a) Explain:
(i) how the initial cost of tangible non-current assets should be measured and; (4 marks)
(ii) the circumstances in which subsequent expenditure on those assets should be capitalised. (3 marks)
(b) Explain IAS 16s requirements regarding the revaluation of non-current assets and the accounting treatment of
surpluses and deficits on revaluation and gains and losses on disposal. (8 marks)
(c) (i) Broadoak has recently purchased an item of plant from Plantco, the details of this are:
$ $
Basic list price of plant 240,000
trade discount applicable to Broadoak 12·5% on list price
Ancillary costs:
shipping and handling costs 2,750

estimated pre-production testing 12,500
maintenance contract for three years 24,000
site preparation costs
electrical cable installation 14,000
concrete reinforcement 4,500
own labour costs 7,500 26,000
Broadoak paid for the plant (excluding the ancillary costs) within four weeks of order, thereby obtaining an
early settlement discount of 3%.
Broadoak had incorrectly specified the power loading of the original electrical cable to be installed by the
contractor. The cost of correcting this error of $6,000 is included in the above figure of $14,000.
The plant is expected to last for 10 years. At the end of this period there will be compulsory costs of $15,000
to dismantle the plant and $3,000 to restore the site to its original use condition.
Required:
Calculate the amount at which the initial cost of the plant should be measured. (Ignore discounting)
(5 marks)
(ii) Broadoak acquired a 12-year lease on a property on 1 October 1999 at a cost of $240,000. The company
policy is to revalue its properties to their market values at the end of each year. Accumulated amortisation is
eliminated and the property is restated to the revalued amount. Annual amortisation is calculated on the
carrying values at the beginning of the year. The market values of the property on 30 September 2000 and
2001 were $231,000 and $175,000 respectively. The existing balance on the revaluation reserve at
1 October 1999 was $50,000. This related to some non-depreciable land whose value had not changed
significantly since 1 October 1999.
Required:
Prepare extracts of the financial statements of Broadoak (including the movement on the revaluation
reserve) for the years to 30 September 2000 and 2001 in respect of the leasehold property. (5 marks)
(25 marks)
6
This is a blank page.

Question 4 begins on page 8
7 [P.T.O.
4 The summarised financial statements of Charmer for the year to 30 September 2001, together with a comparative
balance sheet, are:
Income statement $000
Sales revenue 7,482
Cost of sales (4,284)
Gross profit 3,198
Operating expenses (1,479)
Interest payable (260)
Investment income 120
Profit before tax 1,579
Income tax (520)
Profit for the period 1,059
Balance Sheet as at: 30 September 2001: 30 September 2000:

$000 $000 $000 $000 $000 $000
Assets Cost/valuation Depreciation NBV Cost/valuation Depreciation NBV
Non-current assets
Property, plant and equipment 3,568 1,224 2,344 3,020 1,112 1,908
Investment 690 nil

3,034 1,908
Current assets
Inventory 1,046 785
Trade accounts receivable 935 824
Short term treasury bills 120 50
Bank nil 2,101 122 1,781
Total assets 5,135 3,689
Total Equity and Liabilities
Capital and reserves:
Ordinary shares of $1 each 1,400 1,000
Reserves:
Share premium 460 60
Revaluation 90 40
Accumulated profits
b/f 162 147
Net profit for period 1,059 65
Dividends (500) (50)
c/f 721 1,271 162 262
2,671 1,262
Non-current liabilities
Deferred tax 439 400
Government grants 275 200
10% Convertible Loan Stock nil 714 400 1,000
Current liabilities
Trade accounts payable 644 760
Accrued interest 40 25
Provision for negligence claim nil 120
Proposed dividends 350 30
Provision for income tax 480 367
Government grants 100 125
Overdraft 136 1,750 nil 1,427
Total equity and liabilities 5,135 3,689
8
The following information is relevant:

(i) Non-current assets
Property, plant and equipment is analysed as follows:
30 September 2001: 30 September 2000:
Cost/valuation Depreciation NBV Cost/valuation Depreciation NBV
$000 $000 $000 $000 $000 $000
Land and Buildings 2,000 760 1,240 1,800 680 1,120
Plant 1,568 464 1,104 1,220 432 788
3,568 1,224 2,344 3,020 1,112 1,908
On 1 October 2000 Charmer recorded an increase in the value of its land of $150,000.
During the year an item of plant that had cost $500,000 and had accumulated depreciation of $244,000 was sold
at a loss (included in cost of sales) of $86,000 on its carrying value.
(ii) Government grant
A credit of $125,000 for the current years amortisation of government grants has been included in cost of sales.
(iii) Share capital and loan stocks
The increase in the share capital during the year was due to the following events:
(i) On 1 January 2001 there was a bonus issue (out of the revaluation reserve) of one bonus share for every 10
shares held;
(ii) On 1 April 2001 the 10% convertible loan stock holders exercised their right to convert to ordinary shares.
The terms of conversion were 25 ordinary shares of $1 each for each $100 of 10% convertible loan stock;
and
(iii) The remaining increase in the ordinary shares was due to a stock market placement of shares for cash on
12 August 2001.
(iv) Dividends
The directors of Charmer always declare/propose a final dividend (if the company has made a profit) in the week
preceding the companys year-end. It is paid after the annual general meeting of the shareholders.
(v) Provision for negligence claim:

In June 2001 Charmer made an out of court settlement of a negligence claim brought about by a former employee.
The dispute had been in progress for two years and Charmer had made provisions for the potential liability in each
of the two previous years. The unprovided amount of the claim at the time of settlement was $30,000 and this was
charged to operating expenses.
Required:
Prepare a Cash Flow Statement for Charmer for the year to 30 September 2001 in accordance with IAS 7 Cash
Flow Statements.
(25 marks)
9 [P.T.O.
5 You have been asked to assist the financial accountant of Myriad in preparing the companys financial statements for the
year to 30 September 2001. The financial accountant has asked for your advice in the following matters:
(a) Myriad has recently adopted the use of International Accounting Standards and a review of its existing policy of
prudently writing off of all development expenditure is no longer considered appropriate under IAS 38 Intangible
Assets. The new policy, to be first applied for the financial statements to 30 September 2001, is to recognise
development costs as an intangible asset where they comply with the requirements of IAS 38. Amortisation of all
qualifying development expenditure is on a straight-line basis over a four-year period (assuming a nil residual
value). Recognised development expenditure qualifies for amortisation when the project starts commercial
production of the related product. The amount of recognised development expenditure, and the amount qualifying
for amortisation each year is as follows:
$000 $000
amount recognised amount qualifying
as an asset for amortisation
in the year to 30 September 1999 420 300
1,230 1,060
No development costs were incurred by Myriad prior to 1999.
Changes in accounting policies should be accounted for under the benchmark treatment in IAS 8 Net Profit or Loss
for the Period, Fundamental Errors and Changes in Accounting Policies.
Required:
(i) Explain the circumstances when a company should change its accounting policies; and (4 marks)
(ii) Prepare extracts of Myriads financial statements for the year to 30 September 2001 including the
comparatives figure to reflect the change in accounting policy. (6 marks)
Note: ignore taxation.
(b) Myriad owns several properties which are revalued each year. Three of its properties are rented out under annual
contracts. Details of these properties and their valuations are:
Property type/life cost value 30 September 2000 value 30 September 2001
$000 $000 $000
A freehold 50 years 150 240 200
B freehold 50 years 120 180 145
C freehold 15 years 120 140 150
All three properties were acquired on 1 October 1999.The valuations of the properties are based on their age at the
date of the valuation. Myriads policy is to carry all non-investment properties at cost. Annual amortisation, where
appropriate, is based on the carrying value of assets at the beginning of the relevant period.
Property A is let to a subsidiary of Myriad on normal commercial terms. The other properties are let on normal
commercial terms to companies not related to Myriad.
Myriad adopts the fair value model of accounting for investment properties in IAS 40 Investment Properties, and
the benchmark treatment for owner-occupied properties in IAS 16 Property, Plant and Equipment.
Required:
(i) Describe the possible accounting treatments for investment properties under IAS 40 and explain why they
may require a different accounting treatment to owner-occupied properties and (4 marks)
(ii) Prepare extracts of the consolidated financial statements of Myriad for the year to 30 September 2001 in
respect of the above properties assuming the company adopts the fair value method in IAS 40.
(5 marks)
10
(c) Myriad manufactures and sells high quality printing paper. The auditor has drawn the companys attention to the
sale of some packs of paper on 20 October 2001 at a price of $45 each. These items were included in closing
inventory on 30 September 2001 at their manufactured cost of $48 each. Further investigations revealed that
during the inventory count on 30 September 2001 a quantity of packs of A3 size paper had been damaged by a
water leak. The following week the company removed the damage by cutting the paper down to A4 size (A4 size
is smaller than A3). The paper was then repackaged and put back into inventory. The cost of cutting and
repackaging was $4 per pack. The normal selling price of the paper is $75 per pack for the A3 and $50 per pack
for the A4, however on 12 October 2001 the company reduced the selling prices of all its paper by 10% in
response to similar price cuts by its competitors.
Securiprint, one of the customers that bought some of the damaged paper had used it to print some share
certificates for a customer. Securiprint informed Myriad that these share certificates had been returned by the
customer because they contained marks that were not part of the design. Securiprint believes the marks were part
of a manufacturing flaw on the part of Myriad and is seeking appropriate compensation.
Required:
Discuss the impact the above information may have on the draft financial statements of Myriad for the year to
30 September 2001. (6 marks)
(25 marks)
End of Question Paper
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THURSDAY 6 DECEMBER 2001

Time allowed 3 hours

This paper is divided into two sections

Section A This ONE question is compulsory and MUST be

Section B THREE questions ONLY to be answered

ACCA Learning Web：en.52acca.com ACCA Forum：forum.52acca.com

Section A  This ONE question is compulsory and MUST be attempted

Equity and Liabilities

The following information is relevant:

Section B  THREE questions ONLY to be attempted

2 The following trial balance relates to Telenorth at 30 September 2001:

 computer system 9,600

The following notes are relevant:

(ii) Telenorth has the following depreciation policy:

shipping and handling costs 2,750

This is a blank page.

Balance Sheet as at: 30 September 2001: 30 September 2000:

Investment 690 nil

The following information is relevant:

(v) Provision for negligence claim:

No development costs were incurred by Myriad prior to 1999.

End of Question Paper

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Section A This ONE question is compulsory and MUST be attempted

Section B THREE questions ONLY to be attempted

computer system 9,600