the institute of chartered accountants of bangladesh ...€¦ · 5 harry ltd 25 38 7 131 6 frodo...

The Institute of Chartered Accountants of Bangladesh

FINANCIAL ACCOUNTINGProfessional Stage Application Level

Question Bank

www.icab.org.bd

Administrator

Text Box

CA in Bangladesh www.facebook.com/CAinBD

ii © The Institute of Chartered Accountants in England and Wales, March 2009

Financial accountingThe Institute of Chartered Accountants of Bangladesh Professional Stage

These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales

ISBN: 978-1-84152-838-0First edition 2009

All rights reserved. No part of this publication may be reproduced ortransmitted in any form or by any means or stored in any retrieval system, ortransmitted in, any form or by any means, electronic, mechanical, photocopying,recording or otherwise without prior permission of the publisher.

© The Institute of Chartered Accountants in England and Wales, March 2009 iii

Contents

Page

Title Marks

Timeallocation

Mins Question Answer

Preparation of full single entityfinancial statements

1 Howells Ltd 24 36 3 119

2 Berwick Ltd 20 28 4 122

3 Angus Ltd 21 30 5 124

4 Goblins Ltd 26 39 6 127

5 Harry Ltd 25 38 7 131

6 Frodo Ltd 26 39 8 134

7 Plodder Ltd 22 31 9 137

8 Copeland Ltd 24 36 11 140

9 Pippin Ltd 18 27 13 143

10 Merry Ltd 25 38 14 145

Preparation of extracts fromfinancial statements

11 Montrose Ltd 18 27 17 149

12 Gandalf Ltd 23 35 18 152

13 Cagreg Ltd 22 33 19 155

14 Roberts Ltd 13 19 20 157

15 Dumfries Ltd 20 30 21 159

16 Crieff Ltd 23 32 21 162

17 ITC Solutions Ltd 16 24 22 166

18 Withington Ltd 18 27 23 167

19 Islay Ltd 11 17 24 169

20 Greenstones Ltd 17 26 25 172

21 Okehampton Ltd 17 26 26 174

22 Banchory Ltd 18 27 26 176

23 Banff Ltd 23 35 28 178

24 Skinner Ltd 19 29 29 181

25 Rosetta Ltd 17 25 30 184

26 Arran Ltd 21 32 31 186

27 Elie Ltd 16 26 33 189

28 Wester Ross Ltd 25 38 34 191

29 Shadowlands Ltd 15 23 36 194

30 Scribo Ltd 7 11 37 195

iv © The Institute of Chartered Accountants in England and Wales, March 2009

Page

Title Marks

Timeallocation


Preparation of full consolidatedfinancial statements

31 Hemmingway Ltd 18 27 39 197

32 Highland Ltd 24 36 40 200

33 Ullapool Ltd 14 21 41 203

34 Law Ltd 17 26 42 206

35 Heeley Ltd 16 24 43 208

36 Harris Ltd 19 29 45 211

37 Lowland Ltd 22 33 46 214

38 Vanguard Ltd 18 27 47 217

39 Heaton Ltd 15 23 48 220

40 Jerome Ltd 17 26 49 223

41 Hardmead Ltd 23 35 51 226

42 Tain Ltd 18 27 52 229

43 Glencoe Ltd 17 25 53 232

44 Herdings Ltd 23 35 54 235

45 Camden Ltd 30 45 56 238

46 Gallant Ltd 17 26 57 242

47 Slick Ltd 20 30 58 244

48 Senorita Ltd 18 27 60 247

Single entity financial statements

Objective test questions

49 Accounting and reporting concepts 61 249

50 BAS 1 Presentation of Financial Statements 66 250

51 BAS 2 Inventories 68 250

52 BAS 7 Cash Flow Statements (single companyonly) 71 251

53 BAS 8 Accounting Policies, Changes inAccounting Estimates and Errors 76 254

54 BAS 10 Events after the Balance Sheet Date 78 254

55 BAS 16 Property, Plant and Equipment 80 254

56 BAS 17 Leases 84 256

57 BAS 18 Revenue 86 257

58 BAS 32 and BAS 39 Financial Instruments 88 258

59 BAS 36 Impairment of Assets 90 258

60 BAS 37 Provisions, Contingent Liabilities andContingent Assets 91 259

61 BAS 38 Intangible Assets 94 259

62 BFRS 5 Non-current Assets Held for Sale andDiscontinued Operations 97 260

© The Institute of Chartered Accountants in England and Wales, March 2009 v

Page

Title Marks

Timeallocation


Consolidated financial statements

Objective test questions

63 Consolidated balance sheets 101 263

64 Consolidated statements of financialperformance 107 265

65 Consolidated cash flow statements 110 266

66 Group accounts accounting standards 114 268

vi © The Institute of Chartered Accountants in England and Wales, March 2009

© The Institute of Chartered Accountants in England and Wales, March 2009

1

Question Bank

Your exam will consist of

Part one 5-15 short-form questions 20 marks(worth 1-4 marks each)

Part two 4 questions 80 marks(each worth around 20 marks)

Time available 2.5 hours

Administrator

Text Box

CA in Bangladesh www.facebook.com/CAinBD

2 © The Institute of Chartered Accountants in England and Wales, March 2009

QUESTION BANK

© The Institute of Chartered Accountants in England and Wales, March 2009 3

Preparation of full single entity financial statements

1 Howells Ltd

The trial balance of Howells Ltd as at 31 December 20X8 is as follows.CU CU

Share capitalCU1 ordinary shares 100,000CU1 5% preference shares (irredeemable) 50,000

Retained earnings 56,015General reserve as at 31 December 20X8 20,000Intangible assets 20,500Land and buildings

Cost 450,000Accumulated depreciation 81,000

Plant and machineryCost 82,000Accumulated depreciation 18,000

Inventories at 1 January 20X8 58,045Sundry net current assets 261,349Revenue 1,600,047Purchases 907,989Debenture interest paid 6,260Royalties received 14,005Administrative salaries 126,232Salesmen's salaries and commission 24,291Factory wages 54,117Operating lease rentals 6,002Gain on sale of property 25,040Administrative expenses 18,822Selling and distribution expenses 9,600Dividend received from Morgans Ltd 11,00010% Debentures (issued and redeemable at par) 62,60020X7 final dividend paid 12,500

2,037,707 2,037,707

You are provided with the following information in respect of 20X8.

(1) The gain on sale of the property is not expected to recur.

(2) Depreciation is to be provided on the basis of the following policies.

Buildings Straight line over 50 yearsPlant and machinery Straight line over 10 years

The land originally cost CU115,000. In previous years the policy in respect of plant and machinery hadbeen to depreciate on a reducing balance basis. All the plant was acquired on 1 January 20X5 with theexception of a machine acquired for CU22,000 at the start of 20X8.

(3) The intangible asset is a brand arising on the purchase of a sole trader which is held in the books atoriginal cost. Following an impairment review, fair value less costs to sell has been estimated atCU10,000 and value in use at CU12,000.

(4) Howells Ltd wishes to propose an ordinary dividend of CU25,000 which will be paid on 25 March20X9. The 20X8 preference dividends have been declared but not yet paid.

(5) Tax of CU22,500 is to be charged for the current year.

(6) During the year the directors transferred CU10,000 to the general reserve.



(7) Inventories held at 31 December 20X8 are valued at cost of CU68,000. Within this amount there are1,000 units of finished goods valued at CU20 each. These units are now expected to sell at adiscounted price of CU18 each and incur CU1 selling costs per unit.

Requirements

(a) Prepare the income statement, statement of changes in equity and notes thereto for the year ended31 December 20X8 in a form suitable for publication to the extent the information is available. Youshould classify expenses by function. (20 marks)

(b) Explain the concept of 'fair presentation'. (4 marks)

(24 marks)

2 Berwick Ltd

Berwick Ltd has produced the following trial balance as at 31 January 20X5.

CU CUProfit before tax 370,000Interim dividends paid 22,000Final dividends paid 66,000Development expenditure capitalised 70,000Land and buildings

Revalued 1,500,000Plant and machinery

Cost 650,000Accumulated depreciation 160,000

Motor vehiclesCost 250,000Accumulated depreciation 90,000

Inventories and work in progress 370,000Trade receivables and trade payables 420,000 380,000Prepayments and accruals 97,000 100,000Value added tax 50,000Bank balance in hand and overdrawn 249,000 110,000Bank loan 200,000Share capital – ordinary shares of CU1 each 850,000Retained earnings 770,000Revaluation reserve 564,000Share premium account 50,000

3,694,000 3,694,000

Additional information

(1) The company’s land and buildings were revalued on 1 February 20X4 at CU1.5 million (land elementCU300,000). The remaining useful life of the buildings at that date was estimated at 40 years. Theproperty originally cost CU1 million on 1 February 20X0 (land element CU200,000) and was beingdepreciated over 50 years.

The company intends to transfer to retained earnings that element of the revaluation reserve realisedby depreciation but has not yet done so for the year ended 31 January 20X5.

(2) No adjustments have been made for the depreciation charges for the year ended 31 January 20X5.Depreciation rates are as follows.

Land and buildings – see (1) abovePlant and machinery – 10% straight lineMotor vehicles – 20% reducing balance

(3) The bank loan is repayable over five years in equal annual instalments starting on 30 June 20X5.

(4) Tax on profits for the year has been estimated at CU135,000 and has yet to be provided for in thetrial balance.

QUESTION BANK


(5) The development expenditure was incurred during the year and relates to a single product.Development will be completed in 20X6. The company believes it has a reasonable expectation offuture benefits but has been unable to demonstrate this.

(6) One of Berwick Ltd's customers was declared insolvent on 15 February 20X5. The customer owedBerwick Ltd CU20,000 at 31 January 20X5.

Requirement

Prepare the balance sheet of Berwick Ltd as at 31 January 20X5 and the statement of changes in equity forthe year ended 31 January 20X5 in a form suitable for publication to the extent the information is available.You are not required to prepare any notes to the financial statements. (20 marks)

Note: Work to the nearest CU'000.

3 Angus Ltd

An extract from Angus Ltd's nominal ledger at 28 February 20X7 is as follows.

CU'000Freehold land and buildings

Cost 16,000Accumulated depreciation at 29 February 20X6 2,800

Revenue 200,000Operating expenses 180,000Income tax charge for period 6,000Ordinary share capital 200,000Retained earnings at 29 February 20X6 300,000

The following additional information is available. This information is not reflected in the balances above.

(1) On 1 March 20X6 the company commissioned a valuation of its freehold land and buildings for thefirst time. This valuation showed an open market value of CU20 million (land element CU4 million)and an existing use value of CU15 million (land CU3 million). The accounting records have not yetbeen adjusted to reflect this valuation. Depreciation for the year ended 28 February 20X7 has not yetbeen charged and is to be based on a 40-year useful life. Previously, annual depreciation of CU280,000had been charged.

(2) The company announced the intended sale of its European operations on 31 January 20X7, when aformal disposal plan was approved and adopted for full implementation by 30 June 20X7. Plant andequipment with a carrying amount of CU3 million was classified as held for sale, its fair value at thedate of classification being estimated at CU2.85 million and the costs to sell it at CU50,000. On10 February 20X7 the company contracted to terminate various operating leases for a payment ofCU50,000. Other costs flowing from this disposal decision were estimated at CU100,000. TheEuropean operations contributed 10% of the revenue and 20% of the expenses shown above. Thecompany uses the cost model as its accounting policy for plant and equipment.

(3) As a result of the sale in (2) above the company will need to carry out a reorganisation of its otheractivities at a cost of CU1.25 million. This reorganisation was announced to the workforce and thepublic at the same time as the above.

(4) Prior to the year end the company declared an ordinary dividend of CU2 million.

(5) During April 20X6 a major project on inventory valuation had revealed that inventories in America on28 February 20X6 had been overvalued by CU355,000 due to a compilation error. No adjustment hasbeen made for this error, which is considered material but not fundamental.



Requirements

(a) Prepare, as far as the information permits, the following statements, in a form suitable for publication,for Angus Ltd for the year ended 28 February 20X7.

(i) Income statement

(ii) Statement of changes in equity (15 marks)

(b) Explain the objectives of financial statements, giving appropriate examples. (6 marks)

(21 marks)

4 Goblins Ltd

Goblins Ltd is a computer games manufacturer based in the East End of London. At 31 December 20X4 thefollowing balances have been extracted.

CUPatent rights 60,000Work in progress, 1 January 20X4 125,500Leasehold buildings 300,000Ordinary share capital – CU1 nominal value 500,0005% Preference share capital (redeemable 20X8) – CU1 nominal value 120,000Revenue 1,740,600Staff costs 260,400Accumulated depreciation on buildings, 1 January 20X4 60,000Inventories of finished games, 1 January 20X4 155,600Consultancy fees paid 44,000Directors' emoluments 360,000Computers used on site 50,000Accumulated depreciation on computers, 1 January 20X4 20,000Income tax 12,400Ordinary dividend paid, 30 September 20X4 50,000Bank account 515,200Trade and other receivables 420,300Trade and other payables 80,200Raw materials 294,500Retained earnings, 1 January 20X4 102,300

The following additional information is available.

(1) Closing finished inventories are valued at cost of CU180,000 whilst work in progress has increased toCU140,000. These valuations do not take into account the fact that, at the year end physical inventorycount, it was discovered that ten computer games consoles with a cost CU500 each had been badlydamaged. These items have a scrap value of CU50 each.

(2) The patent rights were acquired on 1 January 20X4 in respect of a program with a three-year lifespan.If the company chose to do so it could sell these rights on without there being a significant impact onthe remainder of the business.

(3) Buildings are depreciated over 30 years. At 1 January 20X4 they were revalued to CU360,000. Thishas not been reflected in the accounts. Computers are depreciated over five years. Goblins Ltd makesa transfer between the revaluation reserve and retained earnings each period as a result of therevaluation in accordance with best practice.

(4) A final dividend of 15p per ordinary share was declared on 15 December 20X4 and was paid shortlyafter the year end. The preference dividend has not yet been paid.

(5) A necessary provision for specific receivables amounting to 5% of year-end receivables is to becreated. In addition, Goblins Ltd received notice on 15 January 20X5 that one of its customers hadgone into liquidation. This customer owed CU45,000 at the year end.

(6) There is an estimated income tax bill in relation to 20X4 of CU120,000. The income tax figure in thetrial balance (a credit balance) represents the difference between the opening provision and the incometax paid in the year.

QUESTION BANK


Requirements

(a) Prepare the income statement for Goblins Ltd for the year ended 31 December 20X4 and the balancesheet at that date in a form suitable for publication to the extent the information is available. Youshould classify expenses according to their nature. (22 marks)

(b) Explain briefly how assets and liabilities are recorded/carried under each of the four differentmeasurement bases referred to in BFRS Framework for the Preparation and Presentation of FinancialStatements. (4 marks)

(26 marks)

5 Harry Ltd

Harry Ltd is a company which makes exclusive furniture to customers’ precise specifications. An extractfrom Harry Ltd’s nominal ledger at 31 December 20X5 is as follows.

CURaw materials and consumables 1,570,000Salaries and wages 1,250,500Work in progress at 1 January 20X5 45,600Finished inventories at 1 January 20X5 13,400Freehold land and buildings

Cost (land CU2 million) 3,600,000Accumulated depreciation at 1 January 20X5 640,000

Plant and machineryCost 520,000Accumulated depreciation at 1 January 20X5 375,000

Office furnitureCost 32,000Accumulated depreciation at 1 January 20X5 28,500

Intangible assets 15,000Lease payment 10,000Trade and other receivables 37,500Trade and other payables 25,400Retained earnings at 1 January 20X5 1,968,600Ordinary share capital – CU1 nominal value 500,000Preference share capital – 4% redeemable CU1 shares 120,000Share premium account 200,000Cash and cash equivalents 263,500Revenue 3,500,000

The following additional information is relevant.

(1) During the year the company used employees’ idle time to produce new furniture for the company’soffices. The old furniture was all scrapped. Raw materials costing CU54,000 were used. Theemployees’ time amounted to a cost to the company of CU20,500. No adjustment has been made forthis in the above.

(2) On 1 January 20X5 Harry Ltd entered into a lease agreement for a new machine. The fair value of thismachine was CU53,000. The lease agreement provides for six annual payments of CU10,000 on31 December each year. Interest is to be allocated on the sum-of-the-digits basis. No other plant waspurchased or sold during the year.

(3) Freehold land and buildings were revalued for the first time on 1 January 20X5. The surveyorperforming the valuation estimated an alternative use valuation of CU5 million (including CU4 millionfor the land) and an existing use valuation of CU3.5 million (including CU3 million for the land).Buildings are to continue to be depreciated on a straight-line basis at a rate of 4% but Harry Ltd makesno transfer between the revaluation reserve and retained earnings in respect of this.

Plant is depreciated on a reducing balance basis at a rate of 20%. Office furniture is depreciated on a15% straight line basis.



(4) During the year the company made a 1 for 5 bonus issue of its ordinary shares. No entries have beenmade in respect of this. Transaction costs amounted to legal costs of CU5,000 and an estimate ofdirectors’ time amounting to a cost of CU10,000. Both of these costs have been charged against theshare premium account.

(5) The preference shares are redeemable in 20X9. Dividends of 10p per share on the ordinary sharesand at the coupon rate on the preference shares were declared on 15 December 20X5 and paid earlyin 20X6. The income tax charge for the period has been estimated at CU250,000.

(6) The intangible asset relates to a patent acquired on the purchase of a sole trader on 1 January 20X5.This patent is considered to have a useful life of 20 years. The annual impairment review has indicatedthat the patent has a recoverable value at 31 December 20X5 of CU14,000.

(7) Closing inventories at cost amounted to work in progress of CU50,200 and finished goods ofCU15,000. The latter included a table with a cost of CU5,000. The customer who had ordered thistable has been declared bankrupt. He had paid a CU1,000 deposit (which has been credited torevenue) and owed CU10,000 at the year end in respect of other items. It is estimated that the tablecan be sold for CU4,000.

Requirement

Prepare an income statement for Harry Ltd for the year ended 31 December 20X5 and a balance sheet asat that date in a form suitable for publication. You should classify expenses according to their nature.

(25 marks)

6 Frodo Ltd

Frodo Ltd is a company which publishes a single textbook and provides tuition courses relating to that text.An extract from Frodo Ltd’s nominal ledger at 31 March 20X6 is as follows.

CUManufacturing costs 4,450,000Administrative salaries 410,500Selling and distribution costs 375,000Inventories at 1 April 20X5 113,400Freehold land and buildings

Cost (land CU1,750,000) 2,550,000Accumulated depreciation at 1 April 20X5 480,000

Plant and machineryCost 620,000Accumulated depreciation at 1 April 20X5 337,000

Borrowings 200,000Trade and other receivables 37,500Trade and other payables 25,400Retained earnings at 1 April 20X5 212,500Ordinary share capital – 50p nominal value 500,000Preference share capital – 5% irredeemable CU1 shares 200,000Cash and cash equivalents 63,500Revenue 6,700,000Finance costs 35,000


(1) The borrowings are repayable in ten equal instalments, commencing on 1 April 20X6.

(2) Revenue is made up of the following.

CUTuition fees 1,500,000Book sales 5,100,000Advances 100,000

6,700,000

QUESTION BANK


The tuition fees all relate to courses held during the year except for fees of CU300,000 which relateto a ten-week course. Five weeks of this course had already been held by the year end. The remainderis to be held in June 20X6. The advances relate to a new publication which Frodo Ltd hascommissioned and advertised heavily but which is not yet in production.

(3) There were no movements of non-current assets during the year. However, on 28 February 20X6,Frodo Ltd decided to sell a major item of plant for which it no longer has any use. This plant costCU120,000 on 1 April 20X1 and was advertised for sale on 1 March 20X6 at a price of CU5,000. InApril 20X6 a buyer was identified at the advertised price. The sale is expected to be completed in May20X6.

Plant is depreciated on a 10% straight line basis, taking into account the month of sale or purchase.Freehold buildings are depreciated over their useful life of 40 years. Depreciation on plant is chargedto cost of sales. Depreciation on freehold land and buildings is charged to administrative expenses.

(4) At the year end the company was in the throes of a legal action by one of its competitors which claimsthat Frodo’s textbook has breached copyright. The case is not due to be decided until June 20X6 butFrodo Ltd’s legal advisors think that the company has a 60% chance of losing the case and estimatesthat this would cost Frodo Ltd CU100,000.

(5) One of Frodo Ltd’s customers who owed CU10,000 at the year end was declared bankrupt on 1 May20X6.

(6) Closing inventories at cost amounted to CU120,000. Within this valuation is an amount of CU50,000relating to fixed overheads, being a share of total fixed overheads of CU1 million. Frodo Ltd hadexpected to produce one million books during the year but, due to production difficulties only in factproduced 800,000. Overheads have been allocated on the basis of CU1.25 per book.

(7) The following should be provided for at the year end.

Income tax of CU350,000

An ordinary dividend of 20p per share

The preference dividend

Requirements

(a) Prepare an income statement for Frodo Ltd for the year ended 31 March 20X6 and a balance sheet asat that date in a form suitable for publication. You should classify expenses by function. (21 marks)

(b) Explain the considerations underlying the accounting requirements for not-for-profit entities, includingthe possible relevance of BFRSs and IPSASs. (5 marks)

(26 marks)

7 Plodder Ltd

As at 30 November 20X0 and 30 November 20W9 Plodder Ltd had the following summarised balancesheets.

20X0 20W9CU CU CU CU

ASSETSNon-current assets

Property, plant and equipment 2,918,000 2,401,000Intangibles 550,000 584,000Investments 406,000 –

3,874,000 2,985,000Current assets

Inventories 685,000 598,000Trade and other receivables 480,000 465,000Prepayments 96,000 126,000Cash and cash equivalents 226,000 200,000

1,487,000 1,389,000



20X0 20W9CU CU CU CU

Total assets 5,361,000 4,374,000

EQUITY AND LIABILITIESCapital and reserves

Ordinary share capital 1,100,000 1,000,000Share premium account 342,000 200,000Revaluation reserve 375,000 –Retained earnings 1,785,000 1,311,000

3,602,000 2,511,000Non-current liabilities

Borrowings 500,000 1,000,000Current liabilities

Trade and other payables 749,000 427,000Accruals 108,000 131,000Taxation 282,000 165,000Provisions 120,000 140,000

1,259,000 863,000Total equity and liabilities 5,361,000 4,374,000

Plodder Ltd's income statement for the year ended 30 November 20X0 was as follows.

CURevenue 5,762,000Cost of sales (4,630,000)Gross profit 1,132,000Distribution costs (236,000)Administrative expenses (127,000)Profit from operations 769,000Finance charge (68,000)Investment income 55,000Profit before tax 756,000Income tax expense (232,000)Profit for the period 524,000


(1) Included within trade and other payables at 30 November 20X0 is CU351,000 (20W9 CU106,000)relating to purchases of property, plant and equipment.

(2) Included within accruals at 30 November 20X0 is CU25,000 (20W9 CU50,000) in respect of interestpayable.

(3) Property, plant and equipment and intangible assets can be analysed as follows.

20X0 20W9CU CU

Property, plant and equipmentCost or valuation 7,839,000 6,375,000Accumulated depreciation (4,921,000) (3,974,000)

2,918,000 2,401,000Intangibles

Cost 883,000 938,000Accumulated amortisation (333,000) (354,000)

550,000 584,000

(4) During the year, plant with an original cost of CU479,000 and a carrying amount at the date ofdisposal of CU326,000 was sold for CU424,000 which was received in cash. Intangible assets withaccumulated amortisation at the date of disposal of CU40,000 were sold for CU12,000.

QUESTION BANK


(5) On 30 November 20X0 freehold land which originally cost CU175,000 (and had not beendepreciated) was revalued to CU550,000.

Requirement

Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations inaccordance with BAS 7 Cash Flow Statements for Plodder Ltd for the year ended 30 November 20X0, usingthe indirect method.

(22 marks)

8 Copeland Ltd

As at 31 May 20X1 and 31 May 20X2 Copeland Ltd had the following summarised balance sheets.

20X2 20X1CU CU CU CU


Property, plant and equipmentCost or valuation 5,164,000 4,347,000Accumulated depreciation (2,198,000) (2,001,000)

2,966,000 2,346,000Intangibles

Cost 9,360,000 8,645,000Accumulated amortisation (3,690,000) (2,715,000)

5,670,000 5,930,000Investments 2,145,000 127,000

10,781,000 8,403,000Current assets

Inventories 1,112,000 1,086,000Trade and other receivables 948,000 840,000Prepayments 95,000 108,000Cash and cash equivalents 489,000 322,000

2,644,000 2,356,000Total assets 13,425,000 10,759,000


Ordinary share capital 1,800,000 1,000,000Share premium account 1,543,000 1,421,000Revaluation reserve 1,880,000 1,256,000Retained earnings 2,739,000 746,000


15% debenture loan 3,000,000 4,500,000Current liabilities

Trade and other payables 1,417,000 896,000Interest payable 225,000 337,000Taxation 641,000 503,000Dividends payable 180,000 100,000

2,463,000 1,836,000Total equity and liabilities 13,425,000 10,759,000



Copeland's income statement for the year ended 31 May 20X2 was as follows.

CURevenue 8,646,000Cost of sales (3,705,000)Gross profit 4,941,000Distribution costs (465,000)Administrative expenses (571,000)Profit from operations 3,905,000Finance cost (563,000)Investment income 78,000Profit before tax 3,420,000Income tax expense (684,000)Profit for the period 2,736,000


(1) On 31 May 20X2 property which was originally purchased for CU734,000 (and which had notpreviously been revalued) was revalued to CU1,000,000. There were no other movements on therevaluation reserve during the year.

(2) During the year plant and equipment with an original cost of CU1,201,000 and a carrying amount atthe date of disposal of CU496,000 was sold at a loss of CU189,000. As at 31 May 20X2 CU165,000 ofthe sale proceeds had yet to be received and is included within trade and other receivables. As at31 May 20X1 the corresponding figure in respect of disposals made during the year then ended wasCU79,000, which was received in full in June 20X1.

(3) As in the previous year, all acquisitions of property, plant and equipment made during the year werepaid for in cash at the date of acquisition. However, included within trade and other payables as at 31May 20X2 is CU376,000 (20X1 – CUnil) relating to the acquisition of intangible assets.

(4) There were no disposals of intangible assets or investments during the year. Trade and otherreceivables as at 31 May 20X2 include CU10,000 (20X1 – CU8,000) in respect of interest receivableon investments.

(5) As at 31 May 20X1 the ordinary share capital of Copeland Ltd consisted of 1 million shares, each witha CU1 nominal value. The following day the company made a 1 for 2 bonus issue of 500,000 shares(utilising available profits).

(6) The dividend payable at both balance sheet dates represents a 10p per share dividend on thecompany’s ordinary shares. Dividends of CU243,000 were charged to retained earnings in the yearended 31 May 20X2.

(7) Copeland Ltd has not yet prepared its statement of changes in equity for the year ended 31 May 20X2.

Requirement

Prepare a cash flow statement and a note reconciling profit before tax to cash generated from operations inaccordance with BAS 7 Cash Flow Statements for Copeland Ltd for the year ended 31 May 20X2, using theindirect method. (24 marks)

QUESTION BANK


9 Pippin Ltd

The following are the draft financial statements for Pippin Ltd for the year ended 31 December 20X7.

Income statement for the year ended 31 December 20X7

CURevenue 7,350,500Cost of sales (4,560,600)Gross profit 2,789,900Administrative expenses (1,060,800)Distribution costs (768,000)Profit from operations 961,100Finance charge (75,000)Profit before tax 886,100Income tax expense (350,000)Profit for the period 536,100

Balance sheet as at 31 December 20X7



Property, plant and equipment 7,500,400 6,950,300Intangibles 350,700 300,500

7,851,100 7,250,800Current assets

Inventories 560,500 765,100Trade and other receivables 169,000 144,500Investments 25,000 12,400Cash and cash equivalents 10,700 20,200

765,200 942,200Total assets 8,616,300 8,193,000


Ordinary share capital 4,000,000 3,500,000Share premium account 1,200,000 950,000Revaluation reserve 500,000 236,800Retained earnings 1,357,800 2,206,700


Preference share capital (redeemable) 500,000 400,000

Current liabilitiesTrade and other payables 148,500 139,500Taxation 410,000 360,000Ordinary dividend payable 500,000 400,000

1,058,500 899,500Total equity and liabilities 8,616,300 8,193,000

Statement of changes in equity for the year ended 31 December 20X7 (extract)

Retainedearnings

CUTransfer from revaluation reserve 15,000Profit for the period 536,100Dividends on ordinary shares (1,400,000)Balance brought forward 2,206,700Balance carried forward 1,357,800




(1) During the year Pippin Ltd issued both further ordinary shares and further redeemable preferenceshares. The latter were issued at par.

(2) Investments categorised as current assets are held for the short-term and are readily convertible intocash on demand.

(3) During the year Pippin Ltd sold plant and equipment with a carrying amount of CU560,500 forCU600,000. Total depreciation charges for the year were CU750,600.

(4) Trade and other payables include accrued interest of CU5,000 (20X6 CU7,000).

(5) Intangibles relate to development costs capitalised in accordance with BAS 38 Intangible Assets. Costsamounting to CU77,500 were capitalised during the year.

Requirement

Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations inaccordance with BAS 7 Cash Flow Statements for Pippin Ltd for the year ended 31 December 20X7, usingthe indirect method. (18 marks)

10 Merry Ltd

The following are the draft financial statements for Merry Ltd for the year ended 31 March 20X5.

Income statement for the year ended 31 March 20X5CU

Revenue 5,650,500Cost of sales (3,460,600)Gross profit 2,189,900Administrative expenses (978,800)Distribution costs (256,000)Profit from operations 955,100Finance charge (89,000)Profit before tax 866,100Income tax expense (297,600)Profit for the period 568,500

Balance sheet as at 31 March 20X520X5 20X4

CU CU CU CUASSETSNon-current assets

Property, plant and equipment 4,360,400 2,950,300Investments 172,000 156,000

4,532,400 3,106,300Current assets

Inventories 460,600 365,100Trade and other receivables 269,000 244,500Cash and cash equivalents 135,000 120,200

864,600 729,800Total assets 5,397,000 3,836,100

QUESTION BANK




Ordinary share capital 3,000,000 1,800,000Share premium account 1,050,000 850,000Retained earnings 142,500 74,500


Finance lease liabilities 500,000 400,000

Current liabilitiesTrade and other payables 348,500 289,600Taxation 300,000 350,000Finance lease liabilities 56,000 72,000

704,500 711,600Total equity and liabilities 5,397,000 3,836,100


(1) Merry Ltd has not yet prepared its statement of changes in equity.

(2) During the year Merry Ltd made a 1 for 10 bonus issue of its ordinary shares. It subsequently issuedfurther shares at the market price. No dividends were payable as at 31 March 20X5 or 20X4.

(3) Cash paid to and on behalf of employees during the year amounted to CU2,650,000.

(4) An impairment review at 31 March 20X5 identified a fall in the recoverable amount of certaininvestments. As a result, an impairment loss of CU12,000 was identified and written off toadministrative expenses.

(5) During the year Merry Ltd acquired plant and equipment for cash of CU2,057,000. In addition, plantand equipment with a fair value of CU600,000 was acquired under a finance lease. All finance costsrelate to finance leases. The depreciation charge for the year, charged to cost of sales, wasCU750,600. A loss on sale of plant of CU55,000 was made during the year.

Requirements

(a) Prepare a cash flow statement in accordance with BAS 7 Cash Flow Statements using the direct methodand a note of gross operating cash flows for Merry Ltd for the year ended 31 March 20X5.

(21 marks)

(b) Prepare the note reconciling profit before tax to cash generated from operations for Merry Ltd forthe year ended 31 March 20X5 as it would appear under the indirect method. (4 marks)

(25 marks)

QUESTION BANK


Preparation of extracts from financial statements

11 Montrose Ltd

Montrose Ltd has various outstanding matters to resolve regarding inventories in preparing its financialstatements for the year ended 30 September 20X4.

(1) Overheads relating to finished goods and work in progress have yet to be included in the finalinventory valuation. An analysis of the company's costing records shows the following.

CUDirect labour 1,000,000Production overheads 660,000General administration overheads 300,000Distribution overheads 200,000Design and marketing overheads 150,000

The company's production activity has been as follows.

Year ended Actual units Budget units30 September 20X3 650,000 650,00030 September 20X4 500,000 700,00030 September 20X5 (projected) – 800,000

Full capacity of the plant is 900,000 units.

A new production process will be introduced in 20X5.

(2) The supply of raw materials in the year ended 30 September 20X4 was interrupted, due to a fire at asupplier's premises. As compensation for production delays, the supplier agreed to a one-off paymentof CU100,000, which was received on 31 August 20X4, and this was credited to productionoverheads.

(3) Raw materials are imported at a purchase cost of CU5.00 per unit. Other costs arising are as follows.

CU per unitImport duty 1.00Transport to factory 0.50Storage and handling costs 1.00

(4) Half of the work in progress is 75% complete, and the remainder is 50% complete as to labour andoverheads, all raw materials having been issued.

(5) The company manufactures to customers' requirements for all orders. The final selling price isdetermined on a cost plus standard mark-up basis for the majority of orders.

(6) Inventory at 30 September 20X4 amounted to the following.

UnitsRaw materials 100,000Work in progress 50,000Finished goods 50,000



(7) The total net realisable value (NRV) of finished goods is CU560,000. The following is an analysis ofmajor orders in finished goods at the year end.

Units NRVCU

Order M147 1,800 22,000Order M293 5,555 55,000Order M467 6,500 60,000Order M364 4,630 54,000Order M191 3,240 40,000

21,725 231,000

Requirements

(a) Calculate the amount to be included in the financial statements of Montrose Ltd for the year ended30 September 20X4 in respect of inventories, preparing all relevant extracts from the financialstatements excluding accounting policy notes. (12 marks)

(b) Explain the different concepts of capital and capital maintenance used in accrual basis accounting,illustrating your explanation with appropriate examples. (6 marks)

(18 marks)

12 Gandalf Ltd

At 1 July 20X5 the capital and reserves section of Gandalf Ltd's balance sheet showed the following.

CUOrdinary share capital (CU1 shares) 500,000Share premium account 120,000Revaluation reserve 420,000Retained earnings 347,500

1,387,500

The accountant of Gandalf Ltd has prepared a draft income statement for the year ended 30 June 20X6which shows a profit for the period of CU135,500. However, there are certain matters which he is unsurehow to deal with and these are set out below. He has also asked for your assistance in preparing thestatement of changes in equity for that year. It is Gandalf Ltd's policy to maintain as high a possible balanceon retained earnings, whilst following BFRS.

(1) During the year Gandalf Ltd issued a further 300,000 ordinary shares at a price of CU1.25 per share. Italso issued 200,000 7% 50p irredeemable preference shares at par and 100,000 5% 50p redeemablepreference shares at a price of 70p per share. Transaction costs in relation to these share issues wereCU5,000, CU3,000 and CU1,000 respectively.

(2) During the year an ordinary interim dividend of CU30,000 was paid. The accountant has debited thisto finance charges. A further ordinary dividend of CU25,000 was declared on 15 June 20X6 and isexpected to be paid shortly. The accountant has made no entries in respect of this dividend or thetwo preference dividends which had been declared by the year end and are due to be paid shortly.

(3) On 1 July 20X5 Gandalf Ltd revalued its freehold land and buildings which were carried in the books atthat date at a cost of CU500,000 (land CU300,000 and buildings CU200,000) and accumulateddepreciation of CU50,000. Depreciation is charged on a straight-line basis over an original estimateduseful life of 40 years. The valuation showed a fair value for the land of CU600,000 and for thebuildings of CU400,000. The estimated remaining useful life of the buildings was reassessed at thesame date and is believed to be 50 years. Depreciation for the year on freehold land and buildings hasnot yet been charged.

(4) On 1 July 20X5 Gandalf Ltd decided to change its depreciation policy for plant and machinery from20% straight-line to 25% reducing balance. Prior to charging depreciation for the year ended 30 June20X6 the plant and machinery account showed a cost of CU357,800 and accumulated depreciation ofCU125,700. There were no movements on the plant and machinery account during the year. Theaccountant has not yet calculated the depreciation charge for the year as he is unsure how to do this.

QUESTION BANK


(5) Whilst preparing the draft financial statements the accountant discovered an error in the previousyear's financial statements. Expenditure of CU42,500 had been capitalised as an intangible assetwhereas in fact this was in contravention of BAS 38. This expenditure has been subject to anamortisation charge of 10% in the current year.

Requirements

(a) Calculate a revised profit for the period reflecting the above matters. (4 marks)

(b) Prepare the statement of changes in equity for Gandalf Ltd for the year ended 30 June 20X6.(11 marks)

(c) Explain the difference between financial statements prepared using the accrual basis and thoseprepared using the cash accounting or break-up bases, illustrating your answers with simplecalculations. (8 marks)

(23 marks)

13 Cagreg Ltd

Cagreg Ltd manufactures and sells heavy plant. The company also hires out plant for monthly periods (ormultiples thereof).

You ascertain the following details.

(1) Freehold land

Freehold land was acquired on 1 February 20X8 for CU100,000 to build a new factory. Due toplanning difficulties, building has not yet been started. The directors wish to revalue the land to its fairvalue of CU130,000 at 30 September 20X9.

(2) Buildings

On 1 October 20X8 the directors reviewed the useful life of the buildings and determined that theremaining life was 56 years. The buildings were acquired for CU200,000 on 1 October 20X4, whentheir useful life was estimated at 40 years.

(3) Plant and machinery

Plant and machinery is accounted for under the cost model accounting policy and is depreciated at therate of 40% per annum based on carrying amount. Such plant has an estimated life of five years.

(i) Plant which cost CU20,000 on 1 October 20X6 was classified as held for sale on 1 February20X9. The sale was agreed at CU5,600 and completed on 31 March 20X9.

(ii) New plant acquired cost CU60,000 on 1 January 20X9.

At 1 October 20X8 the cost of plant and machinery (not leased) was CU200,000, with accumulateddepreciation of CU72,000.

(4) Computer

Previously this has been depreciated on a straight-line basis at the rate of 10% per annum on cost. Thecomputer was acquired on 1 January 20X7 for CU60,000, and by the beginning of this accounting yearCU10,500 of depreciation had been charged. In an effort to charge out computer time to departments,a record is now kept of computer time used. Management wish to depreciate the computer on ausage basis. The manufacturer's estimate of total usage time of the computer's life is 40,000 hours. Thedata processing manager estimates that some 10,000 hours have been worked prior to the currentaccounting period. During the current year the record shows 4,800 hours worked. The computer willhave a scrap value of CU4,500 at the end of its useful life.

Requirements

(a) Prepare the schedule of non-current assets which will form the note to the company's publishedbalance sheet at 30 September 20X9. (16 marks)

(b) Briefly explain the qualitative characteristics contained in BFRS Framework for the Preparation andPresentation of Financial Statements illustrating your answer with reference to the provisions of BAS 16Property, Plant and Equipment. (6 marks)

(22 marks)



14 Roberts Ltd

Roberts Ltd is a pharmaceutical company owning significant non-current tangible assets which are all initiallyrecorded at cost. Subsequently, land and buildings are remeasured at fair value when this differs materiallyfrom the carrying amount. Roberts Ltd adopts the policy of transferring the revaluation surplus included inequity to retained earnings as it is realised.

During the year ended 31 December 20X4 the following events have occurred.

(1) On 30 September 20X4 a fire occurred in the Newcastle factory. All of the inventories and themajority of the non-current assets located at the site were fully insured and therefore the companyhas suffered no loss in respect of those assets. However, one item of specialised machinery had beentransferred into the Newcastle factory on 1 June 20X4 to help the company fulfil a special order.Unfortunately the insurance company was not notified about this and has refused any compensation.

The specialised machinery originally cost CU2.8 million on 1 February 20X0 and was being depreciatedover eight years. Following the damage caused by the fire, Roberts Ltd has identified two options.

(i) Sell the machine. A prospective purchaser has been identified and has indicated that he would pay65% of the carrying amount at the date of the fire. However, before the sale takes place, thepurchaser expects Roberts Ltd to carry out repairs to the asset. This work can be done byemployees of Roberts Ltd and will take approximately 600 hours of skilled labour. Such labour isroutinely charged out to customers at an hourly rate of CU38.40 (including a profit margin of20% on cost). In addition Roberts Ltd will have to pay for the machinery to be moved to its newlocation. An estimate of CU21,000 has been obtained from a transport company, and there willalso be a one-off insurance cost for the journey of CU2,000.

(ii) Repair the asset, transfer it to a factory in Belgium and use it there for approximately three years.The local accountant in Belgium has prepared detailed cash flow projections (which include therepair costs) and estimates the value in use to be CU600,000.

(2) On 1 April 20X1 Roberts Ltd acquired a plot of land in Cardiff at a cost of CU2.6 million. During20X1 a factory was built on the land at a cost of CU1.7 million. Additional architects' fees ofCU80,000 were also incurred. The building work was finished on 1 May 20X2, when the factory wasoccupied and brought into use.

On 31 December 20X3 the land and buildings were revalued to their fair value of CU7.8 million (with60% of the value relating to the land). At this date the directors also reassessed the total useful life ofthe building, increasing it from 30 to 40 years.

On 31 December 20X4 it was discovered that toxic chemicals had been leaking from the factory intothe land. The building can no longer be used. However, a waste disposal company has offered CU1.5million for the site (the purchaser intends to demolish the building and use the site for landfill).

Requirements

(a) Calculate the carrying amounts of the land and the buildings (separately) at 31 December 20X3 and31 December 20X4 and the balance on the revaluation reserve at 31 December 20X4. (6 marks)

(b) Calculate the impairment charges to the income statement for the year ended 31 December 20X4 andshow how they would be disclosed. (7 marks)


(13 marks)

QUESTION BANK


15 Dumfries Ltd

Dumfries Ltd, which uses the straight-line method of depreciation, entered into leasing contracts on1 May 20X4 for certain items of plant and machinery and office equipment. The following information isrelevant.

(1) Plant and machinery with a fair value of CU109,140 was leased under an agreement which requiredannual payments of CU31,300 payable in advance. The primary period of the lease is four years, afterwhich the company can continue to lease the plant and machinery at a nominal rent and is likely to doso.

Dumfries Ltd has estimated the useful life of the plant and machinery at five years and its residual valueas CUnil. Using the interest rate implicit in the lease of 10%, the present value of the minimum leasepayments is CU109,143. The company is fully responsible for the insurance and maintenance of theplant and machinery.

(2) Office equipment with a fair value of CU60,510 was leased under an agreement which required annualpayments of CU15,000 payable in advance. The company is committed to the lease for three years butthe lessor is responsible for the insurance and maintenance of the equipment. The lessor hasestimated the useful life of the office equipment at 12 years. Using the interest rate implicit in the leaseof 10%, the present value of the minimum lease payments is CU41,040.

Requirements

(a) Indicate how the accounting treatment of assets acquired under finance leases reflects the definition ofelements, the recognition criteria and the measurement bases set out in BFRS Framework.

(6 marks)

(b) For leases (1) and (2) above, using the actuarial method, calculate the amounts to be included in theincome statement for each year of the leases and in the balance sheet as at 30 April 20X5, preparingthe reconciliation note for property, plant and equipment and the other notes specifically required byBAS 17 Leases. (14 marks)

(20 marks)

16 Crieff Ltd

Crieff Ltd had the following transactions in the year ended 30 June 20X8.

(1) A computer-controlled cutting machine was leased at a cost of CU40,000 per annum payable inadvance. The primary lease term is for five years from 1 July 20X7 and the machine is expected tohave a useful life of five years, with no residual value. The machine would have cost CU175,000 ifbought outright. Crieff Ltd is responsible for the maintenance and insurance of the asset. The interestrate implicit in the agreement is 8% per annum and the present value of the minimum lease paymentsis CU172,480.

(2) Items of office equipment were leased at a cost of CU7,500 per month payable in advance. The leaseterm is for two years from 1 September 20X7 and can be cancelled at any time by either party to thelease. Any maintenance is carried out by the lessor. The office equipment would have cost CU300,000if bought outright, and is expected to have a useful life of six years.

(3) An agreement was entered into on 1 July 20X7 for the lease of an automatic packing machine at anannual cost of CU30,000 payable in arrears on 30 June each year. The agreement is for five years andCrieff Ltd has the option to purchase the asset at the end of the five years at a nominal cost. The assetis expected to have a useful life of eight years. The machine would have cost CU120,000 if boughtoutright. The interest rate implicit in the agreement is 8% per annum and the present value of theminimum lease payments is CU119,790.

(4) A long-term lease of 40 years for land and buildings with lease payments of CU60,000 per annum inadvance was entered into on 1 July 20X7. The fair value of the leasehold interests has been estimatedat CU600,000 of which CU60,000 relates to land and CU540,000 to buildings.



The useful life of the buildings has been professionally assessed at 45 years. The interest rate implicit inthe lease is 10% and the present value of the minimum lease payments attributable to the buildings isCU528,120.

Requirements

(a) Briefly explain the concepts underlying the accounting treatments required by BAS 17 Leases withreference to BFRS Framework. (3 marks)

(b) Calculate the appropriate amounts to be disclosed in the financial statements for the year ended30 June 20X8, preparing all relevant disclosure notes. You should use the actuarial method toapportion any finance charges. You are not required to produce any notes relevant to the cash flowstatement or accounting policies notes. (20 marks)

(23 marks)

17 ITC Solutions Ltd

ITC Solutions Ltd (ITC) is a company assembling and selling computers. You are the financial accountant ofthe company and you have prepared draft annual financial statements for the year ended 28 February 20X5,for the approval of the board.

The CEO has challenged the figure for revenue as it is less than the figure he was expecting, based on hispersonal records. He asked you to provide an analysis of revenue from each client, which he compared tohis own figures, and he has found three apparent discrepancies. These apparent discrepancies relate to thefollowing transactions:

(1) ITC entered into a fixed price contract for CU120,000 with Arial Ltd to build a computer. Work hadbegun on this project; the costs incurred to date were CU60,000 and it was estimated to be two-thirds completed. However, the engineers have just discovered an incompatibility between two keycomponents and the work on the computer to date will need major revisions. It is difficult to estimatethe costs of completing the work because of the complexity of the new hardware. It is considered thatCU50,000 of the costs incurred to date are recoverable from Arial Ltd.

(2) ITC acts as an agent for ProMarket Ltd, a marketing company. The arrangement is that ITC offers toits clients the services of ProMarket Ltd. If an ITC client uses ProMarket Ltd then the gross fee is paidto ITC, who then remit the fee, less 15% commission, to ProMarket Ltd. In the year ended28 February 20X5 ITC received gross fees of CU300,000 for marketing services provided byProMarket Ltd.

(3) ITC is the exclusive retailer of computers manufactured by LapTop Ltd. LapTop Ltd have announcedthat its latest model, which has a very high specification, is now ready for sale and will be released tothe market in mid-April 20X5. ITC will buy the computers for CU600 and sell them for CU1,000. Inthe short term, demand for the computer will exceed supply and 500 customers of ITC have each paida deposit of CU150 in February 20X5 to secure a computer.

The CEO cannot understand your figures and he considers that the total revenue from these three projectsis:

CU(1) 120,000(2) 300,000(3) 500 CU150 = 75,000

495,000

Requirements

Prepare notes for a meeting with the CEO which:

(a) Explain what is meant by elements of financial statements and the principles of recognition of thoseelements. (4 marks)

(b) Applies these principles to the above three transactions, showing how you have calculated revenue inthe financial statements for the year ended 28 February 20X5. (12 marks)

QUESTION BANK


(16 marks)

18 Withington Ltd

Withington Ltd is organised into several divisions. The following events relate to the year ended31 December 20X0.

(1) A number of customers have initiated legal proceedings relating to the supply of electrical transformerunits during 20X0. Two thousand units were installed during the year. A number proved to be faulty.Following adverse publicity substantially all of the customers are claiming the units are faulty.Withington Ltd's lawyers have confirmed that they believe 25% of the claims are defendable at no cost.The average level of damages per successful claim is estimated at CU1,000. A similar provision was inplace at 31 December 20W9 disclosed in the balance sheet at CU1 million. CU800,000 was paid out insuch claims during 20X0.

(2) A mechanical transformer unit supplied to Swithin Ltd during the year exploded, causing a fire. SwithinLtd has initiated legal proceedings for damages of CU10 million against Withington Ltd. A legal experthas advised Withington Ltd that there is only a 30% chance of defending the claim successfully. Thepresent value of this claim has been estimated at CU9 million. The expert has investigated the cause ofthe problem with a team of accident consultants. Together they have concluded that parts supplied byGeorge Ltd to Withington Ltd for inclusion in the transformer unit were defective and contributed tothe explosion. They have estimated that George Ltd's contributory negligence is 40% of any finalsettlement. Negotiations have commenced with George Ltd and the legal expert believes that thisclaim is likely to succeed.

(3) On 1 January 20X0 Withington Ltd installed a new electric machine. The electric machine costCU200,000 and has an expected life of 20 years. The machine is lined with a special compound. Thelining needs replacing every four years. The cost of the lining included within the machine cost isCU40,000. The financial controller proposes to capitalise the machine at CU200,000 and depreciateover 20 years, while building up a replacement provision over four years for the relining of themachine.

(4) Withington Ltd has begun the extraction of metal ore in an overseas country, Didland. On 1 January20X0 Withington Ltd erected some infrastructure on the site at a cost of CU200,000. Withington Ltdhas a five year operating licence issued by Didland government for the site. Didland has noenvironmental clean-up law enacted. Withington Ltd made public statements during the licencenegotiations that as a responsible company it would restore the environment at the end of the licence.At the end of five years the cost of removing the infrastructure has been estimated at CU100,000. Inaddition, further clean-up costs will be progressively created as the ore is extracted. On the basis ofthe planned extraction, the total cost of cleaning up the extracted ore hole will be CU400,000 at theend of five years. Extraction commenced on 1 January 20X0 and is currently at planned levels.

(5) On 1 July 20X0 Withington Ltd entered into a two-year, fixed price, long run manufacturing contractwith Franklin Ltd. Withington Ltd is manufacturing 1,000 processor units per month. The forecastprofit per unit was CU10 but, due to unforeseen cost increases and production problems, each unit isanticipated to make a loss of CU7. The compensation payable for not fulfilling the contract is CU2million.

(6) During the year a restructuring of the Chuckholder division began. The aim of the plan was to reducecosts and improve business efficiency. The division has not been separately reported as a businesssegment, and accounts for only 2% of group revenue. The plan was implemented on 1 September20X0, when the main attributes were announced to the workforce.

At 31 December 20X0 the anticipated further costs to be incurred are as follows.CU'000

Redundancy costs 1,000Lease termination 2,300Retraining 1,100Relocation 2,100Marketing relaunch 1,400Investment in new systems 1,000

8,900



Requirements

(a) Prepare the provisions and contingencies note for the financial statements for the year ended31 December 20X0, including narrative commentary. (15 marks)

(b) Calculate the annual depreciation charge for 20X0 arising from the above transactions. (3 marks)

(18 marks)

19 Islay Ltd

Islay Ltd has acquired the following businesses.

(1) Savalight, a business specialising in the production of low-cost, energy-efficient light bulbs, acquired on1 June 20X6 for CU580,000. The identifiable assets, liabilities and contingent liabilities of the businesshad a net carrying amount of CU550,000, and were valued at CU500,000 on 1 June 20X6. Animpairment loss of CU20,000 in relation to the goodwill acquired in this business combination wasrecognised in the year ended 31 May 20X8.

(2) Green Goods, a business specialising in the distribution of a range of environmentally-friendlyproducts, acquired on 1 June 20X7 for CU1.8 million. The assets, liabilities and contingent liabilities ofthe business had a net carrying amount of CU1.1 million and were valued at CU1.3 million on1 June 20X7, including goodwill of the business of CU150,000 and a patent of CU70,000 allowing IslayLtd sole use of unique distribution systems for ten years. An impairment loss of CU50,000 in relationto the goodwill acquired in this business combination is to be recognised in the year ended 31 May20X9.

(3) 70% of Smart IT Ltd, a business specialising in the distribution of computers, acquired on 1 June 20X8for CU1.1 million cash. The identifiable assets, liabilities and contingent liabilities of the business had anet carrying amount of CU1 million and were valued at CU1.2 million on 1 June 20X8. In addition, thedirectors of Smart IT Ltd believe that they have built up goodwill within the company and that it isworth CU200,000.

Islay Ltd revalued one class of its property, plant and equipment on 1 June 20X8, and created a revaluationreserve of CU600,000. The revalued assets have a remaining useful life of ten years.

The group's capital and reserves (before reflecting any goodwill impairment or amortisation of intangiblesarising from the above acquisitions) in the draft consolidated financial statements as at 31 May 20X9 are asfollows.

CU'000Capital and reserves

Called up share capital (5,000,000 ordinary shares of CU1 each) 5,000Revaluation reserve (before any 20X9 transfer to retained earnings) 600Retained earnings (CU175,500 for the year ended 31 May 20X9) 700

6,300

Requirement

Calculate and disclose the amounts for intangible assets to be included in the consolidated financialstatements for Islay Ltd for the year ended 31 May 20X9, providing the following disclosures.

Balance sheet extracts

Disclosure note for intangibles (a schedule showing the movements in the year)

Statement of changes in equity attributable to the equity holders of Islay Ltd. (11 marks)

QUESTION BANK


20 Greenstones Ltd

Greenstones Ltd is a large international company operating in high-tech industries and it incurs significantcosts in researching and developing new products. During the year to 31 December 20X8 its Rajshahidivision has been working on three key projects.

Project Alpha Development of a new microchip on behalf of Codack Ltd (costs plus 40% to bereimbursed by Codack Ltd).

Project Beta Research into the next generation of digital cameras.

Project Gamma Development of a new and improved nylon substitute for material currently used inthe casings for digital cameras.

At 1 January 20X8 the following costs had been capitalised.

Project Project ProjectAlpha Beta GammaCU CU CU

Specialised equipment – – 500,000Accumulated depreciation (useful life 60 months) – – (200,000)Research and development – 160,000 650,000

At 31 December 20X8 Project Alpha was held up awaiting supply of a suitable electronic microscope. It isenvisaged that commercial production by Codack Ltd will start in 20Y0.

Project Beta shows great promise but significant production problems still remain.

Project Gamma was completed on 1 October 20X8 with the start of production of the new product. On 1April 20X7, when the accumulated research and development costs stood at CU470,000, the final technicalproblems were overcome. On 1 October 20X8 the specialised equipment was transferred to otherprojects at a carrying amount of CU140,000.

During the year the following costs were incurred.

ProjectGamma

(to 1Project Project OctoberAlpha Beta 20X8)

CU CU CUMaterials 22,000 15,000 98,000Labour 45,000 65,000 75,000

In the three months to 31 December 20X8 sales of the new camera casings exceeded expectations andprofit margins were above forecast. It is estimated that the product will have a life of five years.

Requirements

(a) Explain the qualitative characteristics of relevance and reliability and the potential for conflict betweenthem, giving an appropriate example. (3 marks)

(b) Evaluate the treatment of development expenditure set out in BAS 38 Intangible Assets against thecharacteristics of relevance and reliability. (4 marks)

(c) Prepare extracts from the financial statements for the year ended 31 December 20X8 reflecting theabove. The only note required is that relating to charges against operating profits. (10 marks)

(17 marks)



21 Okehampton Ltd

Okehampton Ltd carries land and buildings under the revaluation model allowed by BAS 16 Property, Plantand Equipment and plant and equipment under the cost model.

On 30 June 20X6 Okehampton Ltd decided to sell four of its non-current assets, all of which met the heldfor sale criteria under BFRS 5 Non-current Assets Held for Sale and Discontinued Operations on that date.Details of these four assets are as follows.

(1) The George House land and buildings had a carrying amount of CU300,000 at 31 December 20X5 andas it had originally cost CU200,000, a surplus of CU100,000 stood in the revaluation reserve in respectof it at that date. Depreciation on the buildings element is charged at the rate of CU6,000 per annum;on historical cost the annual charge would have been CU4,000. On 30 June 20X6 and 31 December20X6 its fair value was estimated as CU320,000 and the costs to sell at CU9,000. It was sold in 20X7for CU350,000 net of selling expenses.

(2) The Elizabeth House land and buildings had a carrying amount of CU400,000 at 31 December 20X5and as it had originally cost CU350,000, a surplus of CU50,000 stood in the revaluation reserve inrespect of it at that date. Depreciation on the buildings element is charged at the rate of CU12,000per annum; on historical cost the annual charge would have been CU8,000. On 30 June 20X6 and 31December 20X6 its fair value was estimated as CU360,000 and the costs to sell at CU8,000. It wassold in 20X7 for CU310,000 net of selling expenses.

(3) The Axford item of plant had a carrying amount of CU200,000 at 31 December 20X5. Depreciation ischarged at the rate of CU20,000 per annum. On 30 June 20X6 and 31 December 20X6 its fair valuewas estimated as CU140,000 and the costs to sell at CU9,000. It was sold in 20X7 for CU120,000 netof selling expenses.

(4) The Waterman item of plant had a carrying amount of CU600,000 at 31 December 20X5.Depreciation is charged at the rate of CU90,000 per annum. On 30 June 20X6 and 31 December20X6 its fair value was estimated as CU620,000 and the costs to sell at CU15,000. It was sold in 20X7for CU635,000 net of selling expenses.

The balance on Okehampton Ltd's revaluation reserve at 31 December 20X5 was CU370,000 and therewere no movements on that reserve other than those in respect of George House and Elizabeth House.

Requirements

Prepare detailed calculations of:

(a) The carrying amounts of these four assets at 31 December 20X6 and the balance on the revaluationreserve on that date. (9 marks)

(b) The amounts to be recognised in respect of these assets in the income statement for the year ended31 December 20X6. (4 marks)

(c) The amounts to be recognised in respect of these assets in the income statement for the year ended31 December 20X7 and the balance on the revaluation reserve on that date. (4 marks)

(17 marks)

22 Banchory Ltd

You have been approached by the financial controller of Banchory Ltd. She has asked you to prepare someinformation in relation to the company's draft financial statements for the year ended 30 April 20X0 whichshow a draft consolidated profit before tax of CU2,665,000. Details are as follows.

(1) Banchory Ltd has lodged a claim of CU500,000 against one of its suppliers for faulty materials suppliedand the consequential loss arising from their use. The supplier has contested the validity of this claimand the legal costs arising from this dispute amounted to CU40,000 by 30 April 20X0. The company’ssolicitors have advised the directors that, although the outcome is not clear, they have a good case,and the draft accounts show a receivable for CU500,000 due from the supplier with the correspondingcredit to cost of sales. No adjustment has been made for the legal costs which have not yet been paid.

QUESTION BANK


On 31 May 20X0 Banchory Ltd’s quality control staff obtained independent evidence which shows thatthe materials were faulty. The company’s solicitors advise that it is now probable that the claim will besettled in full.

(2) Banchory Ltd issues one-year warranties to customers on the supply of some of its products. Thecompany has experienced a significant rise in the incidence of claims by customers since 1 May 20W9.Agreed claims now amount to 10% of the sales of these products. Claims tend to arise two monthsafter the date of sale of the products. Sales subject to warranty in the last six months of the yearamounted to CU6 million. No adjustments have been made to the financial statements in respect ofthis matter.

(3) Banchory Ltd’s solicitors have advised the directors about correspondence from a past employeeclaiming unfair dismissal with effect from 4 May 20X0. The claim, which has been provided for in thedraft financial statements, amounts to CU300,000 and the solicitors consider that it is highly unlikelythe company will have to pay any amount.

(4) The company’s issued share capital on 1 May 20W9 was 2,000,000 ordinary shares of CU1 each, withan authorised share capital of 4,000,000 ordinary CU1 shares. There was also an opening balance onthe share premium account of CU450,000. Retained earnings on 1 May 20W9 were CU3,672,000.This figure is before any retrospective adjustments posted in the year ended 30 April 20X0.

On 31 March 20X0 the company made a 1 for 10 bonus issue. This was followed by a rights issue of 1for 4 ordinary shares at CU1.75 on 15 April 20X0, when the current market price of each share wasCU2.00.

The entire proceeds of the rights issue were immediately used to acquire the share capital of acompany whose net assets at the date of acquisition had a carrying amount of CU850,000 and a fairvalue of CU950,000. The acquired business has not performed to expectations and an impairmentwrite-down to CUnil is required.

(5) During the year the decision was taken to close down one of the company’s two factories, completingthe process, including the sale of the factory unit, prior to the year end. The only gain or loss relatingto this closure was that on the disposal of the factory unit and this has been reflected in the draftresults. At the time this decision was taken, the fair value of the factory was estimated at CU3.05million and the costs to sell it at CU50,000. The factory was eventually sold for CU3.1 million, net ofselling expenses. At the time of classification as held for sale the factory had a carrying amount ofCU2.1 million. The factory had been included in the balance sheet at valuation and the profit ondisposal, which has been included in the draft results, is based on the historical cost carrying amount ofCU1.3 million. The opening balance on the revaluation reserve was CU800,000.

(6) A machine bought on 1 May 20W7 for CU1,800,000 was then thought to have a useful life of tenyears. However, as at 1 May 20W9 it was discovered that the total useful life of this asset is actuallyonly six years. The revision of the useful life has been dealt with as a change in accounting policy. Thisasset is being depreciated on a straight-line basis with an estimated residual value of CUnil.

(7) On 30 October 20W9 Banchory Ltd revalued a freehold building, which had a remaining life of 50years. The revaluation surplus of CU500,000 has not been recognised in the financial statements butthe depreciation charge for the period, which has been included in the draft profit, has been based onthe revalued amount.

Requirements

(a) Prepare the provisions and contingencies notes for the financial statements for the year ended30 April 20X0. (4 marks)

(b) Calculate a revised consolidated profit before tax figure for the year ended 30 April 20X0. (6 marks)

(c) Prepare the consolidated statement of changes in equity for the year ended 30 April 20X0. (8 marks)

(18 marks)



23 Banff Ltd

Banff Ltd sells computer hardware, with or without support services, and also develops unique software.The following matters are outstanding in the preparation of the published financial statements for the yearended 30 April 20X1.

(1) The company has drawn up a detailed formal plan for the closure of its distribution division, which hasoperated as a separate cost centre, intending to sub-contract this work in the future. This plan hasbeen approved by the board of directors and announced to employees by the year end. The planidentified the following costs.

CURedundancy costs 250,000Costs of early termination of existing contracts 100,000Anticipated future operating losses – 1 May 20X1 to date of closure in June 20X1 190,000

The company expects to realise a profit of CU90,000 on disposal of the non-current assets in thedivision to be closed. These assets are accounted for under the cost model accounting policy.

(2) The company has been constructing a specialised item of plant and machinery for its own use. Theitem had been completed by the year end, and the construction director has summarised the costswhich his department was charged.

CUMaterials 100,000Labour costs

Factory staff 100,000Supervision staff (one additional supervisor employed for this project) 15,000

Professional fees – sub-contracted designers 22,000Installation costs 13,000Administration costs recharged by other departments – payroll, personnel,

purchasing (no additional staff required) 11,000

Labour costs include CU20,000 relating to delays in the delivery of components. These arose throughBanff Ltd mis-scheduling deliveries.

The plant is expected to have a useful life of ten years with no residual value. Major overhauls willneed to be carried out every four years at a cost of CU80,000. The company intends to provideCU20,000 annually to meet this cost.

(3) Banff Ltd entered into a six-year finance lease for plant and machinery on 1 May 20X0, paying adeposit of CU100,000 to be followed by five equal annual instalments of CU150,000 on 1 May in eachsubsequent year. The purchase price of the asset if bought outright would be CU780,000. Thecompany uses the sum-of-the-digits method to allocate finance charges. Apart from recording thepayment of the deposit on 1 May 20X0, no other accounting entry has been made for this financelease.

(4) The hardware division made a sale of a computer on 1 May 20X0. The proceeds of CU4 million werereceived on 1 July 20X0 and recognised as revenue. The fee included the supply of hardware and afour year maintenance contract covering maintenance support. The costs of providing that support onsimilar contracts have been CU500,000 per annum, and the mark-up on those maintenance contractswas 50% on cost.

(5) The software division entered into a CU3 million contract on 1 May 20W9 to develop a uniqueproduct for a customer. At 30 April 20X0 the contract was estimated at 25% complete. However, asthe costs to complete could not be estimated reliably, only the costs incurred of CU200,000 wererecognised as revenue. During the year to 30 April 20X1 a further CU2 million of costs have beenincurred and included within inventory. The contract is now thought to be 75% complete, somethingconfirmed by an independent expert assessor who has also estimated the costs to complete asCU400,000 and has confirmed the feasibility of the product. No invoice has yet been rendered to thecustomer.

(6) On 1 May 20W9 Banff Ltd acquired an item of plant for CU1 million. The useful life was estimated aseight years. The carrying amount in the financial statements at 30 April 20X1 is CU750,000 under thecost model accounting policy. On 1 February 20X1 the plant was considered to be surplus torequirements and the management concluded that the carrying amount would be principally recovered

QUESTION BANK


through sale. A professional agent estimated its fair value as CU900,000 and it was advertised for saleon 1 February 20X1 at that price. The agent charges a 3% commission. While the plant is available forimmediate sale, Banff Ltd has continued to use it for training and incidental production purposes. Theother activities undertaken on the machine have been transferred to other items of plant. A thirdparty has made an offer at the asking price and it is expected that the sale will be completed during20X1.

Requirements

(a) Prepare relevant extracts from the income statement for Banff Ltd for the year ended 30 April 20X1and the balance sheet as at that date. You are not required to prepare any disclosure notes.

(21 marks)

(b) Calculate the values for the six-year lease which would have appeared in the income statement andbalance sheet if the lease had been classified as an operating lease. (2 marks)

(23 marks)

24 Skinner Ltd

You have been asked to help the directors of Skinner Ltd complete the financial statements for the yearended 30 June 20X3. You have been asked to provide draft information to the board of directors based onthe following information provided by the assistant accountant of Skinner Ltd.

(1) Property, plant and equipment as at 30 June 20X2 was as follows.

Cost Depreciation Carryingamount

CU CU CUFreehold land and buildings 1,620,000 148,800 1,471,200Plant and machinery 1,278,000 539,600 738,400

2,898,000 688,400 2,209,600

The freehold land and buildings relate to the factory site, of which the land cost CU1 million. On 1 July20X2 the site was revalued to CU2.36 million, of which CU1.6 million relates to the land.

The annual review of the expected lives of the property, plant and equipment has revealed that amachine purchased for CU150,000 on 1 July 20X0 now has a remaining useful life of only five years.

Plant and machinery costing CU430,000 was purchased on 1 January 20X3. There were no disposals.

Depreciation is provided on cost on a straight-line basis. The rates used are 2% per annum forbuildings and 10% per annum for plant and machinery.

(2) On 1 July 20X2 the company leased a grinding machine under an eight year contract. Lease paymentsare CU65,000 per annum payable in arrears, commencing on 30 June 20X3. The only entry made inthe accounts has been to recognise this year’s lease payment as an expense in the income statement aspart of administrative expenses.

The lease agreement shows that the rate of interest implicit in the lease is approximately 5%, and thelessee is responsible for the maintenance of the machine. The present value of the minimum leasepayments is CU419,900.

Other working papers show that the cash price of the machine was CU450,000, and it has anexpected useful life of ten years.

(3) Skinner Ltd manufactures one product, a food processor. The costs of making a processor have beenestablished as follows.

CUVariable cost per unit

Raw materials 10.00Import duties on above 1.00Direct labour 15.00

26.00



In addition, the following costs are also incurred every month.

Cost/5,000 Cost/4,000Total cost units units

CU CU CUFactory power 3,000 0.60 0.75Factory supervisors' salaries 2,000 0.40 0.50Depreciation of plant 7,000 1.40 1.75Selling costs 6,000 1.20 1.50Distribution costs 2,000 0.40 0.50

20,000 4.00 5.00

The normal activity level is 5,000 units produced per month. The selling price is CU32 per unit.Inventory at 30 June 20X3 comprises the 4,000 units produced in June.

Requirements

(a) Prepare the note analysing the movement on property, plant and equipment for the year ended30 June 20X3 and any other narrative notes required in respect of property, plant and equipment as aresult of the above information. (10 marks)

(b) Prepare a note analysing future lease payments on the gross basis and show how the above lease willbe reflected in the financial statements for the year ended 30 June 20X3 (including the cash flowstatement). No other notes to the financial statements are required. (6 marks)

(c) Calculate the carrying amount of inventory at 30 June 20X3. (3 marks)

(19 marks)

25 Rosetta Ltd

Rosetta Ltd, a listed group, is a multinational enterprise that focuses on developing and deliveringpsychometric tests for recruitment purposes and a wide range of training courses/products.

The group is currently finalising its consolidated financial statements for the year ended 31 December 20X2.These were prepared by the CEO in the absence of a financial controller. The draft income statementshows profit before tax of CU17 million, which represents a 16% increase on the previous year.

As the newly-appointed financial controller you have been asked to review the following matters.

(1) At the start of the year an extensive review was carried out on all the property, plant and equipmentheld by the group. Following advice from an independent industry expert, the following changes weremade with effect from 1 January 20X2.

The method of depreciation used on certain items of printing equipment was changed. Theequipment was originally purchased on 1 January 20X1 for CU12 million and was initiallydepreciated using a 15% reducing-balance method. This is to be changed to straight-line over atotal useful life of five years.

The total useful life of some property originally purchased on 1 January 20X0 for CU40 millionwas reduced from 25 to 20 years.

In the draft accounts both of the above items have been dealt with as adjustments to the retainedearnings brought forward at 1 January 20X2. Retained earnings as restated are shown as CU35 millionin the draft accounts.

(2) During the current year the group has expanded into the computer-based training market. This hasbeen achieved in two ways.

(i) Via the acquisition on 1 January 20X2 of 60% of Newtrain Ltd, a company which already had aportfolio of CD-Rom training products. To integrate Newtrain Ltd into the group, Rosetta Ltdplanned substantially to reorganise its operations over the first three months of ownership, so at

QUESTION BANK


the acquisition date a reorganisation provision of CU1.2 million was recognised. Goodwill arisingin the business combination was then measured at CU6 million.

In the draft accounts the goodwill has been amortised over its estimated useful life of twentyyears. An impairment review at 31 December 20X2 revealed its recoverable amount to beCU4.1 million.

(ii) Via the internal development of new IT technology which allows for close monitoring of trainees’progression through the learning material. The project was started in early February 20X2 andthe final product was successfully launched on 30 November 20X2. At that date the followingcosts were capitalised as an intangible non-current asset.

CUIT hardware (purchased 1 February 20X2, useful life 48 months) 600,000Employment costs of those developing the product 1,800,000Costs incurred in training staff to deliver the new product 480,000

2,880,000

This total cost is being amortised over the product's expected useful life of 72 months.

60% of the employment costs were incurred prior to 31 August 20X2, the date on which thetechnical feasibility and financial viability of the product were confirmed. A competitor hasrecently approached Rosetta Ltd and offered CU6 million for the know-how embodied in theproduct. As a result, the intangible asset has been revalued to CU6 million in the draft financialstatements, and a gain of CU3,160,000 recognised in the income statement.

Intangible assets at 1 January 20X2 comprised goodwill in respect of an earlier acquisition ofCU2,100,000. Accumulated impairment losses in relation to that goodwill at 1 January 20X2 wereCU300,000. A further CU200,000 still needs to be recognised in the current year.

Requirements

(a) Prepare the note analysing the movement on intangible assets which would appear in the financialstatements of Rosetta Ltd for the year ended 31 December 20X2. (6 marks)

(b) Calculate a revised pre-tax profit for the year ended 31 December 20X2 and the correct retainedearnings brought forward. (11 marks)

(17 marks)

26 Arran Ltd

The board of directors of Arran Ltd have asked you, as financial controller, to prepare some information inrelation to the company’s draft financial statements for the year ended 31 May 20X1. Details are as follows.

(1) On 1 June 20W8 Arran Ltd acquired 75% of the ordinary share capital of Jura Ltd and 80% of theordinary share capital of Islay Ltd. On 1 December 20X0 Arran Ltd purchased 30% of the ordinaryshare capital of Millport Ltd. On 31 January 20X1 Arran Ltd disposed of its entire holding in Islay Ltdfor CU2.5 million.



The draft income statements of the four companies for the year ended 31 May 20X1 were as follows.

Arran Ltd Jura Ltd Islay Ltd Millport LtdCU CU CU CU

Revenue 10,000,000 6,500,000 3,900,000 14,500,000Cost of sales (7,400,000) (4,500,000) (2,700,000) (10,000,000)

2,600,000 2,000,000 1,200,000 4,500,000Operating expenses (1,100,000) (650,000) (390,000) (1,700,000)Profit before tax 1,500,000 1,350,000 810,000 2,800,000Tax (450,000) (400,000) (240,000) (840,000)Profit for the period 1,050,000 950,000 570,000 1,960,000

Arran Ltd acquired its holding in Islay Ltd for CU1,600,000 when the fair value of the net assetsof Islay Ltd was CU1,400,000. The net assets of Islay Ltd on 1 June 20X0 were CU1,700,000.

Goodwill impairment reviews to the start of the current year revealed cumulative impairments ofCU96,000 in relation to the acquisition of Islay Ltd.

Millport Ltd sold goods to Arran Ltd on 1 January 20X1 for CU480,000, at a mark-up on cost of331/3%. Arran Ltd still had half of these goods in inventory at the year end.

Arran Ltd has not yet accounted for the disposal of Islay Ltd.

(2) Property, plant and equipment in the draft financial statements is currently stated as follows.

CUArran Ltd 5,500,000Jura Ltd 3,400,000Islay Ltd 1,200,000Millport Ltd 200,000

The directors had planned to carry out an impairment review of certain items of plant at 31 May20X1. However, they were too busy to do this and the review was therefore carried out in June20X1. It revealed the following in respect of machines owned by Jura Ltd and Millport Ltd.

Jura Ltd Millport LtdCU CU

Carrying amount 500,000 100,000Fair value 400,000 80,000Costs to sell 50,000 10,000Value in use 390,000 60,000

No falls below carrying amounts were identified at that date in respect of the plant and machinery ofArran Ltd. However, a fire at one of Arran Ltd’s processing units on 1 July 20X1 destroyed much ofthe plant at that unit. This plant had a carrying amount at 31 May 20X1 of CU1 million. Unfortunately,the directors had not kept their insurance valuations up to date and, as a result, only expect torecover 50% of this amount.

Depreciation and impairments on plant and machinery are charged to cost of sales. The incomestatement extracts above do not reflect the above issues. All falls in value are considered to havetaken place in the second half of the year to 31 May 20X1.

Requirements

(a) Calculate the following amounts for inclusion in the consolidated income statement of Arran Ltd forthe year ended 31 May 20X1.

(i) Cost of sales

(ii) Profit arising on the disposal of Islay Ltd

(iii) Share of profits of associates

(iv) Tax charge (12 marks)

QUESTION BANK


(b) Calculate the carrying amount of property, plant and equipment for inclusion in the consolidatedbalance sheet of Arran Ltd as at 31 May 20X1 and prepare any relevant extracts from the financialstatements arising from (2) above. (3 marks)

(c) Explain the rationale for the required treatment of each of the items in (a) above. (6 marks)

(21 marks)

27 Elie Ltd

The directors of Elie Ltd are in the process of preparing financial statements for the year ended 30 June20X2. They have asked you to assist them with certain calculations, details of which are set out below.

(1) On 1 July 20X1 Elie Ltd acquired 80% of the CU1 million ordinary share capital of Monans Ltd byissuing 200,000 CU1 ordinary shares. Elie Ltd’s ordinary shares were quoted at CU17 on 1 July 20X1.Professional fees to support the acquisition process amounted to CU90,000. A further amount ofCU92,000 is payable in cash on 1 July 20X2.

An issue of a further 24,000 shares is contingent on Monans Ltd achieving a 10% increase in revenue inthe year ended 31 October 20X2. These extra shares would be issued on 1 July 20X3. Monans Ltd hasachieved increases in revenue over the past five years of 11%, 8%, 10%, 11% and 12% (from theearliest to the most recent year).

The net assets of Monans Ltd in its accounts as at 1 July 20X1 were CU3 million, with fair value CU1million higher than carrying amount.

Elie Ltd has identified the following matters not recognised in the financial statements of Monans Ltdas at 1 July 20X1.

A legal claim had been made by Monans Ltd against a supplier for damages suffered as a result offaulty goods supplied to Monans Ltd. At the acquisition date the company’s lawyers considered itvirtually certain that the claim would succeed. The fair value of the claim was assessed asCU200,000 and this amount was received in December 20X1. Monans Ltd disclosed CU200,000as a contingent asset at the acquisition date.

Operating losses of CU300,000 were expected to be incurred in the 6 months after acquisition.

Reorganisation costs of CU100,000 were to be incurred to bring Monans Ltd’s systems into linewith those of the group. A detailed plan for these changes was not yet in existence and noannouncement for such changes had been made.

A fall of CU50,000 in the value of inventories held on 30 June 20X1 due to a fire at a warehouseon 5 July 20X1. The inventories now have a net realisable value of CU5,000. All inventories in thegroup at 30 June 20X2 were correctly valued.

The goodwill impairment review at 30 June 20X2 revealed a loss of CU70,000 in relation to thisacquisition.

(2) The consolidated income statement currently shows a profit for the period of CU1,456,500 but hasnot yet been adjusted to reflect any adjustments required as a result of matter (1) above.

In addition to the ordinary shares issued on acquisition of Monans Ltd Elie Ltd also issued 300,000redeemable and 200,000 irredeemable preference shares during the year. All preference shares wereissued at a premium of CU0.20p over their nominal value of CU1 per share and have a coupon rate of5%.

The following ordinary dividends were declared by Elie Ltd.

15 July 20X1 10p per share10 July 20X2 15p per share

All of the preference dividends were declared before the end of the year.

No adjustments to the draft financial statements have been made in respect of these dividends.

On 1 July 20X1 Elie Ltd had the following balances on its consolidated capital and reserves.



CUOrdinary shares 1,000,000Share premium 500,000Revaluation reserve 250,000Retained earnings 5,678,500

7,428,500

(3) The revaluation reserve arose in 20X0 when the company’s plant and machinery was revalued. Oneitem of plant, which was purchased on 1 July 20W8 for CU100,000 and was revalued to CU120,000on 1 July 20X0, was subjected to an impairment review on 30 June 20X2. The review revealed thatthis asset now has a recoverable amount of CU50,000.

Elie Ltd’s depreciation policy is to depreciate all plant on a 10% straight-line basis, whether based oncost or on revalued amount. Elie Ltd makes an annual transfer between the revaluation reserve andretained earnings as a result of its revaluations in accordance with best practice.

Depreciation for the year ended 30 June 20X2 has already been correctly charged to the incomestatement and includes depreciation on the above impaired asset. No adjustment has been made as yetin respect of the above impairment. If total depreciation had been calculated on cost as opposed to onrevalued amounts, the charge would have been CU45,000 lower.

Requirements

(a) Calculate the amount of goodwill acquired in the business combination with Monans Ltd that would becarried in the group accounts of Elie Ltd for the year ended 30 June 20X2. (6 marks)

(b) Prepare the following columns only from the consolidated statement of changes in equity for Elie Ltdfor the year ended 30 June 20X2: ordinary share capital, irredeemable preference share capital, sharepremium and revaluation reserve.

(10 marks)

(16 marks)

28 Wester Ross Ltd

On 1 February 20X0 Wester Ross Ltd acquired 75% of the ordinary share capital of Ullapool Ltd, financedby the issue of 2 million CU1 ordinary shares of Wester Ross Ltd at CU7 per share and by CU7 million incash.

On 10 March 20W8 Wester Ross Ltd acquired 30% of the ordinary share capital of Glenelg Ltd for CU2million cash.

The summarised balance sheets of the companies were as follows.

At 31 October 20X0 (draft) At acquisitionWester Ross Ullapool Glenelg Ullapool Glenelg

Ltd Ltd Ltd Ltd LtdASSETS CU'000 CU'000 CU'000 CU'000 CU'000Non-current assets

Property, plant andequipment 42,000 18,000 3,000 17,000 2,300

Investments 9,000 – – – –Current assets

Inventories 4,000 2,500 500 2,000 300Trade and other receivables 8,500 1,700 400 1,500 100Cash and cash equivalents – 700 – 300 –

Total assets 63,500 22,900 3,900 20,800 2,700

QUESTION BANK


At 31 October 20X0 (draft) At acquisitionWester Ross Ullapool Glenelg Ullapool Glenelg

Ltd Ltd Ltd Ltd LtdEQUITY AND LIABILITIESCapital and reserves

Ordinary share capital

(CU1 shares) 40,000 12,000 1,500 12,000 1,500Revaluation reserve 10,000 2,000 – 1,500 –General reserve – 4,000 – 3,500 –Retained earnings 3,000 2,600 1,900 2,000 900

Equity 53,000 20,600 3,400 19,000 2,400Non-current liabilities 5,500 1,000 300 800 200Current liabilities 5,000 1,300 200 1,000 100Total equity and liabilities 63,500 22,900 3,900 20,800 2,700


(1) The fair value of freehold property in Glenelg Ltd was CU1.5 million above carrying amount at thedate of acquisition; all of this related to the land element of the property.

(2) Wester Ross Ltd has not yet accounted for the shares issued in acquiring Ullapool Ltd but has fullyaccounted for the cash element of the consideration for both Ullapool Ltd and Glenelg Ltd.

(3) Ullapool Ltd sold various items of property, plant and equipment to Wester Ross Ltd for CU750,000on 30 April 20X0. The assets originally cost CU1 million on 30 April 20W5 and are being depreciatedover ten years on a straight-line basis. Wester Ross Ltd is depreciating the assets over their remaininguseful life.

(4) As at 31 October 20X0 the impairment reviews revealed cumulative losses of CU810,000 in relationto the goodwill acquired in the business combination with Ullapool Ltd and of CU276,000 in respectof the investment in Glenelg Ltd.

(5) At the time Ullapool Ltd was acquired the company was in dispute with one of its suppliers, giving riseto a contingent liability of CU110,000. The fair value of this liability as at acquisition was assessed asCU98,000 and the liability was still outstanding as at the year end. In addition, at acquisition UllapoolLtd held raw materials which had cost CU30,000 but which had a replacement cost of CU42,000. Thisinventory was all sold following the acquisition.

(6) After Wester Ross Ltd's draft balance sheet had been prepared, it was decided that the provision foruncollectible trade receivables at 31 October 20X0 should be increased by CU400,000.

(7) On 1 January 20X0 the companies paid the following ordinary dividends.

Wester Ross Ltd 10p per shareUllapool Ltd 5p per shareGlenelg Ltd 20p per share

These dividends have been correctly and consistently accounted for.

Requirements

(a) From the above data calculate the following amounts for the consolidated balance sheet of WesterRoss Ltd as at 31 October 20X0.

(i) Goodwill arising on the acquisition of Ullapool Ltd

(ii) Investments in associates

(iii) Retained earnings (11 marks)

(b) Prepare extracts from the consolidated cash flow statement for the year ended 31 October 20X0 inso far as the information is available, including any relevant notes. (9 marks)

(c) Explain the purpose of group financial statements and the concepts underlying their preparation.(5 marks)

Note: Work to the nearest CU'000. (25 marks)



29 Shadowlands Ltd

You are the newly-appointed financial controller of Shadowlands Ltd. The directors have asked you toprepare certain items of information for the financial statements for the year ended 31 December 20X7.The following information is relevant.

(1) The directors have prepared the following summarised consolidated income statement.

CUOperating profit 3,500,000Investment income 950,000Interest payable (50,000)Profit before taxation 4,400,000Income tax (1,700,000)Profit after taxation 2,700,000

Current assets and liabilities at 31 December 20X7 and 31 December 20X6 and the depreciationcharges for those years were as follows.

20X7 20X6CU CU

Inventories 350,600 460,700Trade and other receivables 279,600 256,900Cash and cash equivalents 10,500 7,850Trade and other payables 178,500 182,300Depreciation charges 356,000 372,000

(2) On 1 January 20X7 Shadowlands Ltd entered into a finance lease for a machine with a fair value ofCU105,000. On that date the company paid a deposit of CU10,000. On 31 December 20X7 thecompany paid the first instalment of CU30,000. Three other instalments of CU30,000 each are due.The directors have debited the payments to date to cost of sales.

(3) In 20X3 Shadowlands Ltd had purchased 30% of the ordinary share capital of Bacardi Ltd forCU300,000 and has treated Bacardi Ltd as an associated undertaking since that date. Bacardi Ltd’scapital and reserves have been as follows.

At acquisitionAt 31 December

20X7

CU CUOrdinary share capital 500,000 500,000Retained earnings 200,000 650,300

In the year to 31 December 20X7 Bacardi Ltd took CU110,200 to retained earnings. Shadowlands Ltddisposed of its holding in Bacardi Ltd on 30 June 20X7 for CU750,000. The directors have creditedthis amount to investment income. Up until 31 December 20X6 Shadowlands Ltd had recognisedimpairments in respect of Bacardi Ltd of CU20,000 in both its individual and its group accounts.

Requirements

(a) Prepare the note to the consolidated cash flow statement for the year ended 31 December 20X7which reconciles profit before tax to cash generated from operations. (6 marks)

(b) Calculate the liability in respect of the finance lease at 31 December 20X7 and show how this wouldbe disclosed in the financial statements. Use the sum-of-the-digits basis to allocate interest. Notes tothe accounts are not required. (4 marks)

(c) Calculate the profit or loss on the disposal of Shadowlands Ltd’s interest in Bacardi Ltd in both thegroup accounts and Shadowlands Ltd’s individual accounts. (5 marks)

(15 marks)

Note: Ignore taxation.

QUESTION BANK


30 Scribo Ltd

Scribo Ltd is a large publishing company which is organised into several divisions. The financial controllerhas asked you, as assistant accountant, to prepare certain items of information for the financial statementsfor the year ended 30 June 20X6. The following information is relevant.

(1) The financial controller has calculated a preliminary figure for revenue for the year ended 30 June20X6. This is made up of the following.

Division RevenueCU

Magazine subscriptions 356,700Magazines sold via newsagents 789,400Book sales 3,450,800Advances for books yet to be published 367,700

4,964,600

The company publishes one magazine, sales of which commenced on 1 March 20X6. Magazinesubscriptions are purchased on an annual basis for CU30 each and magazines are despatched on thefirst working day of the month. 50% of the above revenue from magazine subscriptions arose prior tothe first issue, 25% in March and 25% in April.

Magazines are also sold via newsagents on a sale or return basis for CU3 each. When they receive thenext month’s delivery newsagents are required to return any unsold magazines for the previousmonth, together with a returns note detailing how many copies are being returned. Within the nextweek they are invoiced by Scribo Ltd for the previous month’s purchases. Returns notes received byScribo Ltd on 5 July 20X6 showed returns of 10,500 copies.

(2) The financial statements for the previous year showed that Scribo Ltd had the following recordedwithin non-current assets at 30 June 20X5 in respect of intangible assets.

Cost Accumulatedamortisation/impairments

CU CUGoodwill 450,000 120,000Publishing titles 120,000 12,000Technical know-how 300,000 90,000

The goodwill was acquired on the purchase of a sole trader on 1 July 20X2. At that time it wasestimated that the goodwill had a useful life of ten years. The technical know-how, which relates toScribo Ltd’s printing methods, is protected by a legal right which has a life of ten years.

On the last day of the year Scribo Ltd purchased the assets of one of its competitors, includingcustomer lists valued at CU30,000, publishing titles valued at CU45,000 and goodwill of CU100,000.Impairments to be recognised in the current year amount to CU50,000 in respect of goodwill.Publishing titles and customer lists are considered to have useful lives of five years.

Requirements

(a) Calculate revenue for inclusion in the income statement for the year ended 30 June 20X6. (3 marks)

(b) Prepare the note showing the movements on intangible assets which would appear in the financialstatements for the year ended 30 June 20X6. (4 marks)

(7 marks)

QUESTION BANK


Preparation of full consolidated financial statements

31 Hemmingway Ltd

Hemmingway Ltd has investments in Steinbeck Ltd which is a subsidiary and Innes Ltd which is an investment.The draft balance sheets of Hemmingway Ltd and Steinbeck Ltd at 30 June 20X4 are shown below.

Hemmingway Ltd Steinbeck LtdASSETS CU'000 CU'000 CU'000 CU'000Non-current assets

Property, plant and equipment 6,720 820Investment in Steinbeck Ltd 1,540 –Investment in Innes Ltd 1,200 –

9,460 820Current assets

Inventories 360 170Trade and other receivables 370 230Amount due from Steinbeck Ltd 75 –Cash and cash equivalents 15 10

820 410Total assets 10,280 1,230


Issued CU1 ordinary shares 5,000 600Revaluation reserve 200 40Retained earnings 1,210 220

Equity 6,410 860Non-current liabilities

Borrowings 3,200 50Current liabilities

Trade and other payables 670 270Amount due to Hemmingway Ltd – 50

670 320Total equity and liabilities 10,280 1,230


(1) Hemmingway Ltd acquired 450,000 CU1 ordinary shares in Steinbeck Ltd on 1 July 20X2 for CU1.54million. At that date the balance on Steinbeck Ltd's retained earnings was a credit of CU140,000 and thebalance on the revaluation reserve was a credit of CU28,000.

(2) Innes Ltd is not an associate of Hemmingway Ltd.

(3) The fair value of the plant of Steinbeck Ltd was CU200,000 in excess of its carrying amount at 1 July20X2. This plant is to be depreciated over five years from the acquisition date on a straight-line basis, withno residual value.

(4) Hemmingway Ltd sold plant to Steinbeck Ltd on 1 July 20X3 for CU96,000; the plant had cost CU100,000on 1 July 20X2 and had a carrying amount of CU80,000. The plant is to be depreciated over its estimatedremaining useful life of four years.

(5) Hemmingway Ltd sold goods to Steinbeck Ltd at a price of CU25,000 on 30 June 20X4, which were notreceived by Steinbeck Ltd until 5 July 20X4. Hemmingway Ltd calculates selling price at a mark-up of 25%on cost.



Requirements

(a) Prepare the consolidated balance sheet of Hemmingway Ltd at 30 June 20X4.


(b) Hemmingway Ltd is considering the purchase of more shares in Innes Ltd which will make Innes Ltd anassociate of Hemmingway Ltd. State briefly and justify the appropriate accounting treatment in theconsolidated balance sheet of Hemmingway Ltd if Innes Ltd becomes an associate. (3 marks)

(18 marks)

32 Highland Ltd

The draft summarised balance sheets of Highland Ltd and Lowland Ltd at 31 December 20X2 are set outbelow. On 31 March 20X2 Highland Ltd acquired for cash 75% of the CU1 ordinary shares in Lowland Ltd. Theretained earnings of the two companies at 1 January 20X2 were CU2,800,000 and CU1,500,000 respectively.

Highland Ltd Lowland LtdASSETS CU'000 CU'000 CU'000 CU'000Non-current assets

Property, plant and equipment 3,560 2,800Investment in Lowland Ltd 2,940 –

6,500 2,800Current assets

Inventories 1,150 550Trade receivables – group 400 –Trade receivables – other 1,500 800Cash and cash equivalents 100 50

3,150 1,400Total assets 9,650 4,200


Ordinary share capital 3,500 900Share premium account 700 170Retained earnings 3,500 2,300Equity 7,700 3,370

Non-current liabilitiesBorrowings 1,100 110

Current liabilitiesTrade payables – group – 400Trade payables – other 700 240Dividends 150 80

850 720Total equity and liabilities 9,650 4,200


(1) The fair value of Lowland Ltd's property on 31 March 20X2 was CU200,000 above its carrying amount. Allof this relates to the buildings element of the property, which is being depreciated at 4% per annum.

(2) At the date of acquisition the replacement cost of raw material inventories was CU400,000. The carryingamount was CU300,000. At 31 December 20X2 30% of these raw materials remained in inventory. Therest had been converted to finished goods and sold to third parties.

(3) Highland Ltd has not yet recognised in its draft balance sheet the dividend receivable from Lowland Ltd,which was declared out of post-acquisition profits.

(4) Since the date of acquisition Highland Ltd has sold to Lowland Ltd inventories valued at CU800,000; halfof these goods remained in the inventories of Lowland Ltd at 31 December 20X2. Highland Ltd calculatedthe transfer price of the goods at cost plus a mark-up of 25%.

QUESTION BANK


(5) It is the accounting policy of Highland Ltd to undertake annual reviews for goodwill impairment. At31 December 20X2 an impairment of CU20,000 was identified in respect of Lowland Ltd.

Requirements

(a) Prepare the consolidated balance sheet of Highland Ltd as at 31 December 20X2.


(b) Explain the purpose of group financial statements and the concepts underlying their preparation.(6 marks)

(24 marks)

33 Ullapool Ltd

Ullapool Ltd acquired 70% of the ordinary share capital of Kyle Ltd on 1 May 20X7. The considerationcomprised CU500,000 cash payable 1 May 20X7 and 3 million 25p ordinary shares issued on 1 May 20X7(market value 50p). Professional advisers' fees on the acquisition amounted to CU250,000.

On 31 August 20X7 Ullapool Ltd acquired 30% of the ordinary share capital of Portree Ltd (incorporated on1 November 20X6) for CU590,000 cash. Portree Ltd should be accounted for as an associate.

The draft summarised balance sheets of the three companies at 31 October 20X7 showed the following.

Ullapool Ltd Kyle Ltd Portree LtdASSETS CU'000 CU'000 CU'000 CU'000 CU'000 CU'000Non-current assets

Property, plant andequipment 6,500 2,900 1,800

Investments 2,840 – –9,340 2,900 1,800

Current assetsInventories 900 830 420Trade receivables 430 350 130Cash and cash equivalents 330 120 150

1,660 1,300 700Total assets 11,000 4,200 2,500


Issued CU1 ordinaryshares

– 1,700 800

Issued 25p ordinary shares 4,750 – –Share premium 1,250 – –Retained earnings 2,200 1,850 1,200

Equity 8,200 3,550 2,000Current liabilities

Trade payables 2,800 650 500Total equity and liabilities 11,000 4,200 2,500


(1) The CU2,840,000 investments in the balance sheet of Ullapool Ltd comprise CU2,250,000 in respect ofKyle Ltd and CU590,000 in respect of Portree Ltd.

(2) The company estimates that a further cost of the acquisition of Kyle Ltd was CU50,000 for its own stafftime. This has been charged to the income statement in the year ended 31 October 20X7.

(3) At the date of acquisition land held by Kyle Ltd had a market value of CU290,000 in excess of its carryingamount. In addition inventories included raw materials at an original cost of CU150,000, which had areplacement cost of CU182,000. These inventories had all been sold by the year end.

(4) As at 31 October 20X7 the impairment review indicated losses of CU1,000 in relation to the acquisitionof Portree Ltd.



(5) At the dates of acquisition the retained earnings of Kyle Ltd and Portree Ltd were CU1.25 million andCU1 million respectively.

(6) The inventories of Ullapool Ltd include goods purchased from Kyle Ltd for CU51,000 on 10 October20X7. Kyle Ltd applies a mark-up of 50% on the cost of its goods. Ullapool Ltd had paid for CU31,000 ofthese goods on 20 October. The final CU20,000 was paid on 30 October 20X7, but Kyle Ltd did notreceive and account for the CU20,000 cheque until 3 November 20X7.

Requirement

Prepare the consolidated balance sheet of Ullapool Ltd as at 31 October 20X7. (14 marks)


34 Law Ltd

Law Ltd acquired holdings in Balgay Ltd and Newtyle Ltd as follows.

Balgay Ltd 70% of the ordinary share capital on 1 July 20X0 for CU5.5 million cash.Newtyle Ltd 40% of the ordinary share capital on 10 May 20W7 for CU1 million cash.

The summarised balance sheets of the companies as at 31 August 20X1 were as follows.

Law Ltd Balgay Ltd Newtyle LtdCU'000 CU'000 CU'000


Property, plant and equipment 7,500 6,000 2,500Investments 6,500 – –Intangibles 100 120 –

Current assetsInventories 1,000 500 200Trade and other receivables 1,100 450 190Cash and cash equivalents 200 50 90

Total assets 16,400 7,120 2,980


Ordinary share capital 10,000 6,000 1,000Preference share capital (irredeemable) 2,000 – –Revaluation reserve – 500 –Retained earnings/(losses) 3,000 (280) 1,820

15,000 6,220 2,820

Current liabilitiesTrade and other payables 700 720 110Dividends 700 180 50

Total equity and liabilities 16,400 7,120 2,980


(1) The intangibles carried by Balgay Ltd are CU70,000 goodwill acquired on the acquisition of the net assetsand trade of an unincorporated business in 20W9, and CU50,000 relating to legal rights acquired in thesame year over specialised machinery, without which Balgay Ltd cannot operate.

QUESTION BANK


(2) The reserves of the companies on the dates of acquisition of share capital were as follows.

Revaluation Retainedreserve earningsCU'000 CU'000

Newtyle Ltd 10 May 20W7 900Balgay Ltd 1 July 20X0 500 600

(3) There have been no changes in the share capitals of the companies since Law Ltd acquired the shares.

(4) As at 31 August 20X1 the impairment reviews revealed cumulative losses of CU116,000 relating to thegoodwill arising in the business combination with Balgay Ltd and CU120,000 in respect of the investmentin Newtyle Ltd. Goodwill in respect of Balgay Ltd was originally estimated to have a useful life of fiveyears.

(5) Balgay Ltd sold a property to Law Ltd on 1 September 20X0 for CU400,000. The property had a carryingamount of CU300,000 in the accounts of Balgay Ltd as at 1 September 20X0, with an original cost ofCU600,000 in September 20W5 and an estimated useful life of ten years from that date.

(6) Current liabilities of the companies include the following amounts for dividends declared before the yearend.

Ordinary Preferenceshares shares

CU'000 CU'000Law Ltd 500 200Balgay Ltd 180Newtyle Ltd 50

Law Ltd has not yet accounted for any dividends receivable.

Requirement

Prepare the consolidated balance sheet of Law Ltd as at 31 August 20X1.


35 Heeley Ltd

Heeley Ltd, a listed company, has investments in two companies, Sothall Ltd and Aughton Ltd. The draftsummarised balance sheets of the three companies at 31 December 20X3 are shown below.

Heeley Ltd Sothall Ltd Aughton LtdCU'000 CU'000 CU'000 CU'000 CU'000 CU'000

ASSETSNon-current assetsProperty, plant and

equipment 5,200 4,000 8,000Investments 18,600 – –

23,800 4,000 8,000Current assetsInventories 2,300 1,600 4,500Trade and other

receivables 4,800 2,400 3,700Amount due from

Sothall Ltd 500 – –Cash and cash equivalents 1,100 300 400

8,700 4,300 8,60032,500 8,300 16,600



Heeley Ltd Sothall Ltd Aughton LtdCU'000 CU'000 CU'000 CU'000 CU'000 CU'000

EQUITY AND LIABILITIESCapital and reservesIssued CU1 ordinary

shares20,000 5,000 6,000

Retained earnings/(losses) 6,500 (1,000) 5,000Equity 26,500 4,000 11,000Non-current liabilitiesBorrowings – 2,000 –

Current liabilitiesTrade and other payables 3,700 1,500 4,200Taxation 2,300 500 1,400Amount due to Heeley

Ltd– 300 –

6,000 2,300 5,600Total equity and liabilities 32,500 8,300 16,600


(1) Heeley Ltd acquired 3 million CU1 ordinary shares in Sothall Ltd on 1 April 20X1 for CU3 cash per share.At that date the credit balance on Sothall Ltd's retained earnings was CU4 million.

(2) On 1 April 20X3 Heeley Ltd acquired 2.4 million CU1 ordinary shares in Aughton Ltd for CU4 cash pershare. Aughton Ltd should be accounted for as an associate. The draft profit of Aughton Ltd for the yearended 31 December 20X3 was CU6 million, which accrued evenly over the year.

(3) Professional fees of CU500,000 incurred by Heeley Ltd, which are directly attributable to the acquisitionof Aughton Ltd, have been charged in the income statement of Heeley Ltd.

(4) The fair value of the freehold land of Sothall Ltd was CU1 million in excess of its carrying amount at thedate of acquisition.

(5) Impairment reviews carried out since acquisition have revealed the following losses in relation to goodwilland the investment in the associate.

For year ended 31 December Sothall Ltd Aughton LtdCU'000 CU'000

20X1 30020X2 80020X3 700 1,500

(6) On 27 December 20X3 Sothall Ltd sent a cash payment of CU200,000 to Heeley Ltd. Heeley Ltd receivedthe cash on 5 January 20X4.

(7) Heeley Ltd sold goods at a transfer price of CU1 million to Sothall Ltd during the year; three quarters ofthese goods remained in the inventory of Sothall Ltd at the year end. Heeley Ltd calculates the price ofthe goods using a gross profit of 20% on the transfer price.

(8) After Aughton Ltd's draft balance sheet was prepared, it was discovered that no revenue had beenrecognised for sales totalling CU200,000 made on the last three days of the accounting period, eventhough the relevant goods had been despatched to customers and excluded from Aughton Ltd'sinventories at 31 December 20X3.

Requirement

Prepare the consolidated balance sheet of Heeley Ltd as at 31 December 20X3. (16 marks)


QUESTION BANK


36 Harris Ltd

Harris Ltd has investments in two companies, Scalpay Ltd and Auskerry Ltd. The draft, summarised balancesheets of the three companies at 31 December 20X5 are shown below.

Harris Ltd Scalpay Ltd Auskerry LtdASSETSNon-current assets CU'000 CU'000 CU'000

Property, plant and equipment 20,200 15,100 8,600Investment in Scalpay Ltd 20,000 – –Investment in Auskerry Ltd 4,000 – –

Current assetsInventories 3,500 2,700 1,400Trade receivables 2,300 1,600 900Cash and cash equivalents 200 300 100

Total assets 50,200 19,700 11,000

Capital and reservesIssued CU1 ordinary shares 35,000 15,000 8,000Retained earnings 6,000 2,300 1,900

Non-current liabilitiesDebentures 6,000 1,000 500

Current liabilitiesTrade payables 3,200 1,200 600Dividends – 200 –

Total equity and liabilities 50,200 19,700 11,000


(1) Harris Ltd acquired 75% of the CU1 ordinary shares in Scalpay Ltd on 1 October 20X3. At that date thebalance on Scalpay Ltd's retained earnings was CU1,800,000.

(2) On 1 October 20X5 Harris Ltd acquired 30% of the CU1 ordinary shares in Auskerry Ltd. The profit forAuskerry Ltd for the year ended 31 December 20X5 was CU600,000, and this profit accumulated evenlyover the year. Auskerry Ltd paid no dividends in the year ended 31 December 20X5. Auskerry Ltd shouldbe accounted for as an associated company of Harris Ltd.

(3) Harris Ltd has calculated that the costs incurred in acquiring Auskerry Ltd were CU200,000 and this sumhas been charged to the income statement of Harris Ltd. This comprises CU120,000 allocated overheadsfrom the acquisitions department and CU80,000 of directly attributable costs.

(4) The fair value of the land in Scalpay Ltd was CU1 million in excess of carrying amount at the date ofacquisition.

(5) Harris Ltd has not recognised the dividend receivable from Scalpay Ltd in its draft balance sheet at31 December 20X5.

(6) At 1 October 20X3 Scalpay Ltd had a contingent liability relating to a legal claim against the company ofCU400,000, for which the fair value was estimated at CU300,000. An out of court settlement was agreedon 30 June 20X5 and CU300,000 was paid to settle the case.

(7) Harris Ltd has carried out annual impairment reviews on goodwill. On 31 December 20X4 an impairmentloss of CU100,000 was recognised on the goodwill relating to Scalpay Ltd, but there have been no furtherimpairment losses identified.

(8) Scalpay Ltd sold goods to Harris Ltd valued at CU800,000 during the year ended 31 December 20X5 anda quarter of these goods have been re-sold by Harris Ltd. Scalpay Ltd calculated the transfer price of thegoods at cost plus a mark-up of 25%.

(9) Harris Ltd's draft financial statements at 31 December 20X5 included a note explaining a contingent assetof CU200,000. This sum was received on 31 January 20X6. This should now be accounted for as anadjusting event after the balance sheet date.



Requirements

(a) Prepare the consolidated balance sheet of Harris Ltd at 31 December 20X5. (15 marks)


(b) Explain in what circumstances, if any, Auskerry Ltd could have been considered to be an associatedcompany of Harris Ltd if the shareholding had been 15%, rather than 30%. (4 marks)

(19 marks)

37 Lowland Ltd

Lowland Ltd acquired two subsidiaries as follows.

1 July 20X1 80% of Aviemore Ltd for CU5 million when the carrying amount of the net assets ofAviemore Ltd was CU4 million (represented by share capital of CU3,800,000 andretained earnings of CU200,000).

30 November 20X7 65% of Buchan Ltd for CU2 million when the carrying amount of the net assets ofBuchan Ltd was CU1.6 million (represented by share capital of CU1,200,000 andretained earnings of CU400,000).

The income statements of the companies for the year ended 31 March 20X8 were as follows.

Lowland Aviemore BuchanLtd Ltd Ltd

CU'000 CU'000 CU'000Revenue 5,000 3,000 2,910Cost of sales (3,000) (2,300) (2,820)Gross profit 2,000 700 90Net operating expenses (1,000) (500) (150)Finance cost – (50) (210)Investment income 230 – –Profit/(loss) before tax 1,230 150 (270)Income tax expense (300) (50) –Profit/(loss) for the year 930 100 (270)

Extracts from the statements of changes in equity of the companies (all relating to retained earnings) for theyear ended 31 March 20X8 were as follows.

Lowland Aviemore BuchanLtd Ltd Ltd

CU'000 CU'000 CU'000Net profit/(loss) for the year 930 100 (270)Interim dividends on ordinary shares (200) (50) –

730 50 (270)Balance brought forward 1,500 240 580Balance carried forward 2,230 290 310


(1) On 1 April 20X7 Buchan Ltd issued CU2.1 million 10% loan stock to Lowland Ltd. Interest is payabletwice yearly on 1 October and 1 April. Lowland Ltd has accounted only for the interest received on1 October 20X7.

(2) On 1 April 20X7 Aviemore Ltd sold a freehold property to Lowland Ltd for CU800,000 (land elementCU300,000). The property originally cost CU900,000 (land element CU100,000) on 1 April 20W7. Theproperty's total useful life was 50 years on 1 April 20W7 and there has been no change in the useful lifesince that time. Aviemore Ltd has credited the profit on disposal to 'Net operating expenses'.

(3) The property, plant and equipment of Buchan Ltd on 30 November 20X7 was valued at CU500,000(carrying amount CU350,000) and was all acquired in April 20X7. Those assets have a total useful life often years. Buchan Ltd has not adjusted its accounting records to reflect fair values.

QUESTION BANK


(4) Lowland Ltd charges Aviemore Ltd an annual fee of CU85,000 for management services. This has beenrecognised by Lowland Ltd in 'Investment income'.

(5) Lowland Ltd has recognised its dividend received from Aviemore Ltd in 'Investment income'.

(6) In 20X2 the impairment review revealed a loss of CU1,080,000 in relation to Aviemore Ltd. A furtherloss of CU180,000 has been identified in the current year. In addition, the impairment review in relationto the acquisition of Buchan Ltd has revealed a loss of CU102,000.

Requirement

Prepare the consolidated income statement for Lowland Ltd for the year ended 31 March 20X8 and themovement on retained earnings and minority interest as they would appear in the consolidated statement ofchanges in equity for the year ended 31 March 20X8. (22 marks)


38 Vanguard Ltd

Vanguard Ltd owns 75% of the ordinary share capital of Formidable Ltd and 45% of the ordinary share capitalof Albion Ltd. The draft income statements of the three companies for the year ended 31 March 20X4 were asfollows.

Vanguard Formidable AlbionLtd Ltd LtdCU CU CU

Revenue 346,932 289,028 75,201Cost of sales (261,023) (202,319) (55,342)Gross profit 85,909 86,709 19,859Net operating expenses (53,811) (55,606) (9,765)Profit from operations 32,098 31,103 10,094Finance cost (2,301) (1,500) (1,121)Investment income 24,244 3,242 –Profit before tax 54,041 32,845 8,973Income tax expense (15,753) (6,982) (1,863)Profit for the period 38,288 25,863 7,110

Extracts from the statements of changes in equity of the companies (all relating to retained earnings) for theyear ended 31 March 20X4 were as follows.

Vanguard Formidable AlbionLtd Ltd LtdCU CU CU

Net profit for the year 38,288 25,863 7,110Interim dividends on ordinary shares (9,000) (20,500) (5,500)

29,288 5,363 1,610Balance brought forward 539,260 327,530 25,850Balance carried forward 568,548 332,893 27,460


(1) Details of intra-group trading are as follows.

CUSales by Vanguard Ltd to Formidable Ltd 35,908Cost to Formidable Ltd of inventory items purchased from Vanguard Ltd

At 31 March 20X3 5,600At 31 March 20X4 8,350

Vanguard Ltd has a standard mark-up on cost of 25% for sales to Formidable Ltd. Vanguard Ltd held noinventories purchased from Albion Ltd at either the start or the end of the year.

(2) All dividends have been fully accounted for in the draft figures given.



(3) Formidable Ltd was acquired on 1 April 20X0 for CU415,000 when the carrying amount of its net assetswas CU485,000. Retained earnings of Formidable Ltd were CU150,000 at this date.

(4) During the acquisition process the management of Vanguard Ltd identified a number of intangible assetswhich were not recognised in the financial statements of Formidable Ltd. The fair values were measuredreliably at CU15,000. The useful life of these intangible assets was estimated at 20 years. No other fairvalue adjustments were identified.

(5) Albion Ltd was acquired in April 20X2 for CU53,000 when its retained earnings were CU3,500 and thecarrying amount of its net assets was CU90,000. There was no material difference between the carryingamount and fair value of Albion Ltd's net assets.

(6) An impairment loss in respect of the goodwill acquired in the business combination with Formidable Ltdof CU12,000 was recognised in the financial statements for the year ended 31 March 20X3. A further lossof CU4,000 still needs to be recognised in the current year financial statements. A current yearimpairment loss of CU1,250 still needs to be recognised in the financial statements in respect of theinvestment in Albion Ltd. No previous impairment losses had been identified in respect of Albion Ltd.

Requirements

(a) Prepare the consolidated income statement of Vanguard Ltd for the year ended 31 March 20X4, and themovement on retained earnings as it would appear in the consolidated statement of changes in equity forthe year ended 31 March 20X4. (16 marks)

(b) Calculate the carrying amount of goodwill in respect of Formidable Ltd that would appear in theconsolidated balance sheet of Vanguard Ltd as at 31 March 20X4. (2 marks)

(18 marks)

39 Heaton Ltd

Heaton Ltd has investments in two companies, Sharston Ltd and Ardwick Ltd. Extracts from the draft financialstatements of the three companies for the year ended 31 March 20X4 are shown below.

Income statements

Heaton Sharston ArdwickLtd Ltd Ltd

CU'000 CU'000 CU'000Revenue 23,700 12,500 5,200Cost of sales (17,580) (9,770) (3,350)Gross profit 6,120 2,730 1,850Expenses (2,870) (700) (430)Profit from operations 3,250 2,030 1,420Finance cost (220) (50) (40)Dividend received 320 – –Profit before tax 3,350 1,980 1,380Income tax expense (1,230) (650) (480)Profit for the period 2,120 1,330 900

Extracts from statement of changes in equity (retained earnings)

Heaton Sharston ArdwickLtd Ltd Ltd

CU'000 CU'000 CU'000Net profit for period 2,120 1,330 900Ordinary share dividends (1,000) (400) –

1,120 930 900Balance brought forward 4,250 2,200 1,450Balance carried forward 5,370 3,130 2,350

The only equity reserve of each company is retained earnings.

QUESTION BANK



(1) The issued share capital of each company is

CU1 ordinary sharesHeaton Ltd 6 millionSharston Ltd 5 millionArdwick Ltd 4 million

There have been no movements in share capital since 1 April 20X2.

(2) Heaton Ltd acquired 80% of the CU1 ordinary shares in Sharston Ltd on 1 April 20X2 for CU6.4 million.At that date the balance on Sharston Ltd's retained earnings was a credit balance of CU625,000.

(3) On 1 October 20X3 Heaton Ltd acquired 30% of the CU1 ordinary shares in Ardwick Ltd for CU1.97million. Ardwick Ltd should be accounted for as an associate.

(4) Profits accrued evenly over the current year.

(5) The fair value of the plant and equipment of Sharston Ltd was CU500,000 in excess of its carrying amountat the date of acquisition. The remaining useful life of the plant and equipment was assessed at five yearsfrom that date.

(6) The impairment reviews relating to Sharston Ltd and Ardwick Ltd revealed the following losses.

Sharston ArdwickLtd Ltd

CU'000 CU'000Year ended 31 March 20X3 300 –

20X4 300 20

(7) Heaton Ltd sold goods at a transfer price of CU2 million to Ardwick Ltd in January 20X4; one half ofthese goods remained in Ardwick Ltd's inventories at the year end. Heaton Ltd calculates the price of thegoods using a mark up of 25% on cost.

Requirements

(a) Prepare the consolidated income statement of Heaton Ltd for the year ended 31 March 20X4.(8 marks)

(b) Prepare the retained earnings and minority interest sections of the consolidated statement of changes inequity of Heaton Ltd for the year ended 31 March 20X4. (5 marks)

(c) Explain the single entity concept. (2 marks)

(15 marks)


40 Jerome Ltd

Jerome Ltd acquired 400,000 ordinary shares of George Ltd ten years ago for CU1,820,000. The share capitalof George Ltd was 500,000 CU1 ordinary shares. Goodwill acquired in the business combination wasCU800,000.

On 1 July 20X7 Jerome Ltd acquired 40,000 of Harris Ltd's 100,000 CU1 ordinary share capital for CU4million. The carrying amount of the assets at acquisition was CU8,500,000. No fair value adjustments wereidentified.



The results for these companies for the year ended 31 December 20X7 are as follows.

Jerome Ltd George Ltd Harris LtdCU'000 CU'000 CU'000

Revenue 3,268 2,500 1,500Cost of sales (1,840) (1,375) (1,050)Gross profit 1,428 1,125 450Distribution costs (115) (190) (25)Administrative expenses (93) (245) (45)Profit from operations 1,220 690 380Finance cost (50) (15) (20)Investment income 335 – –Profit before tax 1,505 675 360Income tax expense (315) (175) (100)Profit after tax 1,190 500 260

Extracts from the statement of changes in equity (all relating to retained earnings) for the year ended31 December 20X7 are as follows.

Jerome Ltd George Ltd Harris LtdCU'000 CU'000 CU'000

Profit for the year 1,190 500 260Dividends on ordinary shares (declared on

1 April 20X7 and paid on 1 May 20X7) (200) (300) (80)990 200 180

Balance brought forward 5,310 12,520 340Balance carried forward 6,300 12,720 520

The following information is available.

(1) On 1 January 20X6 George Ltd transferred a non-current asset to Jerome Ltd for CU28,000. George Ltdhad purchased this asset on 1 January 20X3 for CU30,000. The asset had a total useful life of ten yearswith a residual value of nil.

Depreciation on this non-current asset is allocated to administrative expenses.

(2) Jerome Ltd has accounted for its share of any dividends received from George Ltd and Harris Ltd.

(3) The 20X7 impairment review revealed that no impairment adjustment needed to be made in respect ofGeorge Ltd, but that an impairment loss of CU31,000, which has not yet been accounted for, wasrequired in respect of the investment in Harris Ltd.

(4) On 1 April 20X6 Jerome Ltd made loans of CU100,000 to George Ltd and CU150,000 to Harris Ltd.Both of these loans carry interest at 10%.

(5) Profits accrue evenly over the year.

Requirements

(a) Prepare the consolidated income statement for Jerome Ltd for the year ended 31 December 20X7.(9 marks)

(b) Prepare the movement on retained earnings as it would appear in the consolidated statement of changesin equity for the year ended 31 December 20X7. (6 marks)

(c) Calculate the carrying amount of the investment in Harris Ltd that would be presented in theconsolidated balance sheet of Jerome Ltd at 31 December 20X7. (2 marks)

(17 marks)


QUESTION BANK


41 Hardmead Ltd

Hardmead Ltd prepares its consolidated financial statements in accordance with BFRS. Hardmead Ltd hasinvestments in two companies, Stony Ltd and Stratford Ltd.

Extracts from the draft financial statements of the three companies at 30 September 20X5 are shown below:

Income statements HardmeadLtd

Stony Ltd Stratford Ltd

CU'000 CU'000 CU'000Revenue 10,040 7,500 4,600Cost of sales (8,760) (6,900) (3,000)Gross profit 1,280 600 1,600Operating expenses (400) (420) (1,120)Profit from operations 880 180 480Dividends received 80 – –Profit before taxation 960 180 480Income tax expense (400) (60) (160)Net profit for year 560 120 320

Extracts from statements of changes in equity

Retained earningsHardmead

LtdStony Ltd Stratford Ltd

CU'000 CU'000 CU'000Balance brought forward 2,500 6,400 2,000Net profit for period 560 120 320Ordinary share dividends (600) (100) –Balance carried forward 2,460 6,420 2,320


(1) The issued share capital of each company is:

CU1 ordinary sharesHardmead Ltd 2 millionStony Ltd 1 millionStratford Ltd 3 million

(2) Hardmead Ltd acquired 80% of the CU1 ordinary shares in Stony Ltd on 30 September 20X1 for CU6million. The retained earnings of Stony Ltd on that date were CU6 million.

(3) On 1 November 20X2, Hardmead Ltd acquired 60% of the CU1 ordinary shares in Stratford Ltd for CU4million. The retained earnings of Stratford Ltd at that date were CU3 million.

(4) Hardmead Ltd disposed of its entire holding in Stratford Ltd for CU3 million on 31 March 20X5. It hasnot yet accounted for this disposal. Profits in Stratford Ltd have accrued evenly throughout the year.

(5) The fair value of the plant and equipment of Stony Ltd was CU200,000 in excess of its carrying amount atthe date of acquisition. The remaining useful life of the plant and equipment was assessed at four yearsfrom that date.

(6) Stony Ltd sold goods to Hardmead Ltd at a transfer price of CU180,000 during the year ended 30September 20X5. The transfer price was based on a mark-up of 50% on cost. One third of the goodsremained in the inventory of Hardmead Ltd at the year end.

(7) Hardmead Ltd's inventory includes 5,000 finished goods items with a carrying amount of CU100 each. Thenormal selling price of these items is CU120 per item and selling commissions are CU30 per item.Hardmead Ltd had a contract in place to sell 2,000 items to a customer at CU70 per item in October20X5. No selling commissions will be incurred under this contract.

(8) Hardmead Ltd has undertaken annual impairment reviews of goodwill. At 30 September 20X4 impairmentlosses of CU120,000 and CU50,000 for Stony Ltd and Stratford Ltd respectively needed to be recognised.A further impairment loss of CU30,000 has been identified in respect of Stony Ltd for the year ended 30September 20X5.



Requirements

(a) Prepare the consolidated income statement of Hardmead Ltd for the year ended 30 September 20X5.(14marks)

Note: You should assume that the disposal of Stratford Ltd constitutes a discontinued operation inaccordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

(b) Prepare the movements on retained earnings and minority interest that would appear in the consolidatedstatement of changes in equity for the year ended 30 September 20X5. (7 marks)

(c) Set out the principles you have applied in accounting for the disposal of Stratford Ltd. (2 marks)

(23 marks)Note: Work to the nearest CU'000.

42 Tain Ltd

Tain Ltd acquired holdings in other companies as follows.

Banchory Ltd

55% of the ordinary share capital was purchased for CU2.5 million on 1 November 20X4.

Dornoch Ltd

Tain Ltd holds 75% of the ordinary share capital acquired in 20X6. No goodwill was acquired in this businesscombination. Retained earnings at the date of acquisition were CU80,000.

Nairn Ltd

30% of the ordinary share capital was purchased for CU1 million on 1 May 20X9. The net assets of Nairn Ltdhad a carrying amount of CU3 million and a fair value of CU2.7 million at 1 May 20X9.

The income statements of the companies for the year ended 31 October 20X9 were as follows.

Tain Ltd Banchory Ltd Dornoch Ltd Nairn LtdCU'000 CU'000 CU'000 CU'000

Revenue 10,600 5,500 4,700 5,900Cost of sales (7,400) (3,700) (3,520) (4,130)

3,200 1,800 1,180 1,770Operating expenses (1,700) (900) (700) (880)Dividends received 375Profit before tax 1,875 900 480 890Income tax expense (460) (280) (140) (290)Profit after tax 1,415 620 340 600


(1) Banchory Ltd had the following balances on its reserves.

Retainedearnings

Revaluationreserve

CU'000 CU'0001 November 20X4 1,600 30031 October 20X8 2,000 400

There has been no change to the revaluation reserve since 31 October 20X8.

(2) The issued share capitals of Tain Ltd and Banchory Ltd have remained for many years at 5 million and2 million CU1 ordinary shares respectively.

(3) On 31 October 20X9 Tain Ltd disposed of its entire holding in Banchory Ltd for CU3.5 million. Tain Ltdhas not yet accounted for this disposal.

(4) On 1 July 20X9 Dornoch Ltd sold goods to Tain Ltd for CU500,000 on the basis of cost plus a mark-up ofone third. Tain Ltd had CU200,000 of these goods in its inventory at 31 October 20X9.

QUESTION BANK


(5) The goodwill impairment review in relation to the acquisition of Banchory Ltd revealed cumulativeimpairments of CU142,000 at 31 October 20X8. In addition, the 20X9 review in relation to theinvestment in Nairn Ltd revealed that an impairment loss of CU19,000 should be recognised.

(6) During the year Tain Ltd and Dornoch Ltd declared total dividends of CU700,000 and CU500,000respectively.

(7) Retained earnings at 31 October 20X8 for the other group companies were as follows.

CU'000Tain Ltd 2,356Dornoch Ltd 152Nairn Ltd 562

These companies have no other equity reserves.

Requirement

Prepare the consolidated income statement and consolidated statement of changes in equity of Tain Ltd for theyear ended 31 October 20X9 (excluding the section relating to the minority interest).

Note: You should assume that the disposal of Banchory Ltd constitutes a discontinued operation inaccordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations. You are not required toprovide any additional disclosure notes required by BAS 28 Investments in Associates. Work to the nearestCU'000. (18 marks)

43 Glencoe Ltd

Glencoe Ltd acquired holdings in other companies as follows.

Rannoch Ltd Leven LtdDate of acquisition 1 September 20X7 1 May 20X6Cost of acquisition CU3 million CU10 millionPercentage of ordinary share capital acquired 75% 80%Carrying amount of net assets at date of acquisition(equal to fair value) CU4 million CU11.7 million

The companies' draft income statements for the year ended 31 August 20Y0 and draft balance sheets as at thatdate were as follows.

Income statements for the year ended 31 August 20Y0

Glencoe Ltd Rannoch Ltd Leven LtdCU'000 CU'000 CU'000

Revenue 50,000 11,000 35,000Cost of sales (32,000) (7,000) (23,000)

18,000 4,000 12,000Operating expenses (10,000) (2,000) (7,000)Profit before tax 8,000 2,000 5,000Income tax expense (2,500) (600) (1,500)Profit after tax 5,500 1,400 3,500

Balance sheets as at 31 August 20Y0

ASSETS CU'000 CU'000 CU'000Non-current assets

Property, plant and equipment 29,500 3,500 10,000Investments (3,000)

Current assets 36,000 5,900 8,000Total assets 62,500 9,400 18,000



Glencoe Ltd Rannoch Ltd Leven LtdEQUITY AND LIABILITIES CU'000 CU'000 CU'000Capital and reservesOrdinary share capital 35,000 4,000 7,000Retained earnings 17,500 1,400 9,000

52,500 5,400 16,000Current liabilities 10,000 4,000 2,000Total equity and liabilities 62,500 9,400 18,000


(1) Glencoe Ltd disposed of its entire holding in Leven Ltd for CU14 million on 1 June 20Y0. It has not yetaccounted for this disposal except to debit bank and credit the sales proceeds to investments. Profits inLeven Ltd have accrued evenly throughout the year.

(2) Glencoe Ltd disposed of one-fifth of its holding in Rannoch Ltd for CU2,000,000 on the last day of itsfinancial year. The only accounting entries made have been, as for Leven Ltd, to debit bank and credit thesales proceeds to investments.

(3) As at 31 August 20X9 the impairment reviews revealed cumulative losses of CU256,000 in relation to theacquisition of Leven Ltd.

(4) There has been no change in the issued share capitals of the companies since the dates of acquisition.

(5) After Rannoch Ltd's draft financial statements had been prepared, it was discovered that operatingexpenses invoices totalling CU200,000 had been omitted in error from trade payables at 31 August 20Y0.

Requirement

Prepare the consolidated income statement of Glencoe Ltd for the year ended 31 August 20Y0 and theconsolidated balance sheet as at that date.

Note: You should assume that the disposal of Leven Ltd constitutes a discontinued operation in accordancewith BFRS 5 Non-Current Assets Held for Sale and Discontinued Operations but that the disposal of Rannoch Ltddoes not. Work to the nearest CU'000. (17 marks)

44 Herdings Ltd

Herdings Ltd acquired 8,000,000 CU1 ordinary shares in Sandygate Ltd on 1 April 20X1 for CU2.50 cash pershare. At that date the balance on Sandygate Ltd's retained earnings was CU5,000,000. On 1 October 20X2Herdings Ltd acquired 1,500,000 CU1 ordinary shares in Abbeydale Ltd for CU4 cash per share. Abbeydale Ltdshould be accounted for as an associate.

The draft summarised balance sheets of the three companies at 31 March 20X3 are shown below.

Herdings Ltd Sandygate Ltd Abbeydale LtdCU'000 CU'000 CU'000 CU'000 CU'000 CU'000


Property, plant andequipment 13,100 16,400 12,200

Investments 23,500 – –36,600 16,400 12,200

Current assetsInventories 8,100 5,230 3,000Trade receivables 6,850 4,950 4,140Cash and cash equivalents 3,750 150 50

18,700 10,330 7,190Total assets 55,300 26,730 19,390

QUESTION BANK


Herdings Ltd Sandygate Ltd Abbeydale LtdCU'000 CU'000 CU'000 CU'000 CU'000 CU'000


Issued CU1 ordinaryshares

12,000 10,000 5,000

Retained earnings 9,740 8,200 9,00021,740 18,200 14,000

Non-current liabilities7% secured bank debt 26,000 2,000 –

Current liabilitiesTrade payables 5,560 5,450 4,600Taxation 1,700 880 790Dividends 300 200 –

7,560 6,530 5,390Total equity and liabilities 55,300 26,730 19,390


(1) The fair value of the plant of Sandygate Ltd was CU2,000,000 in excess of its carrying amount at the dateof acquisition. The group policy is to depreciate plant over ten years.

(2) At the acquisition date the financial statements of Sandygate Ltd disclosed a contingent liability for anenvironmental damages claim. An independent expert quantified the fair value of the claim as CU100,000at that date.

(3) Herdings Ltd has not recognised the dividend receivable from Sandygate Ltd in its draft balance sheet.

(4) Herdings Ltd has undertaken annual reviews of goodwill for impairment. At 31 March 20X2 animpairment loss of CU1,680,000 was recognised in respect of Sandygate Ltd.

(5) Sandygate Ltd sold goods valued at CU3,300,000 to Herdings Ltd during the year; half of these goodsremained in the inventories of Herdings Ltd at the year end. Sandygate Ltd calculated the transfer price ofthe goods at cost plus a mark-up of 10%.

(6) On 30 September 20X2 Herdings Ltd sold 1,000,000 of its 8,000,000 shares in Sandygate Ltd forCU3,500,000. Herdings Ltd recorded the profit on sale correctly in its own financial statements.

(7) The profits of Sandygate Ltd and Abbeydale Ltd for the year of CU3,000,000 and CU4,000,000respectively accrued evenly over the year.

Requirements

(a) Calculate the group profit on the disposal of the shares in Sandygate Ltd. (3 marks)

(b) Prepare the consolidated balance sheet of Herdings Ltd as at 31 March 20X3. (18 marks)

(c) A third party controls 60% of the ordinary shares in Abbeydale Ltd. Discuss whether Herdings Ltd shouldcontinue to classify its investment in Abbeydale Ltd as an associate. (2 marks)

(23 marks)




45 Camden Ltd

Camden Ltd holds 72% of the ordinary share capital of Kentish Ltd (acquired on 1 March 20X5) and 60% of theordinary share capital of Tufnell Ltd (acquired on 1 October 20X3). Camden Ltd paid CU2 million andCU3 million respectively for these investments. Retained earnings of Tufnell Ltd on acquisition wereCU450,000.

Camden Ltd has no other investments and none of the companies has any preference share capital. Kentish Ltdhas share capital of CU1 million and Tufnell Ltd of CU1.5 million.

The income statements for the year ended 30 September 20X5 are set out below.

Camden Ltd Kentish Ltd Tufnell LtdCU'000 CU'000 CU'000

Revenue 151,360 32,400 95,040Cost of sales and expenses (after creditingdividends received from Kentish Ltd and Tufnell Ltd) (134,904) (28,750) (83,750)Profit from operations 16,456 3,650 11,290Income tax expense (5,436) (1,250) (3,820)Profit for the period 11,020 2,400 7,470


(1) The three companies paid interim dividends of CU2,820,000, CU336,000 and CU2,460,000 respectivelyon 1 May 20X5. Retained earnings at 1 October 20X4 were as follows.

CU'000Camden Ltd 11,820Kentish Ltd 5,430Tufnell Ltd 8,210

(2) On 30 June 20X5 Camden Ltd sold half of its shares in Tufnell Ltd for CU5 million but retained significantinfluence over that company. No impairments in the value of the investment have ever been identified.Camden Ltd has credited the sales proceeds to a suspense account.

(3) Included in the inventories of Kentish Ltd at 30 September 20X5 was CU240,000 for goods purchased inJune 20X5 from Camden Ltd, which the latter company had invoiced at a 20% gross profit margin. Thesewere the only goods sold by Camden Ltd to Kentish Ltd. During the year, prior to the sale of shares inTufnell Ltd, Camden Ltd made sales of CU345,000 to Tufnell Ltd, none of which were included ininventory at the year end.

Requirements

(a) Prepare a consolidated income statement and extracts from the statement of changes in equity forCamden Ltd (retained earnings and minority interests columns only) for the year ended 30 September20X5. You should assume that the partial disposal of Tufnell Ltd does not constitute a discontinuedoperation in accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

(22 marks)

(b) Calculate the carrying amount of Tufnell Ltd in the consolidated balance sheet of Camden Ltd as at30 September 20X5. (2 marks)

(c) Explain your accounting treatment of the following items in the consolidated income statement ofCamden Ltd, referring to the principles underlying the preparation of group accounts.

(i) Consolidation of Kentish Ltd

(ii) Dividends received by Camden Ltd

(iii) Intra-group trading

(iv) Unrealised profits in inventories (6 marks)

(30 marks)


QUESTION BANK


46 Gallant Ltd

Gallant Ltd has a number of subsidiary companies and one associated company. There have been no changes inthe holdings of any of these investments for a number of years. The following are the draft consolidatedfinancial statements for Gallant Ltd for the year ended 31 December 20X7. Gallant Ltd has not yet prepared itsconsolidated statement of changes in equity.

Consolidated income statement for the year ended 31 December 20X7CU

Revenue 5,680,500Cost of sales (3,120,600)Gross profit 2,559,900Administrative expenses (987,800)Distribution costs (458,000)Profit from operations 1,114,100Finance cost (75,000)Share of profits of associate 345,600Profit before tax 1,384,700Income tax expense (420,000)Profit for the period 964,700

Attributable toEquity holders of Gallant Ltd 617,900Minority interest 346,800

964,700




Property, plant and equipment 8,396,200 7,078,400Intangibles 420,000 540,500Investments in associates 1,795,800 1,678,900

10,612,000 9,297,800Current assets

Inventories 670,500 865,100Trade and other receivables 269,000 244,500Cash and cash equivalents 30,700 20,200

970,200 1,129,800Total assets 11,582,200 10,427,600


Ordinary share capital (CU1 shares) 4,000,000 2,400,000Share premium account 1,300,000 2,050,000Revaluation reserve 400,000 236,800Retained earnings 1,357,800 1,393,100

Attributable to the equity holders of Gallant Ltd 7,057,800 6,079,900Minority interest 2,345,900 2,948,200Equity 9,403,700 9,028,100

Non-current liabilitiesFinance lease liabilities 376,000 –

Current liabilitiesTrade and other payables 768,500 639,500Taxation 410,000 360,000Finance lease liabilities 124,000 –Ordinary dividend payable 500,000 400,000

1,802,500 1,399,500Total equity and liabilities 11,582,200 10,427,600




(1) The intangibles balance relates to goodwill arising on acquisition of subsidiaries, in respect of which certainimpairment losses have been written off during the year.

(2) On 1 January 20X7 Gallant Ltd made a 1 for 3 bonus issue of ordinary shares. This was followed, later inthe year, by an issue at full market price.

(3) An analysis of the movement on group property, plant and equipment during the year showed that plantwith a carrying amount of CU760,500 was sold for CU800,000. Total depreciation charges for the yearwere CU970,600.

(4) The finance cost in the consolidated income statement relates to the group's only finance lease, which wastaken out at the start of the year, with the first instalment of CU100,000 being paid on the last day of theyear. This lease has been correctly accounted for in accordance with BAS 17 Leases.

Requirement

Prepare a consolidated cash flow statement and note reconciling profit before tax to cash generated fromoperations for Gallant Ltd for the year ended 31 December 20X7, in accordance with BAS 7 Cash FlowStatements, using the indirect method. (17 marks)

47 Slick Ltd

Slick Ltd has a number of subsidiary companies, one of which, Kay Ltd, was acquired during the current year,the year ended 30 June 20X7. The following are the draft consolidated financial statements for Slick Ltd for theyear ended 30 June 20X7 and the balance sheet of Kay Ltd as at the date of acquisition. Slick Ltd has not yetprepared its consolidated statement of changes in equity.

Consolidated income statement for the year ended 30 June 20X7 (extract)

CU'000Loss from operations (611)Finance cost (25)Loss before tax (636)Income tax expense (20)Loss for the period (656)

Attributable toEquity holders of Slick Ltd (686)Minority interest 30

(656)

Balance sheets

Slick Ltd consolidated Kay Ltd30 June 20X7 30 June 20X6 at acquisitionCU'000 CU'000 CU'000


Property, plant and equipment 2,145 1,980 500Intangibles 215 130 –

2,360 2,110 500Current assets

Inventories 670 590 130Trade and other receivables 520 610 200Cash and cash equivalents 10 35 50

Total assets 3,560 3,345 880

QUESTION BANK


Slick Ltd consolidated Kay Ltd30 June 20X7 30 June 20X6 at acquisitionCU'000 CU'000 CU'000


Ordinary share capital (CU1 shares) 1,500 800 500Share premium account 700 500 110Retained earnings 367 1,064 120

2,567 2,364 730Minority interest 341 352 –

Equity 2,908 2,716 730Current liabilities

Trade and other payables 521 489 100Taxation 131 140 50

Total equity and liabilities 3,560 3,345 880


(1) Slick Ltd issued 500,000 CU1 ordinary shares at a premium of 25p and paid a substantial cash sum, inconsideration for 80% of Kay Ltd's shares. At the date of acquisition all of Kay Ltd's assets and liabilities wererecorded at their fair values, with the exception of property, plant and equipment which had a fair value ofCU100,000 in excess of its carrying amount. Goodwill arising on the acquisition was CU100,000.

(2) During the year Slick Ltd made a further issue of ordinary shares, again, at a premium over nominal value.

(3) An analysis of the movement on group property, plant and equipment during the year showed that plantwith a carrying amount of CU500,000 was sold for CU420,000. Total depreciation charges for the yearwere CU657,000.

(4) Intangibles comprise the goodwill arising on the acquisition of Kay Ltd, which has suffered no subsequentimpairment, and research and development expenditure capitalised in accordance with BAS 38 IntangibleAssets. The costs relate to a single project which is now complete and in respect of which amortisationcommenced during the year.

Requirement

Prepare a consolidated cash flow statement, note reconciling profit/loss before tax to cash generated fromoperations and note showing the effects of the acquisition of Kay Ltd for Slick Ltd for the year ended 30 June20X7, in accordance with BAS 7 Cash Flow Statements, using the indirect method.


48 Senorita Ltd

Senorita Ltd has two subsidiary companies, both of which were acquired several years ago. On 1 April 20X5Senorita Ltd sold its 75% interest in Amigo Ltd for cash of CU500,000. The following are the draft consolidatedfinancial statements for Senorita Ltd for the year ended 31 December 20X5. Senorita Ltd has not yet preparedits consolidated statement of changes in equity.

Consolidated income statement for the year ended 31 December 20X5 (extract)

CU'000Continuing operationsProfit before tax 950Income tax expense (130)Profit for the period from continuing operations 820Discontinued operationsProfit for the period from discontinued operations 100Profit for the period 920Attributable toEquity holders of Senorita Ltd 770Minority interest 150

920



Consolidated balance sheet as at 31 December 20X5

20X5 20X4CU'000 CU'000


Property, plant and equipment 3,457 3,045Current assets

Inventories 570 490Trade and other receivables 420 310Cash and cash equivalents 45 –

Total assets 4,492 3,845


Ordinary share capital (CU1 shares) 1,000 800Share premium account 600 300Retained earnings 1,664 1,019

3,264 2,119Minority interest 740 1,052Equity 4,004 3,171Current liabilities

Trade and other payables 221 339Taxation 167 150Bank overdraft – 35Dividends payable to minority 100 150

Total equity and liabilities 4,492 3,845


(1) The net assets of Amigo Ltd on 1 April 20X5 were as follows.

CU'000Property, plant and equipment 450Inventories 120Trade and other receivables 145Cash and cash equivalents 12Trade and other payables (132)Taxation (15)

580

(2) An analysis of the movement on group property, plant and equipment during the year showed that newplant was purchased for cash of CU1,350,000 and old plant was sold for cash of CU600,000. Totaldepreciation charges for the year were CU257,000.

(3) The profit for the period from discontinued operations, all of which is attributable to the disposal ofAmigo Ltd, can be analysed as follows.

CU'000Profit before tax 45Income tax expense (10)Profit on disposal 65

100

Requirement

Prepare a consolidated cash flow statement, note reconciling profit before tax to cash generated fromoperations and note showing the effects of the disposal of Amigo Ltd for Senorita Ltd for the year ended31 December 20X5, in accordance with BAS 7 Cash Flow Statements using the indirect method.

(18 marks)


QUESTION BANK


Single entity financial statements: objective test questions

49 Accounting and reporting concepts

1 Which of the following characteristics of financial information contribute to reliability, according toBFRS Framework for the Preparation and Presentation of Financial Statements?

(1) Freedom from bias

(2) Freedom from material error

(3) Faithful representation

(4) Consistency

A All of the above

B (1), (2) and (3)

C (1), (2) and (4)

D (3) and (4)

2 Which two of the following, per BFRS Framework for the Preparation and Presentation of FinancialStatements, represent the underlying assumptions relating to financial statements?

(1) The accounts have been prepared on an accrual basis

(2) Users are assumed to have sufficient knowledge to be able to understand the financial statements

(3) The accounting policies used have been disclosed

(4) The business is expected to continue in operation for the foreseeable future

(5) The information presented is free from material error or bias

A (1) and (3)

B (2) and (3)

C (1) and (4)

D (3) and (5)

3 Which of the following are the four principal qualitative characteristics of financial information as setout in BFRS Framework for the Preparation and Presentation of Financial Statements?

A Fair presentation, relevance, reliability and comparability

B Relevance, comparability, materiality and understandability

C Relevance, reliability, comparability and understandability

D Materiality, comparability, reliability and fair presentation



4 According to BFRS Framework for the Preparation and Presentation of Financial Statements which of thefollowing does an entity’s income statement, balance sheet and cash flow statement primarily measure?

Income statement Balance sheet Cash flow statement

A Financial position Financial performance Financial adaptability

B Financial performance Financial adaptability Financial position

C Financial adaptability Financial position Financial position

D Financial performance Financial position Financial adaptability

5 Which of the following does BFRS Framework for the Preparation and Presentation of Financial Statementsregard as the essential features of an asset?

(1) The item is acquired at a cost which can be reliably measured

(2) Rights to future economic benefits from the item must be legally enforceable

(3) Rights to future economic benefits from the item must be controlled by the entity

A (1) and (2)

B (2) only

C (3) only

D All of the above

6 Which of the following does BFRS Framework for the Preparation and Presentation of Financial Statementsregard as the essential features of a liability?

(1) The amount of the obligation must be certain

(2) The obligation must be legally enforceable

(3) Settlement of the obligation must involve an outflow of cash

(4) The obligation must arise from past events

A (1) and (3)

B (2) only

C (4) only

D (3) and (4)

QUESTION BANK


7 According to BFRS Framework for the Preparation and Presentation of Financial Statements, which of thefollowing characteristics should make financial information relevant to users?

(1) Materiality

(2) Predictive value and confirmatory value

(3) Completeness

(4) Faithful representation

(5) Comparability

A (1), (2) and (3)

B (2) and (4)

C (1) and (2)

D (4) and (5)

8 Which of the following are roles of the International Accounting Standards Committee Foundation(IASCF)?

(1) To issue IFRS

(2) To examine any identified or alleged departures from IFRS

(3) To guide the International Accounting Standards Board (IASB)

(4) To secure finance

A (1) and (2)

B (1) and (3)

C (2) and (4)

D (3) and (4)

9 Which of the following capital maintenance concepts is most closely associated with historic costaccounting?

A Real financial capital maintenance

B Money financial capital maintenance

C Operating capital maintenance

D Physical capital maintenance



10 Brodie Ltd has been in business for one year, making all sales at a constant margin of 50%.

During the year, Brodie Ltd sold goods with a total selling price of CU210,000. CU130,000 of thesesales were made to credit customers, of which CU100,000 had been received by the end of the year.The remaining CU80,000 were cash sales. Expenses paid during the year amounted to CU20,000 withCU2,000 accrued expenses at the year end.

How much profit did Brodie Ltd make for the year under the accrual basis and under the cashaccounting basis?

Accrual basis Cash accounting basis

A CU85,000 CU68,000

B CU83,000 CU70,000

C CU83,000 CUnil

D CU48,000 CU40,000

11 Doyle Ltd made a profit of CU100,000 for 20X4 based on historic cost accounting principles. Generalprice indices during the year have increased by 5% and specific price indices by 10%.

How much profit should Doyle Ltd record for 20X4 under three different capital maintenance concepts?

A CU100,000 under real financial capital maintenance, CU95,000 under money financial capitalmaintenance, and CU90,000 under physical capital maintenance

B CU100,000 under money financial capital maintenance, CU90,000 under real financial capitalmaintenance, and CU95,000 under physical capital maintenance

C CU100,000 under money financial capital maintenance, CU95,000 under real financial capitalmaintenance, and CU90,000 under physical capital maintenance

D CU90,000 under money financial capital maintenance, CU100,000 under real financial capitalmaintenance, and CU95,000 under physical capital maintenance

12 Gene Ltd has the following assets and liabilities at 31 December 20X5.Note CU

Fixtures and fittings at carrying amount (1) 10,000Receivables (2) 8,000Cash and cash equivalents 1,000Payables (5,000)

14,000

Notes

(1) The fixtures and fittings have been held for three years and had an estimated useful life of six years.If the fixtures and fittings were to be sold on 31 December 20X5 they would realise CU14,000.

(2) If Gene Ltd was to cease trading it is estimated that an allowance against receivables of CU500would need to be made.

At what amount would the net assets be stated in the balance sheet of Gene Ltd at 31 December20X5 under the break-up basis and under the cash accounting basis?

Break-up basis Cash accounting basis

A CU17,500 CU21,000

B CU15,000 CU11,000

C CU17,500 CU11,000

D CU15,000 CU21,000

QUESTION BANK


13 Which of the following contribute to the qualitative characteristic of comparability, according toBFRS Framework for the Preparation and Presentation of Financial Statements?

(1) Neutrality

(2) Corresponding information

(3) Disclosure of accounting policies

(4) Materiality

A All of the above

B (1), (2) and (3)

C (1), (2) and (4)

D (2) and (3)

14 Sam Ltd owns a building with a fair value and carrying amount on 30 June 20X3 of CU500,000. On 1July 20X3 Sam Ltd sold this building to Tyler Ltd for CU400,000. The sale agreement provides for SamLtd to repurchase the building in four years’ time for CU600,000, when the fair value of the building isestimated to be at least CU700,000.

How should the above transaction be accounted for in the financial statements of Sam Ltd for the yearended 30 June 20X4?

A A loss on disposal of a non-current asset of CU100,000

B A profit on disposal of a non-current asset of CU100,000

C A loan of CU500,000

D A loan of CU400,000 and accrued interest

15 Which of the following shows the meaning of the term GAAP in the UK?

A Generally accepted accounting procedures

B General accounting and audit practice

C Generally agreed accounting practice

D Generally accepted accounting practice

16 The BFRS Framework for the Preparation and Presentation of Financial Statements defines a number ofelements of financial statements.

Which of the following represents those elements of the financial statements directly related to themeasurement of financial position?

A Assets, liabilities and cash flows

B Assets, liabilities and equity

C Income, expenses and equity

D Income, expenses and cash flows



50 BAS 1 Presentation of Financial Statements

1 According to BAS 1 Presentation of Financial Statements which of the following statements are correct?

(1) The accounting policies adopted by a company must be disclosed in the notes to the financialstatements

(2) Inappropriate accounting policies can be rectified by disclosure of the policies used or by theinclusion of explanatory material

(3) Companies may choose to prepare their financial statements (except for the cash flowstatement) on either the accrual basis or the cash basis

A All of the above

B (1) and (2)

C (2) and (3)

D (1) only

2 According to BAS 1 Presentation of Financial Statements which of the following items can appear in acompany’s statement of changes in equity?

(1) Net profit or loss for the period

(2) Dividends paid

(3) Surplus on revaluation of properties

(4) Proceeds of issue of share capital

A All of the above

B (1), (2) and (3)

C (1), (3) and (4)

D (2) and (4)

3 BAS 1 Presentation of Financial Statements requires certain items to be disclosed on the face of thefinancial statements and others to be disclosed in the notes.

Which two of the following items must be shown on the face of the income statement?

(1) Depreciation

(2) Revenue

(3) Closing inventory

(4) Finance cost

(5) Dividends

A (1) and (4)

B (3) and (5)

C (2) and (3)

D (2) and (4)

4 BAS 1 Presentation of Financial Statements suggests two possible formats for the income statement, thedifference between them being whether expenses are classified by their nature or by their function.

QUESTION BANK


Which of the following items will be disclosed on the face of the income statement if a manufacturingentity classifies expenses by their function?

(1) Raw materials and consumables used

(2) Distribution costs

(3) Employee benefit costs

(4) Cost of sales

(5) Depreciation and amortisation expense

A (1), (3) and (4)

B (2) and (4)

C (1) and (5)

D (2), (3) and (5)

5 Bromyard Ltd had a balance of CU700,000 on its retained earnings at 1 January 20X7. During the yearended 31 December 20X7 the company:

Revalued property with a cost of CU1 million and accumulated depreciation of CU600,000 toCU1.2 million. No annual transfers between reserves are to be made

Issued shares at a premium of CU100,000

Made a profit for the year of CU400,000

On 1 December 20X7 the directors proposed a dividend of CU250,000 for the year ended31 December 20X7.

In accordance with BAS 1 Presentation of Financial Statements, what is the closing balance on retainedearnings in Bromyard Ltd’s statement of changes in equity for the year ended 31 December 20X7?

A CU750,000

B CU850,000

C CU1,100,000

D CU1,650,000

6 Worcester Ltd had a balance of CU2 million as its total equity at 1 January 20X2. During the yearended 31 December 20X2 the company:

Revalued property with a cost of CU2 million and accumulated depreciation of CU1,600,000 toCU1.5 million

Issued shares with a nominal value of CU500,000 at a premium of CU100,000

Made a profit for the year of CU750,000

On 1 February 20X3 the directors declared a dividend of CU250,000 for the year ended 31December 20X2.

In accordance with BAS 1 Presentation of Financial Statements, what is the closing balance on total equityin Worcester Ltd’s statement of changes in equity for the year ended 31 December 20X2?

A CU4,350,000

B CU4,450,000

C CU4,200,000

D CU3,850,000



7 Finstock Ltd, a company which builds houses, has a normal operating cycle of 18 months and a yearend of 30 June 20X5.

According to BAS 1 Presentation of Financial Statements, which of the following assets should beclassified as ‘current’ in Finstock Ltd’s balance sheet as at 30 June 20X5?

(1) Inventory which is expected to be realised in September 20X6

(2) A house constructed by Finstock Ltd which is expected to be sold in December 20X5

(3) Marketable securities which are expected to be realised in September 20X6

A (1) and (2)

B (2) and (3)

C (1) and (3)

D All of the above

51 BAS 2 Inventories

1 In accordance with BAS 2 Inventories, the cost of interchangeable inventories must be arrived at usingcost formulas.

Which of the following statements is correct?

(1) As long as the formula used is disclosed, any reasonable formula may be used

(2) First-in, first-out (FIFO) is the only acceptable formula

(3) Last-in, first-out (LIFO) is not an acceptable method

(4) An entity must use the same cost formula for all inventories having a similar nature

A (1), (3) and (4)

B (1) and (4)

C (2) only

D (3) and (4)

2 Which of the following items should be included in arriving at the cost of the inventory of finishedgoods held by a manufacturing company, according to BAS 2 Inventories?

(1) Carriage inwards on raw materials delivered to the factory

(2) Carriage outwards on goods delivered to customers

(3) Factory supervisors‘ salaries

(4) Factory heating and lighting

(5) Cost of abnormally high idle time in the factory

(6) Import duties on raw materials

A (1), (3), (4) and (6)

B (1), (2), (4), (5) and (6)

C (3), (4) and (6)

D (2), (3) and (5)

QUESTION BANK


3 During the year ended 30 September 20X6, Kidderminster Ltd produced 10,000 widgets, compared toa normal production level of 12,000 widgets. 1,000 finished widgets were held at the year end.Production costs incurred for the year were as follows.

CURaw materials 100,000Direct labour 50,000Variable overheads 40,000Fixed overheads 120,000

In accordance with BAS 2 Inventories, what is the value of Kidderminster Ltd’s finished goods at30 September 20X6?

A CU19,000

B CU25,000

C CU29,000

D CU31,000

4 Which of the following items would be classified as inventories in accordance with BAS 2 Inventories?

(1) Finished tables held at the year end by a furniture manufacturing company

(2) Shares held at the year end by a company dealing in shares

(3) A construction contract in progress at the year end at a company which designs and buildsmotorway bridges

A (1) only

B (1) and (2)

C (1) and (3)

D All of the above

5 Tintagel Ltd commenced business on 1 October 20X5. During its first year of trading the companyproduced 10,000 widgets, compared to an anticipated normal production level of 15,000 widgets. At30 September 20X6 there were 1,000 finished widgets in closing inventory.

Production costs incurred for the year were as follows.

CURaw materials 100,000Direct labour 50,000Variable overheads 40,000Fixed overheads 120,000

In accordance with BAS 2 Inventories, how much of the above costs will be carried forward ininventory at 30 September 20X6 and how much will have been recognised in the income statementfor the year ended 30 September 20X6?

In closing inventory In income statement

A CU27,000 CU279,000

B CU31,000 CU279,000

C CU27,000 CU283,000

D CU31,000 CU283,000



6 Wythenshawe Ltd commenced business on 1 June 20X4 manufacturing a single type of widget, whichhad a selling price throughout that year of CU45. During the year the company made 10,000 widgetsand incurred the following costs.

CUMaterials 150,000Labour 75,000Variable production overheads 50,000Fixed production overheads 37,500Administrative, selling and distribution costs 40,000

Towards the end of Wythenshawe Ltd’s first year of trading, market conditions deteriorated and thecompany was left with 3,000 finished widgets in inventory at its year end. These widgets can be soldfor CU35 each but only after incurring CU6 per unit selling costs.

In accordance with BAS 2 Inventories, what was Wythenshawe Ltd’s net profit for the year ended30 June 20X5?

A CU49,500

B CU56,250

C CU74,250

D CU67,500

7 Newcastle Ltd has the following units in inventory at the end of 20X5.

Units Cost per unitCU

Raw materials 7,000 20Work in progress 2,500 25Finished goods 1,000 30

Finished items usually sell for CU35 per unit. However, difficult trading conditions have meant that thecompany expects to have to discount its finished items by 20% and to incur selling costs of CU2 peritem. A further CU2.50 per unit is still to be incurred to finish off the items of work in progress.

In accordance with BAS 2 Inventories, at what amount should inventories be stated in the balance sheetof Newcastle Ltd as at the end of 20X6?

A CU232,500

B CU233,500

C CU224,750

D CU230,500

QUESTION BANK


52 BAS 7 Cash Flow Statements (single company only)

1 In the year ended 31 December 20X7 Drewstead Ltd made a new issue of 7,000 CU1 ordinary sharesat CU2 per share and used part of the proceeds of this issue to repay long-term borrowings ofCU4,100.

In accordance with BAS 7 Cash Flow Statements, what is the net cash flow from financing activities inDrewstead Ltd’s cash flow statement for the year ended 31 December 20X7?

A CU2,900

B CU9,900

C CU11,100

D CU18,100

2 Parrot Ltd had the following balances in its accounts at 30 April 20X6 and 30 April 20X7.

30 April 20X6 30 April 20X7CU CU

Cash in hand 1,000 1,100Bank overdraft 41,627 –Cash at bank – 21,932Long-term bank loan 50,000 25,000

In accordance with BAS 7 Cash Flow Statements, what amount should be shown under net change incash and cash equivalents in the company’s cash flow statement for the year ended 30 April 20X7?

A CU16,695 decrease

B CU63,659 increase

C CU63,559 increase

D CU20,295 decrease

3 The summarised balance sheets of Anteater Ltd were as follows.

31 December 20X7 31 December 20X6CU CU CU CU

Non-current assetsCost 28,000 27,000Accumulated depreciation (10,000) (8,000)

18,000 19,000Current assets

Inventories and trade receivables 55,000 48,000Cash and cash equivalents 1,000 8,000

56,000 56,00074,000 75,000

Share capital 30,000 30,000Retained earnings 30,000 25,000Current liabilities: Trade payables 14,000 20,000

74,000 75,000

Assume that no interest, tax or dividends were paid or charged during the year, and that no non-current assets were sold.



What is the cash generated from or used in operations in accordance with BAS 7 Cash Flow Statementswhich would appear in Anteater Ltd’s cash flow statement for the year ended 31 December 20X7?

A CU6,000 generated

B CU8,000 generated

C CU(6,000) used

D CU(8,000) used

4 Which of the following items would appear in the reconciliation of profit before tax to cash generatedfrom operations in a cash flow statement prepared in accordance with BAS 7 Cash Flow Statements?

(1) Increase in provision for warranty costs

(2) Decrease in income tax payable

(3) Depreciation charge

(4) Change in dividends payable

A (1) and (2)

B (1) and (3)

C (2) and (3)

D (2) and (4)

5 The proposed final dividend for Zebra Ltd for the year ended 30 April 20X2 was CU25,000. This waspaid in May 20X2. The interim dividend for the year ended 30 April 20X3 was CU15,000 and thedeclared final dividend for the year then ended was CU30,000. The final dividend for 30 April 20X3was declared on 25 April 20X3.

In accordance with BAS 7 Cash Flow Statements, what is the figure for dividends paid which will appearin the cash flow statement for Zebra Ltd for the year ended 30 April 20X3?

A CU25,000

B CU30,000

C CU40,000

D CU70,000

6 The accounting records of Tiger Ltd for 20X6 show the following amounts.CU

Carrying amount of property, plant and equipment at 31 December 20X5 330,000Proceeds of sales of property, plant and equipment 60,000Depreciation charged on property, plant and equipment 90,000Profit on sale of property, plant and equipment 15,000Carrying amount of property, plant and equipment at 31 December 20X6 270,000

In accordance with BAS 7 Cash Flow Statements, what amount would appear in Tiger Ltd’s cash flowstatement for 20X6 for purchase of property, plant and equipment?

A CU90,000

B CU75,000

C CU60,000

D CU30,000

QUESTION BANK


7 During 20X1 Lion Ltd issued 200,000 ordinary CU1 shares at CU1.20 per share and 100,000redeemable CU1 preference shares at CU1.10 per share. During 20X1 Lion Ltd also made a 1 for 4bonus issue of the ordinary shares held at the start of the year by the existing 200,000 shareholders.

In accordance with BAS 7 Cash Flow Statements, how much should be shown in Lion Ltd’s cash flowstatement for 20X1 in respect of proceeds from the issue of equity share capital in respect of theabove share issues?

A CU200,000

B CU240,000

C CU350,000

D CU550,000

8 Gazelle Ltd’s balance sheets at 31 December 20X6 and 20X7 showed income tax payable ofCU10,000 and CU15,500 respectively. Income tax charges in the relevant income statements wereCU11,000 and CU16,000 respectively.

How will income tax be reflected in Gazelle Ltd’s cash flow statement and reconciliation of profitbefore tax to cash generated from operations for 20X7 in accordance with BAS 7 Cash FlowStatements?

Cash flow statement Reconciliation

A Income taxes paid CU10,000 Income tax charge CU16,000

B Income taxes paid CU10,000 Does not appear

C Income taxes paid CU10,500 Does not appear

D Income taxes paid CU10,500 Income tax charge CU16,000

9 Moonbeam Ltd’s balance sheets showed the following liabilities.

31 December20X7 20X6

CU CUNon-current liabilities

Borrowings 30,000 25,000Current liabilities

Accrued interest 500 700

Moonbeam Ltd’s income statement for 20X7 showed a finance cost of CU600.

In accordance with BAS 7 Cash Flow Statements, how should the above be reflected in Moonbeam Ltd’scash flow statement and reconciliation of profit before tax to cash generated from operations for20X7?

A CU5,000 as a financing inflow, CU600 added back to profit before tax

B CU5,000 as a financing inflow, CU800 as an operating outflow, CU600 added back to profitbefore tax

C CU800 as an operating outflow, CU5,000 as an investing inflow, CU600 added back to profitbefore tax

D CU5,000 as a financing inflow, CU800 as an operating outflow



10 Animalus Ltd has a profit before tax for 20X1 of CU52,000 after charging depreciation of CU21,600.Its trade receivables have increased by CU15,500 during 20X1 and its trade payables by CU14,600.

In accordance with BAS 7 Cash Flow Statements, what is Animalus Ltd’s cash generated from operationsfor 20X1?

A CU29,500

B CU31,300

C CU72,700

D CU74,500

11 The following information relates to Magi Ltd.30 September

20X7 20X6CU CU

Ordinary shares of CU1 each 50,000 40,000Share premium account 27,500 25,200

On 1 January 20X7 the company made a 1 for 10 bonus issue, and on 1 July 20X7 it issued shares forcash.

How much should appear in Magi Ltd’s cash flow statement for the year ended 30 September 20X7 inrespect of these transactions?

A CU8,300

B CU10,000

C CU12,300

D CU16,300

12 In a company’s cash flow statement how would the payment of VAT to NBR be shown?

A An operating cash outflow

B A decrease in creditors

C An adjustment between profit before tax and cash generated from operating activities

D It would not feature in the statement at all

13 Golden Ltd’s balance sheets at 30 June 20X6 and 20X7 showed carrying amounts of property, plantand equipment of CU225,600 and CU301,700 respectively.

During the year ended 30 June 20X7 Golden Ltd revalued an asset with a carrying amount ofCU16,500 to CU31,000. It disposed of assets for a price of CU40,000, making a profit of CU10,100 onthe transactions.

What should appear in Golden Ltd’s cash flow statement for the year ended 30 June 20X7 in respectof purchase of property, plant and equipment?

A CU91,500

B CU101,600

C CU106,000

D CU116,100

QUESTION BANK


14 The schedule of accruals and prepayments for Metallic Ltd for the years ended 30 April 20X7 and20X8 show the following.

30 April 20X8 30 April 20X7CU CU

Accrued interest 610 590Other accruals 1,560 1,670Prepayments 2,550 2,300

In accordance with BAS 7 Cash Flow Statements, what is the net effect of the above on Metallic Ltd’sreconciliation of profit before tax to cash generated from operations for the year ended 30 April20X8?

A Deduct CU340

B Deduct CU360

C Add back CU340

D Add back CU360

15 During the year ended 31 December 20X6 Tara Ltd undertook the following transactions.

(1) Issued 100,000 CU1 ordinary shares at a price of CU1.20 per share

(2) Sold property, plant and equipment for CU10,000

(3) Purchased property, plant and equipment for CU109,000

(4) Paid CU25,000 off long-term borrowings

What total amounts in respect of the above will appear in cash flows from investing activities and cashflows from financing activities in the cash flow statement of Tara Ltd for 20X6 in accordance withBAS 7 Cash Flow Statements?

Cash inflow/(outflow)Investing Financingactivities activities

CU CU

A 21,000 (25,000)

B (99,000) 95,000

C (99,000) 145,000

D (124,000) 120,000

16 On 1 July 20X5 Verity Ltd entered into a finance lease agreement. The terms of the agreementprovided for annual payments of CU5,000 on 1 July each year. The asset had a fair value at theinception of the lease of CU25,000. CU750 of interest in relation to this agreement was paid andcharged to the income statement in the year ended 30 June 20X6.

In addition to the above transaction, on 1 October 20X5 Verity Ltd purchased a machine for cash ofCU6,500.

In accordance with BAS 7 Cash Flow Statements, how should the above be reflected in Verity Ltd’s cashflow statement for the year ended 30 June 20X6?

A CU31,500 as investing outflows

B CU6,500 as an investing outflow, CU5,000 as a financing outflow

C CU6,500 as an investing outflow, CU4,250 as a financing outflow, CU750 as an operating outflow

D CU10,750 as investing outflows, CU750 as an operating outflow



17 Veronica Ltd prepares its financial statements to 31 December. During 20X8 Veronica Ltd made salesof CU850,000 and incurred costs of CU610,500. At the beginning of 20X8 customers owedCU125,500 and at the end of the year they owed CU135,400. At the beginning of 20X8 Veronica Ltdowed CU45,500 to its suppliers and employees and at the end of the year it owed CU35,700.

During 20X8 Veronica Ltd received interest of CU14,500 and paid interest of CU500.

In accordance with BAS 7 Cash Flow Statements, what was Veronica Ltd’s net cash from operatingactivities under the direct method for the year ended 31 December 20X8?

A CU258,700

B CU233,800

C CU219,800

D CU219,300

53 BAS 8 Accounting Policies, Changes in Accounting Estimates andErrors

1 Which of the following constitute a change of accounting policy according to BAS 8 Accounting Policies,Changes in Accounting Estimates and Errors?

A A change in the basis of valuing property

B A change in depreciation method

C A decision to capitalise borrowing costs relating to the construction of non-current assets, ratherthan writing them off as incurred

D Adopting an accounting policy for a new type of transaction not previously dealt with

2 According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which of the followingitems would qualify for treatment as a change in accounting estimate?

(1) Provision for obsolescence of inventory

(2) Correction necessitated by a material error

(3) A change as a result of the adoption of a new International Accounting Standard

(4) A change in the useful life of a non-current asset

A All of the above

B (2) and (3)

C (1) and (3)

D (1) and (4)

3 In accordance with BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how is a changein accounting policy accounted for?

A By changing the current year figures but not the previous years’ figures

B Via retrospective application

C No alteration of any figures but disclosure in the notes

D No alteration of any figures nor disclosure in the notes

QUESTION BANK


4 Which one of the following would be regarded as a change of accounting policy under BAS 8Accounting Policies, Changes in Accounting Estimates and Errors?

A An entity changes its method of depreciation of machinery from straight line to reducing balance

B An entity has started capitalising borrowing costs for non-current assets whereas it previouslywrote those costs off to its income statement as incurred

C An entity changes its method of calculating the provision for warranty claims on its products sold

D An entity disclosed a contingent liability for a legal claim in the previous year’s accounts. In thecurrent year, a provision has been made for the same legal claim

5 According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how are each of thefollowing types of transactions dealt with?

(1) Change in accounting policy

(2) Change in accounting estimate

(3) Correction of a material prior period error

A (1) and (2) are dealt with retrospectively, (3) is dealt with prospectively

B (1) and (3) are dealt with retrospectively, (2) is dealt with prospectively

C (2) and (3) are dealt with retrospectively, (1) is dealt with prospectively

D All are dealt with retrospectively

6 From the years ended 31 December 20X6 to 31 December 20X8 Zorro Ltd capitalised CU10,000 offinance costs in relation to self-constructed plant. By 31 December 20X8 these costs had been 50%depreciated.

During 20X9 Zorro Ltd capitalised a further CU2,000 of such costs. On the last day of the year, justprior to calculating the annual depreciation charge, when the carrying amount of plant stood atCU250,000, Zorro Ltd decided to change its accounting policy to write-off such finance costs asincurred. Retained earnings at 1 January 20X9 were CU350,000. Draft profit for 20X9 was CU45,000,after charging the correct figure for depreciation of CU30,000.

In accordance with BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors what should thefollowing figures be stated at in Zorro Ltd’s financial statements for the year ended 31 December20X9?

Profit for the year Retained earnings brought forward Carrying amount of plantCU CU CU

A 43,000 340,000 208,000

B 47,000 340,000 208,000

C 43,000 345,000 213,000

D 47,000 345,000 213,000



7 Harriet Ltd has proposed the following changes to its current accounting practices to be used in itsnext financial statements.

(1) Motor vehicles have always been depreciated on a straight-line basis. The company has nowdecided to change to the reducing balance basis as it now believes that this better reflects theconsumption of economic benefits.

(2) In preparing its income statements, Harriet Ltd has previously classified depreciation ondirectors’ motor vehicles as administrative expenses. These depreciation charges are now to beclassified as distribution costs as the company now believes that this gives a more reliable andrelevant presentation.

According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which, if any, of thesechanges represent a change in accounting policy?

A (1) only

B (2) only

C Neither of the above

D Both of the above

54 BAS 10 Events After the Balance Sheet Date

1 Which of the following statements concerning BAS 10 Events After the Balance Sheet Date are correct?

(1) Notes to the financial statements must give details of all material adjusting events reflected inthose financial statements

(2) Notes to the financial statements must give details of all non-adjusting events affecting users’ability to understand the company’s financial position

(3) Financial statements should not be prepared on a going concern basis if, after the balance sheetdate, the directors decide to liquidate the company

A All three statements are correct

B (1) and (2)

C (1) and (3)

D (2) and (3)

QUESTION BANK


2 Georgina Ltd’s income statement for 20X3 showed a profit before tax of CU1,800,000. Early in 20X4,before the financial statements were authorised for issue, the following events took place.

(1) The value of an investment held at the balance sheet date fell by CU85,000 due to a fire at thatcompany’s premises early in 20X4

(2) A customer who owed CU116,000 at the balance sheet date went bankrupt owing a total ofCU138,000

(3) Inventory valued at a cost of CU161,000 in the balance sheet was sold for CU141,000

(4) Assets with a carrying amount at the balance sheet date of CU240,000 were unexpectedlyexpropriated by the Government

In accordance with BAS 10 Events After the Balance Sheet Date what is Georgina Ltd’s profit for 20X3after making the necessary adjustments for the above events?

A CU1,399,000

B CU1,579,000

C CU1,664,000

D CU1,557,000

3 The financial statements of Anna Ltd for the year ended 31 January 20X5 were approved forpublication on 15 May 20X5.

According to BAS 10 Events After the Balance Sheet Date which of the following would be treated as anon-adjusting event in the financial statements for the year ended 31 January 20X5?

A Notice was received on 31 March 20X5 that a major customer of Anna Ltd’s had ceased tradingand was unlikely to make any further payments

B Inventory items at 31 January 20X5, with an original cost of CU30,000, were sold in April 20X5for CU20,000

C During 20X4, a customer commenced legal action against Anna Ltd. At 31 January 20X5, AnnaLtd’s legal advisers were of the opinion that Anna Ltd would lose the case, so Anna Ltd created aprovision of CU200,000 for the damages claimed by the customer. On 27 April 20X5, the courtawarded damages of CU250,000 to the customer

D On 2 May 20X5 there was a fire in Anna Ltd’s main warehouse which destroyed 50% of AnnaLtd’s total inventory

4 The financial statements of Louise Ltd for the year ended 31 December 20X1 were approved forpublication on 20 May 20X2. The following events occurred after the year end.

(1) The directors declared a dividend of 50p per ordinary share on 17 February 20X2. Louise Ltd has200,000 CU1 ordinary shares in issue.

(2) An insurance claim for storm damage to property, caused by unusually high winds, was undernegotiation at the balance sheet date. The claim was settled with the insurers in March 20X2leaving uninsured damage amounting to CU75,000.

What liabilities should be recognised in the financial statements of Louise Ltd for the year ended31 December 20X1 in accordance with BAS 10 Events After the Balance Sheet Date?

Dividend Storm damage

A CU100,000 CUNil

B CU100,000 CU75,000

C CUNil CUNil

D CUNil CU75,000



5 According to BAS 10 Events After the Balance Sheet Date, which of the following would be a non-adjusting post balance sheet event when preparing Gawain Ltd’s group financial statements as at31 March 20X5?

A A decision is made on 9 April 20X5 to sell Gawain Ltd’s major trading activities in Kenya

B The financial statements of Knight Ltd, an unlisted company, in which Gawain Ltd owns 8% of theshare capital, are received on 9 April 20X5 and state that Knight Ltd is going into liquidation

C A customer, against whose debt a provision had been made at 31 March 20X5, was declaredbankrupt on 8 April 20X5

D An insurance claim is agreed on 10 June 20X5 for compensation for a fire in March whichdestroyed part of Gawain Ltd’s inventory

55 BAS 16 Property, Plant and Equipment

1 The components of the cost of a major item of equipment are given below.

CUPurchase price 780,000Import duties 117,000Sales tax (refundable) 78,000Site preparation 30,000Installation costs 28,000Pre-production costs 18,000Initial operating losses before the asset reachesplanned performance 50,000Estimated cost of dismantling and removal of the asset,recognised as a provision under BAS 37 Provisions,Contingent Liabilities and Contingent Assets 100,000

1,201,000

In accordance with BAS 16 Property, Plant and Equipment what amount should be recognised as the costof the asset?

A CU956,000

B CU1,055,000

C CU1,073,000

D CU1,201,000

QUESTION BANK


2 According to BAS 16 Property, Plant and Equipment, which, if any, of the following statements aboutdepreciation are correct?

(1) The main purpose of depreciation is to reflect the fall in value of an asset over its useful life

(2) When an asset is revalued, subsequent depreciation relating to the revaluation surplus should bedebited to the revaluation reserve rather than to the income statement

(3) The provision for depreciation ensures that there are funds available to replace an asset whenthis becomes necessary, though in times of inflation additional amounts may need to be set aside

(4) A change in depreciation method constitutes a change in accounting policy and must beaccounted for as such

A (1) and (4)

B (2) and (3)

C (4) only

D None of the statements is correct

3 Mario Ltd purchased a machine for CU50,000 on 1 January 20X1. The machine was judged to have afive-year life with a residual value of CU5,000. On 31 December 20X2 CU15,000 was spent on anupgrade to the machine. This extended its remaining useful life to five years, with the same residualvalue. During 20X3, the market for the product declined and the machine was sold on 1 January 20X4for CU7,000.

According to BAS 16 Property, Plant and Equipment, what was the loss on disposal?

A CU31,000

B CU35,000

C CU31,600

D CU35,600

4 Gray Ltd purchased a machine on 1 April 20X2 for CU16,000. In the years ended 31 March 20X3 and31 March 20X4 Gray Ltd depreciated the machine at 25% per annum on a straight-line basis. On1 April 20X4 the machine was revalued to CU12,000 with its estimated useful life being unchanged.

In accordance with BAS 16 Property, Plant and Equipment what was the effect of this revaluation onGray Ltd’s profit for the year ended 31 March 20X5?

A An increase of CU1,000

B An increase of CU2,000

C A decrease of CU1,000

D A decrease of CU2,000



5 White Ltd owns many items of property, plant and equipment and accounts for them on a revaluationbasis.

In the year ended 31 March 20X2 White Ltd revalued three of its assets, all of which are in currentuse, as set out below.

Carrying amount ValuationCU CU

Turning machine (asset number 1001) 10,000 7,500Turning machine (asset number 1007) 12,000 9,000Finishing machine (asset number 1012) 8,000 6,500

The company had a revaluation reserve of CU6,500 at 1 April 20X1 due to previous revaluations. Thisbalance of CU6,500 relates to the following assets.

Turning machine (asset number 1001) CU3,000Turning machine (asset number 1008) CU1,500Finishing machine (asset number 1015) CU2,000

In accordance with BAS 16 Property, Plant and Equipment what amount should be charged to theincome statement for the year ended 31 March 20X2 in respect of the above revaluations?

A CU500

B CU2,500

C CU4,000

D CU4,500

6 On 1 July 20X7 Brown Ltd bought a machine for CU48,000. The machine was depreciated at 25% perannum on a straight-line basis until 30 June 20X9.

On 1 July 20X9 the machine was revalued to CU30,000. Brown Ltd considers that its remaining usefullife is now three years.

According to BAS 16 Property, Plant and Equipment, what should the depreciation charge for the yearended 30 June 20Y0 and the minimum balance on the revaluation reserve as at 30 June 20Y0 be?

Depreciation charge Revaluation reserve

A CU8,000 CU4,000

B CU8,000 CU6,000

C CU10,000 CU4,000

D CU10,000 CU6,000

7 Captain Ltd purchased a piece of land during the year ended 30 June 20X5 for CU1 million andrevalued this land on 30 June 20X5 to CU1.3 million. On 1 March 20X6 the land was sold for CU1.4million.

In accordance with BAS 16 Property, Plant and Equipment what is the net amount in respect of this landwhich will appear in Captain Ltd’s statement of changes in equity for the year ended 30 June 20X5 andyear ended 30 June 20X6?

Year ended 30 June

20X5 20X6

A CU300,000 CU400,000

B CUNil CU400,000

C CU300,000 CU100,000

D CUNil CU100,000

QUESTION BANK


8 On 1 January 20X1, Barbosa Ltd purchased an item of plant for CU300,000 which was to bedepreciated over its useful life of 10 years.

On 1 January 20X5, the plant was revalued to its fair value of CU600,000, with no revision to itsremaining useful life.

On 1 January 20X6, the plant was sold for CU700,000.

In accordance with BAS 16 Property, Plant and Equipment, what was the profit on disposal to beincluded in Barbosa Ltd’s income statement for the year ended 31 December 20X6?

A CU200,000

B CU260,000

C CU300,000

D CU400,000

9 Sparrow Ltd owns a building, currently carried in its accounting records at CU800,000. It has agreedto exchange this building for a building owned by Turner Ltd. The building currently owned bySparrow Ltd has a fair value of CU1 million. The building currently owned by Turner Ltd has a fairvalue of CU1.1 million. Sparrow Ltd has agreed to pay the legal costs of the transfer which amount toCU10,000.

According to BAS 16 Property, Plant and Equipment at what value should the building currently ownedby Turner Ltd be recorded at initially in Sparrow Ltd’s accounting records?

A CU800,000

B CU1 million

C CU1.1 million

D CU990,000

10 With regard to BAS 16 Property, Plant and Equipment which of the following statements is true?

A Any assets where management believe the carrying amounts and market values are materiallydifferent may be revalued

B Assets which are carried under the revaluation model must be revalued every five years

C Increases in value on an initial revaluation are always credited directly to equity

D The fair value of land and buildings must be determined on an existing use basis



56 BAS 17 Leases

1 Obi Ltd purchased a machine via a finance lease. The terms of the agreement provided for a primaryperiod of four years and a secondary period of two years. Payments are CU20,000 per annum overthe primary period. The cash price of the plant is CU60,000 and its expected life is five years. Undernormal circumstances there is an expectation that the secondary period will be used. Residual value isexpected to be insignificant.

According to BAS 17 Leases on what value should the depreciation charge on the machine be basedand over what period should depreciation be charged?

Value Period

A CU80,000 4 years

B CU80,000 6 years

C CU60,000 4 years

D CU60,000 5 years

2 On 1 January 20X4 Jedi Ltd entered into a finance lease for a machine with a fair value of CU2,050.Lease payments of CU500 are payable annually in advance for five years, starting on 1 January 20X4.Jedi Ltd allocates finance charges on a sum-of-the-digits basis.

According to BAS 17 Leases what is Jedi Ltd’s non-current liability in respect of this finance lease as at31 December 20X4?

A CU1,200

B CU1,230

C CU1,365

D CU1,500

3 At what amount does BAS 17 Leases require a lessee to capitalise a finance lease at?

A The asset’s fair value

B The cash price of the asset

C The minimum lease payments less the residual value of the asset

D The lower of the asset’s fair value and the present value of the minimum lease payments

4 On 1 June 20X5 Aretoo Ltd acquired a machine under a finance lease. The machine would have had acash price of CU24,000 but Aretoo Ltd agreed to pay a deposit of CU6,000 and ten quarterlyrepayments of CU2,600 each, starting on 31 August 20X5. The charge for interest is to be spreadover the period of the lease on the sum-of-digits basis.

In accordance with BAS 17 Leases how much interest would be allocated to the fourth quarterlyrepayment?

A CU1,067

B CU1,018

C CU800

D CU582

QUESTION BANK


5 On 1 January 20X4 Luke Ltd entered into a finance lease for a machine with a fair value of CU2,050.Lease payments of CU500 are payable annually in arrears for five years, starting on 31 December20X4. Luke Ltd allocates finance charges on a sum-of-the-digits basis.

According to BAS 17 Leases what is Luke Ltd’s liability in respect of this finance lease as at31 December 20X4?

A CU1,550

B CU1,230

C CU1,320

D CU1,700

6 In respect of an operating lease BAS 17 Leases requires which of the following to be disclosed in acompany’s financial statements?

(1) The period-end liability

(2) The amount charged to the income statement for the period

(3) The total lease payments the company is committed to making over the coming years

A (1) and (2)

B (2) only

C (2) and (3)

D (3) only

7 In accordance with BAS 17 Leases which of the following is true with regard to leases of land andbuildings?

A Leases of land will always be treated as operating leases; leases of buildings will always be treatedas finance leases

B Leases of buildings will always be treated as operating leases; leases of land will always be treatedas finance leases

C Leases of land and buildings should be split and classified according to their substance

D Leases of land and buildings should be treated as a combined lease and classified according to itssubstance.

8 On 1 January 20X5, the first day of its accounting year, Anakin Ltd entered into an operating lease.The terms of the lease provided for an initial non-returnable deposit of CU60,000 and then threeannual rentals of CU30,000, payable on the last day of each year.

According to BAS 17 Leases what is the charge to the income statement for the year ended 31December 20X5 and what balance is reflected in the balance sheet as at 31 December 20X5 in respectof this lease?

Income statement charge Balance sheet

A CU30,000 CUNil

B CU90,000 CUNil

C CU50,000 Asset of CU40,000

D CU50,000 Liability of CU40,000



9 The treatment of leases in accordance with BAS 17 Leases follows which of the qualitativecharacteristics of the BFRS Framework for the Preparation and Presentation of Financial Statements?

A Reliability

B Relevance

C Comparability

D Understandability

10 On 1 January 20X7 Darth Ltd entered into a finance lease agreement. The terms of the lease were asfollows.

CUCash price 36,000Less: Deposit payable on 1 January 20X7 (12,000)

24,000Interest at 9% for two years 4,320Balance payable on 31 December 20X7 and 20X8 28,320

The rate of interest implicit in the lease is approximately 12%.

Applying the provisions of BAS 17 Leases, what is the finance charge in Darth Ltd’s income statementfor the year ended 31 December 20X7?

A CU2,160

B CU2,880

C CU3,240

D CU4,320

57 BAS 18 Revenue

1 Northanger Ltd’s draft balance sheet at 30 June 20X7 includes inventories of CU110,000 and tradereceivables of CU190,000. Trade receivables include goods sent out on sale or return at a selling priceof CU20,000. These goods remained unsold at 30 June 20X7 and had a cost of CU15,000.

In accordance with BAS 18 Revenue at what amounts should Northanger Ltd’s inventories and tradereceivables be stated on 30 June 20X7?

Inventories Trade receivables

A CU125,000 CU175,000

B CU125,000 CU170,000

C CU130,000 CU175,000

D CU130,000 CU170,000

QUESTION BANK


2 On 1 July 20X7 Mansfield Ltd entered into a CU5 million contract for the supply of computersoftware and five years of after-sales support. The cost of providing after-sales support is estimated atCU500,000 per annum and the mark-up on similar after-sales only contracts is 30% on cost.

In accordance with BAS 18 Revenue how much revenue should be included in Mansfield Ltd’s incomestatement for the year ended 30 June 20X8 in respect of the above contract?

A CU1.75 million

B CU2.4 million

C CU2.5 million

D CU5 million

3 On 1 July 20X5 Price Ltd entered into a CU3 million contract for the supply of computer hardware.An additional CU1 million was agreed for the provision of after-sales support until 30 June 20X9.

In accordance with BAS 18 Revenue how much revenue should be included in Price Ltd’s incomestatement for the year ended 30 June 20X6 in respect of the above contract?

A CU4 million

B CU3 million

C CU3.25 million

D CU2.25 million

4 On 31 December 20X7 Darcy Ltd sold goods to Willoughby Ltd for CU300,000. These goods had acost of CU250,000. Willoughby Ltd has been granted interest-free credit and will pay for these goodsin full on 31 December 20X9. At the date of sale the fair value of the CU300,000 receivable wasCU290,000.

In accordance with BAS 18 Revenue how much revenue should be included in Darcy Ltd’s incomestatement for the year ended 31 December 20X7 in respect of the above sale?

A CUNil

B CU250,000

C CU290,000

D CU300,000

5 Lydia Ltd has entered into a fixed-price contract for the provision of services to Jane Ltd. The contractcommenced in July 20X1 and will be completed in 20X2. The contract price is CU1 million and costsare recoverable as incurred.

At 31 December 20X1, Lydia Ltd’s year end, costs of CU300,000 had been incurred and the contracthas been assessed as 40% complete. Costs to complete are estimated at CU500,000. All figures arereliable estimates.

In accordance with BAS 18 Revenue how much revenue should be included in Lydia Ltd’s incomestatement for the year ended 31 December 20X1 in respect of this contract?

A CUNil

B CU300,000

C CU400,000

D CU1 million



6 Rochester Ltd has entered into a fixed-price contract for the provision of services to Adele Ltd. Thecontract commenced in September 20X2 and will be completed in 20X3. The contract price is CU2million and costs are recoverable as incurred.

At 31 December 20X2, Rochester Ltd’s year end, costs of CU500,000 have been incurred. Thecontract has been assessed as 30% complete, however, costs to complete cannot be estimated reliably.

In accordance with BAS 18 Revenue how much revenue should be included in Rochester Ltd’s incomestatement for the year ended 31 December 20X2 in respect of this contract?

A CUNil

B CU500,000

C CU600,000

D CU2 million

7 Rainorshine Ltd produces a series of outdoor theatre productions each spring/summer. Thecompany’s year end is 30 June. For the 20X6 season, five productions are planned, one in each monthfrom May through to September. A season ticket covering all five events costs CU100. Due to adverseweather conditions, June’s production was delayed until 2 July.

In accordance with BAS 18 Revenue how much revenue should be included from each ticket sold forthe 20X6 season in Rainorshine Ltd’s income statement for the year ended 30 June 20X6?

A CUNil

B CU100

C CU40

D CU20

58 BAS 32 and BAS 39 Financial Instruments

1 On 3 October 20X6 Corbin Ltd issued 100,000 5% redeemable CU1 preference shares. These sharesare redeemable on 3 October 20Y1.

In accordance with BAS 32 Financial Instruments: Presentation how will these shares and their relateddividend be shown in Corbin Ltd’s financial statements for the year ended 31 December 20X6?

Shares Dividend

A Non-current liabilities Income statement

B Non-current liabilities Statement of changes in equity

C Equity Income statement

D Equity Statement of changes in equity

QUESTION BANK


2 On 5 March 20X7 Marchant Ltd issued 200,000 5% irredeemable CU1 preference shares.

In accordance with BAS 32 Financial Instruments: Presentation how will these shares and their relateddividend be shown in Marchant Ltd’s financial statements for the year ended 31 March 20X7?

Shares Dividend

A Non-current liabilities Income statement

B Non-current liabilities Statement of changes in equity

C Equity Income statement

D Equity Statement of changes in equity

3 According to BAS 32 Financial Instruments: Presentation which of the following could be classified asfinancial assets?

(1) Bank overdraft

(2) Cash at bank

(3) Inventories

(4) A current asset investment

(5) A forward contract

A (1), (2) and (5)

B (2), (4) and (5)

C (2) and (4)

D (3), (4) and (5)

4 According to BAS 39 Financial Instruments: Recognition and Measurement at what amount should afinancial instrument initially be measured?

A Cost

B Fair value of consideration given

C Fair value of consideration given plus directly attributable transaction costs

D Fair value of consideration given less directly attributable transaction costs



59 BAS 36 Impairment of Assets

1 In accordance with BAS 36 Impairment of Assets which of the following statements are true?

(1) Non-current assets must be checked annually for evidence of impairment

(2) An impairment loss must be recognised immediately in the income statement, except that all orpart of a loss on a previously revalued asset should be charged against any related revaluationsurplus

(3) If the fair value less costs to sell exceeds the carrying amount of an asset there is no need toestimate value in use

A (1) and (2)

B (1) and (3)

C (2) and (3)

D (1), (2) and (3)

2 A non-current asset has a carrying amount of CU20,000. It could be sold for CU18,500 with sellingcosts of CU500. Its value in use is CU22,000 and its replacement cost CU50,000.

According to BAS 36 Impairment of Assets what is the recoverable amount of this asset?

A CU18,000

B CU20,000

C CU22,000

D CU50,000

3 Chloe Ltd purchased equipment on 1 April 20X2 for CU100,000. The equipment was depreciatedusing the reducing balance method at 25% per annum. Chloe Ltd prepares accounts to 31 Marchannually.

Depreciation was charged up to and including 31 March 20X6. At that date, the recoverable amountof this equipment was CU22,000.

According to BAS 36 Impairment of Assets what was the impairment loss on this equipment calculatedon 31 March 20X6?

A CUNil

B CU3,000

C CU9,640

D CU20,187

4 Lauren Ltd bought some land on 1 January 20X4 for CU500,000. On 31 December 20X5 this land wasrevalued to CU700,000. On 31 December 20X7 the fair value less costs to sell of this land wasestimated at CU400,000 and its value in use at CU450,000.

According to BAS 36 Impairment of Assets what amount will be included in the income statement ofLauren Ltd for the year ended 31 December 20X7 in respect of the impairment loss on this land?

A CUNil

B CU50,000

C CU200,000

D CU250,000

QUESTION BANK


5 Alayna Ltd bought a machine on 1 January 20X2 for CU50,000. The useful life of this machine wasassessed as 10 years and it was depreciated on a straight-line basis.

On 31 December 20X3 the machine was revalued to a fair value of CU80,000 with no change to itsremaining useful life. On 31 December 20X6 the machine was identified as impaired and revalued toCU20,000.

Alayna Ltd makes a transfer between the revaluation reserve and retained earnings each year as aresult of the revaluation in accordance with best practice.

According to BAS 36 Impairment of Assets what amount will be included in the income statement ofAlayna Ltd for the year ended 31 December 20X6 in respect of this impairment loss?

A CUNil

B CU5,000

C CU25,000

D CU30,000

6 In accordance with BAS 36 Impairment of Assets which of the following assets must be tested forimpairment annually?

(1) All assets

(2) Any assets where there is an indication of a potential impairment

(3) All intangible assets with indefinite useful lives

(4) Goodwill acquired in a business combination

A (1) only

B (2) only

C (2) and (3)

D (2), (3) and (4)

60 BAS 37 Provisions, Contingent Liabilities and Contingent Assets

1 According to BAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the followingstatements are correct?

(1) Provisions should be made for constructive obligations as well as for legal obligations

(2) Discounting may be used when estimating the amount of a provision if the effect is material

(3) A restructuring provision must include the estimated costs of retraining or relocating continuingstaff

(4) A restructuring provision may only be made when a company has a detailed plan for thereconstruction and a firm intention to carry it out

A All four statements

B (1), (2) and (4)

C (1), (3) and (4)

D (1), (2) and (3)



2 According to BAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the following criteriamust be present in order for a company to recognise a provision?

(1) There is a present obligation as a result of past events

(2) It is probable that a transfer of economic benefits will be required to settle the obligation

(3) A reliable estimate of the obligation can be made

A (1), (2) and (3)

B (1) and (2)

C (1) and (3)

D (2) and (3)

3 Which of the following statements about contingencies, if any, are correct according to BAS 37Provisions, Contingent Liabilities and Contingent Assets?

(1) A contingent liability should be disclosed by note if it is probable that an obligation will arise andits amount can be estimated reliably

(2) A contingent asset should be disclosed by note if it is probable that it will arise

(3) An entity should not recognise a contingent asset

A None of the statements is correct

B (1) and (2)

C (2) and (3)

D All of the statements are correct

4 In which of the following circumstances would a provision be recognised under BAS 37 Provisions,Contingent Liabilities and Contingent Assets in the financial statements for the year ending 31 March20X6?

(1) A board decision was made on 15 March 20X6 to close down a division. Potential costs areCU100,000. At 31 March 20X6 the decision had not been communicated to managers,employees or customers

(2) There are anticipated costs from returns of a defective product in the next few months ofCU60,000. In the past all returns of defective products have always been refunded to customers

(3) It is anticipated that a major refurbishment of the company’s head office will take place from June20X6 onwards costing CU85,000

A (1) and (2)

B (2) and (3)

C (2) only

D (3) only

QUESTION BANK


5 Airedale Ltd has the following two legal claims outstanding.

(1) A legal action claiming compensation of CU500,000 filed against Airedale Ltd in March 20X4

(2) A legal action taken by Airedale Ltd against a third party, claiming damages of CU200,000 wasstarted in January 20X3 and is nearing completion

In both cases, it is more likely than not that the amount claimed will have to be paid.

According to BAS 37 Provisions, Contingent Liabilities and Contingent Assets how should Airedale Ltdreport these legal actions in its financial statements for the year ended 31 March 20X5?

Action (1) Action (2)

A Disclose as a note No disclosure

B Make a provision No disclosure

C Make a provision Disclose as a note

D Make a provision Accrue the income

6 In accordance with BAS 37 Provisions, Contingent Liabilities and Contingent Assets which one of the followingwould require a provision to be created by Wally Ltd at its balance sheet date of 31 October 20X5?

A The government introduced new laws on data protection which come into force on 1 January20X6. Wally Ltd’s directors have agreed that this will require a large number of staff to beretrained. At 31 October 20X5, the directors were waiting on a report they had commissionedthat would identify the actual training requirements

B At the balance sheet date, Wally Ltd was negotiating with its insurance provider about theamount of an insurance claim that it had filed. On 20 November 20X5, the insurance provideragreed to pay CU200,000

C Although it has no legal obligation to do so, Wally Ltd makes refunds to customers for any goodsreturned within 30 days of sale, and has done so for many years

D A customer is suing Wally Ltd for damages alleged to have been caused by a product sold to it byWally Ltd. Wally Ltd is contesting the claim and, at 31 October 20X5, the directors have beenadvised by the company’s legal advisers that the company is very unlikely to lose the case

7 Flyaway Ltd operates a low-cost airline. One of its aircraft will require a major refit in 20X6, at a costof CU500,000, to upgrade the on-board facilities. At the same time, the aircraft will also haveadditional safety equipment fitted, at a cost of CU200,000, to allow the company to comply with newlegislation which has been passed and which will come into force in 20X7.

Under BAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following is the correcttreatment in the financial statements for the year ended 31 December 20X5 for each of the above?

Refit Safety equipment

A Provision Provision

B No provision Provision

C Provision No provision

D No provision No provision



8 Charlotte Ltd has been awarded a contract to build an office block for Kylie Ltd. The site preparationwork was sub-contracted to George Ltd. George Ltd’s work was sub-standard and this has caused adelay in contract completion.

As a result of the delay the client is claiming CU10 million in damages from Charlotte Ltd who hascommenced legal action against George Ltd for CU8 million. Charlotte Ltd’s lawyers have advised thatit is probable that both actions will be successful.

In accordance with BAS 37 Provisions, Contingent Liabilities and Contingent Assets how should CharlotteLtd account for these legal actions in its financial statements?

Claim against Charlotte Ltd Claim by Charlotte Ltd

A Provide Recognise asset

B Provide Disclose

C Disclose Ignore

D Ignore Disclose

61 BAS 38 Intangible Assets

1 In accordance with BAS 38 Intangible Assets and BFRS 3 Business Combinations which of the followingstatements is correct?

(1) Negative goodwill should be shown on the balance sheet as a deduction from positive goodwill

(2) As an alternative to capitalisation, goodwill may be written off immediately against reserves

(3) As a business grows, internally generated goodwill may be revalued upwards to reflect thatgrowth

(4) Internally developed brands must not be capitalised

A (1) and (4)

B (2) and (3)

C (3) only

D (4) only

2 During the year ended 30 June 20X3, Emily Ltd spent CU300,000 on the development of a new rangeof garden machinery. In order to carry out this work, Emily Ltd purchase some highly specialisedequipment, on 1 July 20X2 at a cost of CU100,000. The equipment is expected to have a useful life offive years and is to be depreciated over that period by the straight-line method.

According to BAS 38 Intangible Assets, what is the maximum amount that Emily Ltd can carry forwardas development expenditure as at 30 June 20X3?

A CU100,000

B CU300,000

C CU320,000

D CU400,000

QUESTION BANK


3 According to BAS 38 Intangible Assets which of the following conditions would preclude any part of thedevelopment expenditure from being capitalised as an intangible asset?

A The development is incomplete

B The benefits flowing from the completed development are expected to be at least equal to itscost

C Funds are unlikely to be available to complete the development

D The development is expected to give rise to more than one product

4 According to BAS 38 Intangible Assets which of the following types of research and developmentexpenditure must be written off in the year it is incurred?

A Costs of designing a pre-production prototype

B Legal costs in connection with registration of a patent

C Costs of searching for possible alternative products

D Costs of research work which are to be reimbursed by a customer

5 In accordance with BAS 38 Intangible Assets which, if any, of the following statements is correct?

(1) Any intangible asset may be carried at its fair value, as opposed to being carried at cost

(2) Once an intangible asset has been revalued, further revaluations should be carried out annually toensure that the carrying amount does not differ from the fair value at the balance sheet date

A (1) only

B (2) only

C (1) and (2)

D Neither of the above

6 During the current accounting period Jack Ltd considered the recognition of the following costs asintangible assets.

(1) CU40,000 spent on evaluating research findings

(2) CU60,000 spent on acquiring a brand name from a competitor

(3) CU50,000 spent on acquiring the legal rights to a production process, without which Jack Ltd’sbusiness cannot function

In accordance with BAS 38 Intangible Assets what is the maximum amount that Jack Ltd could recogniseas intangible assets?

A CU60,000

B CU100,000

C CU110,000

D CU150,000



7 During the current accounting period Silver Ltd considered the recognition of the following costs asintangible assets.

(1) CU50,000 spent on development expenditure on Project X. The directors are confident of thefinancial, commercial and technical viability of the project

(2) CU6,000 spent on developing a brand internally

(3) CU30,000 spent on acquiring goodwill in Gold Ltd’s books when Silver Ltd acquired the netassets of Gold Ltd

What is the maximum amount that Silver Ltd could recognise as intangible assets in its consolidatedfinancial statements in accordance with BAS 38 Intangible Assets?

A CU50,000

B CU56,000

C CU86,000

D CU30,000

8 In order for an asset to be recognised as an intangible asset in accordance with BAS 38 Intangible Assetswhich of the following recognition criteria must be met?

(1) The asset must be identifiable

(2) The asset must be separable

(3) The cost of the asset must be able to be measured reliably

(4) It must be possible that future benefits from the asset will flow to the entity

A (1) and (3)

B (2) and (3)

C (1), (2) and (3)

D (2), (3) and (4)

9 In accordance with BAS 38 Intangible Assets which of the following statements is correct?

A All intangible assets should be amortised over their expected useful lives

B When intangible assets are amortised a residual value should always be calculated

C Provided a reliable value can be placed upon them, employees’ skills may be capitalised as anintangible asset

D Intangible assets should initially be recognised at cost

QUESTION BANK


62 BFRS 5 Non-current Assets Held for Sale and Discontinued Operations

1 Darren Ltd operates a number of divisions and has a year end of 31 December. On 15 December20X4 the board made the decision to sell Darren Ltd’s manufacturing division. A buyer is expected tobe found within six months and the sale is expected to be completed in early 20X6.

In the company’s financial statements for the year ended 31 December 20X4 and 31 December 20X5how should this division be treated in accordance with BFRS 5 Non-current Assets Held for Sale andDiscontinued Operations?

A As a discontinued operation in 20X4

B As a discontinued operation in both 20X4 and 20X5

C As a continuing operation in 20X4 and as a discontinued operation in 20X5

D As a continuing operation in both 20X4 and 20X5

2 In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what is theminimum disclosure which must be made on the face of the income statement in respect ofdiscontinued operations?

A Post-tax profit or loss on operations and any post-tax gain or loss on related assets

B A combined figure for the post-tax profit or loss on operations and any post-tax gain or loss onrelated assets

C Revenue, expenses, pre-tax profit or loss and tax on operations and any post-tax gain or loss onrelated assets

D Revenue, expenses, pre-tax profit or loss and tax on operations, any pre-tax gain or loss onrelated assets and tax on that gain or loss

3 In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what is theminimum disclosure which must be made on the face of the cash flow statement in respect ofdiscontinued operations?

A Cash flows attributable to the operating, investing and financing activities of the discontinuedoperations

B Net cash flows arising from the operation of the discontinued operations and the sale of relatedassets

C Cash flows arising from the sale of the assets of the discontinued operations

D No separate disclosure is required

4 Gary Ltd operates a number of divisions and has a year end of 30 June. On 30 June 20X7 the boardmade and announced the decision to sell Gary Ltd’s retail division. The sale is expected to becompleted within six months.

In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, how should theretail division’s property, plant and equipment be classified in the balance sheets as at 30 June 20X6and 30 June 20X7?

A As non-current assets at 30 June 20X6 and 30 June 20X7

B As non-current assets held for sale at 30 June 20X6 and 30 June 20X7

C As non-current assets at 30 June 20X6 and as non-current assets held for sale at 30 June 20X7

D As non-current assets at 30 June 20X6 and as current assets at 30 June 20X7



5 During the year Sharon Ltd carried out a reorganisation as follows.

Division A’s operations were terminated in Bangladesh and moved to an overseas division.

Division B was Sharon Ltd’s distribution division. Sharon Ltd has now outsourced this part of thebusiness.

The results of both divisions have previously been reported separately.

Which, if any, of these operations could be a discontinued operation according to BFRS 5 Non-currentAssets Held for Sale and Discontinued Operations?

A Neither division

B Both divisions

C Division A only

D Division B only

6 At a board meeting held on 30 October 20X7 Rosa Ltd made the decision to sell a major division. Theactual closure took place on 12 February 20X8. In the year ended 31 December 20X7 the divisionreported a loss of CU100,000. Costs of redundancies relating to the division to be incurred in 20X8are expected to be CU30,000.

In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what will bereported in Rosa Ltd’s income statement for the year ended 31 December 20X7 in respect of thisdivision?

A CU100,000 loss from continuing operations

B CU130,000 loss from continuing operations

C CU100,000 loss from discontinued operations

D CU130,000 loss from discontinued operations

7 On 30 September 20X1 the directors of Guido Ltd decided to sell the company’s services division andthe division was classified as held for sale. The sale is expected to be completed, along with the salesof related assets, in early December 20X1.

One item of plant within this division had originally cost CU30,000 and had a carrying amount ofCU15,000 on 1 November 20X0. Guido Ltd will carry on using this plant until it is sold.

Guido Ltd has a year end of 30 October and depreciates all plant on a monthly straight-line basis usinga monthly rate of 1%.

In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amountwill be recognised in the balance sheet of Guido Ltd as at 30 October 20X1 in respect of this plant?

A CU11,400 in non-current assets held for sale

B CU11,400 in current assets

C CU11,700 in non-current assets held for sale

D CU11,700 in non-current assets

QUESTION BANK


8 Valerie Ltd acquired a machine on 1 January 20X2 for CU70,000. On 1 January 20X5, when thecarrying amount of the machine was CU40,000, the machine was classified as held for sale. Its fairvalue was estimated at CU30,000 and costs to sell at CU500. The asset was sold on 30 June 20X5 forCU32,000.

In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amountswill be recognised in respect of this asset in Valerie Ltd’s income statement for the year ended31 December 20X5?

Impairment loss Profit on sale

A CU8,000 CUNil

B CU10,500 CU2,500

C CUNil CU8,000

D CU10,000 CU2,000

9 Paul Ltd acquired a building on 1 January 20W7 for CU800,000. The building had a useful life of 50years and was being depreciated on a straight-line basis. On 1 January 20X9 the building was classifiedas held for sale. Its fair value was estimated at CU600,000 and costs to sell at CU10,000. The buildingwas sold on 30 June 20X9 for CU580,000.

In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amountswill be recognised in respect of this building in Paul Ltd’s income statement for the year ended31 December 20X9?

Impairment loss Loss on sale

A CU28,000 CUNil

B CU18,000 CU2,000

C CUNil CU28,000

D CU18,000 CU10,000

10 Michael Ltd bought a piece of land on 1 January 20X5 for CU1 million. The company revalued this landon 31 December 20X6 to CU1.5 million. On 1 September 20X7 the land was classified as held forsale. Its fair value was estimated at CU1.7 million and costs to sell at CU20,000. The land was sold on15 February 20X8 for CU1.8 million.

In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what amountswill be recognised in respect of this land in Michael Ltd’s income statement and revaluation reserve forthe year ended 31 December 20X7?

Debit in income statement Credit to revaluation reserve

A CUNil CU180,000

B CU20,000 CU200,000

C CUNil CUNil

D CU20,000 CU300,000



11 Harry Ltd revalued a machine on 1 January 20X6 to CU280,000. The machine had cost CU200,000 on1 January 20X5 and was being depreciated on a reducing balance basis at a rate of 25%. Thedepreciation policy was unchanged after revaluation. On 1 January 20X8 the machine was classified asheld for sale. Its fair value was estimated at CU80,000 and costs to sell at CU5,000. The machine wassold on 30 June 20X8 for CU75,000.

In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what amountswill be recognised in respect of this machine in Harry Ltd’s income statement and revaluation reservefor the year ended 31 December 20X8?

Debit in income statement Debit to revaluation reserve

A CUNil CU130,000

B CU5,000 CU130,000

C CU82,500 CUNil

D CU82,500 CU130,000

QUESTION BANK


Consolidated financial statements: objective test questions

63 Consolidated balance sheets

1 The summarised balance sheets of Falcon Ltd and Kestrel Ltd at 31 December 20X8 were as follows.

Falcon Ltd Kestrel LtdCUm CUm

Net assets (at fair values) 68 25

Ordinary share capital 10 10Retained earnings 58 15

68 25

On 1 January 20X8 Falcon Ltd had purchased 80% of the ordinary share capital of Kestrel Ltd forCU24 million. The fair value of the net assets of Kestrel Ltd was CU20 million at that date. Thegoodwill arising on consolidation was impaired by 100%.

At what amount will retained earnings be stated in Falcon Ltd's consolidated balance sheet as at31 December 20X8?

A CU55 million

B CU54 million

C CU50 million

D CU62 million

2 Ploughshare Ltd acquired 80% of the ordinary share capital of Sword Ltd on 30 September 20X1. On31 December 20X1, the share capital and retained earnings of Sword Ltd were as follows.

CU'000Ordinary shares of 50p each 300Retained earnings at 1 January 20X1 80Retained profit for the year ended 31 December 20X1 40

420

The profits of Sword Ltd have accrued evenly throughout 20X1. Goodwill arising on the acquisition ofSword Ltd was CU20,000.

What was the cost of the investment in Sword Ltd?

A CU356,000

B CU328,000

C CU348,000

D CU430,000



3 Xanthe Ltd owns 75% of the ordinary share capital of QED Ltd. At the group's year end, Xanthe Ltdheld inventories valued at CU160,000 and QED Ltd held inventories valued at CU90,000. Theinventories held by Xanthe Ltd included CU20,000 of goods purchased from QED Ltd at a profitmargin of 30%. There were also inventories in transit between the two entities; this amounted to afurther CU10,000 at selling price.

To the nearest CU'000, at what value should inventories appear in the year end consolidated balancesheet?

A CU251,000

B CU253,000

C CU254,000

D CU255,000

4 Xiao Ltd owns 80% of Yacht Ltd and 75% of Zebra Ltd. At 31 December 20X5, the three companieshad declared the following dividends for the year ended on that date.

CUXiao Ltd 60,000Yacht Ltd 30,000Zebra Ltd 20,000

Xiao Ltd had also paid an interim dividend of CU15,000. What is the total liability for dividendspayable in the consolidated balance sheet of Xiao Ltd as at 31 December 20X5?

A CU56,000

B CU60,000

C CU71,000

D CU110,000

5 Woolf Ltd acquired 80% of the ordinary share capital of Stephen Ltd on the incorporation of thatcompany many years ago. No goodwill arose on the acquisition.

At 31 December 20X9, the retained earnings of Woolf Ltd were CU202,000 and the consolidatedretained earnings of the Woolf Ltd group were CU230,000.

During the year ended 31 December 20X9, Stephen Ltd had sold goods to Woolf Ltd for CU25,000.The goods originally cost CU20,000.

What were the retained earnings of Stephen Ltd as at 31 December 20X9?

A CU30,000

B CU32,000

C CU33,000

D CU40,000

QUESTION BANK


6 Outlook Ltd has one subsidiary. On 1 January 20X7 Outlook Ltd purchased 30% of the ordinary sharecapital of View Ltd for CU12 million. The summarised balance sheet of View Ltd as at 31 December20X7 was as follows.

CUmNet assets (at carrying amount) 30

Ordinary share capital (CU1 shares) 10Retained earnings at 1 January 20X7 15Net profit for the year ended 31 December 20X7 5

30

At 1 January 20X7 the fair value of the net assets of View Ltd was CU5 million greater than theircarrying amount. The difference, which has not been recorded in View Ltd's books, relates to landwhich is still owned by View Ltd at 31 December 20X7.

At what amount should the investment in View Ltd be included in Outlook Ltd's consolidated balancesheet as at 31 December 20X7?

A CU12 million

B CU13.5 million

C CU17 million

D CU9 million

7 On 1 January 20X2 Alfie Ltd purchased 40% of the equity share capital of Bailey Ltd for CU60,000. Atthis date the retained earnings of Bailey Ltd stood at CU30,000. During the year ended 31 December20X4 Alfie Ltd sold goods to Bailey Ltd for CU10,000. These goods were still in inventory at the yearend. Alfie Ltd makes a gross profit margin of 25% on intra-group sales.

At 31 December 20X4 the balance sheet of Bailey Ltd showed the following.

CU'000Net assets 320

Ordinary share capital 100Retained earnings 220

320

At what amount should Alfie Ltd's interest in Bailey Ltd be stated in its consolidated balance sheet at31 December 20X4?

A CU135,000

B CU135,200

C CU136,000

D CU147,000



8 On 1 January 20X4, Geranium Ltd acquired 60% of the equity share capital of Rose Ltd for CU5million. At that date, the net assets of Rose Ltd were CU8 million. On 1 July 20X9 Geranium Ltd soldthree quarters of its holding in Rose Ltd for CU6.5 million.

The capital and reserves of Rose Ltd at 31 December 20X9 are shown below.

CU'000Ordinary share capital (CU1 shares) 5,000Retained earnings at 1 January 20X9 6,500Retained profit for the year ended 31 December 20X9 2,000

13,500

At what amount should the investment in Rose Ltd be shown in Geranium Ltd's consolidated balancesheet as at 31 December 20X9?

A CU750,000

B CU1,725,000

C CU1,875,000

D CU1,925,000

9 Aster Ltd owns a controlling interest in Chrysanthemum Ltd and exerts significant influence overFlower Ltd, an entity in which it holds 30% of the ordinary share capital.

During the year ended 30 April 20X5, Flower Ltd sold goods to Aster Ltd for CU80,000. The cost ofthe goods to Flower Ltd was CU60,000. 25% of the goods remained in Aster Ltd's inventories at 30April 20X5.

Which of the following is the correct consolidation adjustment in respect of these inventories?

A Dr Consolidated retained earnings CU5,000 Cr Consolidated inventories CU5,000

B Dr Consolidated retained earnings CU1,500 Cr Consolidated inventories CU1,500

C Dr Consolidated inventories CU5,000 Cr Consolidated retained earningsCU5,000

D Dr Consolidated inventories CU1,500 Cr Consolidated retained earningsCU1,500

10 Dartmoor Ltd controls another entity, Clydesdale Ltd, owning 60% of that company's ordinary sharecapital. At the group's year end, 31 December 20X5, Clydesdale Ltd included CU6,000 in itsreceivables in respect of goods supplied to Dartmoor Ltd. However, the payables of Dartmoor Ltdincluded only CU4,000 in respect of amounts due to Clydesdale Ltd. The difference arose because, on31 December 20X5, Dartmoor Ltd sent a cheque for CU2,000 to Clydesdale Ltd, which was notreceived by Clydesdale Ltd until 3 January 20X6.

Which of the following sets of consolidation adjustments to current assets and current liabilities iscorrect?

A Deduct CU6,000 from both consolidated receivables and consolidated payables

B Deduct CU3,600 from both consolidated receivables and consolidated payables

C Deduct CU6,000 from consolidated receivables and CU4,000 from consolidated payables, andinclude cash in transit of CU2,000

D Deduct CU6,000 from consolidated receivables and CU4,000 from consolidated payables, andinclude inventories in transit of CU2,000

QUESTION BANK


11 Ella Ltd acquired 75% of the ordinary shares in Frances Ltd on 1 April 20X2. Ella Ltd has prepared aconsolidated balance sheet at 31 March 20X3, which shows goodwill of CU200,000 and consolidatedretained earnings of CU400,000. However, this consolidated balance sheet has ignored the fair valueof an item of plant held by Frances Ltd which at the date of acquisition was CU120,000 in excess of itscarrying amount. The asset has a remaining useful life of five years.

After adjusting for the above fair value, what amounts should be shown for goodwill and retainedearnings in Ella Ltd's consolidated balance sheet as at 31 March 20X3?

Goodwill Retained earningsCU'000 CU'000

A 80 376

B 110 382

C 110 376

D 200 382

12 Zara Ltd is the sole subsidiary of Anne Ltd. Zara Ltd's balance sheet at 31 December 20X1 can besummarised as follows.

CU'000Total assets 1,000

Ordinary share capital 500Retained earnings 200Equity 700Redeemable preference share capital 300Total equity and liabilities 1,000

Anne Ltd holds 70% of Zara Ltd's ordinary shares and 60% of Zara Ltd's redeemable preferenceshares. All shares were acquired when Zara Ltd's retained earnings were CU100,000. What is theminority interest in Anne Ltd's consolidated balance sheet as at 31 December 20X1?

A CU180,000

B CU210,000

C CU300,000

D CU330,000



13 Sandra Ltd has a number of subsidiary companies. On 1 January 20X5 Sandra Ltd acquired 30% of the10,000 CU1 ordinary shares of Fiona Ltd for CU14,000. The balance on Fiona Ltd's retained earningson that date was CU30,000. Sandra Ltd exerts significant influence over Fiona Ltd.

The balance sheet of Fiona Ltd at 31 December 20X9 is as follows.

CU'000

Total assets 68,000

Ordinary share capital 10,000

Retained earnings 38,000

Liabilities 20,000

Total equity and liabilities 68,000

At 31 December 20X9 Sandra Ltd had identified an impairment loss of 40% in the value of goodwillarising on its investment in Fiona Ltd.

At what value will the investment in Fiona Ltd be shown in the consolidated balance sheet of SandraLtd as at 31 December 20X9?

A CU14,400

B CU15,600

C CU16,400

D CU20,400

14 The summarised balance sheets of Mandy Ltd and Len Ltd at 31 December 20X7 are shown below.

Mandy Ltd Len LtdCU CU

Total assets 349,600 140,000

Ordinary share capital 48,000 24,000Retained earnings 244,800 96,000Liabilities 56,800 20,000Total equity and liabilities 349,600 140,000

On 1 January 20X7 Mandy Ltd purchased 100% of the equity share capital of Len Ltd for CU144,000.At that date, Len Ltd's net assets had a fair value of CU96,000. An impairment loss of 20% has beenidentified by Mandy Ltd in the value of goodwill arising on the acquisition of Len Ltd. What is theamount of consolidated retained earnings at 31 December 20X7?

A CU340,800

B CU259,200

C CU268,800

D CU331,200

QUESTION BANK


64 Consolidated statements of financial performance

1 Betty Ltd acquired a 60% holding in Doris Ltd many years ago. At 31 December 20X3 Betty Ltd heldinventories with a carrying amount of CU30,000 purchased from Doris Ltd at cost plus 20%.

What is the effect of the above transaction on the consolidated income statement for the year ended31 December 20X3?

Profit attributable toEquity holders of Betty Ltd Minority interest

A Reduce by CU3,000 Reduce by CU2,000

B Reduce by CU3,600 Reduce by CU2,400

C Reduce by CU5,000 No effect

D Reduce by CU6,000 No effect

2 Pumpkin Ltd has held 90% of the equity share capital of Squash Ltd for many years. Cost of sales foreach company for the year ended 31 December 20X3 was as follows.

CUPumpkin Ltd 100,000Squash Ltd 80,000

During the year, Squash Ltd sold goods costing CU5,000 to Pumpkin Ltd for CU8,000. At the yearend, all of these goods remained in inventories.

What figure should be shown as cost of sales in the consolidated income statement of Pumpkin Ltd forthe year ended 31 December 20X3?

A CU169,000

B CU172,000

C CU175,000

D CU176,000

3 Zante Ltd purchased 80% of Corfu Ltd's ordinary shares on 1 July 20X0 for CU2,360,000 when thefair value of Corfu Ltd's net assets was CU2,240,000. As at 30 June 20X2 Zante Ltd had recognisedimpairments in respect of goodwill arising on the acquisition of Corfu Ltd amounting to CU100,000.

On 30 June 20X3, Zante Ltd sold all its shares in Corfu Ltd for CU3,600,000. The net assets of CorfuLtd were CU3,310,000 at the date of disposal.

What is the profit on disposal of the shares in Corfu Ltd which should be included in the consolidatedincome statement of Zante Ltd for the year ended 30 June 20X3?

A CU384,000

B CU484,000

C CU952,000

D CU270,000



4 On 1 January 20X4, Geranium Ltd acquired 60% of ordinary shares of Rose Ltd for CU5 million. Atthat date, the fair value of the net assets of Rose Ltd was CU8 million. On 1 July 20X9 Geranium Ltdsold three quarters of its holding in Rose Ltd for CU6.5 million.

The capital and reserves of Rose Ltd at 31 December 20X9 are shown below.

CU'000Share capital (CU1 ordinary shares) 5,000Retained earnings at 1 January 20X9 6,500Retained profit for the year ended 31 December 20X9 2,000

13,500

What is the profit or loss on disposal of the shares in Rose Ltd which should be included in theconsolidated income statement of Geranium Ltd for the year ended 31 December 20X9?

A CU675,000 profit

B CU725,000 loss

C CU725,000 profit

D CU3,025,000 loss

5 Magic Ltd acquired 90% of the ordinary share capital of Wizard Ltd many years ago. On 1 April 20X4Magic Ltd sold one-third of its investment in Wizard Ltd. Wizard Ltd's profit for the year ended31 December 20X4, which accrued evenly over that year, was CU576,000.

What amount of profit for the year is attributable to the minority interest in Wizard Ltd for the yearended 31 December 20X4?

A CU14,400

B CU187,200

C CU192,000

D CU230,400

6 On 1 April 20X3, Bibury Ltd acquired 70% of the ordinary shares of Barnsley Ltd. The followingfigures relate to the year ended 31 December 20X3.

Bibury Ltd Barnsley LtdCU CU

Revenue 769,000 600,000Cost of sales (568,500) (420,000)Gross profit 200,500 180,000

On 15 November 20X3 Barnsley Ltd sold goods which cost it CU5,000 to Bibury Ltd for CU7,000.These goods were still held by Bibury Ltd at 31 December 20X3.

What are the amounts for revenue and gross profit in the consolidated income statement of BiburyLtd for the year ended 31 December 20X3?

Revenue Gross profitCU CU

A 1,212,000 335,500

B 1,212,000 333,500

C 1,362,000 983,500

D 1,362,000 985,500

QUESTION BANK


7 Alexander Ltd acquired 30% of Bucephalus Ltd's ordinary shares in 20X5 for CU450,000 when the fairvalue of Bucephalus Ltd's net assets was CU1 million. No impairment in the value of the investmenthas been identified since that date.

On 30 June 20X9 Alexander Ltd disposed of all of its shares in Bucephalus Ltd for CU600,000 whenBucephalus Ltd's net assets amounted to CU1.2 million. Bucephalus Ltd's profit for the year to31 December 20X9, which accrued evenly over the year, was CU120,000.

What are the amounts for the share of associate's profits and profit on disposal of associate inAlexander Ltd's consolidated income statement for the year ended 31 December 20X9?

Share of Profit onassociate's profits disposal of associate

CU CU

A 18,000 90,000

B 36,000 90,000

C 18,000 240,000

D 36,000 240,000

8 Chloe Ltd, which has many subsidiaries, acquired 90% of the ordinary shares of Charlotte Ltd in 20X5.On 31 December 20X8 Charlotte Ltd's net assets amounted to CU300,000. On 30 September 20X9Chloe Ltd sold all of its shares in Charlotte Ltd. Charlotte Ltd's profit for the year to 31 December20X9 was CU60,000, which accrued evenly over that year.

What amount will appear as a deduction from the minority interest column in Chloe Ltd'sconsolidated statement of changes in equity for the year ended 31 December 20X9 in respect ofCharlotte Ltd?

A CU4,500

B CU30,000

C CU34,500

D CU36,000

9 Shadow Ltd acquired 80% of the ordinary shares of Pip Ltd in 20X6. On 31 December 20X8 Pip Ltd'snet assets amounted to CU400,000. On 30 September 20X9 Shadow Ltd sold one quarter of itsshares in Pip Ltd. Pip Ltd's profit for the year to 31 December 20X9 was CU120,000, which accruedevenly over that year.

What amount will be added to the minority interest column in Shadow Ltd's consolidated statementof changes in equity for the year ended 31 December 20X9 in respect of Shadow Ltd's decrease inholding in Pip Ltd?

A CU30,000

B CU80,000

C CU98,000

D CU104,000



10 Alayna Ltd owns 75% of the ordinary shares in Ellen Ltd and 30% of the ordinary shares in Lauren Ltd,over which it exercises significant influence. In the year ended 30 June 20X8 the companies paid thefollowing dividends.

CUAlayna Ltd 500,000Ellen Ltd 200,000Lauren Ltd 100,000

What will be the total amount shown in Alayna Ltd's consolidated statement of changes in equity forthe year ended 30 June 20X8 in respect of dividends paid?

A CU500,000

B CU550,000

C CU580,000

D CU700,000

11 Parent Ltd owns 80% of the issued ordinary share capital of Subsidiary Ltd. For the year ended31 December 20X6 Subsidiary Ltd reported a net profit of CU55 million. During 20X6, Subsidiary Ltdsold goods to Parent Ltd for CU15 million at cost plus 20%. At the year end half these goods are stillheld by Parent Ltd.

In the consolidated income statement for the year ended 31 December 20X6 what will be the amountfor profit attributable to the minority interest?

A CU8 million

B CU10.7 million

C CU10.75 million

D CU11 million

65 Consolidated cash flow statements

1 The consolidated financial statements of Paulo Ltd for the year ended 31 March 20X4 showed thefollowing.

Minority interest in the consolidated balance sheet at 31 March 20X4 was CU6 million (CU3.6 millionat 31 March 20X3).

Minority interest in the consolidated income statement for the year ended 31 March 20X4 was CU2million.

During the year ended 31 March 20X4, the group acquired a new 75% subsidiary whose net assets atthe date of acquisition were CU6.4 million. On 31 March 20X4, the group revalued all its propertiesand the minority interest in the revaluation surplus was CU1.5 million. There were no dividendspayable to minority shareholders at the beginning or end of the year.

In accordance with BAS 7 Cash Flow Statements what was the dividend paid to minority shareholdersthat will be shown in the consolidated cash flow statement of Paulo Ltd for the year ended 31 March20X4?

A CU1.2 million

B CU2.7 million

C CU4.5 million

D CU7.5 million

QUESTION BANK


2 Nigel Ltd acquired 30% of the shares of Nick Ltd a number of years ago and the investment has sincebeen accounted for as an associate in Nigel Ltd's consolidated financial statements. Both Nigel Ltd andNick Ltd have an accounting year end of 31 October. Nigel Ltd has no other investments in associates.

Nick Ltd's income statement for the year ended 31 October 20X4 showed a net profit for the year ofCU230,000. Nigel Ltd's consolidated balance sheet at 31 October 20X4 showed investments inassociates of CU700,000 (20X3 CU635,000).

In accordance with BAS 7 Cash Flow Statements what amount will be shown as dividends received fromassociates in the consolidated cash flow statement of Nigel Ltd for the year ended 31 October 20X4?

A CU165,000

B CU765,000

C CU4,000

D CU295,000

3 Julie Ltd has one associated company, Andrew Ltd, in which Julie Ltd holds 40% of the issued 100,000CU1 ordinary shares. The financial controller of Julie Ltd is unsure how the following transactionsshould be reflected in the consolidated cash flow statement and has asked you to confirm the overallimpact.

(1) In the previous accounting period, Julie Ltd had made a cash advance of CU100,000 to AndrewLtd. During the current accounting period, Andrew Ltd repaid CU30,000 of this cash advance.

(2) During the current accounting period, Andrew Ltd sold an item of property, plant and machineryat its carrying amount for CU20,000 cash.

(3) During the current accounting period, Andrew Ltd paid a dividend of 20p per share.

In accordance with BAS 7 Cash Flow Statements what is the impact of the above cash transactions onJulie Ltd's consolidated cash flow statement for the current accounting period?

A Cash from sale of associate's plant CU20,000; dividend paid by associate CU20,000

B Cash from repayment of cash advance from associate CU30,000; cash from sale of associate'splant CU20,000

C Cash from repayment of cash advance from associate CU30,000; dividend received fromassociate CU8,000

D Dividend received from associate CU8,000



4 On 1 June 20X5 Faraday Ltd sold its wholly owned subsidiary, Electric Ltd. Faraday Ltd received cashof CU2 million in respect of this sale on 1 July 20X5. A further CU500,000 is payable in cash on 1January 20X6 if Electric Ltd exceeds certain profit targets.

On 1 June 20X5 the net assets of Electric Ltd were as follows.

CUProperty, plant and equipment 650,000Inventories 450,000Receivables 200,000Cash and cash equivalents 20,000Liabilities (130,000)Net assets acquired 1,190,000

In accordance with BAS 7 Cash Flow Statements what amount should be shown in the investingactivities section of the consolidated cash flow statement of Faraday Ltd for the year ended 31December 20X5?

A CU2,000,000

B CU2,480,000

C CU2,500,000

D CU1,980,000

5 On 30 September 20X8 Dougal Ltd acquired 80% of the ordinary shares of Lucy Ltd. Theconsideration was made up of 100,000 of Dougal Ltd's ordinary shares, issued at a price of CU1.25 pershare and cash of CU400,000.

On 30 September 20X8 the net assets of Lucy Ltd were as follows.CU

Property, plant and equipment 450,000Inventories 250,000Receivables 130,000Cash and cash equivalents (40,000)Other liabilities (230,000)Net assets acquired 560,000

In accordance with BAS 7 Cash Flow Statements what amount should be shown in the investingactivities section of the consolidated cash flow statement of Dougal Ltd for the year ended 31December 20X8?

A CU360,000

B CU440,000

C CU432,000

D CU565,000

QUESTION BANK


6 On 1 January 20X3 Judith Ltd's consolidated balance sheet showed property, plant and equipment ofCU257,900. By 31 December 20X3 this figure was CU578,900. The following transactions in relationto the property, plant and equipment of the group took place during 20X3.

(1) Total additions to property, plant and equipment, as shown in the notes to the consolidatedfinancial statements for 20X3, included CU40,000 in relation to assets acquired under financeleases and CU35,000 in relation to assets acquired on the acquisition of a subsidiary during theyear.

(2) Plant with a carrying amount of CU32,000 was sold for CU38,000 during the year.

(3) Total depreciation for the year was CU135,000.

In accordance with BAS 7 Cash Flow Statements what amount will be shown in Judith Ltd's consolidatedcash flow statement for 20X3 as a cash outflow under investing activities in respect of transactions inproperty, plant and equipment?

A CU375,000

B CU413,000

C CU448,000

D CU488,000

7 The financial controller of Judith Ltd is drafting the note to the consolidated cash flow statementreconciling group profit before tax to cash generated from operations for the year ended31 December 20X8. He has asked you to assist him with calculating the movement on receivables andpayables.

The following information is available.

Consolidated31 December

20X831 December

20X7

Acquired withsubsidiary on1 June 20X8

CU'000 CU'000 CU'000Receivables 340 235 90Payables (275) (135) (165)

In accordance with BAS 7 Cash Flow Statements what amount will be shown in Judith Ltd'sreconciliation of profit before tax to cash generated from operations for 20X8 in respect ofreceivables and payables?

Receivables Payables

A Increase of CU195,000 Increase of CU305,000

B Increase of CU105,000 Increase of CU140,000

C Increase of CU15,000 Decrease of CU25,000

D Decrease of CU195,000 Decrease of CU305,000



8 On 30 June 20X8, Parry Ltd sold its investment in its only associate, Sasha Ltd, for a cash sum ofCU460,000. Parry Ltd has held 30% of Sasha Ltd's ordinary shares since its incorporation.

In the year ended 31 December 20X8 Sasha Ltd made a profit after tax of CU700,000. The net assetsof Sasha Ltd on 30 June 20X8 were as follows.

CUProperty, plant and equipment 357,000Inventories 170,000Receivables 45,000Cash and cash equivalents 5,000Other liabilities (87,000)

490,000

Parry Ltd's consolidated balance sheet at 31 December 20X7 reflected investments in associates ofCU120,600.

In accordance with BAS 7 Cash Flow Statements what amount will be shown as an investing inflow inParry Ltd's consolidated cash flow statement for the year ended 31 December 20X8 in respect of itsinvestment in Sasha Ltd?

A CU460,000

B CU455,000

C CU225,600

D CU685,600

66 Group accounts accounting standards

1 Sarah Ltd has owned 100% of the ordinary share capital of Ulysses Ltd and Wally Ltd for many years.Ulysses Ltd operates in a country in Central Africa. In June 20X3, civil war broke out in this country.Essential services have been severely disrupted and it has been impossible to communicate with localpersonnel for several months. This situation is unlikely to be resolved in the near future. Wally Ltd isan insurance company. The rest of the group extracts and processes mineral ores.

In accordance with BAS 27 Consolidated and Separate Financial Statements and BFRS 3 BusinessCombinations which of these companies must be consolidated by Sarah Ltd at 31 December 20X3?

A Ulysses Ltd only

B Wally Ltd only

C Both Ulysses Ltd and Wally Ltd

D Neither Ulysses Ltd nor Wally Ltd

QUESTION BANK


2 Consul Ltd owns the following equity shareholdings in the following companies and has a seat on theboard of each of those companies.

Admiral Ltd 25%Sultan Ltd 20%Warrior Ltd 25%

Consul Ltd holds the largest shareholding in Admiral Ltd, where no other shareholdings are largerthan 10%. Another entity owns 25% of the equity shares in Sultan Ltd and also has a seat on its board.No other individual or entity owns more than 5% of the equity shares of Sultan Ltd. A single entityholds the remaining 75% of Warrior Ltd's equity shares and has a seat on its board. In accordance withBAS 28 Investments in Associates, which entities are likely to be associates of Consul Ltd?

A Admiral Ltd only

B Admiral Ltd and Sultan Ltd

C Admiral Ltd and Warrior Ltd

D Admiral Ltd, Sultan Ltd and Warrior Ltd

3 On 1 January 20X5 Plane Ltd acquired 60% of the ordinary shares of Sycamore Ltd. Goodwill ofCU100,000 arose on the acquisition.

Sycamore Ltd's performance for the years ended 31 December 20X5 and 31 December 20X6 slightlyexceeded budget. However, in the year ended 31 December 20X7 it made substantial losses that hadnot been forecast.

According to BFRS 3 Business Combinations when should the goodwill arising on the acquisition ofSycamore Ltd be reviewed for impairment?

A Annually

B In 20X5 only

C In 20X7 only

D In 20X5 and in 20X7

4 The following statements refer to a situation where an investing entity (Kyle Ltd) seeks to exertcontrol or influence over another entity (Lyle Ltd). Assume that Kyle Ltd is required to prepareconsolidated accounts because of other investments.

(1) If Kyle Ltd owns more than 20%, but less than 50% of the equity shares in Lyle Ltd, then Lyle Ltdis bound to be an associate of Kyle Ltd

(2) If Kyle Ltd controls the operating and financial policies of Lyle Ltd, then Lyle Ltd cannot be anassociate of Kyle Ltd

(3) If Lyle Ltd is an associate of Kyle Ltd, then any amounts payable by Lyle Ltd to Kyle Ltd are noteliminated on preparation of the consolidated balance sheet of Kyle Ltd

Which of the above statements are true?

A (1) and (2) only

B (2) only

C (2) and (3) only

D (1) and (3) only



5 On 1 March 20X5, Pompadour Ltd, a listed entity, acquired 80% of the three million issued ordinaryshares of Madame Ltd. The consideration for each share acquired comprised a cash payment ofCU1.20, plus two ordinary shares in Pompadour Ltd.

The market value of a CU1 ordinary share in Pompadour Ltd on 1 March 20X5 was CU1.50, rising toCU1.60 by the company's year end on 31 March 20X5. Professional fees paid to Pompadour Ltd'sexternal accountants and legal advisers in respect of the acquisition were CU400,000.

According to BFRS 3 Business Combinations what is the fair value of consideration in respect of thisacquisition, for inclusion in Pompadour Ltd's own financial statements for the year ended 31 March20X5?

A CU10,080,000

B CU10,480,000

C CU10,560,000

D CU10,960,000

6 On 30 September 20X5, Gary Ltd purchased 80% of the ordinary share capital of Jerry Ltd for CU1.45million. The carrying amount of Jerry Ltd's net assets at the date of acquisition was CU1.35 million. Avaluation exercise showed that the fair value of Jerry Ltd's property, plant and equipment at that date wasCU100,000 greater than carrying amount, and Jerry Ltd immediately incorporated this revaluation into itsown books.

Jerry Ltd's financial statements at 30 September 20X5 contained notes referring to a contingentliability (which had a fair value of CU200,000).

Gary Ltd acquired Jerry Ltd with the intention of restructuring the latter's production facilities. Theestimated costs of the restructuring plan totalled CU115,000.

According to BFRS 3 Business Combinations what is the amount of goodwill arising on the acquisition ofJerry Ltd?

A CU290,000

B CU450,000

C CU530,000

D CU542,000

© The Institute of Chartered Accountants in England and Wales, March 2009

117

Answer Bank

ANSWER BANK



1 Howells Ltd

Marking guide

Marks

(a) Income statementRevenue ½Cost of sales 4½Other operating income 1Administrative expenses 3½Distribution costs 1Finance costs ½Investment income ½Income tax expense ½Presentation 1

Statement of changes in equityHeadings 1Transfer ½Profit ½Ordinary dividends ½Preference dividends ½Balances brought forward ½Presentation 1

NotesNote 1 3½Note 2 ½

Total available 21½Maximum 20

(b) Paras 2 and 5 1Other valid points (each) ½Total available 5Maximum 4

24

(a) Income statement for the year ended 31 December 20X8Note CU

Revenue 1,600,047Cost of sales (W1) (963,351)Gross profit 636,696Other operating income (W2) 39,045Distribution costs (W1) (33,891)Administrative expenses (W1) (166,256)Profit from operations (1) 475,594Finance cost (6,260)Investment income 11,000Profit before tax 480,334Income tax expense (22,500)Profit for the period 457,834



Statement of changes in equity for the year ended 31 December 20X8

Ordinary Preference General Retained TotalAttributable to the equity holders share share capital reserve earnings

of Howells Ltd capital (irredeemable)CU CU CU CU CU

Recognised directly in equityTransfer between reserves – – 10,000 (10,000) –

Total recognised directly in equity – – 10,000 (10,000) –Profit for the period – – – 457,834 457,834Total recognised income and

expense for the period – – 10,000 447,834 457,83420X7 final dividends on ordinary

shares – – – (12,500) (12,500)20X8 dividends on preference

shares – – – (2,500) (2,500)– – 10,000 432,834 442,834

Balance brought forward 100,000 50,000 10,000 66,015 226,015Balance carried forward 100,000 50,000 20,000 498,849 668,849

Notes to the financial statements (extracts)

(1) The profit from operations is arrived at after charging (crediting)

CUOperating lease rentals 6,002Gain on sale of property (25,040)Depreciation (6,700 + 8,200) (W1) 14,900Impairment of brand 8,500Employee benefits (126,232 + 24,291 + 54,117) 204,640

(2) An ordinary dividend for 20X8 of CU25,000 is proposed for payment on 25 March 20X9.

(b) Fair presentation

BAS 1 Presentation of Financial Statements describes the concept of fair presentation. Fair presentationinvolves

Representing faithfully the effect of transactions, other events and conditions In accordance with the definitions and recognition criteria in BFRS Framework

This is developed by stating that the application of IFRS, Interpretations and additional disclosures willresult in fair presentation.

BAS 1 requires the financial statements to present fairly the financial position and performance of anentity rather than to give a true and fair view. Present fairly is further described as representingfaithfully the effects of transactions and as a result there is unlikely to be a difference between the two.

Whilst not dealing with the concepts directly, BFRS Framework uses the descriptions of fairpresentation and true and fair view interchangeably in its discussion of the application of the principalqualitative characteristics of financial information.

ANSWER BANK


WORKINGS

(1) Allocation of costs

Cost of Admin Distribsales expenses costsCU CU CU

Opening inventories 58,045Purchases 907,989Administrative salaries 126,232Salesmen's salaries 24,291Factory wages 54,117Operating lease rentals 6,002Administrative expenses 18,822Selling and distribution costs 9,600Closing inventories (68,000 – (1,000 CU3)) (65,000)Depreciation

Buildings ((450,000 – 115,000) 50) 6,700

Plant ((22,000 10) + ((60,000 – 18,000) 7)) 8,200Impairment of brand (20,500 – 12,000) 8,500

963,351 166,256 33,891

(2) Other operating income

CURoyalties 14,005Gain on sale of property 25,040

39,045



2 Berwick Ltd

Marking guide

Marks

Balance sheetPPE 5½Inventories ½Receivables 1½Cash ½Ordinary share capital ½Share premium ½Revaluation reserve ½Retained earnings ½Non-current borrowings ½Payables 1½Taxation ½Current borrowings ½Presentation 1

Statement of changes in equityGain on revaluation 1Transfer 2Profit 2Ordinary dividends ½Preference dividends ½Balances brought forward 1Presentation 1

Total available 22Maximum 20

Balance sheet as at 31 January 20X5

CU CUASSETSNon-current assets

Property, plant and equipment (W1) 2,023,000Current assets

Inventories 370,000Trade and other receivables (W4) 497,000Cash and cash equivalents 249,000

1,116,000Total assets 3,139,000

ANSWER BANK



Ordinary share capital 850,000Share premium account 50,000Revaluation reserve 552,000Retained earnings 712,000

Equity 2,164,000Non-current liabilities

Borrowings (200,000 – 40,000) 160,000Current liabilities

Trade and other payables (W5) 640,000Taxation 135,000Borrowings (200,000 5) 40,000

815,000Total equity and liabilities 3,139,000

Statement of changes in equity for the year ended 31 January 20X5

Ordinary Share Revaluation Retained Totalshare premium reserve earningscapital

CU CU CU CU CURecognised directly in equityGain on property revaluation (W2) 564,000Transfer between reserves (W2) – – (12,000) 12,000 –

Total recognised directly in equity – – 552,000 12,000 564,000Profit for the period (W3) – – – 18,000 18,000Total recognised income and

expense for the period – – 552,000 30,000 582,000Final dividends on ordinary shares – – – (66,000) (66,000)Interim dividends on ordinary

shares – – – (22,000) (22,000)– – 552,000 (58,000) 494,000

Balance brought forward 850,000 50,000 – 770,000 1,670,000Balance carried forward 850,000 50,000 552,000 712,000 2,164,000

WORKINGS

(1) Property, plant and equipment

Land and Plant and Motor Totalbuildings machinery vehicles

CU CU CU CUPer TB

Value 1,500,000 650,000 250,000Depreciation b/f (160,000) (90,000)

Depreciation for year((1,500 – 300) 40) (30,000)

(650 10%) (65,000)

((250 – 90) 20%) (32,000)1,470,000 425,000 128,000 2,023,000

(2) Transfer from revaluation reserve to retained earnings

CUNew value of buildings 1 February 20X4 (1,500 – 300) 1,200,000Carrying amount of buildings 1 February 20X4 (800 46/50) (736,000)Surplus on buildings 464,000Transfer to retained earnings per annum (464 1/40) 12,000

Total surplus on revaluation = 464 + 100 on land = CU564,000



(3) Profit for the period

CUDraft for year 370,000Less Depreciation (30 + 65 + 32) (W1) (127,000)

Tax (135,000)Bad debt (20,000)Development expenditure (70,000)

18,000

(4) Trade and other receivables

CUTrade receivables (420,000 – 20,000) 400,000Prepayments 97,000

497,000

(5) Trade and other payables

CUTrade payables 380,000Accruals 100,000VAT 50,000Bank overdraft 110,000

640,000

Note: We are not told of any right of set-off between the bank balance and the overdraft, so it would bewrong to offset them in the balance sheet and show only a net figure.

3 Angus Ltd

Marking guide

Marks

(a) Income statementRevenue ½Operating expenses (including depreciation) 2Provision ½Income tax expense ½Loss from discontinued operations 3Note 1Presentation 1

Statement of changes in equityHeadings 1Revaluation 1½Transfer 1½Profit ½Dividends ½Balances as previously stated 1Correction of error ½Presentation 1


(b) Para 1 1Each other valid point or example ½Total available 7½Maximum 6

21

ANSWER BANK


(a) Financial statements

(i) Income statement for the year ended 28 February 20X7CU'000

Continuing operationsRevenue (W3) 180,000Operating expenses (W3) (143,965)Provision for costs of reorganisation (1,250)Profit before tax 34,785Income tax expense (6,000)Profit for the period from continuing operations 28,785

Discontinued operationsLoss for the period from discontinued operations (W3) (Note) (16,430)Profit for the period 12,355

Note: The results for the year of the European operations (the intended sale of which has beenannounced) were (W3): revenue CU20,000,000, expenses CU36,230,000, loss before taxCU16,230,000, loss on measurement of non-current assets held for sale at fair value less costs tosell CU200,000.

(ii) Statement of changes in equity for the year ended 28 February 20X7

Ordinary Revaluation Retained Totalshare reserve earningscapital

CU'000 CU'000 CU'000 CU'000Recognised directly in equity

Revaluation ofnon-current assets (W1) – 6,800 – 6,800

Transfer between reserves redepreciation on revaluations(W2) – (120) 120 –

Total recognised directly in equity – 6,680 120 6,800Profit for the period – – 12,355 12,355Total recognised income and expensefor the period – 6,680 12,475 19,155

Final dividends on ordinary shares – – (2,000) (2,000)– 6,680 10,475 17,155

Balance brought forwardAs previously stated 200,000 – 300,000 500,000Correction of error – – (355) (355)

Balance carried forward 200,000 6,680 310,120 516,800

(b) Objectives of financial statements

The objective of financial statements as set out in BFRS Framework is to provide information about thefinancial position, performance and changes in financial position of an enterprise that is useful to a widerange of users in making economic decisions.

Users will include present and potential investors, employees, lenders, suppliers, customers,government agencies and the general public.

However, this objective can usually be met by focusing exclusively on the information needs of presentand potential investors. This is because much of the financial information that is relevant to investorswill also be relevant to other users.

Information about financial position is primarily provided by the balance sheet which will allow users toassess:

The entity's ability to generate cash (e.g. for a manufacturing company, from a strong non-currentasset base)

How future cash flows will be distributed (e.g. disclosed borrowings with applicable rates ofinterest)



Requirements for future finance (e.g. disclosed expansion plans)

The ability to meet financial commitments as they fall due (e.g. disclosed due dates ofborrowings)

Information about financial performance is primarily provided by the income statement and statementof changes in equity. For example, the disclosure of continuing and discontinued operations willprovide information about potential changes in the company's economic resources in the future.

Information about changes in financial position is given in the cash flow statement. This will showwhere the company's cash has come from (e.g. from operating cash flows or only from one-off sourcessuch as sales of non-current assets) and its need to use what is generated (e.g. in meeting loanrepayment schedules).

WORKINGS

(1) Revaluation surplus

CU'000Revalued amount 20,000Less Carrying amount (16,000 – 2,800) (13,200)

6,800

Tutorial note

Under para 17 BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors the initial application of apolicy to revalue assets is to be dealt with as a revaluation under BAS 16 Property, Plant and Equipment,rather than as a change of accounting policy under BAS 8.

(2) Excess depreciation

CU'000Revalued depreciation charge ((20,000 – 4,000) 40 years) 400Less Historical cost depreciation charge (280)

120

(3) Allocation of revenue/operating expenses

Total Continuing Discontinuedoperations operations

CU'000 CU'000 CU'000Revenue (90:10) 200,000 180,000 20,000Operating expenses (W5, split 80:20) (180,400) (144,320) (36,080)Correction of error re inventories 355 355 –

(180,045) (143,965) (36,080)Operating lease termination and other costs (50 + 100) (150)

(36,230)Revenue less expenses (16,230)Remeasurement of non-current assets held for sale (W4) (200)Loss for the period (16,430)

(4) Impairment loss and other costs from disposal

CU'000Fair value on classification as held for sale 2,850Less Costs to sell (50)

2,800Carrying amount before classification 3,000

(200)

(5) Depreciation charge in operating expenses

Buildings element = CU20m – CU4m = CU16m

Depreciation charge = CU16m ÷ 40 = CU400,000

Total operating expenses = CU180m + CU0.4m = CU180.4m

ANSWER BANK


4 Goblins Ltd

Marking guide

Marks

(a) Income statementRevenue ½Change in inventories 1½Raw materials and consumables ½Employee benefits 1Depreciation 3Other expenses 1Finance costs ½Income tax expense 1Presentation 1

Balance sheetPPE 3Intangibles 1Inventories 1½Receivables 1½Cash ½Ordinary share capital ½Revaluation reserve 1½Retained earnings 1½Redeemable preference share capital ½Payables 1Dividend ½Presentation 1


(b) Each explanation of asset for each measurement basis ½Each explanation of liability for each measurement basis ½Total available 4Maximum 4

26

(a) Income statement for the year ended 31 December 20X4

CURevenue 1,740,600Change in inventories of finished goods and work in progress (W2) 34,400Raw materials and consumables used (W2) (294,500)Employee benefits expense (W2) (620,400)Depreciation and amortisation expense (W2) (45,000)Other expenses (W2) (107,765)Profit from operations 707,335Finance costs (W8) (6,000)Profit before tax 701,335Income tax expense (W4) (107,600)Profit for the period 593,735



Balance sheet as at 31 December 20X4CU CU


Property, plant and equipment (W1) 365,000Intangibles (W5) 40,000

405,000Current assets

Inventories (W6) 315,500Trade and other receivables (W7) 356,535Cash and cash equivalents 515,200

1,187,235Total assets 1,592,235


Ordinary share capital 500,000Revaluation reserve (W9) 115,000Retained earnings (W9) 576,035

Equity 1,191,035Non-current liabilities

Preference share capital (redeemable) 120,000Current liabilities

Trade and other payables (W8) 86,200Dividend payable (W9) 75,000Taxation 120,000


(b) The four measurement bases

Measurement basis Assets recorded/carried at Liabilities recorded/carried at

Historical cost The amount of cash or cashequivalents paid, or the fairvalue of the considerationgiven, at the time ofacquisition.

The amount of the proceedsreceived in exchange for theobligations or the amount expectedto be paid to settle the liabilities inthe ordinary course of business.

Current cost The amount of cash or cashequivalents payable if thesame or equivalent assetswere acquired currently.

The undiscounted amount thatwould be required to settle theobligations currently.

Realisable(settlement) value

The amount of cash or cashequivalents currentlyobtainable by selling assetsin an orderly disposal.

The undiscounted amountexpected to be paid to settle theliabilities in the normal course ofbusiness.

Present value The discounted presentvalue of the future net cashinflows expected to begenerated by the assets inthe normal course ofbusiness.

The discounted present value ofthe future net cash outflowsexpected to be required to settlethe liabilities in the normal courseof business.

ANSWER BANK


WORKINGS

(1) Property, plant and equipmentLeasehold Computers Total

CU CU CUCost 300,000 50,000Revaluation 60,000 –

360,000 50,000Depreciation

B/f 60,000 20,000Revaluation (60,000) –Charge (W2 & W3) 15,000 10,000C/f 15,000 30,000

NBV c/f 345,000 20,000 365,000

(2) Allocation of costsDepn and Raw Employee Changes in Otheramortn materials benefits inventories expenses

CU CU CU CU CUStaff costs 260,400Leasehold (W3) 15,000Computers (50,000 5) 10,000

Patents (60,000 3) 20,000Directors' emoluments 360,000Raw materials 294,500Bad and doubtful debts

(45,000 + 18,765 (W7)) 63,765Finished games (180,000 –

(10 CU450) – 155,600) (19,900)Work in progress

(140,000 – 125,500) (14,500)Consultancy fees 44,000

45,000 294,500 620,400 (34,400) 107,765

(3) Depreciation on leasehold

=lifeusefulRemaining

amountCarrying

=years24

000,360CU

= CU15,000

Total of 30 years. At 1 January 20X4 CU60,000 depreciation

charged based on (CU300,000 30) CU10,000 per year. Thereforebuildings have 24 years remaining.

Annual transfer from revaluation reserve = CU15,000 – CU10,000 = CU5,000.

(4) Income tax

CUFor year 120,000Overprovision re previous year (12,400)

107,600

(5) Intangibles

CUB/f 60,000Amortisation for the year (W2) (20,000)C/f 40,000



(6) Inventories

CUFinished games (180,000 – (10 CU450)) 175,500WIP 140,000

315,500

(7) Trade and other receivables

CUPer TB 420,300Less Bad debt write off (45,000)

375,300Less Specific allowance @ 5% (18,765)

356,535


CUPer TB 80,200Accrued interest on preference shares (120,000 5%) 6,000

86,200

(9) Reserves

Retained Revaluationearnings reserve

CU CUB/f 102,300 –Profit for the period 593,735 –Revaluation (360,000 – (300,000 – 60,000)) – 120,000Ordinary dividends (50,000 + (15p 500,000)) (125,000)Depreciation transfer (W3) 5,000 (5,000)C/f 576,035 115,000

ANSWER BANK


5 Harry Ltd

Marking guide

Marks

Income statementRevenue 1Change in inventories ½Work capitalised ½Raw materials and consumables ½Employee benefits 1Depreciation/amortisation 3½Other expenses ½Impairment 1Finance costs 1Income tax expense ½Presentation 1

Balance sheetPPE 3½Intangibles ½Inventories 1Receivables 1Cash ½Ordinary share capital ½Share premium 1Revaluation reserve 1Retained earnings 1Redeemable preference share capital ½Non-current finance lease liabilities 1Dividend 1Payables ½Taxation ½Current finance lease liabilities 2Presentation 1


Income statement for the year ended 31 December 20X5

CURevenue (3,500,000 – 1,000) 3,499,000Changes in inventories of finished goods and work in progress (W1) 5,200Work performed by the enterprise and capitalised (W2) 74,500Raw materials and consumables used (1,570,000)Employee benefits expense (1,250,500 + 10,000) (1,260,500)Other expenses (bad debt) (9,000)Depreciation and amortisation expense (W3) (95,025)Impairment of intangibles (15,000 – 750 (W3) – 14,000) (250)Profit from operations 643,925Finance costs (W7) (6,800)Profit before tax 637,125Income tax expense (250,000)Profit for the period 387,125




CU CUASSETSNon-current assets

Property, plant and equipment (W2) 5,181,725Intangibles 14,000

5,195,725Current assets

Inventories (W1) 64,200Trade and other receivables (37,500 – 10,000) 27,500Cash and cash equivalents 263,500

355,200Total assets 5,550,925


Ordinary share capital (W5) 600,000Share premium account (W5) 110,000Revaluation reserve (W4) 2,040,000Retained earnings (W4) 2,295,725

5,045,725Non-current liabilities

Preference share capital (redeemable) 120,000Finance lease liabilities (W6) 36,667

156,667Current liabilities

Dividend payable (W4) 60,000Trade and other payables (25,400 + 4,800 (W7)) 30,200Taxation 250,000Finance lease liabilities (45,000 – 36,667 (W6)) 8,333


WORKINGS

(1) Change in inventories

CUOpening (45,600 + 13,400) 59,000Closing (50,200 + 15,000 – 1,000) (64,200)

(5,200)


Freehold Plant Equipment TotalCU CU CU CU

CostB/f 3,600,000 520,000 Sold (W3)Additions (54,000 + 20,500) – 53,000 74,500Revaluation 1,400,000 – –C/f 5,000,000 573,000 74,500Acc depB/f 640,000 375,000 Sold (W3)Revaluation (640,000) – –Charge (W3) 40,000 39,600 11,175C/f 40,000 414,600 11,175

NBV c/f 4,960,000 158,400 63,325 5,181,725

ANSWER BANK


(3) Depreciation and amortisation expense

CULoss on scrapped office equipment (32,000 – 28,500) 3,500Depreciation on new furniture (74,500 (W2) 15%) 11,175

Depreciation on plant ((573,000 (W2) – 375,000) 20%) 39,600

Depreciation on buildings (1,000,000 4%) 40,000

Amortisation of patent (15,000 20) 75095,025

(4) Reserves

Retained Revaluationearnings reserve

CU CUB/f 1,968,600 –Revaluation (5,000,000 – (3,600,000 – 640,000)) – 2,040,000Ordinary dividends (600,000 (W5) 10p) (60,000) –For year 387,125 –

2,295,725 2,040,000

(5) Bonus issue

Ordinary Shareshares premium

CU CUB/f 500,000 200,000Directors' time – 10,000Bonus issue 100,000 (100,000)

600,000 110,000

(6) Finance lease

CULease payments (6 CU10,000) 60,000Fair value of asset (53,000)Total interest 7,000

SOTD =2

1)(nn =

2

76 = 21

Year ended 31 December B/f Interest Payment C/fCU CU CU CU

20X5 53,000 (6/21 CU7,000) 2,000 (10,000) 45,00020X6 45,000 (5/21 CU7,000) 1,667 (10,000) 36,667

(7) Finance charges

CULease (W6) 2,000Preference dividend (120,000 4%) 4,800

6,800



6 Frodo Ltd

Marking guide

Marks

(a) Income statementRevenue 1½Cost of sales 3½Administrative expenses 1½Distribution costs ½Finance costs ½Income tax expense ½Presentation 1

Balance sheetPPE 3½Inventories 1Receivables 1Cash ½Non-current assets held for sale ½Ordinary share capital ½Irredeemable preference share capital ½Retained earnings 1½Non-current borrowings ½Payables 1Dividend ½Taxation ½Current borrowings ½Provisions ½Presentation 1


(b) Objective of most directors is to maximise profits ½Not-for-profit entities have other considerations ½For each example of a not-for-profit entity with explanation of

objectives (to maximum of 2 marks) 1Success will be subject to non-profit measures ½Example of non-profit measures ½Reporting requirements:

BFRS for companies 1Sector specific regulation ½Foreign Donations Regulations 1978 1IPSASs for public sector bodies ½


26

ANSWER BANK


(a) Income statement for the year ended 31 March 20X6CU

Revenue (W5) 6,450,000Cost of sales (W1) (4,570,400)Gross profit 1,879,600Administrative expenses (W1) (540,500)Distribution costs (W1) (375,000)Profit from operations 964,100Finance costs (35,000)Profit before tax 929,100Income tax expense (350,000)Profit for the period 579,100

Balance sheet as at 31 March 20X6CU CU


Property, plant and equipment (W2) 2,211,000

Current assetsInventories (W1) 110,000Trade and other receivables (37,500 – 10,000) 27,500Cash and cash equivalents 63,500

201,000Non-current assets held for sale 5,000

206,000Total assets 2,417,000


Ordinary share capital 500,000Preference share capital (irredeemable) 200,000Retained earnings (W4) 581,600

1,281,600Non-current liabilities

Borrowings (200,000 9/10) 180,000

Current liabilitiesTrade and other payables (W3) 275,400Taxation 350,000Dividend payable (W4) 210,000Borrowings (200,000 1/10) 20,000Provisions 100,000


(b) Accounting requirements for not-for-profit entities

The objective of most company directors is to make a profit in order to maximise return on theshareholders' investment in that company. However, not-for-profit entities have other considerations.For example, not-for-profit entities might include the following:

NGOs – whose objective will be to maximise revenue and minimise running costs in order to payas much out as a 'cost' of charitable awards

Public sector schools – whose objective will be to add as much value as possible to their pupilswhilst operating within their means (i.e. not to make a profit but to achieve good results whilstnot making a loss)

Public sector hospitals – whose objective will be to provide a high quality of patient care, again,whilst operating within their means.

The 'success' of such entities will often be subject to non-profit measures such as their position inleague tables (exam results for schools, patient survival rates for hospitals).



Nonetheless, many of these entities will be subject to various reporting requirements.

Many of these organisations may still operate as companies. In this case they will be subject to locallegislation and accounting regulation, such as Companies Act and BFRS.

In addition, many not-for-profit entities will need to comply with regulation specific to theirsector. For example, in Bangladesh, NGOs are required to comply with the Foreign DonationsRegulations 1978.

Public sector bodies will be subject to International Public Sector Accounting Standards (IPSASs)where there is no national legislation.

WORKINGS

(1) Allocation of costsCost ofsales Admin Distribution

CU CU CUManufacturing costs 4,450,000 – –Administrative salaries – 410,500 –Selling and distribution costs – – 375,000Opening inventories 113,400 – –Depreciation (W2) 61,000 20,000 –Provision – 100,000 –Bad debt – 10,000 –Closing inventories (120,000 – (50,000 0.25/1.25)) (110,000)Impairment on held-for-sale asset

(120,000 – 48,000 – 11,000 – 5,000) 56,0004,570,400 540,500 375,000


Freehold Plant TotalCU CU CU

CostB/f 2,550,000 620,000Held for sale (120,000)C/f 2,550,000 500,000Acc depn

B/f 480,000 337,000For year ((2,550,000 – 1,750,000) 40) 20,000

On held for sale asset (120,000 10% 11/12) 11,000

Held for sale asset ((120,000 10% 4) + 11,000) (59,000)

On other plant (500,000 10%) 50,000C/f 500,000 339,000

NBV c/f 2,050,000 161,000 2,211,000


CUPer TB 25,400Fees in advance (W5) 150,000Advances (W5) 100,000

275,400

(4) Retained earnings

CUB/f 212,500Ordinary dividend (500,000/50p 20p) (200,000)

Preference dividend (200,000 5%) (10,000)For year 579,100

581,600

ANSWER BANK


(5) Revenue

CUPer TB 6,700,000Less Fees in advance (300,000 5/10) (150,000)

Advances (100,000)6,450,000

7 Plodder Ltd

Marking guide

Marks

Cash flow statementInterest paid 1½Income tax paid 1½Purchase of PPE 3Purchase of investments ½Proceeds from sales of PPE ½Proceeds from sales of intangibles ½Interest received ½Redemption of borrowings ½Dividends paid 1½Proceeds from issue of ordinary shares 1Opening and closing cash ½

ReconciliationPBT ½Investment income ½Finance charge ½Depreciation charge 1½Amortisation charge 1½Profit on disposal of PPE 1½Loss on disposal of intangibles 1½Change in inventories ½Change in receivables ½Change in prepayments ½Change in payables 1Change in accruals 1Change in provisions ½

Presentation 1Total available 24Maximum 22



Cash flow statement for the year ended 30 November 20X0

CU CUCash flows from operating activities

Cash generated from operations 1,780,000Interest paid (W5) (93,000)Income tax paid (W7) (115,000)

Net cash from operating activities 1,572,000

Cash flows from investing activitiesPurchase of property, plant and equipment (W3) (1,323,000)Purchase of investments (406,000)Proceeds from sales of property, plant and equipment 424,000Proceeds from sales of intangible assets 12,000Interest received 55,000

Net cash used in investing activities (1,238,000)

Cash flows from financing activitiesDividends paid (W8) (50,000)Proceeds from issue of ordinary shares (W1) 242,000Redemption of borrowings (500,000)

Net cash used in financing activities (308,000)Net increase in cash and cash equivalents 26,000Cash and cash equivalents at beginning of period 200,000Cash and cash equivalents at end of period 226,000

Note: Reconciliation of profit before tax to cash generated from operations

CUProfit before tax 756,000Investment income (55,000)Finance charge 68,000Depreciation charge (W4) 1,100,000Amortisation charge (W2) 19,000Profit on disposal of property, plant and equipment (W7) (98,000)Loss on disposal of intangible assets (W9) 3,000Increase in inventories (685,000 – 598,000) (87,000)Increase in trade and other receivables (480,000 – 465,000) (15,000)Decrease in prepayments (126,000 – 96,000) 30,000Increase in trade and other payables ((749,000 – 351,000) – (427,000 – 106,000)) 77,000Increase in accruals ((131,000 – 50,000) – (108,000 – 25,000)) 2,000Decrease in provisions (140,000 – 120,000) (20,000)Cash generated from operations 1,780,000

WORKINGS

(1) SHARE CAPITAL AND PREMIUM

CU CUB/d (1,000,000 + 200,000) 1,200,000

C/d (1,100,000 + 342,000) 1,442,000 Cash () 242,0001,442,000 1,442,000

(2) INTANGIBLES – ACCUMULATED AMORTISATION

CU CUDisposals 40,000 B/d 354,000C/d 333,000 Income statement () 19,000

373,000 373,000

ANSWER BANK


(3) PPE – COST OR VALUATION

CU CUB/d 6,375,000 B/d 106,000Revaluation 375,000 Disposals 479,000Cash () 1,323,000C/d 351,000 C/d 7,839,000

8,424,000 8,424,000

(4) PPE – ACCUMULATED DEPRECIATION

CU CUDisposals (W7) 153,000 B/d 3,974,000C/d 4,921,000 Income statement () 1,100,000

5,074,000 5,074,000

(5) FINANCE CHARGE

CU CUCash () 93,000 B/d 50,000C/d 25,000 Income statement 68,000

118,000 118,000

(6) INCOME TAX


397,000 397,000

(7) PPE – DISPOSALS

CU CUIncome statement () 98,000 Acc depn (479,000 – 326,000) 153,000Cost 479,000 Cash 424,000

577,000 577,000

(8) RETAINED EARNINGS

CU CUDividends () 50,000 B/d 1,311,000C/d 1,785,000 Income statement 524,000

1,835,000 1,835,000

(9) INTANGIBLES – DISPOSALS

CU CUCost (938,000 – 883,000) 55,000 Accumulated amortisation 40,000

Cash 12,000Income statement () 3,000

55,000 55,000



8 Copeland Ltd

Marking guide

Marks

Cash flow statementInterest paid 1½Income tax paid 1½Purchase of PPE 3Purchase of intangibles 1½Purchase of investments 1Proceeds from sales of PPE 3Interest received 1½Dividends paid 1½Proceeds from issue of ordinary shares 1½Redemption of borrowings ½Opening and closing cash ½

ReconciliationPBT ½Investment income ½Finance charge ½Depreciation charge 2Amortisation charge 1Loss on disposal of PPE ½Change in inventories ½Change in receivables 1Change in prepayments ½Change in payables 1


ANSWER BANK


Cash flow statement for the year ended 31 May 20X2




Cash flows from investing activitiesPurchase of property, plant and equipment (W1) (1,752,000)Purchase of intangible assets (W4) (339,000)Purchase of investments (W6) (2,018,000)Proceeds from sales of property, plant and equipment (W3) 221,000Interest received (W10) 76,000


Cash flows from financing activitiesDividends paid (W12) (163,000)Proceeds from issue of ordinary shares (W8) 422,000Redemption of borrowings (1,500,000)

Net cash used in financing activities (1,241,000)Net increase in cash and cash equivalents 167,000Cash and cash equivalents at beginning of period 322,000Cash and cash equivalents at end of period 489,000


CUProfit before tax 3,420,000Investment income (78,000)Finance charge 563,000Depreciation charge (W2) 1,260,000Amortisation charge (W5) 975,000Loss on disposal of property, plant and equipment 189,000Increase in inventories (1,112,000 – 1,086,000) (26,000)Increase in trade and other receivables

((948,000 – 165,000 – 10,000) – (840,000 – 79,000 – 8,000)) (20,000)Decrease in prepayments (108,000 – 95,000) 13,000Decrease in trade and other payables (1,417,000 – 376,000 – 896,000) 145,000Cash generated from operations 6,441,000

WORKINGS

(1) PPE – COST OR VALUATION

CU CUB/d 4,347,000Cash () 1,752,000 PPE – disposals 1,201,000Revaluation reserve (W9) 266,000 C/d 5,164,000

6,365,000 6,365,000

(2) PPE – ACCUMULATED DEPRECIATION

CU CUPPE – disposals B/d 2,001,000

(1,201,000 – 496,000) 705,000 Income statement () 1,260,000Revaluation reserve (W9) 358,000C/d 2,198,000

3,261,000 3,261,000



(3) PPE – DISPOSALS

CU CUB/d 79,000 PPE – acc dep (1,201,000 – 496,000) 705,000PPE – cost or valuation 1,201,000 Income statement 189,000

Cash () 221,000C/d 165,000

1,280,000 1,280,000

(4) INTANGIBLES – COST

CU CUB/d 8,645,000Cash () 339,000C/d 376,000 C/d 9,360,000

9,360,000 9,360,000

(5) INTANGIBLES – ACCUMULATED AMORTISATION

CU CUB/d 2,715,000

C/d 3,690,000 Income statement () 975,0003,690,000 3,690,000

(6) INVESTMENTS

CU CUB/d 127,000Cash () 2,018,000 C/d 2,145,000

2,145,000 2,145,000

(7) INCOME TAX


1,187,000 1,187,000


CU CUB/d (1,000,000 + 1,421,000) 2,421,000Retained earnings 500,000

C/d (1,800,000 + 1,543,000) 3,343,000 Cash () 422,0003,343,000 3,343,000

(9) REVALUATION RESERVE

CU CUB/d 1,256,000PPE cost (1,000,000 – 734,000) 266,000

C/d 1,880,000 Acc depn () 358,0001,880,000 1,880,000

(10) INVESTMENT INCOME

CU CUB/d 8,000 Cash () 76,000Income statement 78,000 C/d 10,000

86,000 86,000

ANSWER BANK


(11) FINANCE CHARGE


900,000 900,000

(12) DIVIDENDS

CU CUCash () 163,000 B/d 100,000C/d 180,000 Retained earnings 243,000

343,000 343,000

Tutorial note

The retained earnings T account, which was not needed as a working, is as follows.

RETAINED EARNINGS

CU CU

Share capital and premium (W8) 500,000 B/d 746,000Income statement 2,736,000

Dividends payable () 243,000C/d 2,739,000

3,482,000 3,482,000

9 Pippin Ltd

Marking guide

Marks

Cash flow statementInterest paid 1½Income tax paid 1½Purchase of PPE 2Purchase of intangibles 1½Proceeds from sales of PPE ½Proceeds from issue of ordinary shares 1Proceeds from issue of redeemable preference shares 1Dividends paid 1½Opening and closing cash 1½

ReconciliationPBT ½Finance charge ½Depreciation charge ½Amortisation charge 1½Profit on disposal of PPE 1Change in inventories ½Change in receivables ½Change in payables 1

Presentation 1Total marks available 19Maximum 18



Cash flow statement for the year ended 31 December 20X7




Cash flows from investing activitiesPurchase of property, plant and equipment (W3) (1,583,000)Purchase of intangibles (W4) (77,500)Proceeds from sale of property, plant and equipment 600,000


Cash flows from financing activitiesProceeds from issue of ordinary share capital (5,200,000 – 4,450,000) 750,000Proceeds from issue of redeemable preference

share capital (500,000 – 400,000) 100,000Dividends paid (W7) (1,300,000)

Net cash used in financing activities (450,000)Net increase in cash and cash equivalents 3,100Cash and cash equivalents at beginning of period (12,400 + 20,200) 32,600Cash and cash equivalents at end of period (25,000 + 10,700) 35,700


CUProfit before tax 886,100Finance charge 75,000Depreciation charge 750,600Amortisation charge (W4) 27,300Profit on disposal of property, plant and equipment (600,000 – 560,500) (39,500)Decrease in inventories (765,100 – 560,500) 204,600Increase in trade and other receivables (169,000 – 144,500) (24,500)Increase in trade and other payables (W6) 11,000Cash generated from operations 1,890,600

WORKINGS

(1) INCOME TAX


710,000 710,000

(2) FINANCE CHARGE


82,000 82,000

(3) PPE

CU CUB/d 6,950,300 Disposals 560,500Revaluation reserve (W5) 278,200 Income statement 750,600Cash () 1,583,000 C/d 7,500,400

8,811,500 8,811,500

ANSWER BANK


(4) INTANGIBLES

CU CUB/d 300,500 Income statement () 27,300Cash 77,500 C/d 350,700

378,000 378,000


CU CURetained earnings 15,000 B/d 236,800C/d 500,000 PPE () 278,200

515,000 515,000

(6) Trade and other payablesCU

Opening (139,500 – 7,000) 132,500Closing (148,500 – 5,000)) 143,500Increase 11,000

(7) ORDINARY DIVIDENDS

CU CUCash () 1,300,000 B/d 400,000C/d 500,000 Retained earnings 1,400,000

1,800,000 1,800,000

10 Merry Ltd

Marking guide

Marks

(a) Cash flow statementInterest paid ½Income tax paid 1½Purchase of PPE ½Purchase of investments 1Proceeds from sales of PPE 3½Proceeds from issue of ordinary shares 3½Payment of finance lease liabilities 1½Dividends paid 1½Opening and closing cash ½

Gross operating cash flowsCash received from customers 1½Cash paid to suppliers 6Cash paid to employees ½


(b) For each item ½Total available 4Maximum 4

25



(a) Cash flow statement for the year ended 31 March 20X5


Cash generated from operations 1,711,600Interest paid (89,000)Income tax paid (W4) (347,600)


Cash flows from investing activitiesPurchase of property, plant and equipment (2,057,000)Purchase of investments (172,000 – 156,000 + 12,000) (28,000)Proceeds from sale of property, plant

and equipment (496,300 (W6) – 55,000) 441,300Net cash used in investing activities (1,643,700)

Cash flows from financing activitiesProceeds from issue of ordinary share capital

(1,020,000 (W7) + 380,000 (W8)) 1,400,000Payment of finance lease liabilities (W3) (516,000)Dividends paid (W5) (500,500)

Net cash from financing activities 383,500Net increase in cash and cash equivalents 14,800Cash and cash equivalents at beginning of period 120,200Cash and cash equivalents at end of period 135,000

Note: Gross operating cash flows

CUCash received from customers (W1) 5,626,000Cash paid to suppliers (W9) (1,264,400)Cash paid to and on behalf of employees (2,650,000)Cash generated from operations 1,711,600

(b) Note: Reconciliation of profit before tax to cash generated from operations

CUProfit before tax 866,100Finance charge 89,000Depreciation charge 750,600Impairment write off 12,000Loss on disposal of property, plant and equipment 55,000Increase in inventories (460,600 – 365,100) (95,500)Increase in trade and other receivables (269,000 – 244,500) (24,500)Increase in trade and other payables (348,500 – 289,600) 58,900Cash generated from operations 1,711,600

WORKINGS

(1) TRADE RECEIVABLES

CU CUB/d 244,500 Cash () 5,626,000Income statement 5,650,500 C/d 269,000

5,895,000 5,895,000

ANSWER BANK


(2) Purchases

CUCost of sales 3,460,600Administrative expenses 978,800Distribution costs 256,000Adjustments: Impairment write off (12,000)

Opening inventory (365,100)Depreciation (750,600)Loss on sale (55,000)Closing inventory 460,600

3,973,300

(3) FINANCE LEASE LIABILITIES

CU CUCash () 516,000 B/d 472,000C/d 556,000 PPE 600,000

1,072,000 1,072,000

(4) INCOME TAX


647,600 647,600


CU CUCash – dividends paid () 500,500 B/d 74,500C/d 142,500 Income statement 568,500

643,000 643,000

(6) PPE

CU CUB/d 2,950,300 Income statement 750,600Cash 2,057,000 Disposals () 496,300Finance lease liabilities 600,000 C/d 4,360,400

5,607,300 5,607,300

(7) SHARE CAPITAL

CU CUB/d 1,800,000Bonus issue 180,000

C/d 3,000,000 Cash () 1,020,0003,000,000 3,000,000

(8) SHARE PREMIUM

CU CUBonus issue (W7) 180,000 B/d 850,000C/d 1,050,000 Cash () 380,000

1,230,000 1,230,000

(9) TRADE PAYABLES

CU CU

Cash to suppliers () 1,264,400 B/d 289,600

Cash to employees 2,650,000 Income statement (W2) 3,973,300C/d 348,500

4,262,900 4,262,900

ANSWER BANK



11 Montrose Ltd

Marking guide

Marks

(a) Raw materials calculation (W1) 2WIP calculation (W2) 2Cost of conversion calculations (W3) 3NRV calculations (W5) 4Costed units (W4) ½Note to IS ½Presentation 1Total available 13Maximum 12

(b) Statement of two main concepts (each) ½Explanation of financial capital maintenance 1Monetary or CPP terms (each) ½Example of monetary terms 1Explanation and example of CPP terms (each) 1Explanation of operating capital maintenance 1Example of operating capital maintenance 1Total available 8Maximum 6

18

(a) Extracts from the financial statements for the year ended 30 September 20X4

Note to balance sheet – inventoriesCU

Raw materials and consumables (100,000 units @ CU7.50 (W1)) 750,000Work in progress (W2) 460,312Finished goods and goods for resale (W4) 503,177

1,713,489

Note to income statement

Certain inventories have been written down by CU8,323 to their net realisable value.

(b) Different concepts of capital and capital maintenance

There are two main capital maintenance concepts: financial capital maintenance and physical capitalmaintenance (also called operating capital maintenance).

Financial capital maintenance measures capital as the equity in the balance sheet. So profit will bemeasured as the increase in capital over the period, after allowing for any inflows or outflows to orfrom the owners of the business.

This increase in capital can either be measured in monetary terms or in terms of constant purchasingpower.



For example, say a business commenced on 1 January 20X1 with a contribution of CU1,000 from itsowners. During the year, this cash was used to purchase 100 units for CU10 each. These units werethen sold for CU1,100 cash.

Opening capital is CU1,000 and closing capital is CU1,100. Profit for the year would therefore bemeasured as CU100.

However, the constant purchasing power variation of this system would also look at adjusting openingcapital in order to maintain the general purchasing power of the business. In the above example, saythat the increase in RPI over the year was 5%. An adjustment would be made to the opening capital of

CU50 (5% CU1,000) reducing profit for the year to CU50. This would ensure that even if the entitypaid out all of its profits it would retain sufficient funds in order to be able to continue in business. So,

assuming that units now cost CU10.50 each (CU10 105%), the business still has sufficient cash ofCU1,050 (CU1,100 minus the CU50 paid out) to purchase a further 100 units to sell.

However, the problem with this approach is that general price changes may not be appropriate to thatparticular entity (or industry). The physical capital maintenance concept therefore looks atadjusting opening capital in order to maintain the physical productive capacity of the business. It usesspecific as opposed to general price changes.

In the example, it may therefore be that these units actually now cost CU10.75 each to buy. Thereforean adjustment of CU75 would be made to the opening capital, reducing profit for the year to CU25.Even if all of that profit was paid out the entity would then still be left with sufficient cash of CU1,075(CU1,100 minus the CU25 paid out) so that it can purchase a further 100 units to sell.

WORKINGS

(1) Raw materials

Cost perunitCU

Purchase cost 5.00Import duty 1.00Transport to factory 0.50Storage and handling costs 1.00

7.50

(2) Work in progress

CU25,000 units @ (7.50 (W1) + (75% 2.73) (W3)) 238,687

25,000 units @ (7.50 (W1) + (50% 2.73) (W3)) 221,62550,000 units 460,312

(3) Cost of conversion and of bringing inventories to present location/condition

CUDirect labour 1,000,000Production overheads (660,000 + 100,000) 760,000Design and marketing overheads 150,000

1,910,000

CU1,910,000 700,000 units = CU2.73 per unit

Cost of a completed unit is CU10.23 (7.50 + 2.73)

(4) Finished goods

CU50,000 units @ 10.23 (W3) 511,500Less Provision (W5) (8,323)

503,177

ANSWER BANK


(5) Net realisable value

NRVUnits NRV per unit

CU CUOrder M147 1,800 22,000 12.22Order M293 5,555 55,000 9.90Order M467 6,500 60,000 9.23Order M364 4,630 54,000 11.66Order M191 3,240 40,000 12.35Other () 28,275 329,000 11.64

50,000 560,000

Therefore reduce cost of finished goods for

Cost NRV ProvisionCU CU CU

Order M293: 5,555 units @ 10.23 (W3) 56,828 55,000 1,828Order M467: 6,500 units @ 10.23 (W3) 66,495 60,000 6,495

8,323

Tutorial notes and assumptions

(1) The budgeted level of production for 30 September 20X4 has been used in calculating the cost of afinished goods unit, because it represents normal capacity. It is not appropriate to use the actual levelof production when it has been affected by the interruption to the supply of raw materials (BAS 2 para13). The use of 700,000 units results in more cost being recognised as an expense in the year than ifthe 500,000 had been used.

(2) The exclusion of the CU100,000 compensation received from the finished goods unit calculation hasthe effect of leaving it as a credit in the income statement, to offset the abnormal additional expenseswritten off under (1) above (BAS 2 para 16(a)).

(3) Design and marketing overheads have been included in the calculation on the grounds that thecompany manufactures to customers' requirements for all orders, and on the assumption that thereare firm sales contracts. It would be possible to exclude them.

(4) It would be possible to include distribution overheads in the calculation on the basis that they areinternal overheads which have been incurred in bringing the product to its present location/condition.



12 Gandalf Ltd

Marking guide

Marks

(a) Draft profit ½Ordinary dividend ½Amortisation ½Depreciation on freehold ½Finance charge 1Depreciation on plant 1Total available 4Maximum 4

(b) Statement of changes in equityHeadings 1Revaluation 1Transfer 1½Profit ½Final ordinary dividends ½Interim ordinary dividends ½Preference dividends ½Issue of share capital 2Balances brought forward as reported 2Adjustment to prior year ½


(c) Explanation of accrual basis: each valid point ½ mark, maximum 3½Explanation of cash basis: each valid point ½ mark, maximum 3Example illustrating accrual basis, maximum 3Example illustrating cash basis, maximum 3Explanation of break-up basis: each valid point ½ mark, maximum 2Total available 14½Maximum 8

23

(a) Revised profit for the period

CUDraft profit for the period 135,500Add back: Ordinary dividend charged to profit in error 30,000

Amortisation of intangible (10% 42,500) 4,250Less: Depreciation on freehold land and buildings (W) (8,000)

Finance charge on redeemable preference shares (5% 50,000) (2,500)

Depreciation on plant ((357,800 – 125,700) 25%) (58,025)101,225

ANSWER BANK


(b) Statement of changes in equity for the year ended 30 June 20X6

Attributable to the equity holders of Gandalf LtdPreference

Ordinary shareshare capital Share Revaluationcapital (irredeemable) premium reserve Retained earnings Total

CU CU CU CU CU CU CURecognised directly in equity

Revaluation ofnon-current assets (W) – – – 550,000 – 550,000

Transfer betweenreserves (W) – – – (5,000) 5,000 –

Total recognised directlyin equity – – – 545,000 5,000 550,000

Profit for the period – – – – 101,225 101,225Total recognised income

and expenditure forthe period – – – 545,000 106,225 651,225

Final dividends onordinary shares – – – – (25,000) (25,000)

Interim dividends onordinary shares – – – – (30,000) (30,000)

Dividends on irredeemablepreference shares(100,000 7%) – – – – (7,000) (7,000)

Issue of share capital(75,000 – 5,000 – 3,000) 300,000 100,000 67,000 – – 467,000

300,000 100,000 67,000 545,000 44,225 1,056,225Balance brought forward

– as reported 500,000 – 120,000 420,000 347,500 1,387,500Adjustment to correct prior

year error – – – – (42,500) (42,500)As restated – – – – 305,000Balance carried forward 800,000 100,000 187,000 965,000 349,225 2,401,225

(c) Different bases of accounting

Under the accrual basis, transactions are recognised when they occur, not when the related cash flowsinto or out of the entity. This means that:

Sales are recorded when the risks and rewards of ownership are transferred. This means that,for credit sales, a receivable will be set up when the sale is recorded.

Expenses are recognised when the goods or services are consumed. So a payable will be set upfor any credit purchases and there will be an adjustment for opening and closing inventory.

The consumption of non-current assets will be recognised over their useful lives via adepreciation charge.

Under the cash basis of accounting only the cash impact of a transaction is recorded. This means that:

Sales will only be recorded when the cash is received, so there will be no receivables in respectof credit sales.

Expenses will only be recorded when the cash is paid, so there will be no payables in respect ofcredit purchases and no inventory adjustment.

No depreciation will be charged on non-current assets as the purchase of an asset will be treatedas an expense at the time the cash is paid.

For example, say a business commenced on 1 January 20X1 with a cash contribution of CU1,000 fromits owners. That cash was used to buy goods costing CU400 and a machine with a useful life of fouryears for CU200. Goods costing CU300 were purchased on credit and the business made cash sales ofCU500 and sales on credit of CU400. Closing inventory at cost is CU50.



Accrual Cashbasis basisCU CU

Income statementRevenue (400 + 500) 900 500Purchases (400 + 300) (700) (400)Closing inventory 50 –Depreciation charge/purchase of non-current asset (200 ÷ 4) (50) (200)Profit/(loss) 200 (100)

Balance sheetNon-current asset (200 – 50) 150 –Inventory 50 –Trade receivables 400 –Cash (1,000 – 400 – 200 + 500) 900 900Trade payable (300) –

1,200 900

Capital 1,000 1,000Retained earnings 200 (100)

1,200 900

The break-up basis is primarily relevant to the balance sheet. It reflects the fact that the business is nolonger a going concern. Under the break-up basis:

All assets and liabilities are classified as current.

Assets are valued on the basis of recoverable amounts rather than at cost. In the case of a forcedsale such values are likely to be less than cost.

WORKING

Revaluation

CUFair value (600,000 + 400,000) 1,000,000Less Carrying amount (500,000 – 50,000) (450,000)

Revaluation surplus arising 550,000

CURevaluation surplus due to building (400,000 – (200,000 – 50,000)) 250,000

Therefore annual reserve transfer = CU250,000 / 50 years= CU5,000 pa

ANSWER BANK


13 Cagreg Ltd

Marking guide

Marks

(a) CostBrought forward 1Additions ½Revaluation 1Held for sale ½

Accumulated depreciationBrought forward 1Held for sale ½

Depreciation charges for yearBuildings 2Held for sale plant 3½Plant held throughout year 3Addition 1Computer 2


(b) Each valid point ½Max for any one qualitative characteristic 3Total available 8½Maximum 6

22

(a) Non-current asset note

Property, plant and equipment

Freehold Plant andland Buildings machinery Computer Total

Cost or valuation CU CU CU CU CUAt 1 October 20X8 100,000 200,000 200,000 60,000 560,000Additions – – 60,000 – 60,000Revaluation surplus 30,000 – – – 30,000Classified as held for sale – – (20,000) – (20,000)At 30 September 20X9 130,000 200,000 240,000 60,000 630,000

DepreciationAt 1 October 20X8 – 20,000 72,000 10,500 102,500Charge for year (W1-3) – 3,214 67,280 7,200 77,694Classified as held for sale (W2a) – – (13,760) – (13,760)At 30 September 20X9 – 23,214 125,520 17,700 166,434

Carrying amountAt 30 September 20X9 130,000 176,786 114,480 42,300 463,566

At 1 October 20X8 100,000 180,000 128,000 49,500 457,500



(b) Qualitative characteristics and BAS 16

Understandability

Information must be readily understandable to users so that they can perceive its significance. This isdependent on how information is presented and how it is categorised.

For example, BAS 16 requires disclosures to be given by each class of property, plant and equipment.Therefore it will be clear what types of assets have been purchased during the year and what types ofassets have been sold. If this information were merged over one class it would be less understandable.

Relevance

Information is relevant if it influences the economic decisions of users.

The choice of the revaluation model as a measurement model in BAS 16 provides relevant information byshowing up-to-date values. This will help give an indication as to what the entity's underlying assets are worth.

Reliability

Information is reliable if it is free from error or bias, complete and portrays events in a way thatreflects their reality.

Although the revaluation model gives relevant information this information is generally seen to be lessreliable than the cost model – the other measurement model allowed by BAS 16. The cost model isbased on historic costs which are not the most relevant costs on which to base future decisions.However, historic cost is reliable being based on fact.

Comparability

Users must be able to compare information with that of previous periods or with that of anotherentity. Comparability is achieved via consistency and disclosure.

BAS 16 facilitates comparability between companies by requiring the disclosure of accounting policies(in accordance with BAS 1) in respect of, for example, depreciation methods and measurement bases.

BAS 16 allows comparability between the cost and the revaluation model (for example to facilitatecomparison between two companies who have adopted different models) by requiring equivalent costinformation to be disclosed under the revaluation model. It also requires disclosures (in accordancewith BAS 8) of the effect of a change in an accounting estimate such as useful lives or depreciationrates. This facilitates comparison.

WORKINGS

(1) Depreciation charges for the year on buildings

Carrying amount at 1 October 20X8 (200,000 36/40) CU180,000

Depreciation (180,000 1/56) CU3,214

(2) Plant and machinery

(a) Held-for-sale assetChargefor year

CU CU CUCost 1 October 20X6 20,000Depreciation to

1 October 20X7 (40% 20,000) 8,000

1 October 20X8 (40% (20,000 – 8,000)) 4,800(12,800)

7,200Depreciation to 1 February 20X9

(40% 4/12 7,200) (960) 960NBV on classification as held for sale 6,240

Total depreciation at date of reclassification(12,800 + 960) 13,760

Note: There will also be an impairment loss of 6,240 – 5,600 = CU640 to be charged against profits forthis plant, but the impairment loss does not have to be disclosed in the PPE note.

ANSWER BANK


(b) Plant held throughout year

Cost Depn

CU CUTotal at 1 October 20X8 200,000 72,000Less Disposal (20,000) (12,800)Plant held throughout year 180,000 59,200Charge for year (40% (180,000 – 59,200)) 48,320 48,320

107,520

(c) Addition

Cost 1 January 20X9 60,000Charge for year (40% 9/12 60,000) (18,000) 18,000

42,000Total charge for year 67,280

(3) Computer

CUCost 60,000Depreciation to 1 October 20X8 (10,500)Carrying amount at 1 October 20X8 49,500Less Estimated residual value (4,500)Amount to be depreciated 45,000

Remaining useful life (40,000 – 10,000) = 30,000 hours

Current usage = 4,800 hours

Charge for year = (30,000

4,800 45,000) =

CU7,200

14 Roberts Ltd

Marking guide

Marks

(a) Carrying amount of land and buildingsOriginal cost 1Fees ½Accumulated depreciation to 31 Dec 20X3 1Revaluation surplus 1Accumulated depreciation to 31 Dec 20X4 1

Revaluation reserveBalance at 31 Dec 20X3 ½Annual transfer 1


(b) Calculation of impairment on land and buildings 1½Calculation of impairment on specialised machinery 4½Narrative to note ½Impairment disclosure ½Total available 7Maximum 7

13



(a) Carrying amount of land and buildings

Land Buildings TotalCU'000 CU'000 CU'000

Cost 2,600 1,700Fees – 80

2,600 1,780Acc depn to 31 December 20X3 (1,780 20/360) – (99)Carrying amount 31 December 20X3 2,600 1,681Revaluation surplus () 2,080 1,439Revalued amount (60%/40%) 4,680 3,120 7,800Acc depn to 31 December 20X4 (3,120 12/460*) – (81)Carrying amount 31 December 20X4 4,680 3,039

* Revised total life = 480 months and the factory has been occupied for 20 months – remaining life is460 months.

Revaluation reserve

CU'000 CU'000Balance as at 31 December 20X3 (2,080 + 1,439) 3,519Annual transfer

Depn based on value 81Depn based on cost (1,681 12/460) (44)

(37)Balance as at 31 December 20X4 3,482

(b) Income statement charges and disclosure

Note to the financial statements

The profit from operations is arrived at after chargingCU'000

Impairment of non-current assets (2,737 (W1) + 450 (W2)) 3,187

WORKINGS

(1) Impairment of land and buildings

CU'000Carrying amount at 31 December 20X4 (4,680 + 3,039) 7,719Recoverable amount (1,500)

6,219Charged to revaluation reserve (3,482)Charge to income statement 2,737

(2) Impairment of specialised machineryCU'000 CU'000

Carrying amount (2,800,000 40/96) 1,167Fair value less costs to sell

Gross selling price (1,167 65%) 759

Less Repair costs (CU38.40 100/120 600) (19)Transport costs (21)Insurance (2)

717

Value in use (given) 600

Impairment (1,167 – 717) 450

ANSWER BANK


15 Dumfries Ltd

Marking guide

Marks

(a) Each valid point ½Total available 7Maximum 6

(b) Income statementsOperating lease payments 1Depreciation 1Finance charges 3

Balance sheetNon-current finance lease liabilities 1Current finance lease liabilities 1

NotesAdditions ½Depreciation charge ½Assets held under finance leases (in heading) ½Gross basis analysis 1½Net basis analysis 1Commitments 1


20

(a) BFRS Framework and accounting for finance leases

Elements of financial statements

Assets/liabilities

A non-current asset acquired under a finance lease meets the definition of an asset as it is

Controlled by the lessee (which has physical possession of the asset)

Results from a past event (e.g. the lease agreements signed on 1 May 20X4)

Gives rise to future economic benefits, i.e. the use of the asset to generate revenue

even though the asset is not legally owned by the lessee.

The lease payments are a liability as the company has an obligation arising from a past transaction totransfer economic benefits, i.e. to make lease payments. Under most lease contracts the lessee will notbe able to cancel these payments.

Recognition

The asset and liability should be recognised if

It is probable that future economic benefits will flow to or from the company, and Those benefits can be measured reliably.

The inflows and outflows are probable as a contract has been signed.

The benefits can be measured reliably at the present value of the minimum lease payments or fair value.



Measurement

The two main bases of measurement are historical cost and current cost. Leased assets are basicallyincluded at historical cost, i.e. the minimum lease payments, although these are discounted to showcost in 'today's pounds'.

(b) Extracts from the income statements for the years ended 30 April

20X5 20X6 20X7 20X8 20X9Profit from operations is stated CU CU CU CU CU

after chargingOperating lease payments 15,000 15,000 15,000 – –Depreciation (109,1405) 21,828 21,828 21,828 21,828 21,828

Finance costFinance charges re finance

lease (W) 7,784 5,432 2,844 – –

Extracts from the balance sheet as at 30 April 20X5

CUNon-current liabilities

Finance lease liabilities (W) 54,324Current liabilities

Finance lease liabilities (W) 31,300

Notes to the balance sheet

(1) Property, plant and equipmentPlant and machinery held

under finance leasesCost CU

At 1 May 20X4 XAdditions 109,140At 30 April 20X5 X

Accumulated depreciationAt 1 May 20X4 XCharge for year 21,82830 April 20X5 X

Carrying amountAt 30 April 20X5 XAt 30 April 20X4 X

(2) Analysis of finance lease liabilities

Gross basis

Finance lease liabilities includeCU

Gross payments due withinOne year 31,300Two to five years (2 31,300) 62,600

93,900Less Finance charges allocated to future periods () (8,276)

85,624

ANSWER BANK


Net basis


Amounts due withinOne year 31,300Two to five years 54,324

85,624

(3) Commitments

The minimum lease payments under non-cancellable operating leases are as follows.

CUWithin one year 15,000Within two to five years 15,000

30,000

WORKING

Finance charges

Year to 30 April Interestaccrued

B/f Payment Capital @ 10% C/fCU CU CU CU CU

20X5 109,140 (31,300) 77,840 7,784 85,62420X6 85,624 (31,300) 54,324 5,432 59,75620X7 59,756 (31,300) 28,456 2,844 31,30020X8 31,300 (31,300) – – –

Total

CU85,624

Non-current

CU54,324

Current ()

CU31,300



16 Crieff Ltd

Marking guide

Marks

(a) Qualitative characteristic of reliability ½Faithful representation therefore substance ½Substance different from form ½Finance lease as example: risk and rewards transferred but not legal title ½Definition and recognition of asset ½Definition and recognition of liability ½As elements of financial statements ½Total available 3½Maximum 3

(b) Income statementFinance cost 3

Note to income statementDepreciation 2Operating lease payments 1

Balance sheetNon-current finance lease liabilities 3Current finance lease liabilities 1½

Notes to balance sheetAdditions 1Depreciation charge 1Assets held under finance leases ½Net basis analysis 2½Gross basis analysis 3½


23

(a) BAS 17 concepts

BAS Framework sets out the qualitative characteristics of financial statements, one of which isreliability. One aspect of reliability is that of faithful representation. For information to representtransactions faithfully, those transactions should be accounted for in accordance with substance andeconomic reality, not merely legal form.

Substance is not always consistent with legal form. An example of this is a finance lease, wheresubstantially all the risks and rewards relating to a non-current asset are transferred to the lessee eventhough legal title remains with the lessor.

As the lessee controls the asset and will gain benefit from it, it should be treated as an asset.Conversely, the requirement to pay instalments to the lessor is a liability. BAS Framework requires thelessee to recognise these elements in its financial statements.

ANSWER BANK


(b) Disclosure re leases

Income statementCU

Finance cost (10,598 (W1) + 9,583 (W3) + 47,412 (W5)) 67,593

Notes to the income statement

(1) Profit from operations is stated after charging

CUDepreciation of leased assets (49,470 (W4) + 13,203 (balance sheet note (1) below)) 62,673Operating lease payments (75,000 (W2) + 6,000) 81,000

Balance sheet

Current liabilities

CUFinance lease liabilities (40,000 (W1) + 22,050 (W3) + 54,000 (W5)) 116,050

Non-current liabilitiesCU

Finance lease liabilities (103,078 (W1) + 77,323 (W3) + 467,532 (W5)) 647,933

Notes to the balance sheet


Land and Plant andbuildings machinery

Cost CU CUAt 1 July 20X7 X XAdditions (172,480 + 119,790) 528,120 292,270Disposals (X) (X)At 30 June 20X8 X X

Accumulated depreciationAt 1 July 20X7 X XEliminated on disposals (X) (X)Charge for the year (528,120 ÷ 40) (W4) 13,203 49,470At 30 June 20X8 X X

Carrying amountAt 30 June 20X8 X X

At 30 June 20X7 X X

Of the carrying amount of non-current assets CU757,717 relates to assets held under financeleases.

(2) Analysis of finance lease liabilities

Net basis


Amounts due withinOne year 116,050Two to five years (W6) 214,033Over five years (W6) 433,900

763,983



Gross basis


Gross payments due withinOne year (40,000 + 30,000 + 54,000) 124,000Two to five years ((40,000 3) + (30,000 3) + (54,000 4)) 426,000

Over five years (34 54,000) 1,836,0002,386,000

Less Finance charges allocated to future periods () (1,622,017)(143,078 + 99,373 + 521,532) 763,983

WORKINGS

(1) Cutting machine (finance lease)

Payment table

Year ended B/f Payment Capital Interest C/f@ 8%

CU CU CU CU CU30 June 20X8 172,480 (40,000) 132,480 10,598 143,07830 June 20X9 143,078 (40,000) 103,078 8,246 111,324

Total liability

CU143,078

Non-current

CU103,078

Current

CU40,000 ()

(2) Office equipment (operating lease)

10 months' rental included in the financial statements.

10 CU7,500 = CU75,000

(3) Packing machine (finance lease)

Payment table

Year ended B/f Interest Payment Capital@ 8% c/f

CU CU CU CU30 June 20X8 119,790 9,583 (30,000) 99,37330 June 20X9 99,373 7,950 (30,000) 77,323

Total liability

CU99,373

Non-current

CU77,323

Current

CU22,050 ()

(4) Depreciation – plant and machinery

CUCutting machine (172,480 5) 34,496Packing machine (119,790 8) 14,974

49,470

ANSWER BANK


(5) Buildings (finance lease)

Payment table


CU CU CU CU CU30 June 20X8 528,120 (54,000) 474,120 47,412 521,53230 June 20X9 521,532 (54,000) 467,532 46,753 514,285

Total liability

CU521,532

Non-current

CU467,532

Current

CU54,000 ()

(6) Net basis analysis

CUTwo to five yearsCutting machine 103,078Packing machine 77,323Buildings (per below) 33,632

214,033Over five yearsBuildings (W5) 467,532Less Years 2 – 5 () (33,632)More than 5 years (W7) 433,900

(7) Continuation of buildings payment table


CU CU CU CU CU30 June 20Y0 514,285 (54,000) 460,285 46,029 506,31430 June 20Y1 506,314 (54,000) 452,314 45,231 497,54530 June 20Y2 497,545 (54,000) 443,545 44,355 487,90030 June 20Y3 487,900 (54,000) 433,900

Tutorial notes

(1) As the office equipment operating lease is cancellable at any time by either party, no operating leasecommitment disclosure is required.

(2) Useful life is taken to be eight years for agreement (3) rather than the agreement term of five years.This is because the option to acquire at the end of the agreement is assumed to take place from theoutset of the agreement, given the nominal cost involved.

(3) Assets held under finance leases should be capitalised at the lower of fair value (normally cash price)and the present value of minimum lease payments.



17 ITC Solutions Ltd

Marking guide

Marks

(a) Meaning of elements 1½Elements relevant to balance sheet 1Elements relevant to income statement 1Conditions for recognition 1Meaning of recognition 1Total available 5½Maximum 4

(b) Revenue calculations 2Transaction (1), discussion of revenue recognition 2Transaction (1), discussion of costs recognition and resultant loss 2Transaction (2) 2½Transaction (3), discussion of revenue recognition 2Transaction (3), discussion of treatment of deposits as liability 1½Total available 12Maximum 12

16

(a) Recognition of elements of financial statements

Financial statements portray the financial effects of transactions and other events. BFRS Frameworksplits these transactions into broad classes according to their economic characteristics. These classesare referred to as the 'elements' of financial statements.

Elements relevant to the measurement of financial position in the balance sheet are: assets, liabilitiesand equity.

Elements relevant to the measurement of financial performance in the income statement are: incomeand expenses.

Although there are specific definitions which relate to each type of element, each element is only'recognised' in the financial statements if:

It is probable that any future economic benefit associated with the item will flow to or from theentity, and

The item has a cost or value which can be measured reliably.

Recognition means incorporating the item into the income statement or balance sheet by depicting theitem in words and by including it as a monetary amount.

(b) Application of the above principles to the three transactions

(1) Fixed price contract to build computer

Revenue = recoverable costs = CU50,000

Because the outcome of the project is uncertain it is not yet probable that future benefits for thewhole of this CU120,000 will flow to the entity. There is only certainty over the CU50,000 whichis considered to be recoverable and can be reliably measured (being part of actual costs incurredof CU60,000). Hence only CU50,000 should be recognised as revenue this year.

The costs incurred this year of CU60,000, which have already led to an outflow of benefits andcan be reliably measured (as actual costs) should also have been recognised (as an expense). As aresult, a loss of CU10,000 will be recognised in the current year.

ANSWER BANK


(2) Agency commission

Revenue = agency commission = CU300,000 15% = CU45,000

Although the CU300,000 can be reliably measured, the economic benefit from the wholeCU300,000 does not flow to ITC – as ITC has to remit 85% of this back to ProMarket Ltd. ITC'sinflow is only 15% of this.

ITC should therefore recognise only the 15% commission as revenue. It should not recognise thetotal amount received as revenue, and the 85% paid out as an expense.

(3) Deposits

Revenue = CUnil

ITC should not recognise any revenue as it has not yet provided any goods to customers andtherefore has no probability of any economic benefit. The revenue should only be recognisedwhen the computers are delivered to the customer and the receipt of the final instalment can bereliably measured.

ITC will have to refund the deposits if the supplier fails to deliver. There is therefore a futureobligation which meets the definition of a liability. Hence the deposits of CU75,000 should beshown in the balance sheet as 'deferred' under current liabilities.

18 Withington Ltd

Marking guide

Marks

(a) Presentation 1Opening provision ½Utilised in year ½Income statement charge 1Closing provision 4½Faulty goods narrative 1Compensation claim narrative 1Rectification costs narrative 1½Onerous contract narrative 1½Restructuring narrative 1Contingent asset note 1½Total available 15Maximum 15

(b) 1 mark each calculation 3Maximum 3

18



(a) Notes to the financial statements as at 31 December 20X0 (extracts)

(1) Provisions for liabilities

Provision Provision ProvisionProvision for for for Provisionre faulty compensation rectification onerous forgoods claim costs contract restructuring Total

CU'000 CU'000 CU'000 CU'000 CU'000 CU'000

At 1 January 20X0 1,000 – – – – 1,000Utilised in the year (800) – – – – (800)Income statement

charge (bal fig) 1,300 9,000 1180 126 3,300 13,906At 31 December

20X0 (W) 1,500 9,000 180 126 3,300 14,106

The provision in respect of faulty goods relates to the supply of faulty electrical transformer unitsduring 20X0. The provision is based on the level of claims anticipated to succeed, based on legaladvice.

The compensation claim provision is in respect of a claim made by a customer for damages as aresult of a faulty mechanical transformer unit supplied by the company. It represents the presentvalue of the amount at which the company's legal advisors believe the claim is likely to be settled.

The provision for rectification costs is in respect of the company's operations to extract metalore in Didland. Withington Ltd has a five year operating licence issued by the Didlandgovernment and has estimated that the cost of cleaning up the extracted ore hole will beCU400,000 at the end of those five years. A provision of CU80,000 is to be made each year. Inaddition, the cost of removing infrastructure from the site in five years' time will be CU100,000.

The provision for the onerous contract is in respect of a two-year fixed-price contract whichWithington Ltd entered into on 1 July 20X0. Due to unforeseen cost increases and productionproblems, a loss on this contract is now anticipated. The provision is based on the amount of thisloss up to the end of the contract, which is less than the compensation which would be payablein the event of the contract not being fulfilled.

During the year Withington Ltd announced and commenced a restructuring of its Chuckholderdivision. Details of the restructuring have been fully communicated to those affected. The cost ofthe restructuring, which began on 1 September 20X0, is estimated at CU3.3 million.

(2) Contingent assets

A counter-claim in respect of the compensation claim provided for above has been made againstthe supplier of parts for the affected transformer. Legal advice is that this claim is likely tosucceed and should amount to around 40% of the total damages (CU3.6 million).

(b) Depreciation charge for 20X0

CUElectric machine ((200,000 – 40,000) ÷ 20 years) 8,000Lining (40,000 ÷ 4 years) 10,000Infrastructure ((200,000 + 100,000) ÷ 5 years)) 60,000

WORKING

Closing provisions

CUProvision re faulty goods (75% 2,000 CU1,000) 1,500,000Provision for rectification costs (400,000 ÷ 5 years + 100,000) 180,000Onerous contract (18 months 1,000 per month CU7) 126,000Restructuring (1,000,000 + 2,300,000) 3,300,000

ANSWER BANK


Tutorial notes

(1) Installation of new machine

The proposed treatment of building up a replacement provision does not fall within the BAS 37definition of a provision, as it is not a legal or constructive obligation at the balance sheet date. Noobligation to replace the lining exists independent of the company's future actions, because thecompany could sell the asset before the replacement became necessary.

(2) Onerous contract

A provision for this should be recognised at the lower of the cost of fulfilling the contract and thecompensation payable for not fulfilling it. At 31 December 20X0 the contract has a further 18 months

to run, so the cost of fulfilling it is CU126,000 (18 months 1,000 per month CU7). This is theamount of the provision to be made, as it is lower than the CU2m cost of not fulfilling the contract.

(3) Restructuring of the Chuckholder division

The Chuckholder division programme of restructuring meets the BAS 37 requirements for recognition– the announcements and implementation before the year end means the company is demonstrablycommitted.

However, the only provisions which should be made are those for the direct expenditure necessarilyentailed in the reorganisation and not associated with ongoing activities. Redundancy costs and leaseterminations match this definition, but the other expenditures listed will benefit ongoing operationsand do not qualify for recognition in 20X0.

19 Islay Ltd

Marking guide

Marks

Balance sheetIntangibles ½Share capital ½Revaluation reserve ½Retained earnings ½

Intangibles noteOpening cost 1½Additions ½Opening impairment/amortisation 1Charge for year ½

SOCIEHeadings 1Revaluation ½Transfer ½Profit 1½Brought forward balances 2




Consolidated balance sheet as at 31 May 20X9 (extracts)

CUNon-current assets

Intangibles 976,000Capital and reserves

Called up share capital 5,000,000Revaluation reserve 540,000Retained earnings 676,000

6,216,000

Disclosure note for intangibles

Non-current assets – intangiblesGoodwill Patent

(W1) rights TotalCost CU CU CU

At 1 June 20X8 730,000 70,000 800,000Additions 260,000 – 260,000At 31 May 20X9 990,000 70,000 1,060,000

Impairment/amortisationAt 1 June 20X8 20,000 7,000 27,000Charge for the year 50,000 7,000 57,000At 31 May 20X9 70,000 14,000 84,000

Carrying amountAt 31 May 20X9 920,000 56,000 976,000At 31 May 20X8 710,000 63,000 773,000

Consolidated statement of changes in equity attributable to equity holders of Islay Ltdfor the year ended 31 May 20X9

Ordinaryshare Revaluation Retainedcapital reserve earnings Total

CU CU CU CURecognised directly in equity

Revaluation of non-current assets – 600,000 – 600,000Transfer between reserves re

depreciation on revaluations – (60,000) 60,000 –Total recognised directly in equity – 540,000 60,000 600,000Profit for the period (W5) – – 118,500 118,500Total recognised income and expense

for the period – 540,000 178,500 718,500Balance brought forward (W6) 5,000,000 – 497,500 5,497,500Balance carried forward 5,000,000 540,000 676,000 6,216,000

WORKINGS

(1) Goodwill

Green Smart ITSavalight Goods Ltd Total

(W2) (W3) (W4)CU CU CU CU

Goodwill 80,000 650,000 260,000 990,000Impairment b/f (20,000) – – (20,000)Impairment in the year – (50,000) – (50,000)C/f 60,000 600,000 260,000 920,000

ANSWER BANK


(2) Savalight

CUCost 580,000Less Net assets acquired at fair value (500,000)Goodwill 80,000Impairment at 1 June 20X8 (20,000)Carrying amount b/f and c/f 60,000

(3) Green Goods

CU CUCost 1,800,000Less Net assets acquired at fair value 1,300,000

Existing goodwill (150,000)(1,150,000)

Goodwill – carrying amount b/f 650,000Impairment in the year (50,000)Carrying amount c/f 600,000

(4) Smart IT

CUCost 1,100,000Less Net assets acquired at fair value (1,200,000 70%) (840,000)Goodwill – carrying amount c/f 260,000

(5) Revised profit for the year

CUOriginal profit for the year 175,500Less Goodwill impairment in the year (W1) (50,000)

Patent amortisation in the year (70,000 10) (7,000)118,500

(6) Retained earnings b/f

CUOriginal retained profit b/f (700,000 – 175,500) 524,500Less Goodwill impairment b/f (W1) (20,000)

Patent amortisation b/f (70,000 10) (7,000)497,500



20 Greenstones Ltd

Marking guide

Marks

(a) Explanation of relevance ½Explanation of reliability ½Explanation of conflict 1Example 1Total available 3Maximum 3

(b) Explanation of criteria for carry forward 2Evaluation against reliability 1Evaluation against relevance 1BAS 38 approach to conflict 1Total available 5Maximum 4

(c) Income statementRevenue 1

Balance sheetPPE ½Intangibles 3

SOCIEPrior year errors 1

Operating profit noteR&D write-offs 2Amortisation 1Impairment 1½


17

(a) Relevance and reliability

Information is relevant if it influences the economic decisions of users. Information is reliable if it isfree from error or bias, complete and portrays events in a way that reflects their reality.

The potential for conflict between relevance and reliability arises because economic decisions can onlybe made in relation to future events, so forward-looking information is very relevant to users offinancial statements. But much forward-looking information is of very limited reliability, because itrelates to what might happen, but might not.

A classic example of the possible conflict is how to reflect in financial statements a substantial claim fordamages lodged against an entity. Many different estimates can be made of the outcome of such aclaim; which should be recognised in the statements, and when? Relevance argues for earlyrecognition, reliability for recognition only when it would not present a potentially misleading pictureof the position of the entity.

(b) Evaluation of treatment of development expenditure against relevance and reliability

Under BAS 38 development expenditure should be recognised as an asset, but only where it meets anumber of stringent conditions. These relate to the technical feasibility of the project, how theprobable future economic benefits will be generated and the availability of resources to complete thedevelopment. It must also be possible to measure the development expenditure reliably.

ANSWER BANK


The most reliable information would be provided if the costs are recognised in the income statementas they are incurred (indeed this is the approach to be taken to research expenditure and todevelopment expenditure where the recognition criteria are not met).

However, this does not provide relevant information where benefits from the expenditure will flowinto the entity over several accounting periods. However, the reliability of this more relevantinformation can be seriously compromised where there are uncertainties surrounding the futureoutcome of the project.

Hence, BAS 38 adopts the relevance approach but only where the information backing up thatapproach is reliable, i.e. there is sufficient certainty surrounding the viability/profitability of the project.

(c) Extracts from the financial statements for the year ended 31 December 20X8

Income statement

CURevenue (67,000 (W1) 140%) 93,800Cost of sales (W1) (257,150)

Balance sheet


Property, plant and equipment 140,000Intangibles (W2) 477,850

Statement of changes in equityRetainedearnings

CU CUAt the beginning of the year

As previously reported XPrior year errors (160,000 + 470,000) (630,000)

Restated X

Note to the financial statements

Operating profit is stated after chargingCU

Research and development expenditure written off (W1) 147,000Amortisation of development expenditure (W2) 25,150Impairment of property, plant and equipment (W3) 85,000

WORKINGS

(1) Cost of sales

CUProject Alpha write off (22,000 + 45,000) 67,000Project Beta write off (15,000 + 65,000) 80,000

147,000Project Gamma amortisation (W2) 25,150Impairment (W3) 85,000

257,150



(2) Intangible assets

CUCost

Gamma costs from 1 April 20X7 to 31 December 20X7 correctly capitalised(650,000 – 470,000) 180,000

Gamma costs in year (98,000 + 75,000) 173,000Depreciation on specialised equipment used from 1 April 20X7 to

30 September 20X8 (18/60 CU500,000) 150,000503,000

Accumulated amortisation (503,000 5

0.25 ) (25,150)

477,850

(3) Impairment of specialised equipment

CUCarrying amount at 1 October 20X8 (500,000 27/60) 225,000Recoverable amount (140,000)

85,000

Tutorial note

Research and development costs written off or amortised in the year and the impairment of the specialisedequipment have all been charged to cost of sales. Other classifications would also be marked as correct.

21 Okehampton Ltd

Marking guide

Marks

(a) Carrying amounts 4Revaluation reserve 5Total available 9Maximum 9

(b) Depreciation 2Impairment losses 2Total available 4Maximum 4

(c) Income statement amounts 2Revaluation reserve 2Total available 4Maximum 4

17

ANSWER BANK


(a) Balances at 31 December 20X6

CUGeorge HouseCarrying amount as non-current asset at 30 June 20X6 (300,000 – (6,000 50%)) 297,000Fair value at 30 June 20X6 320,000Increase in revaluation surplus 23,000Carrying amount at 31 December 20X6 (320,000 – 9,000 costs to sell) 311,000

Elizabeth HouseCarrying amount as non-current asset at 30 June 20X6 (400,000 – (12,000 50%)) 394,000Fair value at 30 June 20X6 360,000Decrease in revaluation surplus – charged to revaluation reserve as balance re this

asset is sufficient (50,000 – 2,000 excess deprecation, per below) (34,000)Carrying amount at 31 December 20X6 (360,000 – 8,000 costs to sell) 352,000

Axford plantCarrying amount as non-current asset at 30 June 20X6 (200,000 – (20,000 50%)) 190,000Fair value less costs to sell at 30 June 20X6 (140,000 – 9,000) 131,000Impairment loss – to income statement (59,000)Carrying amount at 31 December 20X6 131,000

Waterman plantCarrying amount as non-current asset at 30 June 20X6 (600,000 – (90,000 50%)) 555,000Fair value less costs to sell at 30 June 20X6 (620,000 – 15,000) 605,000No change to carrying amountCarrying amount at 31 December 20X6 555,000

Revaluation reserveBalance at 1 January 20X6 370,000Transfer to retained earnings of excess of depreciation over that calculated on

historical cost for 6 months to 30 June 20X6:George House (6,000 – 4,000) 50% (1,000)

Elizabeth House (12,000 – 8,000) 50% (2,000)Revaluation surplus/(deficit) at 30 June 20X6:

George House (as above) 23,000Elizabeth House (as above) (34,000)

Balance at 31 December 20X6 356,000

(b) Income statement for year ended 31 December 20X6

CUDepreciation ((6,000 + 12,000 + 20,000 + 90,000) 50%) (64,000)Impairment loss

(9,000 + 8,000 costs to sell re land and buildings and 59,000 re Axford) (76,000)

(c) Income statement and revaluation reserve in 20X7

CUIncome statementProfit on sale of non-current assets held for saleGeorge House (350,000 – 311,000) 39,000Elizabeth House (310,000 – 352,000) (42,000)Axford plant (120,000 – 131,000) (11,000)Waterman plant (635,000 – 555,000) 80,000

66,000

Revaluation reserveBalance at 1 January 20X7 356,000Transfer to retained earnings of surpluses re assets now disposed of

George House (100,000 – 1,000 + 23,000) (122,000)Elizabeth House (50,000 – 2,000 – 34,000) (14,000)

Balance at 31 December 20X7 220,000



22 Banchory Ltd

Marking guide

Marks

(a) Contingent asset note 1½Warranties narrative note 1Warranties movement note 1½Total available 4Maximum 4

(b) Contingent asset ½Legal costs ½Provision (2) ½Provision (3) ½Goodwill impairment 1½Profit on factory 1Impairment loss on factory on classification as held for sale ½Additional depreciation on machine 1½Total available 6½Maximum 6

(c) Headings 1Revaluation ½Revaluation on classification as held for sale 1Transfers 3Issue of share capital 2Brought forward balances 1Presentation 1Total available 9½Maximum 8

18

(a) Notes to the financial statements

Contingent asset

The company is currently involved in litigation with one of its suppliers under product liability for aclaim of CU500,000. Legal costs, currently CU40,000, may also be reimbursed. The legal costs havebeen accrued for at the year end and recognised as an expense in the income statement.

Warranties provision

The amount of CU200,000 relates to a new provision against claims made on a warranty offered bythe company on its products. It relates to claims on products sold in the last two months of the year.It is expected that most of the expenditure will be incurred in the next financial year.

CUMovement during year

Balance as at 1 May 20W9 –Increase during the year 200,000Balance as at 30 April 20X0 (2/6 6,000,000 10%) 200,000

ANSWER BANK


(b) Revised consolidated profit before tax

CUPer question 2,665,000

Less Contingent asset (1) (500,000)Legal costs (1) (40,000)Provision (2) (200,000)Impairment of goodwill (4) (W4) (12,500)Profit on sale of factory unit (3,100,000 – 1,300,000) (5) (1,800,000)Impairment loss on asset reclassified as held for sale (5) (50,000)'Additional' depreciation on machine (6) (W1) (60,000)

Add back Provision (3) 300,000Add profit on sale of held for sale asset (3,100,000 – 3,000,000) 100,000

402,500

(c) Consolidated statement of changes in equity for the year ended 30 April 20X0

Ordinary Share Revaluation Retained Totalshare capital premium reserve earnings

CU CU CU CU CU

Recognised directly in equityRevaluation of non-current assets – – 500,000 – 500,000Revaluation on classification as

held for sale(3,050,000 – 2,100,000) – – 950,000 – 950,000Transfer between reserves (W2) 200,000 (200,000) (1,755,000) 1,755,000 –

Total recognised directly in equity 200,000 (200,000) (305,000) 1,755,000 1,450,000Profit for the period – – – 402,500 402,500Total recognised income and expense

for the period 200,000 (200,000) (305,000) 2,157,500 1,852,500Issue of share capital (W3) 550,000 412,500 – – 962,500Balance brought forward 2,000,000 450,000 800,000 3,672,000 6,922,000Balance carried forward 2,750,000 662,500 495,000 5,829,500 9,737,000

WORKINGS

(1) Depreciation on machine

CUCharge per draft income statement (1/6 1,800,000) 300,000

Charge needed (¼ 1,440,000) (360,000)Adjustment (60,000)

(2) Transfer between reserves

CUExtra depreciation re revalued asset since date of revaluation

(500,000 ÷ 50 6/12) 5,000Balance re revalued asset sold in the year (800,000 + 950,000) 1,750,000

1,755,000

(3) Share issues

Ordinary Share

shares premiumCU CU

B/f 2,000,000 450,000Bonus issue (2,000,000 ÷ 10) 200,000 (200,000)

2,200,000 250,000Rights issue (2,200,000 ÷ 4) 550,000 CU0.75 412,500

2,750,000 662,500



(4) Goodwill – impairment write down

CUCost of acquisition (550,000 + 412,500) (W3) 962,500Less Fair value (950,000)

12,500

Tutorial note

The fact that the carrying amount of property at the date of sale is based on cost means that ameasurement adjustment under BFRS 5 at the time of the decision to sell would only have been made if fairvalue less costs to sell had been below the then carrying amount. With the ultimate selling price so much inexcess of cost, it was unlikely that any such adjustment would have been necessary. This is the reason whythe question did not contain any information about values at the time the decision to sell was made.

23 Banff Ltd

Marking guide

Marks

(a) Balance sheetOwned plant 4Leased plant 1Inventories 1½Trade and other receivables ½Non-current assets held for sale 2Current finance lease liabilities 1Provision 1Current deferred income ½Non-current finance lease liabilities 3Non-current deferred income ½

Income statementRevenue 3Cost of sales 2Loss on termination ½Finance cost ½


(b) Income statement amount 1Balance sheet amount 1Total available 2Maximum 2

23

ANSWER BANK


(a) Extracts from the financial statements

Balance sheet as at 30 April 20X1


Property, plant and equipmentPlant and machinery (W1) 195,000

Plant and machinery held under finance leases (780,000 –6

780,000 ) 650,000

Current assetsInventories (W4) 250,000Trade and other receivables (W4) 2,250,000

X

Non-current assets held for sale (W5) 781,250Current liabilities

Finance lease liabilities (W2) 150,000Provision for closure costs (250,000 + 100,000) 350,000Deferred income (500,000 150%) 750,000

Non-current liabilitiesFinance lease liabilities (W2) 553,333Deferred income (750,000 2) 1,500,000

Income statement for the year ended 30 April 20X1

CURevenue (1,750,000 (W3) + 2,050,000 (W4)) 3,800,000Cost of sales (W4) (1,750,000)Loss on termination of operations (350,000)Finance cost (23,333)

(b) Six-year lease as an operating lease

Income statement: Operating lease rentals (850,000 ÷ 6) = CU142,000

Balance sheet: Accrual (142,000 – 100,000) = CU42,000

WORKINGS

(1) Specialised plant – carrying amount

CU CUMaterials 100,000Labour costs

Factory staff 100,000Less Abnormal costs (should be expensed in the year) (20,000)

80,000Factory supervision – incremental costs 15,000Professional fees 22,000Installation costs 13,000

230,000Less Depreciation of component re overhauls (80,000 ÷ 4) (20,000)

Depreciation of remainder (230,000 – 80,000) ÷ 10) (15,000)195,000



(2) Finance lease

CUTotal payments (100,000 + (5 150,000)) 850,000Less Fair value of asset (780,000)Finance charge 70,000

Sum of digits allocation =2

1)(55 = 15 (lease is payable in advance)

Year B/f Payment Capital Interest C/fCU CU CU CU CU

20X1 780,000 (100,000) 680,000 23,333 (5/15 70,000) 703,33320X2 703,333 (150,000) 553,333 18,667 (4/15 70,000) 572,000

Total liability at 30 April 20X1

CU703,333

Non-current liability

CU553,333

Current liability ()

CU150,000

(3) Hardware revenue

CUTotal revenue 4,000,000Support service (500,000 x 150% x 4 years) (3,000,000)Attributable to hardware 1,000,000

Support services pa (500,000 x 150%) 750,000Hardware 1,000,000

1,750,000

(4) Software revenue and costs

Estimated profit on contract CUPrice 3,000,000Costs estimated (200,000 + 2,000,000 + 400,000) (2,600,000)

400,000

To date 20X0 20X1CU CU CU

Revenue (75% x 3,000,000) 2,250,000 200,000 2,050,000Costs () (1,950,000) (200,000) (1,750,000)Profit (75% x 400,000) 300,000 – 300,000

Inventories CUCosts incurred to date (200,000 + 2,000,000) 2,200,000Recognised in income statement (1,950,000)

250,000

(5) Held for sale asset

Lower of: CU

Carrying amount at classification (1,000,000 86 4

1) 781,250

Fair value less costs to sell (900,000 97%) 873,000

ANSWER BANK


24 Skinner Ltd

Marking guide

Marks

(a) CostBrought forward ½Revaluation ½Additions 1

DepreciationBrought forward ½Revaluation ½Charge 5

NotesValuation 1Leased assets ½

Presentation 1Total available 10½Maximum 10

(b) Current liabilities 1Non-current liabilities 1Analysis of gross lease payments 2Finance cost ½Financing activities ½Operating activities ½Presentation 1Total available 6½Maximum 6

(c) Cost 2½NRV 1½Total available 4Maximum 3

19

(a) Notes to the financial statements as at 30 June 20X3 (extracts)

Property, plant and equipment

Freehold land Plant and

and buildings machinery TotalCU CU CU

Cost or valuationAt 1 July 20X2 1,620,000 1,278,000 2,898,000Revaluation 740,000 – 740,000Additions (W3) – 849,900 849,900At 30 June 20X3 2,360,000 2,127,900 4,487,900

DepreciationAt 1 July 20X2 148,800 539,600 688,400Revaluation (148,800) – (148,800)Charge for the year (W1) 20,000 210,788 230,788At 30 June 20X3 20,000 750,388 770,388

Carrying amountAt 30 June 20X3 2,340,000 1,377,512 3,717,512At 30 June 20X2 1,471,200 738,400 2,209,600



The freehold land and buildings were valued for the purposes of the 20X3 financial statements at openmarket valuation. This valuation was made by ………………. . The historical cost of the land andbuildings was CU1,620,000 and the related depreciation is CU161,200.

Of the total carrying amount of plant and machinery of CU1,377,512, CU367,412 (419,900 – 52,488(W1)) relates to assets held under finance leases.

(b) Finance lease

Balance sheet as at 30 June 20X3 (extracts)

Current liabilitiesCU

Finance lease liabilities (W2) 46,205

Non-current liabilitiesCU

Finance lease liabilities (W2) 329,690

Notes to the financial statements as at 30 June 20X3 (extracts)

Analysis of finance leases – gross basis


Gross lease payments due withinOne year 65,000Two to five years (65,000 4) 260,000

Over five years (65,000 2) 130,000455,000

Less Finance charges allocated to future periods((65,000 8) – 419,900 – 20,995) or () (79,105)

375,895

Income statement for the year ended 30 June 20X3 (extracts)CU

Finance cost (W2) 20,995

Cash flow statement for the year ended 30 June 20X3 (extracts)

Cash flows from operating activities CUFinance costs paid (20,995)

Cash flows from financing activitiesPayment of finance lease liabilities (65,000 – 20,995) (44,005)

(c) Closing inventory

Cost CUVariable cost 26.00Share of overheads (0.60 + 0.40 + 1.40) 2.40

28.40Net realisable value

Selling price 32.00Less Selling, marketing and distribution costs (1.20 + 0.40) (1.60)

30.40

CUValue at lower of cost and net realisable value (4,000 CU28.40) 113,600

ANSWER BANK


WORKINGS

(1) Depreciation charge

Buildings

CUValuation 2,360,000Land element (1,600,000)Buildings 760,000

YearsOriginal useful life 50

Elapsed (620,000

148,800 50) (12)

Remaining useful life 38

Depreciation charge =years38

760,000= CU20,000 per annum

Plant and machinery

DepreciationCU CU

Cost at 1 July 20X2 1,278,000Less Revised useful life asset (150,000)

1,128,000@ 10% 112,800

Asset with revised useful life

Depreciation charge =lifeusefulRevised

amountCarrying =years5

80%150,00024,000

Additions – 430,000 10% for 6 months 21,500Leased asset

Depreciation charge =years8

419,90052,488

210,788

(2) Leased grinding machine

PV of MLP = CU419,900

Representing450,000

419,900 100 = 93% of the fair value of the asset

Year ended B/f Interest @ 5% Payment Capital c/fCU CU CU CU

30 June 20X3 419,900 20,995 (65,000) 375,89530 June 20X4 375,895 18,795 (65,000) 329,690

Total

CU375,895

Capital > 1 year

CU329,690

Capital < 1 year

CU46,205 ()

(3) AdditionsCU

Plant and machinery purchases 430,000Leased machine 419,900

849,900



25 Rosetta Ltd

Marking guide

Marks

(a) CostBrought forward ½Additions 3

Amortisation/impairmentBrought forward ½Charge 2


(b) Revised pre-tax profitAdjustments re depreciation 4Adjustments re goodwill 2Adjustments re development costs 4

Retained earnings brought forward 1½Total available 11½Maximum 11

17

(a) Notes to the financial statements for the year ended 31 December 20X2 (extracts)

DevelopmentIntangibles Goodwill costs Total

CU CU CUCost

At 1 January 20X2 2,100,000 2,100,000Additions 4,800,000 (W2) 757,500 (W3) 5,557,500At 31 December 20X2 6,900,000 757,500 7,657,500

Amortisation/impairmentAt 1 January 20X2 300,000 300,000Charge for year 900,000 (W2) 10,521 (W3) 910,521At 31 December 20X2 1,200,000 10,521 1,210,521

Carrying amountAt 31 December 20X2 5,700,000 746,979 6,446,979At 31 December 20X1 1,800,000 1,800,000

(b) Revised pre-tax profit

CUPer draft financial statements 17,000,000Depreciation adjustments (1) (150,000 + 44,444) (W1) (194,444)Acquisition (2)(i)

Goodwill amortisation added back (6,000,000 ÷ 20 years) 300,000Provision for reorganisation added back to goodwill (1,200,000)

Capitalised development costs (2)(ii)Amortisation added back (2,880,000 1/72) 40,000

Employment costs (1,800,000 60%) (1,080,000)Staff training costs (480,000)Depreciation of computer equipment not capitalised (W3) (100,000)Revaluation gain reversed (3,160,000)Correct amortisation of development costs (W3) (10,521)

Goodwill impairments in year (W2) (900,000)10,215,035

ANSWER BANK


Retained earnings brought forward

CUAs incorrectly restated 35,000,000Add back Depreciation adjustment (600,000 + 800,000) (W1) 1,400,000

36,400,000

WORKINGS

(1) Depreciation charges

Carrying amount at 1 January 20X2 Equipment PropertyCU CU

Cost 12,000,000 40,000,000Acc depn

15% 12,000,000 (1,800,000)

25

40,000,000 2 years (3,200,000)

10,200,000 36,800,000

Depreciation charge for year (÷ 4 / ÷ 18) 2,550,000 2,044,444

Treatment per draft accounts Dr CrCU CU

Equipment

Statement of changes in equity (5

12,000,000 – 1,800,000) 600,000

Income statement (5

12,000,000 ) 2,400,000

Acc depn 3,000,000Property

Statement of changes in equity

((20

40,000,000 2 years) – 3,200,000) 800,000

Income statement (20

40,000,000 ) 2,000,000

Acc depn 2,800,000

Additional charge needed 150,000 + 44,444

(2) Goodwill arising in year and impairments of goodwill

CUAs calculated 6,000,000Less Reorganisation provision (1,200,000)

4,800,000Recoverable amount (4,100,000)Impairment 700,000Impairment re b/f goodwill 200,000Total impairments in year 900,000



(3) Development costs

CUEmployment costs after 31 August 20X2

(40% 1,800,000) 720,000Amortisation of IT hardware * from 31 August 20X2

to 30 November 20X2 (600,000 3/48) 37,500757,500

Amortisation in year ( 1/72) 10,521

* should have been capitalised within PPE. Additional depreciation not capitalised

as intangible = 600,000 8/48 (Feb to Aug plus December) 100,000

Tutorial note

In the draft financial statements the excess reorganisation provision of CU400,000 has been correctlyreleased to the income statement but the original provision set up of CU1.2 million was not charged. Oncethe adjustment of CU1.2 million has been actioned (Dr Income statement, Cr Goodwill) the incomestatement will have borne the true post-acquisition cost of CU0.8 million.

26 Arran Ltd

Marking guide

Marks

(a) Cost of sales 2½Profit on disposal 4½Share of profits of associate 3Tax charge 2Total available 12Maximum 12

(b) PPE calculation 1½Operating profit note ½Events after the balance sheet date note 1½Total available 3½Maximum 3

(c) Cost of sales 2Profit on disposal 2Share of profits of associate 2Tax charge 1Total available 7Maximum 6

21

ANSWER BANK


(a) Calculation of amounts for the consolidated income statement for the year ended 31 May20X1

(i) Cost of salesCU

Arran Ltd 7,400,000Jura Ltd

Per question 4,500,000Impairment of PPE (500,000 – 390,000) 110,000

Islay Ltd (2,700,000 8/12) 1,800,00013,810,000

(ii) Profit on disposal of Islay LtdCU CU

Sales proceeds 2,500,000Less Share of net assets at disposal

Net assets at 1 June 20X0 1,700,000Profit to 31 January 20X1 (8/12 570,000) 380,000

2,080,000 80% (1,664,000)Less Carrying amount of goodwill at disposal (W3) (384,000)

452,000

(iii) Share of profits of associates

CUShare of profit after tax ((1,960,000 6/12) – (100,000 - 70,000) 30%) 285,000

Less Share of PURP (60,000 (W2) 30%) (18,000)267,000

(iv) Tax charge

CUArran Ltd 450,000Jura Ltd 400,000Islay Ltd (240 8/12) 160,000

1,010,000

(b) Calculation of property, plant and equipment for the consolidated balance sheet as at31 May 20X1

CUArran Ltd 5,500,000Jura Ltd (3,400,000 – 110,000 (a)) 3,290,000

8,790,000

Notes to the financial statements for the year ended 31 May 20X1 (extracts)

(1) Operating profit is stated after charging

CUImpairment of property, plant and equipment 110,000

(2) Events after the balance sheet date

On 1 July 20X1 there was a serious fire at one of the company’s processing units. This firedestroyed plant included in the consolidated balance sheet at a carrying amount of CU1 million.Only 50% of this amount is expected to be recoverable from the company’s insurers and hence aloss of CU500,000 is anticipated in the current year.



(c) Rationale for treatment

Cost of sales

This should reflect the cost of goods sold outside the group, comprising parent and entities controlledby the parent, i.e. its subsidiaries.

Applying the single entity concept, the only amounts to be included are those for the period duringwhich the parent controls the subsidiaries.

Associates are not controlled by the investor (the investor only has significant influence over theinvestee), so nothing is included for them in cost of sales and no adjustment is required.

Profit on disposal of Islay Ltd

This should be based on the group’s investment in Islay Ltd, not only the parent company’s investment.

This is a better reflection of profit/loss on disposal achieved by management, as it is based on originalcost plus post acquisition profits.

Any unimpaired goodwill arising on acquisition should be derecognised, as this part of the cost ofacquiring the investment can no longer be carried as an asset.

Share of profits of associates (Millport Ltd)

The level of investment in Millport Ltd is one of 'significant influence', so mere inclusion of dividendincome would not reflect profit to the group shareholders and the return achieved by management.

Equity accounting has been used: this shows the group share of after-tax profits from the associate(irrespective of whether or not a dividend is declared) for the post-acquisition period.

As Arran Ltd holds inventory on which Millport Ltd made a profit, its share of the unrealised amountmust be excluded from its share of Millport Ltd's profit for the year.

Tax charge

This should be based on the whole group’s individual company charges.

It only includes tax on subsidiaries held up to the date of disposal or from acquisition to balance sheetdate as appropriate – as profits earned up to these dates are included.

WORKINGS

(1) Group structure

80%

Arran Ltd

30%

Millport Ltd

Acquired1 Dec 20X0

6/12 incl

Islay Ltd

75%

Jura LtdDisposed of31 Jan 20X1

8/12 incl

(2) PURP% CU

SP 1331/3 240,000 (½ 480)Cost (100) (180,000)GP 331/3 60,000

ANSWER BANK


(3) Goodwill in respect of Islay Ltd

CUCost of investment 1,600,000Less Share of net assets acquired (80% 1,400) (1,120,000)Goodwill 480,000Impairment prior to start of year (96,000)Goodwill at disposal date 384,000

27 Elie Ltd

Marking guide

Marks

(a) Cost of investment 4Fair value of net assets acquired 2Impairment ½Total available 6½Maximum 6

(b) Presentation 1½Impairment recognised against revaluation reserve 3½Transfer of excess depreciation 1Share issues 2½Brought forward balances 1½Total available 10

16

(a) Goodwill calculation

CU CUCost of investment

Shares (200,000 CU17) 3,400,000Professional fees 90,000Contingent share element (24,000 CU17) 408,000Deferred cash consideration 92,000

3,990,000Less Fair value of net assets acquired

Carrying amount 3,000,000Unrecognised asset – the legal claim 200,000Fair value adjustments 1,000,000

4,200,000 80% (3,360,000)

Goodwill 630,000Less Goodwill impaired to date (70,000)Goodwill for the consolidated balance sheet 560,000



(b) Statement of changes in equity for the year ended 30 June 20X2 (extract)

Attributable to the Equity Holders of Elie LtdOrdinary Preference

share share capital Share Revaluationcapital (irredeemable) premium reserveCU CU CU CU

Recognised directly in equityImpairment ofnon-current assetpreviously revalued (W3) – – – (38,000)Transfer betweenreserves (45,000 –2,000 (W2)) – – – (43,000)

Total recognised incomeand expense for the period – – – (81,000)Issue of share capital (W1) 200,000 200,000 3,240,000 –

200,000 200,000 3,240,000 (81,000)Balance brought forward 1,000,000 – 500,000 250,000Balance carried forward 1,200,000 200,000 3,740,000 169,000

WORKINGS

(1) Share issuesOrdinary Irredeemable Share

shares preference shares premiumCU CU CU

B/f 1,000,000Acquisition of Monans Ltd 200,000 (

CU16)3,200,000

Irredeemable preference shares 200,000 ( 20p) 40,0001,200,000 200,000 3,240,000

(2) Revaluation surplus on impaired assetCU CU

Cost on 1 July 20W8 100,000Depreciation to 30 June 20X0 @ 10% 2 (20,000)

80,000Revalued on 1 July 20X0 120,000Surplus 40,000Transfer to retained earnings y/e 30 June 20X1

Depreciation based on revalued amount (10% 120,000) 12,000

Depreciation based on cost (10% 100,000) (10,000)(2,000)

In revaluation reserve on 1 July 20X1 38,000

(3) Impairment of assetCU

Revalued amount on 1 July 20X0 120,000Depreciation to 30 June 20X1 @ 10% (12,000)

108,000Recoverable amount at 30 June 20X2 (50,000)Charge to revaluation reserve (W2) (38,000)Charge to income statement 20,000

ANSWER BANK


28 Wester Ross Ltd

Marking guide

Marks

(a) Goodwill 4½Investments in associates 2Retained earnings 5Total available 11½Maximum 11

(b) Cash flow extractsAcquisition 1Dividends from associates 1Dividends paid 1

NoteNarrative 1Minority interest 1Current liabilities 1All other amounts (not totals or sub-totals) 3


(c) Purpose 2Key concepts 1Discussion of single entity concept 1½Discussion of substance over form 1Total available 5½Maximum 5

25

(a) Calculation of balance sheet amounts at 31 October 20X0

(i) Goodwill arising on Ullapool LtdCU'000 CU'000

Cost of acquisition ((2,000 CU7) + 7,000) 21,000Less Fair value of net assets acquired

Ordinary share capital 12,000Revaluation reserve 1,500General reserve 3,500Retained earnings 2,000

Fair value adjustmentsTo inventory (42 – 30) 12Re contingent liability (98)

18,914 75% (14,185)

Goodwill 6,815

Less Impairment to date (810)Goodwill for consolidated balance sheet 6,005

(ii) Investments in associates

CU'000Cost 2,000Share of post acquisition change in net assets (30% (1,900 – 900)) 300

2,300Less Impairment to date (276)

2,024



(iii) Retained earnings

CU'000Wester Ross Ltd 3,000Less Provision for uncollectible trade receivables (400)

2,600Ullapool Ltd (363,000 (W1) 75%) 272Glenelg Ltd (ii) 300Less Goodwill impairment to date (276 + 810) (1,086)

2,086

(b) Consolidated cash flow statement for the year ended 31 October 20X0 (extracts)

Cash flows from investing activities CU'000Acquisition of Ullapool Ltd net of cash acquired (Note 1) (6,700)Dividends received from associate (W3) 90

Cash flows from financing activitiesDividends paid (W3) (4,000)

Notes to the cash flow statement

(1) Acquisition of subsidiary

During the period the group acquired 75% of the ordinary share capital of Ullapool Ltd. The fairvalue of assets acquired and liabilities assumed were as follows.

CU'000Goodwill ((a) (i)) 6,815Property, plant and equipment 17,000Inventories (2,000 + 12 ((a) (i))) 2,012Trade and other receivables 1,500Cash 300Non-current liabilities (800)Current liabilities (1,000 + 98) (1,098)Minority interest (18,914 (a) (i) 25%) (4,729)Total purchase price 21,000Less Non cash consideration (14,000)Cash consideration 7,000Less Cash acquired (300)Cash flow on acquisition 6,700

(c) Group accounts

Purpose

The purpose of group financial statements is to provide comprehensive information to investors on acompany which uses resources to invest in other companies.

Group financial statements give information to users on the abilities of management to produce anacceptable return on the capital employed.

Specific rules on consolidations contained in BAS 27 Consolidated and Separate Financial Statementsresult in only the profits of subsidiaries earned in the post acquisition period being reported in theconsolidated income statement.

Managers are therefore held accountable for their performance after acquisition and not on the profits'bought in'.

ANSWER BANK


Concepts underlying their preparation

The two key concepts underlying the preparation of group financial statements are

The single entity concept, and

The principle of substance over form.

In order that users are better informed, the group financial statements are presented for the group asa single economic unit.

Therefore all the resources at the group’s disposal and the return on those resources can be seen inone set of financial statements.

Without this users would be presented with various sets of individual company financial statementsbased on the legal form that each company is a separate legal entity.

The preparation of group financial statements under the single entity concept underlines theapplication of 'substance over form', which is a fundamental principle in the preparation of financialstatements.

This ignores the fact that the group is not a legal unit.

The 'single entity' concept means that all effects of intra-group trading are eliminated, so that only theresults of trading with entities outside the group are shown; this provides a more meaningful basis forassessing management’s performance.

WORKINGS

(1) Post-acquisition retained earnings of Ullapool Ltd

CU'000Per individual company balance sheet 2,600Less Reduction in profit re inventories (12)

NCA PURP (W2) (225)Pre-acquisition profits (2,000)

363

(2) PURP in non-current asset transfer

CU'000 CU'000Carrying amount at 30 April 20X0

Cost 1,000Less Accumulated depreciation (5 years 10%) (500)

Carrying amount 500Disposal proceeds 750Unrealised profit 250Less Effect of excess depreciation

Normal depreciation (CU1m 10) 100New depreciation (CU750 ÷ 5 years remaining) 150

For half a year (50) (25)Net effect – adjust against retained earnings of seller (Ullapool Ltd) 225

(3) Dividends

CU'000Wester Ross Ltd – paid – ordinary (10p 40,000,000) 4,000

Glenelg Ltd – paid to Wester Ross Ltd – ordinary (20p 1,500,000 30%) 90



29 Shadowlands Ltd

Marking guide

Marks

(a) Profit before tax 2Depreciation charge ½Profit on disposal of associate ½All other adjustments (1 mark each) 3Total available 7Maximum 7

(b) Total finance charge calculation 1Sum of digits calculation ½Lease payments table 1½Disclosure 1Total available 4Maximum 4

(c) Individual accounts 1½Group accounts

Proceeds ½Share of net assets 1½Goodwill 2


15

(a) Note reconciling profit before tax to cash generated from operations

CUProfit before tax (4,400,000 + 40,000 – 10,000 (b) – 750,000) 3,680,000Finance cost (50,000 + 10,000 (b)) 60,000Investment income (950,000 – 750,000) (200,000)Depreciation charge 356,000Profit on disposal of associate (c) (351,440)Decrease in inventories (460,700 – 350,600) 110,100Increase in trade and other receivables (279,600 – 256,900) (22,700)Decrease in trade and other payables (182,300 – 178,500) (3,800)Cash generated from operations 3,628,160

(b) Finance lease

CUDeposit 10,000Instalments (4 CU30,000) 120,000Fair value of asset (105,000)Finance charge 25,000

SOD =2

1)(nn =

2

54= 10

Year ended B/f Interest Payment C/fCU CU CU CU

31 December 20X7 105,000 10,000 (4/10 25,000) (40,000) 75,00031 December 20X8 75,000 7,500 (3/10 25,000) (30,000) 52,500

ANSWER BANK


Disclosed asCurrent liabilities CU

Finance lease liability (75,000 – 52,500) 22,500

Non-current liabilitiesFinance lease liability 52,500

(c) Disposal of Bacardi Ltd

In the individual accounts of Shadowlands Ltd CU

Cost 300,000Less Impairments to date of sale (20,000)Carrying amount at disposal 280,000Proceeds 750,000Profit on disposal 470,000

In the group accounts CU CU

Proceeds 750,000Less Share of net assets to date of sale

Share capital 500,000Retained earnings (650,300 – (½ 110,200)) 595,200

1,095,200

30% (328,560)Less Goodwill not yet impaired

Original cost 300,000Less Share of net assets acquired

(30% (500,000 + 200,000)) (210,000)90,000

Less Impaired to date (20,000)(70,000)

Profit on disposal 351,440

30 Scribo Ltd

Marking guide

Marks

(a) Magazine subscriptions 2Magazines sold via newsagents 1Book sales ½Total available 3½Maximum 3

(b) CostBrought forward ½Additions 1

Amortisation/impairmentBrought forward ½Charge for year 1½


7



(a) Calculation of revenue

CUMagazine subscriptions (W1) 96,607Magazines sold via newsagents (W2) 757,900Book sales 3,450,800

4,305,307

(b) Intangible assets movements note

Goodwill Publishing Technical Customer Totaltitles know-how lists

CU CU CU CU CUCost

At 1 July 20X5 450,000 120,000 300,000 – 870,000Additions 100,000 45,000 – 30,000 175,000At 30 June 20X6 550,000 165,000 300,000 30,000 1,045,000

Accumulatedamortisation/impairment

At 1 July 20X5 120,000 12,000 90,000 – 222,000Charge for year

(120,000 ÷ 5) 50,000 24,000 30,000 – 104,000At 30 June 20X6 170,000 36,000 120,000 – 326,000

Carrying amountAt 30 June 20X6 380,000 129,000 180,000 30,000 719,000At 1 July 20X5 330,000 108,000 210,000 – 648,000

WORKINGS

(1) Magazine subscriptions revenue

CUPre March (50% CU356,700 4/12) 59,450

March (25% CU356,700 3/12) 22,294

April (25% CU356,700 2/12) 14,86396,607

(2) Magazines on sale or return revenue

CUTotal 789,400Less June returns (10,500 CU3) (31,500)

757,900

ANSWER BANK



31 Hemmingway Ltd

Marking guide

Marks

(a) CBSPPE 1½Intangibles/goodwill 1Investment ½Inventories 1½Trade and other receivables ½Cash and cash equivalents ½Share capital ½Revaluation reserve 1Retained earnings 1½Minority interest ½Borrowings ½Trade and other payables ½

Other workingsGroup structure (W1) ½Net assets (W2) 2PPE PURP (W8) 2


(b) Carried at cost plus share of post-acquisition profits 1Increase consolidated earnings by share of post-acquisition profits

less impairments 1Equity method used where significant influence ½Do not add assets and liabilities to those of parent as no control ½No minority interest ½Total available 3½Maximum 3

18



(a) Consolidated balance sheet at 30 June 20X4

CU'000 CU'000ASSETSNon-current assets

Property, plant and equipment(6,720 + 820 + (200 – 80 (W2)) – 12 (W8)) 7,648Intangibles (W3) 814Investments 1,200

9,662Current assets

Inventories (360 + 170 – 5 (W5) + 25 (W7)) 550Trade and other receivables (370 + 230) 600Cash and cash equivalents (15 + 10) 25

1,175Total assets 10,837


Ordinary share capital 5,000Revaluation reserve (W6) 209Retained earnings (W5) 1,193

Attributable to equity holders of Hemmingway Ltd 6,402Minority interest (W4) 245Equity 6,647Non-current liabilities

Borrowings (3,200 + 50) 3,250Current liabilities

Trade and other payables (670 + 270) 940Total equity and liabilities 10,837

WORKINGS

(1) Group structure

Hemmingway Ltd

Steinbeck Ltd

75%

(2) Net assets

At balancesheet date Acquisition Post acq

Steinbeck Ltd CU'000 CU'000 CU'000Revaluation reserve 40 28 12

Share capital 600 600 –Retained earnings 220 140 80Fair value adjustment 200 200 –Depn thereon (40% 200) (80) – (80)

940 940 –

980 968 12

ANSWER BANK


(3) Intangibles – goodwill

CU'000Cost of investment 1,540Less Share of net assets acquired (75% 968 (W2)) (726)

814

(4) Minority interest

CU'00025% 980 (W2) 245


CU'000Hemmingway Ltd 1,210Inventory PURP (25 25/125) (5)PPE PURP (W8) (12)

1,193

(6) Revaluation reserve

CU'000Hemmingway Ltd 200Steinbeck Ltd (75% 12 (W2)) 9

209

(7) Inter-company balances

CU'000Hemmingway Ltd receivable 75Inventory in transit (25)Steinbeck Ltd payable 50

(8) PPE PURP

CU'000Carrying amount after transfer (96 – (96 25%)) 72

Carrying amount without transfer (100 – (100 20% 2)) (60)12

(b) Innes Ltd as an associate

If Innes Ltd became an associate of Hemmingway Ltd, then the investment would be carried in theconsolidated balance sheet at its equity method valuation which would be

Cost of the investment, plus Share of post acquisition change in Innes Ltd's net assets.

Hemmingway Ltd's consolidated retained earnings would be increased by Hemmingway Ltd's share ofthe post acquisition profits retained by Innes Ltd, less any impairment to the investment.

This equity method of accounting is used where a parent company has significant influence over anassociate.

The individual assets and liabilities are not added to those of the parent company as there is nocontrol over them.

There is no 'minority interest' as only the parent company's share of the net assets is included in theconsolidated balance sheet, unlike a subsidiary where 100% of the assets and liabilities are includedeven though the ownership may be less than 100%.



32 Highland Ltd

Marking guide

Marks

(a) CBSPPE 1½Intangibles/goodwill 1½Inventories 1½Trade receivables ½Cash and cash equivalents ½Share capital ½Share premium ½Retained earnings 2½Minority interest ½Borrowings ½Trade payables ½Dividends payable 1

Other workingsNet assets (W2) 6


(b) PurposeComprehensive information ½Ability of management to produce acceptable return ½Only post-acquisition profits allowed ½Therefore managers assessed on only post-acquisition performance ½

ConceptsSingle entity and explanation of how accounts would differ without this 2Explanation of calculation of intra-group items 1½Substance over form and explanation 1½


24

(a) Consolidated balance sheet as at 31 December 20X2


Property, plant and equipment (3,560 + 2,800 + 200 – 6 (W2)) 6,554Intangibles (W3) 602

7,156Current assets

Inventories (1,150 + 550 – 80 (W6) + (100 – 70 (W2))) 1,650Trade receivables (1,500 + 800) 2,300Cash and cash equivalents (100 + 50) 150


ANSWER BANK


EQUITY AND LIABILITIES CU'000 CU'000Capital and reserves

Ordinary share capital 3,500Share premium account 700Retained earnings (W6) 3,838

Attributable to equity holders of Highland Ltd 8,038Minority interest (W4) 898Equity 8,936Non-current liabilities

Borrowings (1,100 + 110) 1,210Current liabilities

Trade payables (700 + 240) 940Dividends payable (W7) 170

1,110Total equity and liabilities 11,256

(b) Group accounts

Purpose

The purpose of group financial statements is to provide comprehensive information to investors on acompany which uses resources to invest in other companies.

Group financial statements give information to users on the abilities of management to produce anacceptable return on the capital employed.

Specific rules on consolidations contained in BAS 27 Consolidated and Separate Financial Statementsresult in only the profits of subsidiaries earned in the post acquisition period being reported in theconsolidated income statement.

Managers are therefore held accountable for their performance after acquisition and not on the profits'bought in'.

Concepts underlying their preparation

The two key concepts underlying the preparation of group financial statements are

The single entity concept, and The principle of substance over form.

In order that users are better informed, the group financial statements are presented for the group asa single economic unit.

Therefore all the resources at the group's disposal and the return on those resources can be seen inone set of financial statements.

Without this users would be presented with various sets of individual company financial statementsbased on the legal form that each company is a separate legal entity.

The preparation of group financial statements under the single entity concept underlines theapplication of 'substance over form', which is a fundamental principle in the preparation of financialstatements.

This ignores the fact that the group is not a legal unit.

The 'single entity' concept means that all effects of intra-group trading are eliminated, so that only theresults of trading with entities outside the group are shown; this provides a more meaningful basis forassessing management's performance.



WORKINGS

(1) Group structure

Highland Ltd

Lowland Ltd

75%

(2) Net assets of Lowland Ltd

Balancesheet date Acquisition Post acqCU'000 CU'000 CU'000 CU'000

Share capital 900 900 –Share premium 170 170 –Fair value adjustment on property 200 200 –Fair value adjustment on inventory

(400 – 300) 100 100 –Retained earnings 2,300Less Additional depreciation on

property (200 4% 9/12) (6)

Inventory disposed of (70% 100) (70)2,224

(1,500 + 220 (W8)) 1,720 5043,594 3,090 504

(3) Goodwill on acquisition of Lowland Ltd

CU'000Cost of investment 2,940Less Share of net assets acquired (75% 3,090 (W2)) (2,318)

622Impairment to date (20)Balance c/f 602


CU'000Share of net assets (3,594 (W2) 25%) 898


CU'000Highland Ltd 3,500Add Dividend from Lowland Ltd (80 75%) 60

Lowland Ltd (504 (W2) 75%) 378Less PURP (W6) (80)Goodwill impairment to date (20)

3,838

(6) PURP

% CU'000SP (800 ½) 125 400Cost (100) (320)GP 25 80

ANSWER BANK


(7) Dividends

CU'000Highland Ltd 150Lowland Ltd – minority interest (80 25%) 20

170

(8) Pre/post acquisition profits

CU'000Retained profit for the year (2,300 – 1,500) 800Add back Dividend 80Total profits for the year 880

Pre-acquisition (3/12 880) 220

Post-acquisition ((9/12 880) – 80) 580800

33 Ullapool Ltd

Marking guide

Marks

CBSPPE 1½Investments in associates 1½Inventories 1½Trade receivables 1Cash and cash equivalents 1Share capital ½Share premium ½Retained earnings 2½Minority interest ½Trade payables ½

Other workingsNet assets (W2) 3




Consolidated balance sheet as at 31 October 20X7


Property, plant and equipment (6,500 + 2,900 + 290) 9,690Investments in associates (W7) 649


Inventories (900 + 830 – 17 (W6)) 1,713Trade receivables (430 + 350 – 20) 760Cash and cash equivalents (330 + 120 + 20) 470


EQUITY AND LIABILITIESCapital and reservesOrdinary share capital 4,750Share premium 1,250Retained earnings (W5) 2,685

Attributable to the equity holders of Ullapool Ltd 8,685Minority interest (W4) 1,147Equity 9,832Current liabilities

Trade payables (2,800 + 650) 3,450Total equity and liabilities 13,282

WORKINGS

(1) Group structure

70%

30%

Portree Ltd

Kyle Ltd

Ullapool Ltd

(2) Net assets

Balance sheet date Acquisition Post acqKyle Ltd CU'000 CU'000 CU'000 CU'000 CU'000Share capital 1,700 1,700 –Retained earningsPer question 1,850 1,250PURP (W6) (17) –FV adj – inventory – 32

1,833 1,282 551FV adj – land 290 290 –

3,823 3,272

Balance Acquisition Postsheet date acq

Portree Ltd CU'000 CU'000 CU'000Share capital 800 800Retained earnings 1,200 1,000 200

2,000 1,800

ANSWER BANK


(3) Goodwill – Kyle Ltd

CU'000Cost of investment as recorded (2,840 – 590) 2,250Less Share of net assets acquired (70% 3,272 (W2)) (2,290)Discount on acquisition (40)


CU'000Kyle Ltd (30% 3,823 (W2)) 1,147


CU'000Ullapool Ltd 2,200Kyle Ltd (70% 551 (W2)) 386

Portree Ltd (30% 200 (W2)) 60Less Impairment to date (1)Add Discount on acquisition (W3) 40

2,685

(6) PURP

% CU'000SP 150 51Cost (100) (34)GP 50 17

(7) Investments in associates

CU'000Cost 590Share of post acquisition change in net assets (30% 200 (W2)) 60

650Less Impairment to date (1)

649

Tutorial note

In accordance with BFRS 3 the staff costs re acquisition should be included in cost of investment only ifdirectly attributable to the acquisition. As the staff would have been paid irrespective of whether theacquisition was made, the cost is recognised in profit or loss.



34 Law Ltd

Marking guide

Marks

CBSPPE 2½Intangibles 2Investments in associates 1Inventories ½Trade and other receivables 1Cash and cash equivalents ½Ordinary share capital ½Preference ½Retained earnings 3Minority interest ½Trade and other payables ½Dividends payable 1

Other workingsNet assets (W2) 3½


Consolidated balance sheet as at 31 August 20X1


Property, plant and equipment (7,500 + 6,000 – 80 (W6)) 13,420Intangibles (100 + 50 + 463 (W3)) 613Investments in associates (W7) 1,248


Inventories (1,000 + 500) 1,500Trade and other receivables (1,100 + 450 + 20 (W5)) 1,570Cash and cash equivalents (200 + 50) 250



Ordinary share capital 10,000Preference share capital 2,000Retained earnings (W5) 2,606

Attributable to the equity holders of Law Ltd 14,606Minority interest (W4) 1,821Equity 16,427Current liabilities

Trade and other payables (700 + 720) 1,420Dividends payable (700 + 180 – 126 (W5)) 754


ANSWER BANK


WORKINGS

(1) Group structure

70%

Law Ltd

Balgay Ltd

40%

Newtyle Ltd

(2) Net assets

Balance sheet date Acquisition Post acqBalgay Ltd CU'000 CU'000 CU'000 CU'000 CU'000Share capital 6,000 6,000 –Revaluation reserve 500 500 –Retained earnings/(losses)Per question (280) 600FV adjsGoodwill (70) (70)NCA PURP (W6) (80) –

(430) 530 (960)6,070 7,030

Newtyle LtdShare capital 1,000 1,000 –Retained earnings 1,820 900 920

2,820 1,900

(3) Goodwill

Balgay Ltd CU'000Cost of investment 5,500Less Share of net assets acquired (70% 7,030) (W2)) (4,921)

579Less Impairment to date (116)Balance c/f 463

(4) Minority interest – Balgay LtdCU'000

Share of net assets (30% 6,070 (W2)) 1,821

(5) Retained earningsCU'000

Law Ltd 3,000Dividends receivable

Balgay Ltd (180 70%) 126

Newtyle Ltd (50 40%) 20

Balgay Ltd (70% 960 (W2)) (672)

Newtyle Ltd (40% 920 (W2)) 368Less Goodwill impairment to date (116 + 120) (236)

2,606



(6) NCA PURPCU'000

Carrying amount after transfer (400 4/5) 320

Carrying amount as if transfer never occurred (300 –10

600 ) (240)

80

(7) Investments in associatesCU'000

Cost 1,000Share of post acquisition change in net assets (40% 920 (W2)) 368


1,248

35 Heeley Ltd

Marking guide

Marks

CBSPPE 1Intangibles 1½Investment in associates 2Inventories 1½Trade and other receivables ½Cash and cash equivalents 1Share capital ½Retained earnings 3Minority interest ½Borrowings ½Trade and other payables ½Taxation ½

Other workingsGroup structure (W1) ½Net assets (W2) 3


ANSWER BANK


Consolidated balance sheet as at 31 December 20X3


Property, plant and equipment (5,200 + 4,000 + 1,000) 10,200Intangibles (W3) 1,200Investments in associates (W9) 10,480


Inventories (2,300 + 1,600 – 150 (W6)) 3,750Trade and other receivables (4,800 + 2,400) 7,200Cash and cash equivalents (1,100 + 300 + 200 (W7)) 1,600



Ordinary share capital 20,000Retained earnings (W5) 2,430

Attributable to the equity holders of Heeley Ltd 22,430Minority interest (W4) 2,000Equity 24,430Non-current liabilities

Borrowings 2,000Current liabilities

Trade and other payables (3,700 + 1,500) 5,200Taxation (2,300 + 500) 2,800


WORKINGS

(1) Group structure

Heeley Ltd

Sothall Ltd

40%

Aughton Ltd60%



(2) Net assets

Balance Postsheet date Acquisition acq

Sothall Ltd CU'000 CU'000 CU'000Share capital 5,000 5,000 –Retained earnings (1,000) 4,000 (5,000)FV adj – land 1,000 1,000 –

5,000 10,000

Balance sheet date At acquisition Post acqAughton Ltd CU'000 CU'000 CU'000 CU'000 CU'000Share capital 6,000 6,000 –Retained earnings 5,000 500*Uninvoiced sales 200 –

5,200 500 4,70011,200 6,500

* The retained earnings of Aughton Ltd at the date of acquisition are the unadjusted retained earningsat the year end less nine months' profit for the year on a pro rata basis (5,000 – (9/12 x 6,000)).

(3) Goodwill

Sothall Ltd CU'000Cost of investment (3,000 CU3) 9,000

Less Share of net assets acquired (60% 10,000 (W2)) (6,000)3,000

Impairment to date (300 + 800 + 700) (1,800)Balance c/f 1,200

(4) Minority interest – Sothall Ltd

CU'000Share of net assets (40% 5,000 (W2)) 2,000


CU'000Heeley Ltd 6,500Less PURP (W6) (150)Add Professional fees (W8) 500

6,850Sothall Ltd (60% 5,000 loss (W2)) (3,000)

Aughton Ltd (40% 4,700 (W2)) 1,880Less Goodwill impairment to date (1,800 (W3) + 1,500) (3,300)

2,430

(6) PURP

% CU'000SP (1,000 ¾) 100 750Cost (80) (600)GP 20 150

ANSWER BANK


(7) Cash in transit

The cash in transit needs recording in the consolidated financial statements, and the inter-companybalances need eliminating.

CU'000 CU'000Dr Amount due to Heeley Ltd 300Dr Cash 200Cr Amount due from Sothall Ltd 500

(8) Professional fees

CU'000 CU'000Dr Investment in Aughton Ltd 500Cr Retained earnings 500

(9) Investments in associates – Aughton Ltd

CU'000Cost (2,400 CU4) 9,600Professional fees (W8) 500

10,100Share of post acquisition change in net assets (40% 4,700 (W2)) 1,880

11,980Less Impairment to date (1,500)

10,480

36 Harris Ltd

Marking guide

Marks

(a) CBSPPE 1Intangibles 1½Investment in associates 2Inventories 1½Trade receivables ½Cash and cash equivalents ½Share capital ½Retained earnings 3½Minority interest ½Debentures ½Trade payables ½Dividends payable ½

Other workingsNet assets (W2) 2½


(b) Significant influence presumed at 20%, so 15% not usually associated 1Only if exercised significant influence ½Via ½ mark each ½ (max 2½)Majority/substantial holding of remaining 85% would not preclude

significant influence ½Total available 4½Maximum 4

19



(a) Consolidated balance sheet at 31 December 20X5

ASSETS CU'000Non-current assets

Property, plant and equipment (20,200 + 15,100 + 1,000) 36,300Intangibles (W3) 6,775Investments in associates (W7) 4,125


Inventories (3,500 + 2,700 – 120 (W6)) 6,080Trade receivables (2,300 + 1,600) 3,900Other receivables (W5) 200Cash and cash equivalents (200 + 300) 500

57,880


Ordinary share capital 35,000Retained earnings (W5) 6,885

Attributable to the equity holders of Harris Ltd 41,885Minority interest (W4) 4,545Equity 46,430Non-current liabilities

Debentures (6,000 + 1,000) 7,000Current liabilities

Trade payables (3,200 + 1,200) 4,400Dividends payable (25% 200) 50

Total equity and liabilities 57,880

(b) Associate at shareholding of 15%

Significant influence is presumed to exist if Harris Ltd holds 20% or more of the shares in AuskerryLtd, so a 15% holding would not normally give rise to an associated company.

However, Auskerry Ltd would be an associate of Harris Ltd if Harris Ltd exercised significant influenceover Auskerry Ltd. In spite of only a 15% holding, significant influence could exist if Harris Ltd

Has representation on Auskerry Ltd's board of directors

Participates in Auskerry Ltd's policy-making decisions

Has material transactions with Auskerry Ltd

Interchanges managerial personnel with Auskerry Ltd

Provides essential technical information

A majority or substantial ownership of the remaining 85% shares in Auskerry Ltd would notnecessarily preclude Auskerry Ltd from being an associate.

WORKINGS

(1) Group structure

Harris Ltd

Scalpay Ltd

30%

Auskerry Ltd

75%

ANSWER BANK


(2) Net assets – Scalpay Ltd

Balance sheetdate

Acquisition Post acq

CU'000 CU'000 CU'000Share capital 15,000 15,000 –Retained earnings 2,300 1,800 500PURP (W6) (120) – (120)Fair value adj re land 1,000 1,000 –Fair value adj contingent liability – (300) 300

18,180 17,500 680

(3) Goodwill – Scalpay Ltd

CU'000Cost of investment 20,000Less Share of net assets acquired (75% 17,500 (W2)) (13,125)


6,775

(4) Minority interest – Scalpay Ltd



CU'000Harris Ltd 6,000Add Dividends receivable from Scalpay Ltd (75% 200) 150

Professional fees 80Contingent asset 200

6,430Scalpay Ltd (75% 680 (W2)) 510

Auskerry Ltd (30% 150 (W7)) 45Less Goodwill impairment to date (100)

6,885

(6) PURP

(7) Investments in associates – Auskerry Ltd

CU'000Cost of investment 4,000Professional fees 80

4,080Share of post acquisition profits (3/12 600 = 150 30%) 45

4,125

% CU'000SP (800 ¾) 125 600Cost (100) (480)GP 25 120



37 Lowland Ltd

Marking guide

Marks

CISRevenue 1Cost of sales 1Operating expenses 3Finance cost 1½Investment income 2Tax ½Minority interest 1

Presentation 1CSCE

Profit for period ½Dividends 1Arising on acquisition 2½Brought forward 3

Presentation 1Other workings

Freehold PURP (W4) 2½Depreciation adjustment (W5) 1Interest on loan stock (W6) 1


Consolidated income statement for the year ended 31 March 20X8

CU'000Revenue (W2) 8,970Cost of sales (W2) (6,240)Gross profit 2,730Net operating expenses (W2) (1,816)Finance cost (W2) (50)Investment income (W2) 140Profit before tax 1,004Income tax expense (W2) (350)Profit after tax 654

Attributable to equity holders of Lowland Ltd () 680Minority interest (W3) (26)

654

ANSWER BANK


Consolidated statement of changes in equity for the year ended 31 March 20X8 (extract)

Retained Minorityearnings interest

CU'000 CU'000Profit/(loss) for the period 680 (26)Interim dividends on ordinary shares (50 20%) (200) (10)

480 (36)Arising on acquisition of subsidiary (W9) – 613Balance brought forward (W7 and W8) 452 808Balance carried forward 932 1,385

WORKINGS

(1) Group structure

Lowland Ltd

Aviemore Ltd Buchan Ltd

65% 4/12 (30 November 20X7)80%

(2) Consolidation schedule

Lowland Aviemore BuchanLtd Ltd Ltd 4/12

Adj Consol

CU'000 CU'000 CU'000 CU'000 CU'000Revenue 5,000 3,000 970 8,970C of S (3,000) (2,300) (940) (6,240)Op expensesPer question (1,000) (500) (50) 85PURP (W4) (64)Depn adj (W5) (5)Impairment of GW (180 + 102) (282) (1,816)Finance cost (W6) (50) (70) 70 (50)Inv incomePer question (230 – (80% 50)) 190 (85)Accrued loan stock interest(W6)

105 (70) 140

Tax (300) (50) (350)PAT/(loss) 36 (95)


CU'000Aviemore Ltd (20% 36 (W2)) 7

Buchan Ltd (35% (95) (W2)) (33)(26)

Tutorial note

A share of the loss for the year in Buchan Ltd can be allocated to the minority only because overall BuchanLtd has net assets. If Buchan Ltd were to have net liabilities overall, the minority could only be allocatedtheir share of those net liabilities if they were to have a binding obligation to make an additional investmentover the losses, and are able to do so.



(4) PURP on freehold property – Aviemore Ltd

CU'000 CU'000 CU'000(i) Profit on sale

Proceeds 800Less Carrying amount of land and property

at disposalLand 100Property

Cost 800

Less Accum depn (50

800 10 yrs) (160)

640 (740)60

(ii) Depreciation adjustmentAnnual depreciationWithout transfer (800 50) 16

Actual depreciation with transfer ((800 – 300) 40) (12)4

64

(5) Depreciation adjustment – Buchan Ltd

CU'000

Fair value adjustment

years10

350)(500 4/12 5

(6) Interest on loan stock

Loan of CU2.1m with interest @ 10%

CU'000Annual interest 210,000Split Pre-acq 8/12 140,000

Post-acq 4/12 70,000

Lowland Ltd has accounted for six months only = CU105,000 (6/12 210,000)

Adjustment

(i) Include CU105,000 in Lowland Ltd

(ii) Remove CU70,000 as post-acq intra-group transaction


CU'000Lowland Ltd 1,500Aviemore Ltd (80% (240 – 200)) 32Buchan Ltd –

Impairment of goodwill (1,080)452

(8) Minority interest b/f – Aviemore Ltd

CU'000Share capital 3,800Retained earnings b/f 240Net assets b/f 4,040

20% 808

ANSWER BANK


(9) Minority interest arising on acquisition of subsidiary – Buchan Ltd

CU'000 CU'000Share capital 1,200Retained earnings at 1 April 20X7 580Loss to date of acquisition (400 – 580) (180)

400Fair value adjustment (500 – 350) 150

1,750

35% 613

Tutorial note

It would be possible to accrue two months' loan stock interest for Lowland Ltd (CU35,000) for pre-acquisition interest, instead of per W6.

38 Vanguard Ltd

Marking guide

Marks

(a) CISRevenue 1Cost of sales 2Operating expenses 1Finance cost ½Investment income 1½Share of profits of associates 1Tax ½Minority interest ½

Presentation 1CSCE

Profit for period ½Dividends ½Brought forward 4

Presentation ½Other workings

PURP (W4) 2Intangible amortisation (W5) 1


(b) Cost of acquisition ½Share of fair value of net assets acquired 1Accumulated impairment losses ½Total available 2Maximum 2

18



(a) Consolidated income statement for the year ended 31 March 20X4

CURevenue (W2) 600,052Cost of sales (W2) (428,734)Gross profit 171,318Net operating expenses (W2) (113,417)Profit from operations 57,901Finance cost (W2) (3,801)Investment income (W2) 9,636Share of profit of associates (W6) 1,950Profit before tax 65,686Income tax expense (W2) (22,735)Profit for period 42,951

Attributable to equity holders of Vanguard Ltd () 36,673Minority interest (W3) 6,278

42,951

Consolidated statement of changes in equity for the year ended 31 March 20X4 (extract)

Retainedearnings

CUProfit for the period 36,673Interim dividends on ordinary shares (9,000)

27,673Balance brought forward (W7) 667,657Balance carried forward (W9) 695,330

(b) Carrying amount of goodwill re Formidable Ltd

CUCost of acquisition 415,000Less Share of fair value of net assets acquired (75% (485,000 + 15,000)) (375,000)

40,000Less Accumulated impairment losses (12,000 + 4,000) (16,000)Goodwill in consolidated balance sheet 24,000

WORKINGS

(1) Group structure

Vanguard Ltd

75% 45%

Formidable Ltd Albion Ltd

ANSWER BANK



Vanguard FormidableLtd Ltd Adj ConsolCU CU CU CU

Revenue 346,932 289,028 (35,908) 600,052C of SPer question (261,023) (202,319) 35,908PURP (W4) (550)Amortisation of intangibles (W5) (750) (428,734)Op expensesPer question (53,811) (55,606)Impairment loss (current year) (4,000) (113,417)Finance cost (2,301) (1,500) (3,801)Investment income (W8) 6,394 3,242 9,636Tax (15,753) (6,982) (22,735)

PAT 25,113


CUFormidable Ltd (25% 25,113 (W2)) 6,278

(4) PURP

Opening Closinginventories inventories Movement

% CU CU CUSP 125 5,600 8,350Cost (100) (4,480) (6,680)GP 25 1,120 1,670 550

(5) Intangible amortisation

CUIntangible – FV adjustment 15,000Amortisation b/f (15,000 3/20) (2,250)

12,750Amortisation in current year (15,000 1/20) (750)Intangible c/f 12,000

(6) Share of profit of associates

CUShare of profit after tax (45% 7,110) 3,200Less Current year impairment loss (1,250)

1,950


CUVanguard Ltd 539,260Formidable Ltd (75% (327,530 – 150,000 – 2,250 (W5))) 131,460

Albion Ltd (45% (25,850 – 3,500)) 10,057Less Impairment losses (12,000)PURP on opening inventories (W4) (1,120)

667,657

(8) Non-group investment income in Vanguard Ltd

CUTotal per income statement 24,244Less From Formidable Ltd (20,500 75%) (15,375)

From Albion Ltd (5,500 45%) (2,475)6,394



(9) Proof of retained earnings c/f (for tutorial purposes only)

CUVanguard Ltd 568,548Formidable Ltd (75% (332,893 – 150,000 – 3,000 (W5))) 134,920

Albion Ltd (45% (27,460 – 3,500)) 10,782Less Goodwill impairment to date (12,000 + 4,000 + 1,250) (17,250)

PURP on closing inventories (W4) (1,670)695,330

39 Heaton Ltd

Marking guide

Marks

(a) Revenue 1½Cost of sales 3Expenses ½Finance cost ½Share of profit of associates 1½Tax ½Minority interest ½Presentation 1Total available 9Maximum 8

(b) Profit for period ½Dividends 1Brought forward 4Total available 5½Maximum 5

(c) Consolidation as if single entity 1Represents substance not legal form 1Substance is that shareholders invest in subsidiaries via parent

therefore interested in whole group 1Total available 3Maximum 2

15

(a) Consolidated income statement for the year ended 31 March 20X4

CU'000Revenue (W2) 35,900Cost of sales (W2) (27,510)Gross profit 8,390Expenses (W2) (3,570)Profit from operations 4,820Finance cost (W2) (270)Share of profits of associates (W5) 115Profit before tax 4,665Income tax expense (W2) (1,880)Profit for period 2,785

Attributable to equity holders of Heaton Ltd () 2,539Minority interest (W3) 246

2,785

ANSWER BANK


(b) Statement of changes in equity for the year ended 31 March 20X4 (extract)


CU'000 CU'000Profit for the period (part (a)) 2,539 246Dividends (400 20%) (1,000) (80)

1,539 166Balance brought forward (W6 and W7) 5,130 1,520Balance carried forward (W9) and (20% 8,430 (W8)) 6,669 1,686

(c) The single entity concept

Group financial statements consolidate the results and net assets of group members to present thefinancial statements as if the group were a single economic entity.

This represents the economic substance of the group and contrasts with the legal form, where eachcompany is a separate legal entity.

However, in substance, the shareholders of the parent company are investing in the subsidiariesthrough their investment in the parent company, and as such are interested in the financialperformance and position of all members of the group.

WORKINGS

(1) Group structure

Heaton Ltd

80%

30% (6/12 incl)

Ardwick LtdSharston Ltd


Heaton SharstonLtd Ltd Consol

CU'000 CU'000 CU'000Revenue 23,700 12,500Adjustment re Ardwick Ltd's inventory (2,000 50% 30%) (300) 35,900Cost of salesPer question (17,580) (9,770)Adjustment re Ardwick Ltd's inventory (300 100/125) 240Depn adj (W4) (100)Subsid goodwill impairment – current year (300) (27,510)Expenses (2,870) (700) (3,570)Finance cost (220) (50) (270)Tax (1,230) (650) (1,880)

1,230

(3) Minority interestCU'000

Share of profit after tax (20% 1,230 (W2)) 246



(4) Depreciation adjustment

The fair value adjustment needs to be depreciated. The uplift is CU500,000 so the depreciation isCU100,000 per annum. At the start of the year the accumulated depreciation is CU100,000 (500,000

1/5) and it will be CU200,000 (500,000 2/5) at the end of the year.

(5) Share of profits of associatesCU'000

Share of profit after tax (6/12 900 30%) 135Less Impairment losses (20)

115

(6) Retained earnings b/fCU'000

Heaton Ltd 4,250Sharston Ltd (80% (2,200 – 100 (W4) – 625) 1,180Impairment of goodwill b/f (300)

5,130

(7) Minority interest b/f

CU'000Share capital 5,000Retained earnings 2,200Fair value adjustment (W4) 400Net assets 7,600

20% 1,520

(8) Net assets

Balancesheet date Acquisition Post acqCU'000 CU'000 CU'000

Sharston LtdShare capital 5,000 5,000 –Retained earnings – per question 3,130 625 2,505Fair value adj (W4) 300 500 (200)

8,430 6,125 2,305Ardwick LtdShare capital 4,000 4,000 –Retained earnings – per question 2,350 1,900 450

6,350 5,900 450

The retained earnings of Ardwick Ltd at the date of acquisition are the retained earnings at the year

end less six months' profit for the year on a pro-rata basis (2,350 – (6/12 900)).


CU'000Heaton Ltd (5,370 – 300 + 240) 5,310Sharston Ltd (80% 2,305 (W8)) 1,844

Ardwick Ltd (30% 450 (W8)) 135Impairment of goodwill (300 + 300 + 20) (620)

6,669

ANSWER BANK


40 Jerome Ltd

Marking guide

Marks

(a) Revenue ½Cost of sales ½Distribution cost ½Administrative expenses 2Finance cost 1Investment income 1½Share of profit of associates 1½Tax ½Minority interest ½Presentation 1Group structure (W1) ½Total available 10Maximum 9

(b) Profit for period ½Dividends ½Brought forward 5Presentation ½Total available 6½Maximum 6

(c) Cost of investment ½Share of post acquisition change in net assets 1Impairment to date ½Total available 2Maximum 2

17

(a) Consolidated income statement for the year ended 31 December 20X7

CU'000Revenue (W2) 5,768Cost of sales (W2) (3,215)Gross profit 2,553Distribution costs (W2) (305)Administrative expenses (W2) (337)Profit from operations 1,911Finance cost (W2) (55)Investment income (W2) 85Share of profit of associates (W5) 21Profit before tax 1,962Income tax expense (W2) (490)Profit for period 1,472

Attributable to equity holders of Jerome Ltd () 1,372Minority interest (W3) 100

1,472



(b) Consolidated statement of changes in equity for the year ended 31 December 20X7(extract)

Retainedearnings

CU'000Profit for the period (from (a)) 1,372Final dividends on ordinary shares (200)

1,172Balance brought forward (W8) 14,701Balance carried forward (W10) 15,873

(c) Carrying amount of investment in Harris Ltd in consolidated balance sheet at31 December 20X7

CU'000Cost of investment 4,000Share of post acquisition change in net assets (W5) 52


4,021

WORKINGS

(1) Group structure

500

400= 80%

Jerome plc

George Ltd Harris Ltd

100

40= 40% on 1 July 20X7 6

/12 incl500

400= 80%


Jerome GeorgeLtd Ltd Adj Consol

CU'000 CU'000 CU'000 CU'000Revenue 3,268 2,500 5,768C of S (1,840) (1,375) (3,215)Distribution costs (115) (190) (305)Administrative expensesPer question (93) (245)Depn adj on NCA (W4) 1 (337)Finance cost (50) (15) 10 (W7) (55)Investment income (W6) 95 (10)(W7) 85Tax (315) (175) (490)PAT 501


CU'000George Ltd (501 (W2) 20%) 100

ANSWER BANK


(4) Depreciation adjustment to non-current asset transferred

CU'000Depreciation without transfer (30 10) 3

Depreciation with transfer (28 7) 4Excess depreciation in year to be eliminated 1

Carrying amount at 31 December 20X6 without transfer (30 6/10) 18

Carrying amount at 31 December 20X6 with transfer (28 6/7) 24(6)

Carrying amount at 31 December 20X7 without transfer (30 5/10) 15

Carrying amount at 31 December 20X7 with transfer (28 5/7) 20(5)

(5) Share of profits of associates – Harris Ltd

CU'000Share of profit after tax (260 x 6/12 40%) 52Less Impairment losses (31)

21

(6) Investment income – Jerome Ltd

CU'000Per question 335Less Dividends received from George Ltd (300 80%) (240)

95

(7) Intra group investment income/finance cost

CU'000Loan to George Ltd (100 10%) 10


CU'000Jerome Ltd 5,310George Ltd (80% (12,520 – 775 (W9) – 6 (W4))) 9,391

14,701

(9) Retained earnings on acquisition – George Ltd

CU'000Cost of investment 1,820Less Share capital (80% 500) (400)Goodwill (800)80% of retained earnings 620

100/80 775


CU'000Jerome Ltd 6,300George Ltd (80% (12,720 – 775 (W9) – 5 (W4))) 9,552Harris Ltd (W5) 21

15,873



41 Hardmead Ltd

Marking guide

Marks

(a) Revenue 1Cost of sales 5Operating expenses 1Tax ½Loss from discontinued operations 5Minority interest 1Profit split ½Presentation 1Total available 15Maximum 14

(b) Profit for period ½Dividends 1Eliminated on disposal 1Brought forward 5Presentation ½Total available 8Maximum 7

(c) Mark each point per answer ½Total available 2½Maximum 2

23

(a) Consolidated income statement for the year ended 30 September 20X5

Continuing operations CU'000Revenue (W2) 17,360Cost of sales (W2) (15,640)Gross profit 1,720Operating expenses (W2) (850)Profit before tax 870Income tax expense (W2) (460)Profit for period from continuing operations 410Discontinued operationsLoss for the period from discontinued operations (160 (W4) – 446 (W6)) (286)Profit for the period 124

Attributable toEquity holders of Hardmead Ltd () 50Minority interest (W3) 74

124

ANSWER BANK


(b) Consolidated statement of changes in equity for the year ended 30 September 20X5(extracts)


CU'000 CU'000Profit for the period 50 74Dividends on ordinary shares (100 20%) (600) (20)Eliminated on disposal of subsidiary (W12) – (2,064)

(550) (2,010)Balance brought forward (W9 & W11) 2,090 3,490Balance carried forward (W10 & W13) 1,540 1,480

(c) Underlying principles re disposal

The concept of control is an example of the substance over form concept. The subsidiary isconsolidated whilst it is under the control of the parent.

Therefore 100% of the results of Stratford Ltd are consolidated until the date on which control isrelinquished.

40% of the results for the first six months are acknowledged as belonging to the minority interestwhich is consistent with the concept of ownership.

The loss on disposal is based upon the net assets of Stratford Ltd at the date of disposal.

The loss on disposal includes any unimpaired goodwill, since this asset is also disposed of eventhough it is not recognised in Stratford Ltd's own balance sheet.

WORKINGS

(1) Group structureHardmead Ltd

Stony Ltd Stratford Ltd

60% Disposed of 31 March 20X5 (6/12 incl)80%

(2) Consolidation schedule for continuing operations

Hardmead StonyLtd Ltd Adjs Total

CU'000 CU'000 CU'000 CU'000Revenue 10,040 7,500 (180) 17,360Cost of salesPer question (8,760) (6,900) 180 (15,640)Inventory NRV adj (W8) (90)PURP (W7) (20)Fair value adj (200/4) (50)Operating expensesPer question (400) (420) (850)Impairment loss (30)Tax (400) (60) (460)PAT 50


CU'000Stony Ltd (20% 50 (W2)) 10

Stratford Ltd (40% 160 (W4)) 6474



(4) Profit for Stratford Ltd for year to disposal

CU'000PAT = 320 6/12 = 160

(5) Goodwill – Stratford Ltd

CU'000 CU'000Cost of investment 4,000Less Share of fair value of net assets acquired

Share capital 3,000Retained earnings 3,000

6,000 60% (3,600)Goodwill 400Impairment brought forward (50)Goodwill at date of disposal 350

(6) Group loss on disposal of Stratford Ltd

CU'000 CU'000Sales proceeds 3,000Less Share of net assets at disposal

Share capital 3,000Retained earnings (2,000 + 160 (W4)) 2,160

5,160 60% (3,096)(96)

Less Carrying amount of goodwill at disposal (W5) (350)Loss on disposal (446)

(7) PURP

% CU'000SP 150 (180 1/3) 60Cost (100) (40)GP 50 20

(8) Inventory NRV adjustmentCU'000

Contract (2 70) 140

Remainder ((5 – 2) (120 – 30)) 270410

Current carrying amount (5 100) 500Provision needed 90

(9) Consolidated retained earnings brought forwardCU'000

Hardmead Ltd – per question 2,500Stony Ltd (80% (6,400 – 6,000 + 200 – 150)) 360

Stratford Ltd (60% (2,000 – 3,000)) (600)Impairment (120 + 50) (170)

2,090

(10) Consolidated retained earnings carried forward (for tutorial purposes only)

CU'000Hardmead Ltd – per question 2,460NRV adjustment (W8) (90)Loss on investment (4,000 – 3,000) (1,000)Stony Ltd (80% (6,420 – 6,000 + 200 – 200 – 20)) 320Impairment (120 + 30) (150)

1,540

ANSWER BANK


(11) Minority interest brought forward

CU'000Stony Ltd ((1,000 + 6,400 + 200 – 150) 20%) 1,490

Stratford Ltd ((3,000 + 2,000) 40%) 2,0003,490

(12) Minority interest eliminated on disposal of Stratford Ltd

CU'000Brought forward (W11) 2,000MI in profit of year (W3) 64

2,064

(13) Minority interest carried forward (for tutorial purposes only) – Stony Ltd

CU'000Brought forward (W11) 1,490In year (W3) 10Less Dividends to MI in year (20)

1,480

42 Tain Ltd

Marking guide

Marks

CISRevenue 1Cost of sales 2Operating expenses ½Share of profits of associate 1½Tax ½Profit from discontinued operations 5Minority interest 1Profit split ½

Presentation 1½Group structure ½CSCE

Profit for period ½Dividends ½Brought forward 3½

Presentation ½Total available 19Maximum 18



Consolidated income statement for the year ended 31 October 20X9

CU'000Continuing operationsRevenue (W2) 14,800Cost of sales (W2) (10,470)Gross profit 4,330Operating expenses (W2) (2,400)Share of profit of associates (W9) 71Profit before tax 2,001Tax (W2) (600)Profit for the period from continuing operations 1,401Discontinued operationsProfit for the period from discontinued operations (620 (W4) + 526 (W6)) 1,146Profit for the period 2,547Attributable to equity holders of Tain Ltd (balancing figure) 2,196Minority interest (W3) 351

2,547

Consolidated statement of changes in equity for the year ended 31 October 20X9 (extract)

Ordinaryshare Retainedcapital earnings Total

CU'000 CU'000 CU'000Profit for the period – 2,196 2,196Dividends – (700) (700)

– 1,496 1,496Balance brought forward (W8) 5,000 2,488 7,488Balance carried forward 5,000 3,984 8,984

WORKINGS

(1) Group structure

Tain Ltd

Banchory LtdDisposed of 31October 20X9

( 1212

incl)

Domoch LtdNairn LtdAcq 1 May 20X9

(612

incl)

55%

30%75%

ANSWER BANK



Tain DornochLtd Ltd Adj Consol

CU'000 CU'000 CU'000 CU'000Revenue 10,600 4,700 (500) 14,800Cost of salesPer Q (7,400) (3,520) 500 (10,470)PURP (W7) (50)Operating expenses (1,700) (700) (2,400)Tax (460) (140) (600)PAT 290


CU'000Dornoch Ltd (25% 290 (W2)) 72

Banchory Ltd (45% 620 (W4)) 279351

(4) Profit of Banchory Ltd for year to disposal

CU'000PAT = 620 12/12 620

(5) Goodwill

Banchory Ltd CU'000 CU'000Cost of investment 2,500Less Share of fair value of net assets acquiredShare capital 2,000Retained earnings 1,600Revaluation reserve 300

3,900 55% (2,145)Goodwill 355Impairment brought forward (142)Goodwill at date of disposal 213

(6) Group profit on disposal of Banchory Ltd

CU'000 CU'000Sales proceeds 3,500Less Share of net assets at disposal

Share capital 2,000Revaluation reserve 400Retained earnings (2,000 + 620) 2,620

5,020 55% (2,761)739

Less Carrying amount of goodwill at disposal (W5) (213)Profit on disposal 526

(7) PURP% CU'000

SP 1331/3 200Cost (100) (150)GP 331/3 50


CU'000Tain Ltd 2,356Banchory Ltd ((2,000 – 1,600) 55%) 220

Dornoch Ltd ((152 – 80) 75%) 54Less Goodwill impairment to date (Banchory Ltd) (142)

2,488



(9) Share of profits of associates

CU'000Share of profit after tax (30% 600 6/12) 90Less Impairment loss (19)

71

43 Glencoe Ltd

Marking guide

Marks

CIS

Revenue ½Cost of sales ½Operating expenses 1Profit on sale of interest in subsidiary 2½Tax ½Profit from discontinued operations 4½Minority interest 1

Presentation 1Group structure ½CBS

PPE ½Current assets ½Share capital ½Retained earnings 3Minority interest ½Current liabilities ½


ANSWER BANK


Consolidated income statement for the year ended 31 August 20Y0

Continuing operations CU'000Revenue (W2) 61,000Cost of sales (W2) (39,000)Gross profit 22,000Operating expenses (W2) (12,200)Operating profit 9,800Profit on sale of interest in subsidiary (W9) 1,220Profit before tax 11,020Income tax expense (W2) (3,100)Profit for the period from continuing operations 7,920

Discontinued operationsProfit for the period from discontinued operations(2,625 (W3) + 1,516 (W4)) 4,141Profit for the period 12,061

Attributable to equity holders of Glencoe Ltd () 11,236Minority interest (W6) 825

12,061

Balance sheet as at 31 August 20Y0 CU'000ASSETSNon-current assets

Property, plant and equipment (29,500 + 3,500) 33,000Current assets (36,000 + 5,900) 41,900Total assets 74,900

EQUITY AND LIABILITIESCapital and reservesOrdinary share capital 35,000Retained earnings (W7) 23,620

Attributable to the equity holders of Glencoe Ltd 58,620Minority interest (W8) 2,080Equity 60,700Current liabilities (10,000 + 4,000 + 200) 14,200Total equity and liabilities 74,900

WORKINGS

(1) Group structure

75% 60%

Glencoe Ltd

Leven LtdRannoch Ltd

80% Sold 1 June 20Y0 (9/12 incl)(15% sold 31 August 20Y0)




Glencoe RannochLtd Ltd Consol

CU'000 CU'000 CU'000Revenue 50,000 11,000 61,000C of S (32,000) (7,000) (39,000)Op expenses – per question (10,000) (2,000)

– omitted invoices (200) (12,200)Tax (2,500) (600) (3,100)PAT 1,200

(3) Profit of Leven Ltd for year to disposal

CU'000PAT= 3,500 9/12 2,625

(4) Group profit on disposal of Leven Ltd

CU'000 CU'000Sales proceeds 14,000Less Share of net assets at date of disposal

At 1 September 20X9 (16,000 – 3,500) 12,500Add Profit to 1 June 20Y0 (W3) 2,625

15,125 80% (12,100)1,900

Less Carrying amount of goodwill at disposal (W5) (384)

Profit on disposal 1,516

(5) Goodwill on acquisition

Rannoch Ltd CU'000Cost 3,000Less Net assets acquired (4,000 75%) (3,000)

–

Leven Ltd CU'000Cost of investment 10,000Less Share of fair value of net assets acquired (11,700 80%) (9,360)

640Impairment brought forward (256)

384

(6) Minority interest – income statement

CU'000Leven Ltd (20% 2,625 (W3)) 525

Rannoch Ltd (25% 1,200 (W2)) 300825

(7) Consolidated retained earnings

CU'000Glencoe Ltd 17,500Profits on disposal omitted in error ((14,000 – 10,000) + (2,000 – (15/75 3,000))) 5,400

Rannoch Ltd (60% (1,400 – 200)) 72023,620

ANSWER BANK


(8) Minority interest – balance sheet

CU'000Rannoch Ltd ((5,400 – 200) 40%) 2,080

(9) Group profit on partial disposal of Rannoch Ltd

CU'000Sales proceeds 2,000Less Share of net assets at date of disposal disposed of ((5,400 – 200) 15%) (780)Less Carrying amount of goodwill at disposal (W5) –Profit on disposal 1,220

44 Herdings Ltd

Marking guide

Marks

(a) Sales proceeds ½Share of net assets disposed of 2Goodwill disposed of ½Total available 3Maximum 3

(b) CBSPPE 1½Intangibles 2Investments in associates 1Inventories 1½Trade receivables ½Cash and cash equivalents ½Ordinary share capital ½Retained earnings 2½Minority interest ½Bank debt ½Trade payables ½Taxation ½Provisions ½Dividends payable 1Other workings

Group structure (W1) ½Net assets (W2) 4


(c) Explanation of significant influence 1½Impact of third party holding 60% 1Conclusion ½Total available 3Maximum 2

23



(a) Group profit on disposal of shares in Sandygate Ltd

CU'000 CU'000Sales proceeds 3,500Less Share of net assets disposed of at date of disposal

Net assets at 31 March 20X3 18,200Fair value adjustment (2,000 8/10) 1,600Add back Dividend 200Less Profit for 6 months (3,000 6/12) (1,500)

18,500 10% (1,850)

1,650Less Carrying amount of goodwill on disposal relating to shares disposed of (W3) (600)

1,050

(b) Consolidated balance sheet as at 31 March 20X3


Property, plant and equipment (13,100 + 16,400 + 1,600 (W7)) 31,100Intangibles (W3) 4,200Investments in associates (W8) 6,600


Inventories (8,100 + 5,230 – 150 (W6)) 13,180Trade receivables (6,850 + 4,950) 11,800Cash and cash equivalents (3,750 + 150) 3,900


EQUITY AND LIABILITIESCapital and reservesOrdinary share capital 12,000Retained earnings (W5) 10,865

Attributable to equity holders of Herdings Ltd 22,865Minority interest (W4) 5,865Equity 28,730Non-current liabilities

7% secured bank debt (26,000 + 2,000) 28,000Current liabilities

Trade payables (5,560 + 5,450) 11,010Taxation (1,700 + 880) 2,580Provisions 100Dividends payable (300 + (200 – 140)(W5)) 360


(c) Classification of investment in Abbeydale Ltd

The key issue in defining an associate in BAS 28 Investments in Associates is whether an investor hassignificant influence over the investee. Significant influence is the power to participate in the financialand operating policy decisions of the investee but is not control over those policies. If the investorholds 20% or more of the voting power, it is presumed that it does have significant influence.

The third party owning 60% appears to have control and has the power to govern the financial andoperating policies of Abbeydale Ltd. If one party has control and can govern those policies, it isreasonable to question whether another investor could ever have significant influence.

However, BAS 28 states that this does not necessarily preclude another investor from havingsignificant influence. The 20% test is not definitive, and the investor should consider other evidencesuch as board representation.

ANSWER BANK


WORKINGS

(1) Group structure

Herdings Ltd

Sandygate LtdAbbeydale Ltd

70%10,000

7,000

30% =5,000

1,500on 1 October 20X2 (6/12 incl)

80%10,000

8,000

(2) Net assets

Balance sheet date Acquisition Post acqSandygate Ltd CU'000 CU'000 CU'000 CU'000Share capital 10,000 10,000 –Retained earningsPer question 8,200PURP (W6) (150)Depreciation adjustment (W7) (400)

7,650 5,000 2,650Fair value adjustmentsPPE (W7) 2,000 2,000 –Contingent liability (100) (100) –

19,550 16,900 2,650Abbeydale LtdShare capital 5,000 5,000Retained earnings 9,000 7,000 * 2,000

14,000 12,000 2,000

* The retained earnings of Abbeydale Ltd at the date of acquisition are the retained earnings as at the

year end less six months' profit for the year on a pro-rata basis (i.e. 9,000,000 – (6/12 4,000,000)).

(3) Goodwill – Sandygate Ltd

CU'000Cost of original investment (8,000 CU2.50) 20,000

Less Share of fair value of net assets acquired (80% 16,900 (W2)) (13,520)6,480

Impairment to 31 March 20X2 (1,680)Balance at disposal 4,800Less Disposed of (1/8) (600)Balance c/f 4,200

(4) Minority interest – Sandygate Ltd



CU'000Herdings Ltd 9,740Add Dividend not recorded (70% 200) 140

9,880Sandygate Ltd (70% 2,650 (W2)) 1,855

Abbeydale Ltd (30% 2,000 (W2)) 600

Less Goodwill impairment to date on shares retained (1,680 7/8) (1,470)10,865



(6) PURP

% CU'000SP (3,300 ½) 110 1,650Cost (100) (1,500)GP 10 150

(7) Fair value adjustment – PPE

At acquisition the PPE needs revaluing upwards by CU2,000,000. The additional depreciation to datewill be for two years.

CU'000Accumulated depreciation = 2/10 2,000,000 400Net adjustment to PPE 1,600

(8) Investments in associates

CU'000Cost 6,000Share of post acquisition change in net assets (30% 2,000 (W2)) 600

6,600

45 Camden Ltd

Marking guide

Marks

(a) CISRevenue 1½Cost of sales and expenses 3½Profit on sale of interest in subsidiary 4½Share of profits of associate 1½Tax 1Minority interest 1Split of profit ½

Presentation 1Group structure ½CSCE

Profit for period ½Dividends 1½Added on acquisition 1½Eliminated on disposal 2Brought forward 1½


(b) Cost ½Share of post-acquisition change in net assets 1½Total available 2Maximum 2

(c) Consolidation of Kentish Ltd 1½Dividends received by Camden Ltd 2½Intra group trading 1½Unrealised profit in inventories 2Total available 7½Maximum 6

30

ANSWER BANK


(a) Consolidated income statement for the year ended 30 September 20X5

CU'000Revenue (W2) 240,955Cost of sales and expenses (W2) (215,668)Profit on sale of interest in subsidiary (W10) 229Share of profits of associate (W7) 560Profit before tax 26,076Income tax expense (W2) (9,030)Profit for the period 17,046

Attributable to equity holders of Camden Ltd () 14,413Minority interest (W4) 2,633

17,046

Consolidated statement of changes in equity for the year ended 30 September 20X5(extracts)


CU'000 CU'000Net profit for the period 14,413 2,633Interim dividends on ordinary shares (W5) (2,820) (1,078)Added on acquisition of subsidiary (W6) – 2,080Eliminated on disposal of subsidiary (W8) – (5,141)

11,593 (1,506)Balance brought forward (11,820 + (60% (8,210 – 450))) (W8) 16,476 3,884Balance carried forward 28,069 2,378

(b) Carrying amount of Tufnell Ltd in consolidated balance sheet as at 30 September 20X5

CU'000Cost (3,000 30/60) 1,500

Share of post acquisition change in net assets (30% (8,210 + 7,470 – 2,460 – 450)) 3,8315,331

(c) Explanation of accounting treatment

(i) Consolidation of Kentish Ltd

As Camden Ltd acquired 72% of Kentish Ltd on 1 March 20X5, it is on this date thatCamden Ltd gains control, and from this date that 100% of Kentish Ltd's costs and revenuesshould be taken into the consolidated income statement, as Camden Ltd controls thewhole of Kentish Ltd.

Therefore the consolidated income statement includes seven months of the results ofKentish Ltd.

28% of Kentish Ltd is later appropriated to the minority interest because this is theproportion not owned by Camden Ltd.

(ii) Dividends received by Camden Ltd

The dividend income from subsidiaries in Camden Ltd's own income statement should beignored on consolidation and 'replaced' with the results of the subsidiaries line-by-line.

This is because under the single entity concept Camden Ltd controls the subsidiaries andtherefore controls the entire results made, not just those distributed as dividends.

As the results should be brought in, the intra-group dividends received should beeliminated, to avoid double counting.



(iii) Intra-group trading

Any trade between members of the group should be eliminated on consolidation.

This is because under the single entity concept a group cannot sell to/buy from itself;therefore the sales by Camden Ltd to both subsidiaries must be cancelled by eliminating thesale in the books of Camden Ltd and the purchases in the books of the subsidiaries.

(iv) Unrealised profits in inventories

Under the single entity concept, no sale of goods has been made until they are sold outsidethe group.

Prior to that time, any profit created by intra-group transactions should not be recognised.

Inventories should be valued at the lower of cost and net realisable value to the group – in

this case the price paid by Camden Ltd, i.e. CU192,000 (240,000 80%).

By eliminating the unrealised profit, the closing inventories in the income statement (withincost of sales) are reduced to their cost to the group.

WORKINGS

(1) Group structure

Kentish Ltd Tufnell Ltd

60% 30% (on 30 June 20X5 9/12 incl)

Camden Ltd

(Acq 1 March 20X5 7/12 incl) 72%


Camden Kentish TufnellLtd Ltd Ltd Adj Consol

7/129/12

CU'000 CU'000 CU'000 CU'000 CU'000(240)

Revenue 151,360 18,900 71,280 (345) 240,955C of S and expenses

240Per Q (134,904) (16,771) (62,812) 345Divs received from

Kentish Ltd (72% 336) (242)

Tufnell Ltd (60% 2,460) (1,476)PURP (W3) (48) (215,668)Tax (5,436) (729) (2,865) (9,030)PAT 1,400 5,603

(3) PURP

% CU'000SP 100 240Cost (80) (192)GP 20 48

ANSWER BANK


(4) Minority interest in profit for the year

CU'000Kentish Ltd (28% 1,400 (W2)) 392

Tufnell Ltd (40% 5,603 (W2)) 2,241Cost 2,633

(5) Dividends to minority

CU'000Kentish Ltd (28% 336) 94

Tufnell Ltd (40% 2,460) 9841,078

(6) Minority interest added on acquisition

CU'000Kentish Ltd (28% (1,000 + 5,430 + (5/12 2,400)) 2,080

(7) Share of profits of associate

CU'000Share of profit after tax (30% 7,470 3/12) 560

(8) Minority interest eliminated on disposal

CU'000MI brought forward (40% (8,210 + 1,500)) 3,884MI for year (W4) 2,241Less Dividend paid to MI (W5) (984)

5,141

(9) Minority interest carried forward (for tutorial purposes only)

CU'000Kentish Ltd (28% (1,000 + 5,430 + 2,400 – 336) 2,378

(10) Group profit on part disposal of Tufnell Ltd

CU'000 CU'000Sales proceeds 5,000Less Share of net assets disposed of at date of disposal

Net assets at 1 October 20X4 (1,500 + 8,210) 9,710Profit to 30 June 20X5 (7,470 9/12) 5,603Dividends paid (2,460)

12,853 30% (3,856)1,144

Less Carrying amount of goodwill on disposal relating to sharesCost 3,000

Share of fair value of net assets acquired (60% (1,500 + 450)) (1,170)Original goodwill 1,830Now disposed of 30/60 (915)

229



46 Gallant Ltd

Marking guide

Marks

Cash flow statementInterest paid ½Income tax paid 1Purchase of PPE 3Proceeds from sales of PPE ½Dividends from associates 1½Proceeds from issue of ordinary shares 2Payment of finance lease liabilities ½Dividends paid to MI 1½Dividends paid 1½Opening and closing cash ½

Presentation 1Reconciliation

Each item ½ mark (max 4½) 4½Total available 18Maximum 17

Consolidated cash flow statement for the year ended 31 December 20X7


Cash generated from operations (see Note) 2,464,800Interest paid (75,000)Income tax paid (W2) (370,000)

Net cash from operating activities 2,019,800Cash flows from investing activities

Purchase of property, plant and equipment (W5) (2,360,700)Proceeds from sale of property, plant and equipment 800,000Dividends received from associates (W1) 228,700

Net cash used in investing activities (1,332,000)Cash flows from financing activities

Proceeds from issue of ordinary share capital (W8) 850,000Payment of finance lease liabilities (100,000 – 75,000) (25,000)Dividends paid to minority interests (W4) (949,100)Dividends paid (W7) (553,200)

Net cash used in financing activities (677,300)Net increase in cash and cash equivalents 10,500Cash and cash equivalents at beginning of period 20,200Cash and cash equivalents at end of period 30,700

ANSWER BANK



CUProfit before tax 1,384,700Share of profits from associates (345,600)Finance charge 75,000Depreciation charge 970,600Impairment losses (540,500 – 420,000) 120,500Profit on disposal of property, plant and equipment (800,000 – 760,500) (39,500)Decrease in inventories (865,100 – 670,500) 194,600Increase in trade and other receivables (269,000 – 244,500) (24,500)Increase in trade and other payables (768,500 – 639,500) 129,000Cash generated from operations 2,464,800

WORKINGS

(1) INVESTMENTS IN ASSOCIATES

CU CUB/d 1,678,900 Cash () 228,700Share of profits (IS) 345,600 C/d 1,795,800

2,024,500 2,024,500

(2) INCOME TAX

CU CUCash () 370,000 B/d 360,000C/d 410,000 IS 420,000

780,000 780,000


CU CUDividends 653,200 B/d 1,393,100C/d 1,357,800 IS 617,900

2,011,000 2,011,000

(4) MINORITY INTEREST

CU CUCash () 949,100 B/d 2,948,200C/d 2,345,900 IS 346,800

3,295,000 3,295,000

(5) PPE

CU CUB/d 7,078,400 Disposals 760,500Leased assets IS – Depn charges 970,600(376,000 + 124,000 + 25,000) 525,000Additions () 2,360,700 C/d 8,396,200Revaluation (W6) 163,200

10,127,300 10,127,300




CU CUB/d 236,800

C/d 400,000 PPE () 163,200400,000 400,000

(7) DIVIDENDS (GALLANT LTD)

CU CUCash () 553,200 B/d 400,000C/d 500,000 SCE (W3) 653,200

1,053,200 1,053,200


CU CUB/d (2,400,000 + 2,050,000) 4,450,000

Bonus issue 800,000 Bonus Issue (2,400,000 3) 800,000C/d (4,000,000 + 1,300,000) 5,300,000 Cash () 850,000

6,100,000 6,100,000

47 Slick Ltd

Marking guide

Marks

Cash flow statementInterest paid ½Income tax paid 1½Acquisition of subsidiary ½Purchase of PPE 2½Proceeds from sales of PPE ½Proceeds from issue of ordinary shares 1½Dividends paid to MI 2½Dividends paid 1Opening and closing cash ½


Inventories 1Trade and other receivables 1Trade and other payables 1Each other item ½ 2½

Note re acquisition of subEach item other than totals ½ mark (max 5) 5


ANSWER BANK


Consolidated cash flow statement for the year ended 30 June 20X7

CU'000 CU'000Cash flows from operating activities

Cash generated from operations (Note (1)) 413Interest paid (25)Income tax paid (W4) (79)

Net cash from operating activities 309Cash flows from investing activities

Acquisition of subsidiary Kay Ltd net of cash acquired (Note (2)) (89)Purchase of property, plant and equipment (W1) (722)Proceeds from sale of property, plant and equipment 420

Net cash used in investing activities (391)Cash flows from financing activities

Proceeds from issue of ordinary share capital (W2) 275Dividends paid to minority interests (W3) (207)Dividends paid (W5) (11)

Net cash from financing activities 57Net decrease in cash and cash equivalents (25)Cash and cash equivalents at beginning of period 35Cash and cash equivalents at end of period 10


(1) Reconciliation of loss before tax to cash generated from operations

CU'000Loss before tax (636)Finance charge 25Depreciation charge 657Amortisation charge (130 – 115) 15Loss on disposal of property, plant and equipment (500 – 420) 80Decrease in inventories (670 – 590 – 130) 50Decrease in trade and other receivables (520 – 610 – 200) 290Decrease in trade and other payables (521 – 489 – 100) (68)Cash generated from operations 413

(2) Acquisition of subsidiary

During the year the group acquired subsidiary Kay Ltd. The fair value of the assets acquired andliabilities assumed were as follows.

CU'000Property, plant and equipment (500 + 100) 600Inventories 130Trade and other receivables 200Cash and cash equivalents 50Trade and other payables (100)Taxation (50)Minority interest (W3) (166)

664Goodwill 100Total purchase price 764Less Cash and cash equivalents of Kay Ltd (50)

Non-cash consideration – shares issued (500 CU1.25) (625)Cash flow on acquisition net of cash acquired 89



WORKINGS

(1) PPE

CU'000 CU'000B/d 1,980 IS Depn 657On acq of sub (500 + 100) 600 Disposals 500Additions () 722 C/d 2,145

3,302 3,302


CU'000 CU'000B/d (800 + 500) 1,300Acq of sub 625

C/d (1,500 + 700) 2,200 Cash () 2752,200 2,200


CU'000 CU'000B/d 352

Dividends to MI () 207 Acq of sub ((880 + 100 – 150) 20%) 166C/d 341 IS 30

548 548

(4) INCOME TAX

CU'000 CU'000B/d 140

Cash () 79 IS 20C/d 131 Acq of sub 50

210 210


CU'000 CU'000Dividends () 11 B/d 1,064IS 686C/d 367

1,064 1,064

ANSWER BANK


48 Senorita Ltd

Marking guide

Marks

Cash flow statementIncome tax paid 1½Disposal of subsidiary ½Purchase of PPE ½Proceeds from sales of PPE ½Proceeds from issue of ordinary shares 1Dividends paid to MI 2Dividends paid 1Opening cash ½Closing cash ½


Profit before tax 1Depreciation charge ½Profit on disposal 2½Inventories 1Trade and other payables 1

Note re disposal of subEach item other than totals ½ mark (max 4½) 4½


Consolidated cash flow statement for the year ended 31 December 20X5

CU'000 CU'000Cash flows from operating activities

Cash generated from operations (Note (1)) 442Income tax paid (W1) (108)

Net cash from operating activities 334Cash flows from investing activities

Disposal of subsidiary Amigo Ltd net of cash disposed of (Note (2)) 488Purchase of property, plant and equipment (1,350)Proceeds from sale of property, plant and equipment 600

Net cash used in investing activities (262)Cash flows from financing activities

Proceeds from issue of ordinary share capital ((1,000 + 600) – (800 + 300)) 500Dividends paid to minority interests (W3) (367)Dividends paid (W2) (125)

Net cash from financing activities 8Net increase in cash and cash equivalents 80Cash and cash equivalents at beginning of period (35)Cash and cash equivalents at end of period 45




(1) Reconciliation of profit before tax to cash generated from operations

CU'000Profit before tax (950 + 45) 995Depreciation charge 257Profit on disposal of property, plant and equipment (600 – 231 (W4)) (369)Increase in inventories (570 – 490 + 120) (200)Increase in trade and other receivables (420 – 310 + 145) (255)Increase in trade and other payables (221 – 339 + 132) 14Cash generated from operations 442

(2) Disposal of subsidiary

During the year the group disposed of subsidiary Amigo Ltd. The book value of the assets andliabilities disposed of were as follows.

CU'000Property, plant and equipment 450Inventories 120Trade and other receivables 145Cash and cash equivalents 12Trade and other payables (132)Taxation (15)Minority interest (580 25%) (145)

435Profit on disposal 65Total sales proceeds 500Less Cash and cash equivalents of Amigo Ltd (12)Cash flow on disposal net of cash disposed of 488

WORKINGS

(1) INCOME TAX

CU'000 CU'000On disposal 15 B/d 150Cash () 108 IS (130 + 10) 140C/d 167

290 290


CU'000 CU'000Dividends paid () 125 B/d 1,019C/d 1,664 IS 770

1,789 1,789


CU'000 CU'000Dividends paid () 367 B/d (1,052 + 150) 1,202Disposal (Note (2)) 145 IS 150C/d (740 + 100) 840

1,352 1,352

(4) PPE

CU'000 CU'000B/d 3,045 Disposal of sub 450Additions 1,350 Disposals () 231

IS – Depn charge 257C/d 3,457

4,395 4,395

ANSWER BANK



49 Accounting and reporting concepts

1 B Consistency contributes to comparability.

2 C The Framework cites two underlying assumptions – that the accounts have been prepared on anaccrual basis (accrual basis of accounting) and that the business is expected to continue inoperation for the foreseeable future (going concern).

3 C The four principal qualitative characteristics are relevance, reliability, comparability andunderstandability.

4 D The income statement measures financial performance, the balance sheet measures financialposition and the cash flow statement measures financial adaptability.

5 C An asset is 'a resource controlled by the entity as a result of past events and from whicheconomic benefits are expected to flow to the entity'. An item might meet the definition of anasset (3) but can only be recognised if both (1) and (3) are true. Rights to future economicbenefits do not need to be legally enforceable (a lessee does not have legal ownership of afinance lease but it is still recognised as an asset).

6 C A liability is 'a present obligation of the entity arising from past events, the settlement of which isexpected to result in an outflow from the entity of resources embodying economic benefits'. Theamount of the liability need not be certain (e.g. a provision). The obligation need not be legallyenforceable (it may be a constructive obligation). Settlement of the obligation must involve anoutflow of economic resources, but not necessarily cash.

7 C The qualitative characteristic of relevance is dependent on materiality and predictive andconfirmatory values. Completeness and faithful representation are characteristics of thequalitative characteristic of reliability not relevance. Comparability is a separate qualitativecharacteristic.

8 D The IASB issue IFRS although the IASCF guide their work programme.

9 B Historic cost accounting measures capital in money terms which does not necessarily maintaineither the real financial capital or the operating capacity of the business.

10 B Accrual basis (210,000 50/100) – 22,000 = CU83,000

Cash accounting basis ((100,000 + 80,000) 50/100)) – 20,000 = CU70,000

11 C Historic cost accounting is based on a system of money financial capital maintenance, hence profitunder that system is CU100,000. A system of real financial capital maintenance adjusts for generalprice changes (i.e. the CU100,000 is reduced by an allowance for the 5% general price changes,giving profit of CU95,000). A system of physical capital maintenance adjusts for specific pricechanges (i.e. the CU100,000 is reduced by an allowance for the 10% specific price changes, givingprofit of CU90,000).

12 A Break-up basis = 14,000 + 7,500 + 1,000 – 5,000 = CU17,500

Cash accounting basis = 20,000 + 1,000 = CU21,000

13 D Users need to be able to compare financial statements through time and across different entities.Hence the disclosure of corresponding information and accounting policies will assist in this.Neutrality is relevant to the characteristic of reliability. Materiality is relevant to thecharacteristic of relevance.

14 D The substance of the arrangement is that of a loan secured on the building. A portion of theinterest of CU200,000 (CU600,000 - CU400,000) should be charged in each of the four years sothat by the repurchase date the loan account stands at CU600,000.

15 D GAAP stands for 'generally accepted accounting practice'.



16 B The elements of the financial statements are assets, liabilities, equity, income and expenses.Assets, liabilities and equity are directly related to the measurement of financial position. Incomeand expenses are directly related to the measurement of profit.

50 BAS 1 Presentation of Financial Statements

1 D Inappropriate accounting policies cannot be rectified by disclosure of the policies used or by theinclusion of explanatory material. Companies must prepare their financial statements (except forthe cash flow statement) on the accrual basis.

2 A All of the items listed will be reflected in the statement of changes in equity.

3 D Revenue and finance cost must be disclosed on the face of the income statement whicheverformat is used. Depreciation will appear on the face of an income statement where expenses areclassified by nature but would be subsumed within other categories (cost of sales, administrativeexpenses, distribution cost) where expenses are classified by function. Closing inventory appearson the face of the balance sheet but will be subsumed within cost of sales or changes ininventories in the income statement.

4 B This is the most commonly seen form of the income statement, which includes cost of sales anddistribution costs. The other three items are all used where expenses are classified by nature.

5 B 700,000 + 400,000 – 250,000 = CU850,000

6 B

CU'000Brought forward 2,000Revaluation (1,500 – (2,000 – 1,600)) 1,100Share issue (500 + 100) 600Profit 750Carried forward 4,450

The dividend was not declared until after the year end so does not reduce equity this year.

7 A The inventory is expected to be realised within the normal operating cycle of 18 monthstherefore is classified as current. Because Finstock Ltd builds houses, the house is inventory asopposed to property and hence, since it will be realised within the normal operating cycle, isclassified as current. According to BAS 1, marketable securities are classified as current if theyare expected to be realised within 12 months of the balance sheet date. This is not the case hereso the securities are classified as non-current.

51 BAS 2 Inventories

1 D Only two cost formulas are allowed by BAS 2: FIFO and WAC (Weighted Average Cost)therefore (1) and (2) are incorrect and (3) is correct. (4) is correct – although if inventories donot have a similar nature different cost formulas may be used.

2 A Carriage outwards on goods delivered to customers will be relevant to the calculation of NRV,but not cost. BAS 2 specifies that abnormal costs should not be carried forward in inventory.

3 C

Cost per widgetCU

Raw materials (CU100,000 ÷ 10,000) 10Direct labour (CU50,000 ÷ 10,000) 5Variable overheads (CU40,000 ÷ 10,000) 4Fixed overheads (CU120,000 ÷ 12,000) 10

29 1,000 widgets = CU29,000

4 A BAS 2 applies to all inventories except work-in-progress under construction contracts, financialinstruments (e.g. shares, bonds) and biological assets.

ANSWER BANK


5 C Costs applicable to normal levels of production = 100,000 + 50,000 + 40,000 + (120,000 2/3)= 270,000

Closing inventory 1,000/10,000 270,000 = CU27,000

Charged to IS in year (270,000 – 27,000) + (120,000 1/3) = CU283,000

6 A

CURevenue ((10,000 – 3,000) CU45) 315,000Costs (352,500)Closing inventory at NRV* (3,000 CU29) 87,000Net profit 49,500

*Cost per unit = 312,500/10,000 = CU31.25 therefore NRV of CU29 (35 – 6) is lower

7 C

CURaw materials (7,000 CU20) 140,000

Work in progress at NRV (2,500 ((35 80%) – 2 – 2.50)) 58,750

Finished goods at NRV (1,000 ((35 80%) – 2)) 26,000224,750

52 BAS 7 Cash Flow Statements (single company only)

1 B

CUIssue of shares (7,000 CU2) 14,000Repay long-term borrowings (4,100)Net cash flow from financing activities 9,900

2 B

CUIncrease in cash in hand (1,100 – 1,000) 100Increase in cash at bank (21,932 + 41,627) 63,559Net increase 63,659

3 C

CUProfit before tax (30,000 – 25,000) 5,000Increase in inventories and trade receivables (55,000 – 48,000) (7,000)Decrease in trade payables (20,000 – 14,000) (6,000)Depreciation charge (10,000 – 8,000) 2,000Cash used in operations (6,000)

4 B Tax and dividends appear below profit before tax and hence do not appear in the reconciliation.

Depreciation and an increase in a provision are charged before arriving at profit before tax andhence are adjusted for in the reconciliation.



5 C

DIVIDENDS PAYABLE

CU CUCash () 40,000 B/d – Final for 20X2 25,000C/d – Final for 20X3 30,000 Income statement

Interim for 20X3 15,000Final for 20X3 30,000

70,000 70,000

6 B

PROPERTY, PLANT AND EQUIPMENT – NBV

CU CUB/d 330,000 Depn 90,000Cash () 75,000 Disposals (W) 45,000

C/d 270,000405,000 405,000

WORKING

DISPOSALS

CU CUIncome statement 15,000 Cash 60,000NBV () 45,000

60,000 60,000

7 B Only the fresh issue of ordinary shares generates cash = 200,000 CU1.20 = CU240,000

The redeemable preference shares are classified as borrowings so the CU110,000 received willbe classified as proceeds from issue of borrowing, not proceeds from issue of equity sharecapital.

8 C The reconciliation starts with profit before tax so tax does not appear within it. Income taxespaid were CU10,500.

WORKING

INCOME TAX PAID


26,000 26,000

9 B Issue of non-current interest-bearing borrowings of (30,000 – 25,000) CU5,000 shown as aninflow under financing activities. Interest paid of (700 + 600 – 500) CU800 shown as an outflowunder operating activities. The finance cost of CU600 is added back to profit before tax in thereconciliation.

10 C

CUProfit before tax 52,000Depreciation charge 21,600Increase in trade receivables (15,500)Increase in trade payables 14,600Cash generated from operations 72,700

ANSWER BANK


11 C

SHARE CAPITAL

CU CUB/d 40,000Bonus issue (40,000 ÷ 10) 4,000

C/d 50,000 Cash () 6,00050,000 50,000

SHARE PREMIUM

CU CUBonus issue 4,000 B/d 25,200C/d 27,500 Cash () 6,300

31,500 31,500

Therefore, total cash received for shares (6,000 + 6,300) 12,300

12 D It would not feature in the statement at all, but would appear in the reconciliation note.

13 A

PROPERTY, PLANT AND EQUIPMENT – NBV

CU CUB/d 225,600 Disposals (40,000 – 10,100) 29,900Revaluation (31,000 – 16,500) 14,500Additions () 91,500 C/d 301,700

331,600 331,600

14 B

CUProfit before tax XIncrease in prepayments (2,550 – 2,300) (250)Decrease in accruals* (1,670 – 1,560) (110)Deduct (360)

* other than accrued interest which is adjusted for in arriving at interest paid.

15 B Investing activities

CUSale of property, plant and equipment 10,000Purchase of property, plant and equipment (109,000)

(99,000)

Financing activities

CUShare issue (100,000 CU1.20) 120,000Repay loan (25,000)

95,000

16 C CU6,500 will be shown as purchase of PPE (an investing outflow), CU4,250 (the capital elementof the finance lease repayment) will be shown as a financing outflow, and the interest of CU750will be shown as an operating outflow.

17 D

CUCash receipts from customers (850,000 + 125,500 – 135,400) 840,100Cash paid to suppliers and employees (610,500 + 45,500 – 35,700) (620,300)Interest paid (500)

219,300



53 BAS 8 Accounting Policies, Changes in Accounting Estimates andErrors

1 C A is not a change of accounting policy (the accounting policy is still to carry property under thevaluation model as opposed to under the cost model), B is a change of accounting estimate, D isspecifically mentioned in IAS 8 as not constituting a change of accounting policy.

2 D Material errors are treated in the same way as changes of accounting policy, by the application ofretrospective restatement.

3 B BAS 8 requires that a change in accounting policy is accounted for by retrospective application.

4 B Only capitalisation of borrowing costs represents a change of accounting policy.

5 B Both changes in accounting policies and the correction of material prior period errors are dealtwith retrospectively. Changes in accounting estimates are dealt with prospectively.

6 C Profit for the year = 45,000 – 2,000 = CU43,000

Retained earnings brought forward = 350,000 – 5,000 = CU345,000

Plant at NBV = 250,000 – 30,000 – 5,000 – 2,000 = CU213,000

7 C (1) is a change in accounting estimate. (2) is not a change in accounting policy, but a change inclassification. This is covered by BAS 1 which requires that comparative amounts are alsoreclassified and certain disclosures given.

54 BAS 10 Events After the Balance Sheet Date

1 D Adjusting events are reflected in the financial statements, therefore there is no specificrequirement to disclose such events.

2 C CU1,800,000 – CU116,000 – CU20,000 = CU1,664,000

3 D The fire (D) had not taken place at the balance sheet date. Although notice of the customerceasing to trade (A) was not received until 31 March 20X5, the customer would have been indifficulties at the balance sheet date and hence the debt was irrecoverable at that date. Althoughevidence of the inventory’s NRV at below cost was not available until April, NRV is assumed tohave fallen by the balance sheet date. The legal action (B) was ongoing at the balance sheet date,and the court’s decision on 27 April showed the amount to be provided.

4 D Only dividends declared before the year end are recognised as liabilities. The claim in respect ofstorm damage was in negotiation at the year end so that storm must have occurred by thebalance sheet date – hence this is an adjusting event and the uninsured amount of CU75,000should be recognised as a liability.

5 A In A, the decision to sell was not made until after the year end therefore this is a non-adjustingevent. In B and C, the liquation/bankruptcy would have occurred by the year end; it was just thatGawain Ltd did not know of it until after the year end. In that it had occurred by the year endboth matters are adjusting. In D, the fire took place before the year end so is an adjusting event.

55 BAS 16 Property, Plant and Equipment

1 C 780,000 + 117,000 + 30,000 + 28,000 + 18,000 + 100,000 = CU1,073,000

2 D None of these statements is correct. The purpose of the provision for depreciation is to spreadthe cost less residual value of an asset over its useful life ((1) and (3)). When an asset is revalued,depreciation on the whole (revalued) amount is charged to the income statement. Depreciationon the surplus may be debited to the revaluation reserve but only as a reserve transfer fromretained earnings (2). A change in depreciation method constitutes a change in accountingestimate, not policy per BAS 8 (4).

ANSWER BANK


3 C

CUOriginal purchase price 50,000Depreciation for 20X1 ((50,000 – 5,000) ÷ 5) (9,000)Depreciation for 20X2 (9,000)Upgrade 31 December 20X2 15,000NBV at end of 20X2 47,000Depreciation for 20X3 ((47,000 – 5,000) ÷ 5) (8,400)NBV 1 January 20X4 38,600Disposal proceeds (7,000)Loss on disposal 31,600

4 D

CUDepreciation based on original cost (16,000 25%) 4,000Depreciation based on revalued amount (12,000 ÷ 2) 6,000Decrease in profit 2,000

5 D Only asset 1001 has a balance in respect of it in the revaluation reserve. Since its revaluation lossof CU2,500 is less than its balance on the revaluation reserve of CU3,000 the whole of this losscan be charged to the revaluation reserve. The losses on the other two (CU3,000 and CU1,500)must be charged to the income statement.

6 C

CUCost 48,000Depreciation to 30 June 20X9 (48,000 25% 2) (24,000)Carrying amount at revaluation 24,000Revaluation 30,000Revaluation reserve 6,000Excess depreciation charged to revaluation reservein y/e 30 June 20Y0* (2,000)Revaluation reserve at 30 June 20Y0 4,000

*Historic cost depreciation charge (24,000 ÷ 3) 8,000Depreciation charge on revalued amount (30,000 ÷ 3) (10,000)Excess depreciation 2,000

7 C CUYear ended 30 June 20X5 – on revaluation (1.3m – 1m) 300,000Year ended 30 June 20X6 – on disposal (1.4m – 1.3m) 100,000

8 A

CURevalued on 1 January 20X5 to 600,000Accumulated depreciation to 31 December 20X5 (600,000 ÷ 6) (100,000)NBV on 1 January 20X6 500,000Sale proceeds 700,000Profit on disposal 200,000

9 B BAS 16 states that where there is an exchange of items of PPE such that there is no cash price,cost should be measured at fair value. Here, instead of paying cash, Sparrow Ltd has given up anasset with a fair value of CU1 million, in order to acquire the building previously owned byTurner Ltd. Hence this building should be recorded in Sparrow Ltd’s books at that amount.



10 C This is true for initial revaluations upwards. For a subsequent revaluation upwards whichreverses a previous revaluation loss which was recognised in the income statement this will notnecessarily hold true. Re A, whole classes of assets must be carried under either the revaluationmodel or the cost model – it is not permissible to revalue just those assets where carryingamounts and market values are materially different. Re B, assets must be revalued with sufficientregularity such that carrying amounts never differ materially from fair values. Although BAS 16mentions five years, longer could be justified if fair value movements are small and slow. Re D,the fair value of land and buildings is based on market values, which will take into accountalternative uses.

56 BAS 17 Leases

1 D Assets held under finance leases are recorded at their fair value (here, the cash price) anddepreciated over the shorter of the lease term and the asset’s useful life. Here, the lease term issix years (the primary period plus the secondary period, since this is expected to be taken up)and the useful life is five years.

2 B

Year ended B/f Payment Capital Interest C/fCU CU CU CU CU

31 Dec 20X4 2,050 (500) 1,550 (4/10) 180 1,73031 Dec 20X5 1,730 (500) 1,230 (3/10) 135 1,365

Borrowing over four periods (since paying in advance)

Therefore SOTD = (4 5) ÷ 2 = 10

Total interest = (5 500) – 2,050 = CU450

3 D

4 B Borrowing over ten quarters (since paying in arrears)

Therefore SOTD = (10 11) ÷ 2 = 55

CUDeposit 6,000Instalments (10 CU2,600) 26,000Cash price (24,000)Total interest 8,000

Allocated to 4th repayment = 7/55 CU8,000 = CU1,018

5 D

Year ended B/f Interest Payment C/fCU CU CU CU

31 Dec 20X4 2,050 (5/15) 150 (500) 1,70031 Dec 20X5 1,700 (4/15) 120 (500) 1,320

Borrowing over five periods (since paying in arrears)

Therefore SOTD = (5 6) ÷ 2 = 15

Total interest = (5 500) – 2,050 = CU450

6 C There is no period-end liability for an operating lease, only for a finance lease.

7 C Although this will usually lead to leases of land being treated as operating leases and leases ofbuildings being treated as finance leases this will not always be the case.

ANSWER BANK


8 C

CUCash paid (60,000 + 30,000) 90,000Income statement charge ((60,000 + (3 30,000)) ÷ 3)) (50,000)Prepayment 40,000

9 A The underlying concept of the treatment of leases is substance over form. This is a consequenceof the requirement to present transactions faithfully, part of the qualitative characteristic ofreliability.

10 B CU24,000 (the cash price less the deposit) is owed on 1 January 20X7. This is subject to interestat 12% for 20X7, as no further payment is made until the last day of 20X7. Therefore CU24,000

12% = CU2,880.

57 BAS 18 Revenue

1 B Because the risk and rewards of ownership have not yet passed (the goods are unsold at the yearend) revenue should not be recognised. Hence the CU20,000 selling price should be removedfrom revenue and trade receivables and the CU15,000 cost added in to closing inventories (andhence be removed from cost of sales).

Inventories = 110,000 + 15,000 = CU125,000

Trade receivables = 190,000 – 20,000 = CU170,000

2 B

CUmTotal contract price 5.00Less: After-sales support (500,000 5 years 130%) (3.25)Revenue for year re supply of software 1.75Revenue for year re after-sales support (500,000 130%) 0.65

2.4

3 C

CUmSupply of hardware 3.00One year of after-sales support at additional fixed fee(1m ÷ 4 years) 0.25

3.25

4 C Once a sale has been made, the revenue should be measured at the fair value of theconsideration receivable, i.e. CU290,000.

5 C For the rendering of services, BAS 18 requires that revenue is recognised by reference to thestage of completion of the contract (provided revenue, stage of completion and costs can bemeasured reliably and it is probable that economic benefits will flow to the seller). We are toldthat all figures are reliable and that the contract is expected to make a profit – hence economicbenefits will flow to the seller. Therefore 40% of the revenue is recognised this year.

6 B Where costs cannot be measured reliably in respect of a contract for the rendering of services(see answer 5 above) and the outcome of the contract is uncertain, revenue should be restrictedto the extent of the costs which are recoverable.

7 D BAS 18 requires revenue from artistic performances to be recognised when the event takes place(Appendix para 15). Since the June production was delayed until July only May’s proportion of the

season ticket (1/5 CU100) should be recognised by 30 June 20X6.



58 BAS 32 and BAS 39 Financial Instruments

1 A Redeemable preference shares are classified as liabilities. Dividends on these shares are shown asfinance cost in the income statement, not as dividends in the statement of changes in equity.

2 D Irredeemable preference shares are classified as equity. Dividends on these shares are reflectedin the statement of changes in equity.

3 B (1) is a financial liability, (2) and (4) are financial assets, (3) is neither and (5) could be either,depending on which company’s financial statements are being considered.

4 C

59 BAS 36 Impairment of Assets

1 D They are all true. (3) is true because an asset is impaired if its recoverable amount is less than itscarrying amount. Recoverable amount is the higher of fair value less costs to sell and value inuse so if fair value less costs to sell already exceeds the carrying amount there is no need toestimate value in use.

2 C Recoverable amount is the higher of fair value less costs to sell (CU18,000) and value in use(CU22,000).

3 CCU

Cost 100,000Depreciation:Year ended 31 March 20X3 @ 25% (25,000)

75,000Year ended 31 March 20X4 @ 25% (18,750)



31,640Recoverable amount (22,000)Impairment loss 9,640

4 B Recoverable amount is the higher of fair value less costs to sell and value in use i.e. CU450,000.The impairment loss is therefore CU250,000 (700,000 – 450,000). Since there is CU200,000(700,000 – 500,000) in the revaluation reserve in respect of this land, then CU200,000 of theimpairment loss can be set against the revaluation reserve, with the remaining CU50,000 chargedto the income statement.

5 BCU

Carrying amount at revaluation 80,000Depreciation to 31 December 20X6 (80,000 3/8) (30,000)Carrying amount on 31 December 20X6 50,000Revalued to (20,000)Impairment loss 30,000

Charged to revaluation reserve (see below) 25,000Charged to income statement (β) 5,000

30,000

Cost 1 January 20X2 50,000Depreciation to 31 December 20X3 (50,000 2/10) (10,000)Carrying amount on 31 December 20X3 40,000Revalued to 80,000To revaluation reserve on 31 December 20X3 40,000Annual transfer of excess depreciationDepreciation based on revalued amount (see above) (30,000)Depreciation based on historic cost (50,000 3/10) 15,000Balance on revaluation reserve on 31 December 20X6 25,000

ANSWER BANK


6 D In addition to intangible assets with indefinite useful lives and goodwill acquired in a businesscombination, which must be tested for impairment annually, other assets are only required to betested for impairment if there are indications of a possible impairment (such as a fall in marketvalues or evidence of physical damage).

60 BAS 37 Provisions, Contingent Liabilities and Contingent Assets

1 B BAS 37 excludes retraining and relocation of continuing staff from restructuring provisions.

2 A All three criteria must be present.

3 C (1) is not correct – if it is probable and the amount can be estimated reliably, then it must beprovided for.

4 C In (1) as the board decision had not been communicated by the year end there is assumed to beno legal or constructive obligation therefore no provision should be made. In (2) as refunds havebeen made in the past to all customers there is a valid expectation from customers that therefunds will be made therefore the amount should be provided for. In (3) there is no presentobligation to carry out the refurbishment therefore no provision should be made.

5 C Since it is probable (i.e. 'more likely than not') that the claim will be paid out a provision shouldbe made for the claim against Airedale Ltd. The claim Airedale Ltd has made against a third partyis a contingent asset. Contingent assets are only ever disclosed, and only then if it is probable thatthe asset will be recovered, as is the case here.

6 C As refunds have been made in the past there is a valid expectation from customers that therefunds will be made, creating a constructive (as opposed to a legal) obligation. Therefore WallyLtd must provide for customer refunds. Regarding A – there is no obligating event (see answer 7)as the training has not been carried out, therefore no provision should be made. B is a contingentasset as opposed to a contingent liability or a provision. Regarding D – since Wally Ltd is unlikelyto lose the case, disclosure should be made as a contingent liability, as opposed to a provisionbeing made.

7 D A provision is recognised under BAS 37, inter alia, where the entity has a present obligation as aresult of a past event. At 31 December 20X5 there is no obligating event as neither the refit northe fitting of the safety equipment has been carried out therefore no provision is needed foreither.

8 B Since it is probable (i.e. 'more likely than not') that the claim against Charlotte Ltd will succeed aprovision should be made. Counter-claims should be recognised as separate assets but onlywhere reimbursement is virtually certain. Here reimbursement is only 'probable' so the claimagainst George Ltd should be disclosed, but not recognised as an asset.

61 BAS 38 Intangible Assets

1 D (1) False – negative goodwill is recognised immediately in profit or loss, not shown on thebalance sheet. (2) False – positive goodwill is capitalised and then subject to impairment reviews– there is no alternative treatment. (3) and (4) False and true – neither internally generatedgoodwill nor internally developed brands can be capitalised.

2 C

CUDevelopment costs 300,000Depreciation on equipment used for development (100,000 ÷ 5) 20,000

320,000

3 C Regarding A – costs are capitalised throughout the development phase then amortised oncedevelopment is complete. Regarding B – this says that the project will at least break even – if itwas to make a loss, the costs could not be carried forward.



4 C C is given as an example of research activities in BAS 38 (para 56 (c)). Research costs are writtenoff as incurred. A is given as an example of development activities in BAS 38 (para 59 (a)) andmay therefore be carried forward if certain conditions (para 57) are met. B – the cost of thepatent, including these legal costs, will be capitalised as a separately acquired intangible. D –recoverable costs will be an asset in their own right (a receivable from the customer).

5 D (1) Whilst there is a choice to measure all intangibles after initial recognition at cost or fair value,in order for fair value to be used it must be possible to measure fair values reliably withreference to an active market. This is unlikely to be possible for most (unique) intangibles.Also for one intangible to be revalued, the whole class of intangibles must be revalued. (2)Revaluations must be carried out with sufficient regularity to ensure that the carrying amountdoes not differ from the fair value. This is not necessarily annually.

6 C (1) is given as an example of research activities in BAS 38 (para 56 (b)). Research costs arewritten off as incurred. (2) is an acquired intangible and will therefore automatically meet BAS38’s recognition criteria. Although (3) is not a separable intangible it arises from legal rights and istherefore identifiable and may be recognised provided its cost can be measured reliably (and itcan, at CU50,000). Therefore a total of CU110,000 is recognised (CU60,000 plus CU50,000).

7 A (1) can be capitalised as the BAS 38 para 57 criteria appear to be met. (2) cannot be capitalised asBAS 38 prohibits the recognition of internally generated brands. Regarding (3) – althoughgoodwill acquired on a business combination is recognised under BFRS 3 Business Combinations asan intangible asset, per BAS 38 any goodwill recorded in the acquiree’s books cannot berecognised. Therefore only CU50,000 (1) is recognised.

8 A For an asset to be recognised as an intangible asset in accordance with BAS 38 it must beidentifiable (1). Identifiable means the asset is either separable or arises from contractual orother legal rights – therefore (2) is not correct. Once an asset had met the identifiability test it isonly recognised if it is probable (not just 'possible' per (4)) that future benefits from the assetwill flow to the entity and the cost of the asset must be able to be measured reliably (3).

9 D Having been initially recognised at cost, the entity then has a choice of the cost model or therevaluation model for each class of intangibles. A is false – intangible assets with indefinite usefullives are not amortised but reviewed for impairment annually. B is false – residual values areassumed to be zero unless a third party is committed to buying the asset at the end of its usefullife or there is an active market for that type of asset (which would be unusual for an intangible).C is false – intangible assets must meet the basic definition of an asset, which includes the factthat the asset must be under the control of the entity. Employees’ skills are not controlled by theentity as the employees could decide to leave.

62 BFRS 5 Non-current Assets Held for Sale and Discontinued Operations

1 C A discontinued operation is one that has either been disposed of in the period, or is held for sale.A held for sale asset is one where the sale has been committed or is expected to be completewithin one year from the date of classification. This division does not qualify as held for sale in20X4 as it is not expected to be sold until early 20X6. It will therefore not be disclosed asdiscontinued until 20X5.

2 B BFRS 5 para 33. Additional disclosures are required by way of note.

3 D BFRS 5 para 33. Although the disclosures described in C are required they may be given on theface of the cash flow statement, or by way of note.

4 C Since the decision to sell was made by the year end and the sale is expected to be completedwithin 12 months the retail division will be classified as a discontinued operation. Until the non-current assets of the division are finally disposed of, they are shown in the balance sheet,separately from all other assets, as non-current assets held for sale (usually immediatelyunderneath the sub-total for current assets). This will be the case at 30 June 20X7. These assets,which were classified as non-current assets prior to their division being classified as held for saleare not reclassified as held for sale in any prior periods.

ANSWER BANK


5 D Both meet the definition of a component as they have both been reported separately. Theclosure of Division A does not represent the discontinuance of a separate major line of businessas its operations have been moved to another division. Division B does represent this type ofdiscontinuance as its operations have been outsourced.

6 D Since the sale was completed within one year of classification this is a discontinued operation inthe year ended 31 December 20X7. The original loss of CU100,000 will be increased by aprovision for the redundancy costs in accordance with BAS 37.

7 C Once the division is classified as held for sale any non-current assets are reclassified as non-current assets held for sale and depreciation on them ceases.

CUCarrying amount on 1 November 20X0 15,000Depreciation up to classification as held for sale (30,000 1% 11) (3,300)

11,700

8 B On classification as held for sale an asset held under the cost model is measured at the lower ofits carrying amount and its fair value less costs to sell. On ultimate disposal any differencebetween carrying amount and disposal proceeds is treated as a loss or gain under BAS 16.

CUCarrying amount on classification as held for sale 40,000Fair value less costs to sell (30,000 – 500) (29,500)Impairment loss 10,500

Profit on sale (32,000 – 29,500) 2,500

9 D

CUCost 800,000Depreciation to 31 December 20X8 (800,000 ÷ 50 12) (192,000)Carrying amount on classification as held for sale 608,000Fair value less costs to sell (600,000 – 10,000) (590,000)Impairment loss 18,000

Loss on sale (590,000 – 580,000) 10,000

10 B Assets held under the revaluation model are revalued to fair value immediately prior toclassification as held for sale. Costs to sell are immediately recognised in the income statement asan impairment loss.

CUmImmediately before classification as held for sale:Carrying amount 1.5Revaluation 1.7Credit to revaluation reserve 0.2

On classification as held for sale:

Costs to sell recognised in income statement CU20,000

Sale is in the year ended 31 December 20X8 so final profit of CU100,000 (1.8m – 1.7m) will berecognised in the income statement then and the balance in the revaluation reserve in respect ofthis asset transferred to retained earnings.



11 B

CUCost 200,000Depreciation to 31 December 20X5 (200,000 25%) (50,000)Carrying amount on revaluation 150,000Revalued to 280,000Original balance on revaluation reserve 130,000

Carrying amount on revaluation on 1 January 20X6 280,000Depreciation for 20X6 @ 25% (70,000)

210,000Depreciation for 20X7 @ 25% (52,500)Carrying amount immediately before classification as held for sale 157,500

Immediately prior to classification as held for sale the asset will be revalued to its fair value ofCU80,000, and this fall in value of CU77,500 will be debited to the revaluation reserve. Theremaining CU52,500 in the revaluation reserve will be transferred out to retained earnings onsale. The classification as held for sale at below carrying amount brings forward the debit to therevaluation reserve.

On classification as held for sale the costs to sell of CU5,000 are recognised in the incomestatement.

ANSWER BANK



63 Consolidated balance sheets

1 B

CUmFalcon Ltd 58Kestrel Ltd (80% (15 – 10)) 4Less: Impairment of goodwill * (8)

54

CUmCost of investment 24Less: Fair value of net assets acquired (80% 20) (16)*Goodwill 8

2 C

CU'000Fair value of net assets acquiredOrdinary shares 300Retained earnings at 1 January 20X1 80Retained profit for the 9 months ended 30 September 20X1 (9/12 40) 30

410

Group share ( 80%) 328Add Goodwill 20Cost of investment 348

3 A

CU'000Xanthe Ltd 160QED Ltd 90Inventories in transit 10Less: PURP ((20 + 10) 30%)) (9)

251

4 C

CUDividends payable by parent (Xiao Ltd) 60,000Dividends payable to minorityYacht Ltd (20% 30,000) 6,000

Zebra Ltd (25% 20,000) 5,00071,000

5 D

CUConsolidated balance sheet 230,000Less Woolf Ltd (202,000)Add back PURP (5,000 80%) 4,000Group share of Stephen Ltd 32,000

Therefore, retained earnings of Stephen Ltd = 100/80 CU32,000 CU40,000



6 B

CUmCost of investment 12.0Group share of post-acquisition retained earnings (30% 5) 1.5

13.5

7 A

CU'000Cost of investment 60Group share of post-acquisition retained earnings (40% (220 – 30)) 76

Less: PURP (40% 10 25%) (1)135

8 D After the disposal, Geranium Ltd retains a 15% holding in Rose Ltd. This is treated as a simplenon-current asset investment and valued at the date of disposal using the equity method.

CU'000Net assets (15% (5,000 + 6,500 + 6/12 2,000)) 1,875

Goodwill remaining (1/4 (5,000 – 60% 8,000)) 501,925

9 B The unrealised profit is CU5,000 and the inventories are still held by Aster Ltd. Therefore theadjustment must be to Cr consolidated inventories. However as Flower Ltd is an associate the

amount is only the group share of the unrealised profit i.e. 30% 5,000 = CU1,500.

10 C

11 B

CU'000Consolidated retained earnings per question 400Less: Group share of depreciation of fair value adjustment ((120 ÷ 5) 75%) (18)

382

Goodwill per question 200Less: Group share of fair value adjustment (120 75%) (90)

110

12 B The redeemable preference shares are debt, not equity, so do not feature in the calculation ofminority interest.

Minority interest = 700,000 30% = CU210,000

13 B

CUCost of investment 14,000Group share of post-acquisition retained earnings (30% 8,000) 2,400

Less: Goodwill impairment to date (40% 2,000) (800)15,600

CUCost of investment 14,000Less: Fair value of net assets acquired (30% 40,000) (12,000)Goodwill 2,000

ANSWER BANK


14 BCU

Mandy Ltd 244,800Len Ltd (96,000 – (96,000 – 24,000)) 24,000Less: Goodwill impairment (48,000 20%) (9,600)

259,200

CUCost of investment 144,000Less: Fair value of net assets acquired (96,000)Goodwill 48,000

64 Consolidated statements of financial performance

1 A The provision for unrealised profit is CU5,000 (30,000 20/120). Since the seller was thesubsidiary, the profit is eliminated against the subsidiary's profits, meaning that both the groupand the minority interest will bear their share.

2 CCU

Pumpkin Ltd 100,000Squash Ltd 80,000Less: Intra-group sales (8,000)Add: PURP (8,000 – 5,000) 3,000

175,000

3 BCU'000

Sale proceeds 3,600Less: Share of net assets at disposal (80% 3,310) (2,648)Less: Carrying amount of goodwill at date of disposal

(2,360 – (80% 2,240) – 100) (468)484

4 CCU'000

Sale proceeds 6,500Less: Share of net assets at disposal (45% 12,500) (5,625)Less: Carrying amount of goodwill at date of disposal

((5,000 – (60% 8,000)) 3/4) (150)Profit on disposal 725

5 BCU'000

Pre-disposal (3/12 576,000 10%) 14,400

Post-disposal (9/12 576,000 40%) 172,800187,200

6 BCU

Revenue (769,000 + (9/12 600,000) – 7,000) 1,212,000

Cost of sales (568,500 + (9/12 420,000) – 7,000 + 2,000) (878,500)Gross profit 333,500



7 ACU

Share of associate's profits (30% 120,000 6/12) 18,000

Sales proceeds 600,000Less: Share of net assets at disposal (30% 1,200,000) (360,000)Less: Carrying amount of goodwill at date of disposal

(450,000 – (30% 1,000,000)) (150,000)Profit on disposal of associate 90,000

8 CCU

Minority interest at start of year (10% 300,000) 30,000

Minority interest in profits of year (10% 60,000 9/12) 4,50034,500

9 C An adjustment representing the increase in the minority interest on the decrease in holding mustbe made. This will be the increase in the minority interest in the net assets of Pip Ltd at disposal.

CUNet assets at disposal (400,000 + (9/12 120,000)) 490,000

increase in minority interest % (was 20% now 40% therefore 20%) 98,000

10 B

CUAlayna Ltd – paid to group shareholders 500,000Ellen Ltd – paid to minority interest (200,000 25%) 50,000

550,000

11 C

CU'000Subsidiary Ltd 55,000Less: PURP (15,000 20/120 ½) (1,250)

53,750

MI share ( 20%) 10,750

65 Consolidated cash flow statements

1 B

MINORITY INTEREST

CUm CUmB/d 3.6

Dividends to MI (β) 2.7 IS 2.0Revaluation 1.5

C/d 6.0 Acquisition of sub (6.4 25%) 1.68.7 8.7

ANSWER BANK


2 C

INVESTMENTS IN ASSOCIATES

CU'000 CU'000B/d 635 Dividends from associates (β) 4IS (230 30%) 69 C/d 700

704 704

3 C Transactions between associates and the group are not cancelled on consolidation, hence therepayment of the advance of CU30,000 will appear in the consolidated cash flow statement. Thecash from sale of the plant will be reflected in the associate's own cash flow statement, but not inthe consolidated cash flow statement – all that is shown in the consolidated cash flow statement

is dividends received by the parent from associates (100,000 20p 40% = CU8,000).

4 D The net cash effect of the disposal is shown (i.e. CU2 million cash proceeds less the CU20,000cash and cash equivalents disposed of = CU1,980,000).

5 B The net cash effect of the acquisition is shown. This will usually be the cash consideration lessthe cash and cash equivalents acquired. However, in this case, Dougal Ltd has acquired Lucy Ltd'soverdraft so the net cash effect is the cash consideration of CU400,000 plus the overdraft ofCU40,000 = CU440,000.

6 B The cash outflow will be in respect of cash paid for purchases of PPE. In calculating this figurethe PPE acquired under finance leases and the PPE acquired with the subsidiary need to beexcluded. The former because the purchase was not for cash, the latter because any cash effectwill have already been included in the consolidated cash flow statement as part of the figure foracquisition of subsidiary. The cash from the disposals of CU38,000 will be shown as a cash inflow– the two are not netted off.

PROPERTY, PLANT AND EQUIPMENT

CU CUB/d 257,900 Disposals 32,000Finance leases 40,000 IS - Depreciation 135,000On acquisition of subsidiary 35,000Cash additions (β) 413,000 C/d 578,900

745,900 745,900

7 C Increase in receivables (340 – 235 – 90) 15

Decrease in payables (275 – 135 – 165) 25

8 D Cash received from the sale of CU460,000 will be shown as an investing inflow, along with anydividends received from the associate – which in this case were CU225,600 (see working below).

INVESTMENTS IN ASSOCIATES

CU CUB/d 120,600 Dividends from associates (β) 225,600IS (30% 350,000) 105,000 C/d –

225,600 225,600



66 Group accounts accounting standards

1 B Ulysses Ltd is not consolidated. The civil war means that Sarah Ltd is no longer able to exercisecontrol over Ulysses Ltd; consequently the definition of a subsidiary is not met. Dissimilaractivities are not grounds for exclusion and hence Wally Ltd is consolidated.

2 B Consul Ltd cannot exercise significant influence over Warrior Ltd because it is controlled byanother company and, with a 75% holding, that company can do most things, including passingspecial resolutions, without paying much attention to Consul Ltd. Consul Ltd has the largestshareholding in Admiral Ltd and a board seat, so will be able to exercise significant influence overAdmiral Ltd. Sultan Ltd is not so clear cut. However, it is likely that both the other entity andConsul Ltd have significant influence over Sultan Ltd.

3 A Per BFRS 3 goodwill acquired in a business combination should be reviewed for impairmentannually.

4 C Statement (1) – Untrue – there is a presumption that Lyle Ltd would be an associate of Kyle Ltdat a holding or 20% or over, but this is rebuttable (for example if another party held, say, 70% ofthe shares whilst Kyle Ltd only held 30%).

Statement (2) – True – if Kyle Ltd controls Lyle Ltd then Lyle Ltd will be a subsidiary not anassociate.

Statement (3) – True – there is no elimination of balances for an associate as the associate is notpart of the group.

5 B

CUCash (80% 3,000,000 CU1.20) 2,880,000

Shares (80% 3,000,000 2 CU1.50) 7,200,000Acquisition fees 400,000

10,480,000

6 B In accordance with BFRS 3, restructuring provisions can only be included in the goodwillcalculation if there is an existing liability for the restructuring in accordance with BAS 37Provisions, Contingent Liabilities and Contingent Assets. In this case Jerry Ltd has no such existingliability and therefore the provision is excluded.

CU CUCost of investment 1,450,000Less: Share of fair value of net assets acquiredCarrying amount of net assets 1,350,000Fair value adjustment to PPE 100,000Contingent liability (200,000)

1,250,000Group share 80% (1,000,000)Goodwill 450,000

Administrator

Text Box

CA in Bangladesh (We believe in sharing...) www.facebook.com/CAinBD

REVIEW FORM – FINANCIAL ACCOUNTING

Your ratings, comments and suggestions would be appreciated on the following areas ofthis Question Bank

Very useful Useful Not useful

Number of questions in each section

Standard of answers

Amount of guidance on exam technique

Quality of marking guides

Excellent Good Adequate Poor

Overall opinion of thisQuestion Bank

Please return to:

Deputy Director, Learning & Professional Development

Email: [email protected]

ICABICAB Bhaban100 Kazi Nazrul Islam Ave., Kawran BazarDhaka 1215

www.icab.org.bd

For space to add further comments please see overleaf.

http://www.icab.org.bd/

http://www.icab.org.bd/

REVIEW FORM (continued)

TELL US WHAT YOU THINK

Please note any further comments and suggestions/errors below.

the institute of chartered accountants of bangladesh ...€¦ · 5 harry ltd 25 38 7 131 6 frodo...

Documents