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The Institute of Chartered Accountants of Bangladesh
FINANCIAL ACCOUNTING Professional Stage Application Level
Question Bank www.icab.org.bd
Financial accounting The 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: 978-1-84152-838-0 First edition 2009 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means or stored in any retrieval system, or transmitted in, any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior permission of the publisher.
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© The Institute of Chartered Accountants in England and Wales, March 2009
Contents
Title
Marks
Time allocation Mins
Question
Answer
24 20 21 26 25 26 22 24 18 25
36 28 30 39 38 39 31 36 27 38
3 4 5 6 7 8 9 11 13 14
119 122 124 127 131 134 137 140 143 145
18 23 22 13 20 23 16 18 11 17 17 18 23 19 17 21 16 25 15 7
27 35 33 19 30 32 24 27 17 26 26 27 35 29 25 32 26 38 23 11
17 18 19 20 21 21 22 23 24 25 26 26 28 29 30 31 33 34 36 37
149 152 155 157 159 162 166 167 169 172 174 176 178 181 184 186 189 191 194 195
Page
Preparation of full single entity financial statements 1 2 3 4 5 6 7 8 9 10
Howells Ltd Berwick Ltd Angus Ltd Goblins Ltd Harry Ltd Frodo Ltd Plodder Ltd Copeland Ltd Pippin Ltd Merry Ltd
Preparation of extracts from financial statements 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Montrose Ltd Gandalf Ltd Cagreg Ltd Roberts Ltd Dumfries Ltd Crieff Ltd ITC Solutions Ltd Withington Ltd Islay Ltd Greenstones Ltd Okehampton Ltd Banchory Ltd Banff Ltd Skinner Ltd Rosetta Ltd Arran Ltd Elie Ltd Wester Ross Ltd Shadowlands Ltd Scribo Ltd
© The Institute of Chartered Accountants in England and Wales, March 2009
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Title
Marks
Time allocation Mins
Question
Answer
18 24 14 17 16 19 22 18 15 17 23 18 17 23 30 17 20 18
27 36 21 26 24 29 33 27 23 26 35 27 25 35 45 26 30 27
39 40 41 42 43 45 46 47 48 49 51 52 53 54 56 57 58 60
197 200 203 206 208 211 214 217 220 223 226 229 232 235 238 242 244 247
61 66 68
249 250 250
71
251
76 78 80 84 86 88 90
254 254 254 256 257 258 258
91 94
259 259
97
260
Page
Preparation of full consolidated financial statements 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48
Hemmingway Ltd Highland Ltd Ullapool Ltd Law Ltd Heeley Ltd Harris Ltd Lowland Ltd Vanguard Ltd Heaton Ltd Jerome Ltd Hardmead Ltd Tain Ltd Glencoe Ltd Herdings Ltd Camden Ltd Gallant Ltd Slick Ltd Senorita Ltd
Single entity financial statements Objective test questions 49 50 51 52 53 54 55 56 57 58 59 60 61 62
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Accounting and reporting concepts BAS 1 Presentation of Financial Statements BAS 2 Inventories BAS 7 Cash Flow Statements (single company only) BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors BAS 10 Events after the Balance Sheet Date BAS 16 Property, Plant and Equipment BAS 17 Leases BAS 18 Revenue BAS 32 and BAS 39 Financial Instruments BAS 36 Impairment of Assets BAS 37 Provisions, Contingent Liabilities and Contingent Assets BAS 38 Intangible Assets BFRS 5 Non-current Assets Held for Sale and Discontinued Operations
© The Institute of Chartered Accountants in England and Wales, March 2009
Title
Marks
Time allocation Mins
Page Question
Answer
101
263
107 110 114
265 266 268
Consolidated financial statements Objective test questions 63 64 65 66
Consolidated balance sheets Consolidated statements of financial performance Consolidated cash flow statements Group accounts accounting standards
© The Institute of Chartered Accountants in England and Wales, March 2009
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© The Institute of Chartered Accountants in England and Wales, March 2009
CA in Bangladesh www.facebook.com/CAinBD
Question Bank Your exam will consist of Part one
5-15 short-form questions (worth 1-4 marks each)
20 marks
Part two
4 questions (each worth around 20 marks)
80 marks
Time available
2.5 hours
© The Institute of Chartered Accountants in England and Wales, March 2009
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
Preparation of full single entity financial statements
1
Howells Ltd The trial balance of Howells Ltd as at 31 December 20X8 is as follows. Share capital CU1 ordinary shares CU1 5% preference shares (irredeemable) Retained earnings General reserve as at 31 December 20X8 Intangible assets Land and buildings Cost Accumulated depreciation Plant and machinery Cost Accumulated depreciation Inventories at 1 January 20X8 Sundry net current assets Revenue Purchases Debenture interest paid Royalties received Administrative salaries Salesmen's salaries and commission Factory wages Operating lease rentals Gain on sale of property Administrative expenses Selling and distribution expenses Dividend received from Morgans Ltd 10% Debentures (issued and redeemable at par) 20X7 final dividend paid
CU
20,500 450,000 82,000
CU 100,000 50,000 56,015 20,000
81,000 18,000
58,045 261,349 1,600,047 907,989 6,260 14,005 126,232 24,291 54,117 6,002 18,822 9,600 12,500 2,037,707
25,040 11,000 62,600 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 Plant and machinery
Straight line over 50 years Straight line over 10 years
The land originally cost CU115,000. In previous years the policy in respect of plant and machinery had been to depreciate on a reducing balance basis. All the plant was acquired on 1 January 20X5 with the exception 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 at original cost. Following an impairment review, fair value less costs to sell has been estimated at CU10,000 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 March 20X9. 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.
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full single entity financial statements (7) Inventories held at 31 December 20X8 are valued at cost of CU68,000. Within this amount there are 1,000 units of finished goods valued at CU20 each. These units are now expected to sell at a discounted 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 ended 31 December 20X8 in a form suitable for publication to the extent the information is available. You should classify expenses by function. (20 marks)
(b) Explain the concept of 'fair presentation'.
(4 marks) (24 marks)
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Berwick Ltd Berwick Ltd has produced the following trial balance as at 31 January 20X5. CU Profit before tax Interim dividends paid Final dividends paid Development expenditure capitalised Land and buildings Revalued Plant and machinery Cost Accumulated depreciation Motor vehicles Cost Accumulated depreciation Inventories and work in progress Trade receivables and trade payables Prepayments and accruals Value added tax Bank balance in hand and overdrawn Bank loan Share capital – ordinary shares of CU1 each Retained earnings Revaluation reserve Share premium account
CU 370,000
22,000 66,000 70,000 1,500,000 650,000 160,000 250,000 90,000 370,000 420,000 97,000 249,000
3,694,000
380,000 100,000 50,000 110,000 200,000 850,000 770,000 564,000 50,000 3,694,000
Additional information (1) The company’s land and buildings were revalued on 1 February 20X4 at CU1.5 million (land element CU300,000). The remaining useful life of the buildings at that date was estimated at 40 years. The property originally cost CU1 million on 1 February 20X0 (land element CU200,000) and was being depreciated over 50 years. The company intends to transfer to retained earnings that element of the revaluation reserve realised by 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 Plant and machinery Motor vehicles
– – –
see (1) above 10% straight line 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 the trial balance.
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© The Institute of Chartered Accountants in England and Wales, March 2009
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 of future benefits but has been unable to demonstrate this. (6) One of Berwick Ltd's customers was declared insolvent on 15 February 20X5. The customer owed Berwick 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 for the 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.
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Angus Ltd An extract from Angus Ltd's nominal ledger at 28 February 20X7 is as follows. CU'000 Freehold land and buildings Cost Accumulated depreciation at 29 February 20X6 Revenue Operating expenses Income tax charge for period Ordinary share capital Retained earnings at 29 February 20X6
16,000 2,800 200,000 180,000 6,000 200,000 300,000
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 the first 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 yet been adjusted to reflect this valuation. Depreciation for the year ended 28 February 20X7 has not yet been charged and is to be based on a 40-year useful life. Previously, annual depreciation of CU280,000 had been charged. (2) The company announced the intended sale of its European operations on 31 January 20X7, when a formal disposal plan was approved and adopted for full implementation by 30 June 20X7. Plant and equipment with a carrying amount of CU3 million was classified as held for sale, its fair value at the date of classification being estimated at CU2.85 million and the costs to sell it at CU50,000. On 10 February 20X7 the company contracted to terminate various operating leases for a payment of CU50,000. Other costs flowing from this disposal decision were estimated at CU100,000. The European operations contributed 10% of the revenue and 20% of the expenses shown above. The company 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 other activities at a cost of CU1.25 million. This reorganisation was announced to the workforce and the public 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 on 28 February 20X6 had been overvalued by CU355,000 due to a compilation error. No adjustment has been made for this error, which is considered material but not fundamental.
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full single entity financial statements 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
(b) Explain the objectives of financial statements, giving appropriate examples.
(15 marks) (6 marks) (21 marks)
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Goblins Ltd Goblins Ltd is a computer games manufacturer based in the East End of London. At 31 December 20X4 the following balances have been extracted. CU Patent rights 60,000 Work in progress, 1 January 20X4 125,500 Leasehold buildings 300,000 Ordinary share capital – CU1 nominal value 500,000 5% Preference share capital (redeemable 20X8) – CU1 nominal value 120,000 Revenue 1,740,600 Staff costs 260,400 Accumulated depreciation on buildings, 1 January 20X4 60,000 Inventories of finished games, 1 January 20X4 155,600 Consultancy fees paid 44,000 Directors' emoluments 360,000 Computers used on site 50,000 Accumulated depreciation on computers, 1 January 20X4 20,000 Income tax 12,400 Ordinary dividend paid, 30 September 20X4 50,000 Bank account 515,200 Trade and other receivables 420,300 Trade and other payables 80,200 Raw materials 294,500 Retained 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 to CU140,000. These valuations do not take into account the fact that, at the year end physical inventory count, it was discovered that ten computer games consoles with a cost CU500 each had been badly damaged. 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 on the remainder of the business. (3) Buildings are depreciated over 30 years. At 1 January 20X4 they were revalued to CU360,000. This has not been reflected in the accounts. Computers are depreciated over five years. Goblins Ltd makes a transfer between the revaluation reserve and retained earnings each period as a result of the revaluation in accordance with best practice. (4) A final dividend of 15p per ordinary share was declared on 15 December 20X4 and was paid shortly after 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 be created. In addition, Goblins Ltd received notice on 15 January 20X5 that one of its customers had gone 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 the trial balance (a credit balance) represents the difference between the opening provision and the income tax paid in the year.
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
Requirements (a)
Prepare the income statement for Goblins Ltd for the year ended 31 December 20X4 and the balance sheet at that date in a form suitable for publication to the extent the information is available. You should classify expenses according to their nature. (22 marks)
(b) Explain briefly how assets and liabilities are recorded/carried under each of the four different measurement bases referred to in BFRS Framework for the Preparation and Presentation of Financial Statements. (4 marks) (26 marks)
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Harry Ltd Harry Ltd is a company which makes exclusive furniture to customers’ precise specifications. An extract from Harry Ltd’s nominal ledger at 31 December 20X5 is as follows. Raw materials and consumables Salaries and wages Work in progress at 1 January 20X5 Finished inventories at 1 January 20X5 Freehold land and buildings Cost (land CU2 million) Accumulated depreciation at 1 January 20X5 Plant and machinery Cost Accumulated depreciation at 1 January 20X5 Office furniture Cost Accumulated depreciation at 1 January 20X5 Intangible assets Lease payment Trade and other receivables Trade and other payables Retained earnings at 1 January 20X5 Ordinary share capital – CU1 nominal value Preference share capital – 4% redeemable CU1 shares Share premium account Cash and cash equivalents Revenue
CU 1,570,000 1,250,500 45,600 13,400 3,600,000 640,000 520,000 375,000 32,000 28,500 15,000 10,000 37,500 25,400 1,968,600 500,000 120,000 200,000 263,500 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’s offices. The old furniture was all scrapped. Raw materials costing CU54,000 were used. The employees’ time amounted to a cost to the company of CU20,500. No adjustment has been made for this in the above. (2) On 1 January 20X5 Harry Ltd entered into a lease agreement for a new machine. The fair value of this machine was CU53,000. The lease agreement provides for six annual payments of CU10,000 on 31 December each year. Interest is to be allocated on the sum-of-the-digits basis. No other plant was purchased or sold during the year. (3) Freehold land and buildings were revalued for the first time on 1 January 20X5. The surveyor performing the valuation estimated an alternative use valuation of CU5 million (including CU4 million for 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 makes no 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 a 15% straight line basis.
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full single entity financial statements (4) During the year the company made a 1 for 5 bonus issue of its ordinary shares. No entries have been made in respect of this. Transaction costs amounted to legal costs of CU5,000 and an estimate of directors’ time amounting to a cost of CU10,000. Both of these costs have been charged against the share premium account. (5) The preference shares are redeemable in 20X9. Dividends of 10p per share on the ordinary shares and at the coupon rate on the preference shares were declared on 15 December 20X5 and paid early in 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 indicated that 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 of CU15,000. The latter included a table with a cost of CU5,000. The customer who had ordered this table has been declared bankrupt. He had paid a CU1,000 deposit (which has been credited to revenue) and owed CU10,000 at the year end in respect of other items. It is estimated that the table can be sold for CU4,000. Requirement Prepare an income statement for Harry Ltd for the year ended 31 December 20X5 and a balance sheet as at that date in a form suitable for publication. You should classify expenses according to their nature. (25 marks)
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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. Manufacturing costs Administrative salaries Selling and distribution costs Inventories at 1 April 20X5 Freehold land and buildings Cost (land CU1,750,000) Accumulated depreciation at 1 April 20X5 Plant and machinery Cost Accumulated depreciation at 1 April 20X5 Borrowings Trade and other receivables Trade and other payables Retained earnings at 1 April 20X5 Ordinary share capital – 50p nominal value Preference share capital – 5% irredeemable CU1 shares Cash and cash equivalents Revenue Finance costs
CU 4,450,000 410,500 375,000 113,400 2,550,000 480,000 620,000 337,000 200,000 37,500 25,400 212,500 500,000 200,000 63,500 6,700,000 35,000
The following additional information is relevant. (1) The borrowings are repayable in ten equal instalments, commencing on 1 April 20X6. (2) Revenue is made up of the following. Tuition fees Book sales Advances
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© The Institute of Chartered Accountants in England and Wales, March 2009
CU 1,500,000 5,100,000 100,000 6,700,000
QUESTION BANK
The tuition fees all relate to courses held during the year except for fees of CU300,000 which relate to a ten-week course. Five weeks of this course had already been held by the year end. The remainder is to be held in June 20X6. The advances relate to a new publication which Frodo Ltd has commissioned 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 cost CU120,000 on 1 April 20X1 and was advertised for sale on 1 March 20X6 at a price of CU5,000. In April 20X6 a buyer was identified at the advertised price. The sale is expected to be completed in May 20X6. 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 charged to 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 claims that Frodo’s textbook has breached copyright. The case is not due to be decided until June 20X6 but Frodo Ltd’s legal advisors think that the company has a 60% chance of losing the case and estimates that 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 May 20X6. (6) Closing inventories at cost amounted to CU120,000. Within this valuation is an amount of CU50,000 relating to fixed overheads, being a share of total fixed overheads of CU1 million. Frodo Ltd had expected to produce one million books during the year but, due to production difficulties only in fact produced 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 as at 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, including the possible relevance of BFRSs and IPSASs. (5 marks) (26 marks)
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Plodder Ltd As at 30 November 20X0 and 30 November 20W9 Plodder Ltd had the following summarised balance sheets. 20X0 20W9 CU CU CU CU ASSETS Non-current assets Property, plant and equipment 2,918,000 2,401,000 Intangibles 550,000 584,000 Investments 406,000 – 3,874,000 2,985,000 Current assets Inventories 685,000 598,000 Trade and other receivables 480,000 465,000 Prepayments 96,000 126,000 Cash and cash equivalents 226,000 200,000 1,487,000 1,389,000
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full single entity financial statements 20X0 CU Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Revaluation reserve Retained earnings Non-current liabilities Borrowings Current liabilities Trade and other payables Accruals Taxation Provisions Total equity and liabilities
20W9
CU 5,361,000
CU
CU 4,374,000
1,100,000 342,000 375,000 1,785,000 3,602,000
1,000,000 200,000 – 1,311,000 2,511,000
500,000
1,000,000
749,000 108,000 282,000 120,000
427,000 131,000 165,000 140,000 1,259,000 5,361,000
863,000 4,374,000
Plodder Ltd's income statement for the year ended 30 November 20X0 was as follows. CU 5,762,000 (4,630,000) 1,132,000 (236,000) (127,000) 769,000 (68,000) 55,000 756,000 (232,000) 524,000
Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance charge Investment income Profit before tax Income tax expense Profit for the period The following additional information is relevant.
(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 interest payable. (3) Property, plant and equipment and intangible assets can be analysed as follows. 20X0 CU Property, plant and equipment Cost or valuation Accumulated depreciation Intangibles Cost Accumulated amortisation
20W9 CU
7,839,000 (4,921,000) 2,918,000
6,375,000 (3,974,000) 2,401,000
883,000 (333,000) 550,000
938,000 (354,000) 584,000
(4) During the year, plant with an original cost of CU479,000 and a carrying amount at the date of disposal of CU326,000 was sold for CU424,000 which was received in cash. Intangible assets with accumulated amortisation at the date of disposal of CU40,000 were sold for CU12,000.
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
(5) On 30 November 20X0 freehold land which originally cost CU175,000 (and had not been depreciated) was revalued to CU550,000. Requirement Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations in accordance with BAS 7 Cash Flow Statements for Plodder Ltd for the year ended 30 November 20X0, using the indirect method. (22 marks)
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Copeland Ltd As at 31 May 20X1 and 31 May 20X2 Copeland Ltd had the following summarised balance sheets. 20X2 CU ASSETS Non-current assets Property, plant and equipment Cost or valuation Accumulated depreciation Intangibles Cost Accumulated amortisation
5,164,000 (2,198,000) 9,360,000 (3,690,000)
1,112,000 948,000 95,000 489,000
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Revaluation reserve Retained earnings Non-current liabilities 15% debenture loan Current liabilities Trade and other payables Interest payable Taxation Dividends payable Total equity and liabilities
20X1 CU
CU
4,347,000 (2,001,000) 2,966,000
Investments Current assets Inventories Trade and other receivables Prepayments Cash and cash equivalents
CU
5,670,000 2,145,000 10,781,000
2,644,000 13,425,000
2,346,000 8,645,000 (2,715,000)
1,086,000 840,000 108,000 322,000
5,930,000 127,000 8,403,000
2,356,000 10,759,000
1,800,000 1,543,000 1,880,000 2,739,000 7,962,000
1,000,000 1,421,000 1,256,000 746,000 4,423,000
3,000,000
4,500,000
1,417,000 225,000 641,000 180,000
896,000 337,000 503,000 100,000 2,463,000 13,425,000
1,836,000 10,759,000
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full single entity financial statements Copeland's income statement for the year ended 31 May 20X2 was as follows. Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance cost Investment income Profit before tax Income tax expense Profit for the period
CU 8,646,000 (3,705,000) 4,941,000 (465,000) (571,000) 3,905,000 (563,000) 78,000 3,420,000 (684,000) 2,736,000
The following additional information is relevant. (1) On 31 May 20X2 property which was originally purchased for CU734,000 (and which had not previously been revalued) was revalued to CU1,000,000. There were no other movements on the revaluation reserve during the year. (2) During the year plant and equipment with an original cost of CU1,201,000 and a carrying amount at the date of disposal of CU496,000 was sold at a loss of CU189,000. As at 31 May 20X2 CU165,000 of the sale proceeds had yet to be received and is included within trade and other receivables. As at 31 May 20X1 the corresponding figure in respect of disposals made during the year then ended was CU79,000, 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 were paid for in cash at the date of acquisition. However, included within trade and other payables as at 31 May 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 other receivables as at 31 May 20X2 include CU10,000 (20X1 – CU8,000) in respect of interest receivable on investments. (5) As at 31 May 20X1 the ordinary share capital of Copeland Ltd consisted of 1 million shares, each with a 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 the company’s ordinary shares. Dividends of CU243,000 were charged to retained earnings in the year ended 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 in accordance with BAS 7 Cash Flow Statements for Copeland Ltd for the year ended 31 May 20X2, using the indirect method. (24 marks)
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
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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 CU 7,350,500 (4,560,600) 2,789,900 (1,060,800) (768,000) 961,100 (75,000) 886,100 (350,000) 536,100
Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance charge Profit before tax Income tax expense Profit for the period Balance sheet as at 31 December 20X7 20X7 CU
ASSETS Non-current assets Property, plant and equipment Intangibles
560,500 169,000 25,000 10,700
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Revaluation reserve Retained earnings Non-current liabilities Preference share capital (redeemable)
Total equity and liabilities
CU
7,500,400 350,700 7,851,100
Current assets Inventories Trade and other receivables Investments Cash and cash equivalents
Current liabilities Trade and other payables Taxation Ordinary dividend payable
20X6 CU
CU 6,950,300 300,500 7,250,800
765,100 144,500 12,400 20,200 765,200 8,616,300
942,200 8,193,000
4,000,000 1,200,000 500,000 1,357,800 7,057,800
3,500,000 950,000 236,800 2,206,700 6,893,500
500,000
400,000
148,500 410,000 500,000
139,500 360,000 400,000 1,058,500 8,616,300
899,500 8,193,000
Statement of changes in equity for the year ended 31 December 20X7 (extract)
Transfer from revaluation reserve Profit for the period Dividends on ordinary shares Balance brought forward Balance carried forward
Retained earnings CU 15,000 536,100 (1,400,000) 2,206,700 1,357,800
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full single entity financial statements The following additional information is relevant. (1) During the year Pippin Ltd issued both further ordinary shares and further redeemable preference shares. The latter were issued at par. (2) Investments categorised as current assets are held for the short-term and are readily convertible into cash on demand. (3) During the year Pippin Ltd sold plant and equipment with a carrying amount of CU560,500 for CU600,000. 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. Costs amounting 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 in accordance with BAS 7 Cash Flow Statements for Pippin Ltd for the year ended 31 December 20X7, using the indirect method. (18 marks)
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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 20X5
CU 5,650,500 (3,460,600) 2,189,900 (978,800) (256,000) 955,100 (89,000) 866,100 (297,600) 568,500
Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance charge Profit before tax Income tax expense Profit for the period Balance sheet as at 31 March 20X5 ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets
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20X5 CU
CU
20X4 CU
4,360,400 172,000 4,532,400 460,600 269,000 135,000
CU 2,950,300 156,000 3,106,300
365,100 244,500 120,200 864,600 5,397,000
© The Institute of Chartered Accountants in England and Wales, March 2009
729,800 3,836,100
QUESTION BANK
20X5 CU EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Retained earnings Non-current liabilities Finance lease liabilities Current liabilities Trade and other payables Taxation Finance lease liabilities
CU
20X4 CU
3,000,000 1,050,000 142,500 4,192,500
1,800,000 850,000 74,500 2,724,500
500,000
400,000
348,500 300,000 56,000
289,600 350,000 72,000 704,500 5,397,000
Total equity and liabilities
CU
711,600 3,836,100
The following additional information is relevant. (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 issued further 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 certain investments. As a result, an impairment loss of CU12,000 was identified and written off to administrative expenses. (5) During the year Merry Ltd acquired plant and equipment for cash of CU2,057,000. In addition, plant and equipment with a fair value of CU600,000 was acquired under a finance lease. All finance costs relate to finance leases. The depreciation charge for the year, charged to cost of sales, was CU750,600. 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 method and 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 for the year ended 31 March 20X5 as it would appear under the indirect method. (4 marks) (25 marks)
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full single entity financial statements
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
Preparation of extracts from financial statements
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Montrose Ltd Montrose Ltd has various outstanding matters to resolve regarding inventories in preparing its financial statements for the year ended 30 September 20X4. (1) Overheads relating to finished goods and work in progress have yet to be included in the final inventory valuation. An analysis of the company's costing records shows the following. CU 1,000,000 660,000 300,000 200,000 150,000
Direct labour Production overheads General administration overheads Distribution overheads Design and marketing overheads The company's production activity has been as follows. Year ended 30 September 20X3 30 September 20X4 30 September 20X5 (projected)
Actual units 650,000 500,000 –
Budget units 650,000 700,000 800,000
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 a supplier's premises. As compensation for production delays, the supplier agreed to a one-off payment of CU100,000, which was received on 31 August 20X4, and this was credited to production overheads. (3) Raw materials are imported at a purchase cost of CU5.00 per unit. Other costs arising are as follows. CU per unit 1.00 0.50 1.00
Import duty Transport to factory Storage and handling costs
(4) Half of the work in progress is 75% complete, and the remainder is 50% complete as to labour and overheads, all raw materials having been issued. (5) The company manufactures to customers' requirements for all orders. The final selling price is determined on a cost plus standard mark-up basis for the majority of orders. (6) Inventory at 30 September 20X4 amounted to the following. Raw materials Work in progress Finished goods
Units 100,000 50,000 50,000
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements (7) The total net realisable value (NRV) of finished goods is CU560,000. The following is an analysis of major orders in finished goods at the year end. Units Order M147 Order M293 Order M467 Order M364 Order M191
1,800 5,555 6,500 4,630 3,240 21,725
NRV CU 22,000 55,000 60,000 54,000 40,000 231,000
Requirements (a)
Calculate the amount to be included in the financial statements of Montrose Ltd for the year ended 30 September 20X4 in respect of inventories, preparing all relevant extracts from the financial statements 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)
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Gandalf Ltd At 1 July 20X5 the capital and reserves section of Gandalf Ltd's balance sheet showed the following. Ordinary share capital (CU1 shares) Share premium account Revaluation reserve Retained earnings
CU 500,000 120,000 420,000 347,500 1,387,500
The accountant of Gandalf Ltd has prepared a draft income statement for the year ended 30 June 20X6 which shows a profit for the period of CU135,500. However, there are certain matters which he is unsure how to deal with and these are set out below. He has also asked for your assistance in preparing the statement of changes in equity for that year. It is Gandalf Ltd's policy to maintain as high a possible balance on 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. It also issued 200,000 7% 50p irredeemable preference shares at par and 100,000 5% 50p redeemable preference shares at a price of 70p per share. Transaction costs in relation to these share issues were CU5,000, CU3,000 and CU1,000 respectively. (2) During the year an ordinary interim dividend of CU30,000 was paid. The accountant has debited this to finance charges. A further ordinary dividend of CU25,000 was declared on 15 June 20X6 and is expected to be paid shortly. The accountant has made no entries in respect of this dividend or the two 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 at that date at a cost of CU500,000 (land CU300,000 and buildings CU200,000) and accumulated depreciation of CU50,000. Depreciation is charged on a straight-line basis over an original estimated useful life of 40 years. The valuation showed a fair value for the land of CU600,000 and for the buildings of CU400,000. The estimated remaining useful life of the buildings was reassessed at the same date and is believed to be 50 years. Depreciation for the year on freehold land and buildings has not yet been charged. (4) On 1 July 20X5 Gandalf Ltd decided to change its depreciation policy for plant and machinery from 20% straight-line to 25% reducing balance. Prior to charging depreciation for the year ended 30 June 20X6 the plant and machinery account showed a cost of CU357,800 and accumulated depreciation of CU125,700. There were no movements on the plant and machinery account during the year. The accountant has not yet calculated the depreciation charge for the year as he is unsure how to do this.
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
(5) Whilst preparing the draft financial statements the accountant discovered an error in the previous year's financial statements. Expenditure of CU42,500 had been capitalised as an intangible asset whereas in fact this was in contravention of BAS 38. This expenditure has been subject to an amortisation 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 those prepared using the cash accounting or break-up bases, illustrating your answers with simple calculations. (8 marks) (23 marks)
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Cagreg Ltd Cagreg Ltd manufactures and sells heavy plant. The company also hires out plant for monthly periods (or multiples 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 to planning difficulties, building has not yet been started. The directors wish to revalue the land to its fair value 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 the remaining life was 56 years. The buildings were acquired for CU200,000 on 1 October 20X4, when their 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 the rate 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 February 20X9. 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 accumulated depreciation of CU72,000. (4) Computer Previously this has been depreciated on a straight-line basis at the rate of 10% per annum on cost. The computer was acquired on 1 January 20X7 for CU60,000, and by the beginning of this accounting year CU10,500 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 a usage basis. The manufacturer's estimate of total usage time of the computer's life is 40,000 hours. The data processing manager estimates that some 10,000 hours have been worked prior to the current accounting period. During the current year the record shows 4,800 hours worked. The computer will have 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 published balance sheet at 30 September 20X9. (16 marks)
(b) Briefly explain the qualitative characteristics contained in BFRS Framework for the Preparation and Presentation of Financial Statements illustrating your answer with reference to the provisions of BAS 16 Property, Plant and Equipment. (6 marks) (22 marks)
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements
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Roberts Ltd Roberts Ltd is a pharmaceutical company owning significant non-current tangible assets which are all initially recorded at cost. Subsequently, land and buildings are remeasured at fair value when this differs materially from the carrying amount. Roberts Ltd adopts the policy of transferring the revaluation surplus included in equity 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 the majority of the non-current assets located at the site were fully insured and therefore the company has suffered no loss in respect of those assets. However, one item of specialised machinery had been transferred 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 depreciated over 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 pay 65% of the carrying amount at the date of the fire. However, before the sale takes place, the purchaser expects Roberts Ltd to carry out repairs to the asset. This work can be done by employees of Roberts Ltd and will take approximately 600 hours of skilled labour. Such labour is routinely charged out to customers at an hourly rate of CU38.40 (including a profit margin of 20% on cost). In addition Roberts Ltd will have to pay for the machinery to be moved to its new location. An estimate of CU21,000 has been obtained from a transport company, and there will also 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 the repair 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. During 20X1 a factory was built on the land at a cost of CU1.7 million. Additional architects' fees of CU80,000 were also incurred. The building work was finished on 1 May 20X2, when the factory was occupied and brought into use. On 31 December 20X3 the land and buildings were revalued to their fair value of CU7.8 million (with 60% of the value relating to the land). At this date the directors also reassessed the total useful life of the building, increasing it from 30 to 40 years. On 31 December 20X4 it was discovered that toxic chemicals had been leaking from the factory into the land. The building can no longer be used. However, a waste disposal company has offered CU1.5 million 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 and 31 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 and show how they would be disclosed. (7 marks) Note: Work to the nearest CU'000. (13 marks)
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
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Dumfries Ltd Dumfries Ltd, which uses the straight-line method of depreciation, entered into leasing contracts on 1 May 20X4 for certain items of plant and machinery and office equipment. The following information is relevant. (1) Plant and machinery with a fair value of CU109,140 was leased under an agreement which required annual payments of CU31,300 payable in advance. The primary period of the lease is four years, after which the company can continue to lease the plant and machinery at a nominal rent and is likely to do so. Dumfries Ltd has estimated the useful life of the plant and machinery at five years and its residual value as CUnil. Using the interest rate implicit in the lease of 10%, the present value of the minimum lease payments is CU109,143. The company is fully responsible for the insurance and maintenance of the plant and machinery. (2) Office equipment with a fair value of CU60,510 was leased under an agreement which required annual payments of CU15,000 payable in advance. The company is committed to the lease for three years but the lessor is responsible for the insurance and maintenance of the equipment. The lessor has estimated the useful life of the office equipment at 12 years. Using the interest rate implicit in the lease of 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 of elements, 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 the income statement for each year of the leases and in the balance sheet as at 30 April 20X5, preparing the reconciliation note for property, plant and equipment and the other notes specifically required by BAS 17 Leases. (14 marks) (20 marks)
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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 in advance. The primary lease term is for five years from 1 July 20X7 and the machine is expected to have a useful life of five years, with no residual value. The machine would have cost CU175,000 if bought outright. Crieff Ltd is responsible for the maintenance and insurance of the asset. The interest rate implicit in the agreement is 8% per annum and the present value of the minimum lease payments is CU172,480. (2) Items of office equipment were leased at a cost of CU7,500 per month payable in advance. The lease term is for two years from 1 September 20X7 and can be cancelled at any time by either party to the lease. Any maintenance is carried out by the lessor. The office equipment would have cost CU300,000 if 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 an annual cost of CU30,000 payable in arrears on 30 June each year. The agreement is for five years and Crieff Ltd has the option to purchase the asset at the end of the five years at a nominal cost. The asset is expected to have a useful life of eight years. The machine would have cost CU120,000 if bought outright. The interest rate implicit in the agreement is 8% per annum and the present value of the minimum 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 in advance was entered into on 1 July 20X7. The fair value of the leasehold interests has been estimated at CU600,000 of which CU60,000 relates to land and CU540,000 to buildings.
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements The useful life of the buildings has been professionally assessed at 45 years. The interest rate implicit in the lease is 10% and the present value of the minimum lease payments attributable to the buildings is CU528,120. Requirements (a)
Briefly explain the concepts underlying the accounting treatments required by BAS 17 Leases with reference to BFRS Framework. (3 marks)
(b) Calculate the appropriate amounts to be disclosed in the financial statements for the year ended 30 June 20X8, preparing all relevant disclosure notes. You should use the actuarial method to apportion any finance charges. You are not required to produce any notes relevant to the cash flow statement 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 of the 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 his personal records. He asked you to provide an analysis of revenue from each client, which he compared to his own figures, and he has found three apparent discrepancies. These apparent discrepancies relate to the following transactions: (1) ITC entered into a fixed price contract for CU120,000 with Arial Ltd to build a computer. Work had begun on this project; the costs incurred to date were CU60,000 and it was estimated to be twothirds completed. However, the engineers have just discovered an incompatibility between two key components and the work on the computer to date will need major revisions. It is difficult to estimate the costs of completing the work because of the complexity of the new hardware. It is considered that CU50,000 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 to its clients the services of ProMarket Ltd. If an ITC client uses ProMarket Ltd then the gross fee is paid to ITC, who then remit the fee, less 15% commission, to ProMarket Ltd. In the year ended 28 February 20X5 ITC received gross fees of CU300,000 for marketing services provided by ProMarket Ltd. (3) ITC is the exclusive retailer of computers manufactured by LapTop Ltd. LapTop Ltd have announced that its latest model, which has a very high specification, is now ready for sale and will be released to the market in mid-April 20X5. ITC will buy the computers for CU600 and sell them for CU1,000. In the short term, demand for the computer will exceed supply and 500 customers of ITC have each paid a 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 projects is: CU (1) 120,000 (2) 300,000 75,000 (3) 500 CU150 = 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 those elements. (4 marks)
(b) Applies these principles to the above three transactions, showing how you have calculated revenue in the financial statements for the year ended 28 February 20X5. (12 marks)
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
(16 marks)
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Withington Ltd Withington Ltd is organised into several divisions. The following events relate to the year ended 31 December 20X0. (1) A number of customers have initiated legal proceedings relating to the supply of electrical transformer units 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 in place at 31 December 20W9 disclosed in the balance sheet at CU1 million. CU800,000 was paid out in such claims during 20X0. (2) A mechanical transformer unit supplied to Swithin Ltd during the year exploded, causing a fire. Swithin Ltd has initiated legal proceedings for damages of CU10 million against Withington Ltd. A legal expert has advised Withington Ltd that there is only a 30% chance of defending the claim successfully. The present value of this claim has been estimated at CU9 million. The expert has investigated the cause of the problem with a team of accident consultants. Together they have concluded that parts supplied by George Ltd to Withington Ltd for inclusion in the transformer unit were defective and contributed to the explosion. They have estimated that George Ltd's contributory negligence is 40% of any final settlement. Negotiations have commenced with George Ltd and the legal expert believes that this claim is likely to succeed. (3) On 1 January 20X0 Withington Ltd installed a new electric machine. The electric machine cost CU200,000 and has an expected life of 20 years. The machine is lined with a special compound. The lining needs replacing every four years. The cost of the lining included within the machine cost is CU40,000. The financial controller proposes to capitalise the machine at CU200,000 and depreciate over 20 years, while building up a replacement provision over four years for the relining of the machine. (4) Withington Ltd has begun the extraction of metal ore in an overseas country, Didland. On 1 January 20X0 Withington Ltd erected some infrastructure on the site at a cost of CU200,000. Withington Ltd has a five year operating licence issued by Didland government for the site. Didland has no environmental clean-up law enacted. Withington Ltd made public statements during the licence negotiations 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. In addition, further clean-up costs will be progressively created as the ore is extracted. On the basis of the planned extraction, the total cost of cleaning up the extracted ore hole will be CU400,000 at the end 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 contract with Franklin Ltd. Withington Ltd is manufacturing 1,000 processor units per month. The forecast profit per unit was CU10 but, due to unforeseen cost increases and production problems, each unit is anticipated to make a loss of CU7. The compensation payable for not fulfilling the contract is CU2 million. (6) During the year a restructuring of the Chuckholder division began. The aim of the plan was to reduce costs and improve business efficiency. The division has not been separately reported as a business segment, and accounts for only 2% of group revenue. The plan was implemented on 1 September 20X0, 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 1,000 Lease termination 2,300 Retraining 1,100 Relocation 2,100 Marketing relaunch 1,400 Investment in new systems 1,000 8,900
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements Requirements (a)
Prepare the provisions and contingencies note for the financial statements for the year ended 31 December 20X0, including narrative commentary. (15 marks)
(b) Calculate the annual depreciation charge for 20X0 arising from the above transactions.
(3 marks) (18 marks)
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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 on 1 June 20X6 for CU580,000. The identifiable assets, liabilities and contingent liabilities of the business had a net carrying amount of CU550,000, and were valued at CU500,000 on 1 June 20X6. An impairment loss of CU20,000 in relation to the goodwill acquired in this business combination was recognised in the year ended 31 May 20X8. (2) Green Goods, a business specialising in the distribution of a range of environmentally-friendly products, acquired on 1 June 20X7 for CU1.8 million. The assets, liabilities and contingent liabilities of the business had a net carrying amount of CU1.1 million and were valued at CU1.3 million on 1 June 20X7, including goodwill of the business of CU150,000 and a patent of CU70,000 allowing Islay Ltd sole use of unique distribution systems for ten years. An impairment loss of CU50,000 in relation to the goodwill acquired in this business combination is to be recognised in the year ended 31 May 20X9. (3) 70% of Smart IT Ltd, a business specialising in the distribution of computers, acquired on 1 June 20X8 for CU1.1 million cash. The identifiable assets, liabilities and contingent liabilities of the business had a net carrying amount of CU1 million and were valued at CU1.2 million on 1 June 20X8. In addition, the directors of Smart IT Ltd believe that they have built up goodwill within the company and that it is worth CU200,000. Islay Ltd revalued one class of its property, plant and equipment on 1 June 20X8, and created a revaluation reserve 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 intangibles arising from the above acquisitions) in the draft consolidated financial statements as at 31 May 20X9 are as follows. CU'000
Capital and reserves Called up share capital (5,000,000 ordinary shares of CU1 each) Revaluation reserve (before any 20X9 transfer to retained earnings) Retained earnings (CU175,500 for the year ended 31 May 20X9)
5,000 600 700 6,300
Requirement Calculate and disclose the amounts for intangible assets to be included in the consolidated financial statements for Islay Ltd for the year ended 31 May 20X9, providing the following disclosures.
24
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.
© The Institute of Chartered Accountants in England and Wales, March 2009
(11 marks)
QUESTION BANK
20
Greenstones Ltd Greenstones Ltd is a large international company operating in high-tech industries and it incurs significant costs in researching and developing new products. During the year to 31 December 20X8 its Rajshahi division has been working on three key projects. Project Alpha
Development of a new microchip on behalf of Codack Ltd (costs plus 40% to be reimbursed 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 in the casings for digital cameras.
At 1 January 20X8 the following costs had been capitalised.
Specialised equipment Accumulated depreciation (useful life 60 months) Research and development
Project Alpha CU – – –
Project Beta CU – – 160,000
Project Gamma CU 500,000 (200,000) 650,000
At 31 December 20X8 Project Alpha was held up awaiting supply of a suitable electronic microscope. It is envisaged 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 1 April 20X7, when the accumulated research and development costs stood at CU470,000, the final technical problems were overcome. On 1 October 20X8 the specialised equipment was transferred to other projects at a carrying amount of CU140,000. During the year the following costs were incurred.
Materials Labour
Project Alpha CU 22,000 45,000
Project Beta CU 15,000 65,000
Project Gamma (to 1 October 20X8) CU 98,000 75,000
In the three months to 31 December 20X8 sales of the new camera casings exceeded expectations and profit 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 between them, giving an appropriate example. (3 marks)
(b) Evaluate the treatment of development expenditure set out in BAS 38 Intangible Assets against the characteristics of relevance and reliability. (4 marks) (c)
Prepare extracts from the financial statements for the year ended 31 December 20X8 reflecting the above. The only note required is that relating to charges against operating profits. (10 marks) (17 marks)
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements
21
Okehampton Ltd Okehampton Ltd carries land and buildings under the revaluation model allowed by BAS 16 Property, Plant and 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 held for 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 and as it had originally cost CU200,000, a surplus of CU100,000 stood in the revaluation reserve in respect of 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 December 20X6 its fair value was estimated as CU320,000 and the costs to sell at CU9,000. It was sold in 20X7 for CU350,000 net of selling expenses. (2) The Elizabeth House land and buildings had a carrying amount of CU400,000 at 31 December 20X5 and as it had originally cost CU350,000, a surplus of CU50,000 stood in the revaluation reserve in respect of it at that date. Depreciation on the buildings element is charged at the rate of CU12,000 per annum; on historical cost the annual charge would have been CU8,000. On 30 June 20X6 and 31 December 20X6 its fair value was estimated as CU360,000 and the costs to sell at CU8,000. It was sold 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 is charged at the rate of CU20,000 per annum. On 30 June 20X6 and 31 December 20X6 its fair value was estimated as CU140,000 and the costs to sell at CU9,000. It was sold in 20X7 for CU120,000 net of 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 December 20X6 its fair value was estimated as CU620,000 and the costs to sell at CU15,000. It was sold in 20X7 for CU635,000 net of selling expenses. The balance on Okehampton Ltd's revaluation reserve at 31 December 20X5 was CU370,000 and there were 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 revaluation reserve on that date. (9 marks)
(b) The amounts to be recognised in respect of these assets in the income statement for the year ended 31 December 20X6. (4 marks) (c)
The amounts to be recognised in respect of these assets in the income statement for the year ended 31 December 20X7 and the balance on the revaluation reserve on that date. (4 marks) (17 marks)
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Banchory Ltd You have been approached by the financial controller of Banchory Ltd. She has asked you to prepare some information in relation to the company's draft financial statements for the year ended 30 April 20X0 which show 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 supplied and the consequential loss arising from their use. The supplier has contested the validity of this claim and the legal costs arising from this dispute amounted to CU40,000 by 30 April 20X0. The company’s solicitors 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 corresponding credit to cost of sales. No adjustment has been made for the legal costs which have not yet been paid.
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
On 31 May 20X0 Banchory Ltd’s quality control staff obtained independent evidence which shows that the materials were faulty. The company’s solicitors advise that it is now probable that the claim will be settled in full. (2) Banchory Ltd issues one-year warranties to customers on the supply of some of its products. The company 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 months after the date of sale of the products. Sales subject to warranty in the last six months of the year amounted to CU6 million. No adjustments have been made to the financial statements in respect of this matter. (3) Banchory Ltd’s solicitors have advised the directors about correspondence from a past employee claiming unfair dismissal with effect from 4 May 20X0. The claim, which has been provided for in the draft financial statements, amounts to CU300,000 and the solicitors consider that it is highly unlikely the 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, with an authorised share capital of 4,000,000 ordinary CU1 shares. There was also an opening balance on the 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 1 for 4 ordinary shares at CU1.75 on 15 April 20X0, when the current market price of each share was CU2.00. The entire proceeds of the rights issue were immediately used to acquire the share capital of a company whose net assets at the date of acquisition had a carrying amount of CU850,000 and a fair value of CU950,000. The acquired business has not performed to expectations and an impairment write-down to CUnil is required. (5) During the year the decision was taken to close down one of the company’s two factories, completing the process, including the sale of the factory unit, prior to the year end. The only gain or loss relating to this closure was that on the disposal of the factory unit and this has been reflected in the draft results. At the time this decision was taken, the fair value of the factory was estimated at CU3.05 million and the costs to sell it at CU50,000. The factory was eventually sold for CU3.1 million, net of selling expenses. At the time of classification as held for sale the factory had a carrying amount of CU2.1 million. The factory had been included in the balance sheet at valuation and the profit on disposal, which has been included in the draft results, is based on the historical cost carrying amount of CU1.3 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 ten years. However, as at 1 May 20W9 it was discovered that the total useful life of this asset is actually only six years. The revision of the useful life has been dealt with as a change in accounting policy. This asset 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 50 years. The revaluation surplus of CU500,000 has not been recognised in the financial statements but the depreciation charge for the period, which has been included in the draft profit, has been based on the revalued amount. Requirements (a)
Prepare the provisions and contingencies notes for the financial statements for the year ended 30 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)
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements
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 year ended 30 April 20X1. (1) The company has drawn up a detailed formal plan for the closure of its distribution division, which has operated as a separate cost centre, intending to sub-contract this work in the future. This plan has been approved by the board of directors and announced to employees by the year end. The plan identified the following costs. Redundancy costs Costs of early termination of existing contracts Anticipated future operating losses – 1 May 20X1 to date of closure in June 20X1
CU 250,000 100,000 190,000
The company expects to realise a profit of CU90,000 on disposal of the non-current assets in the division 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. The item had been completed by the year end, and the construction director has summarised the costs which his department was charged. CU Materials 100,000 Labour costs Factory staff 100,000 Supervision staff (one additional supervisor employed for this project) 15,000 Professional fees – sub-contracted designers 22,000 Installation costs 13,000 Administration 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 through Banff Ltd mis-scheduling deliveries. The plant is expected to have a useful life of ten years with no residual value. Major overhauls will need to be carried out every four years at a cost of CU80,000. The company intends to provide CU20,000 annually to meet this cost. (3) Banff Ltd entered into a six-year finance lease for plant and machinery on 1 May 20X0, paying a deposit of CU100,000 to be followed by five equal annual instalments of CU150,000 on 1 May in each subsequent year. The purchase price of the asset if bought outright would be CU780,000. The company uses the sum-of-the-digits method to allocate finance charges. Apart from recording the payment of the deposit on 1 May 20X0, no other accounting entry has been made for this finance lease. (4) The hardware division made a sale of a computer on 1 May 20X0. The proceeds of CU4 million were received on 1 July 20X0 and recognised as revenue. The fee included the supply of hardware and a four year maintenance contract covering maintenance support. The costs of providing that support on similar contracts have been CU500,000 per annum, and the mark-up on those maintenance contracts was 50% on cost. (5) The software division entered into a CU3 million contract on 1 May 20W9 to develop a unique product for a customer. At 30 April 20X0 the contract was estimated at 25% complete. However, as the costs to complete could not be estimated reliably, only the costs incurred of CU200,000 were recognised as revenue. During the year to 30 April 20X1 a further CU2 million of costs have been incurred and included within inventory. The contract is now thought to be 75% complete, something confirmed by an independent expert assessor who has also estimated the costs to complete as CU400,000 and has confirmed the feasibility of the product. No invoice has yet been rendered to the customer. (6) On 1 May 20W9 Banff Ltd acquired an item of plant for CU1 million. The useful life was estimated as eight years. The carrying amount in the financial statements at 30 April 20X1 is CU750,000 under the cost model accounting policy. On 1 February 20X1 the plant was considered to be surplus to requirements and the management concluded that the carrying amount would be principally recovered
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
through sale. A professional agent estimated its fair value as CU900,000 and it was advertised for sale on 1 February 20X1 at that price. The agent charges a 3% commission. While the plant is available for immediate sale, Banff Ltd has continued to use it for training and incidental production purposes. The other activities undertaken on the machine have been transferred to other items of plant. A third party has made an offer at the asking price and it is expected that the sale will be completed during 20X1. Requirements (a)
Prepare relevant extracts from the income statement for Banff Ltd for the year ended 30 April 20X1 and 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 and balance 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 year ended 30 June 20X3. You have been asked to provide draft information to the board of directors based on the following information provided by the assistant accountant of Skinner Ltd. (1) Property, plant and equipment as at 30 June 20X2 was as follows. Cost Freehold land and buildings Plant and machinery
CU 1,620,000 1,278,000 2,898,000
Depreciation CU 148,800 539,600 688,400
Carrying amount CU 1,471,200 738,400 2,209,600
The freehold land and buildings relate to the factory site, of which the land cost CU1 million. On 1 July 20X2 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 a machine 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 for buildings 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 payments are CU65,000 per annum payable in arrears, commencing on 30 June 20X3. The only entry made in the accounts has been to recognise this year’s lease payment as an expense in the income statement as part of administrative expenses. The lease agreement shows that the rate of interest implicit in the lease is approximately 5%, and the lessee is responsible for the maintenance of the machine. The present value of the minimum lease payments is CU419,900. Other working papers show that the cash price of the machine was CU450,000, and it has an expected useful life of ten years. (3) Skinner Ltd manufactures one product, a food processor. The costs of making a processor have been established as follows. CU Variable cost per unit Raw materials Import duties on above Direct labour
10.00 1.00 15.00 26.00
© The Institute of Chartered Accountants in England and Wales, March 2009
29
Preparation of extracts from financial statements In addition, the following costs are also incurred every month.
Factory power Factory supervisors' salaries Depreciation of plant Selling costs Distribution costs
Total cost CU 3,000 2,000 7,000 6,000 2,000 20,000
Cost/5,000 units CU 0.60 0.40 1.40 1.20 0.40 4.00
Cost/4,000 units CU 0.75 0.50 1.75 1.50 0.50 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 ended 30 June 20X3 and any other narrative notes required in respect of property, plant and equipment as a result of the above information. (10 marks)
(b) Prepare a note analysing future lease payments on the gross basis and show how the above lease will be reflected in the financial statements for the year ended 30 June 20X3 (including the cash flow statement). 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 delivering psychometric 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 statement shows 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 equipment held by the group. Following advice from an independent industry expert, the following changes were made with effect from 1 January 20X2.
The method of depreciation used on certain items of printing equipment was changed. The equipment was originally purchased on 1 January 20X1 for CU12 million and was initially depreciated using a 15% reducing-balance method. This is to be changed to straight-line over a total useful life of five years.
The total useful life of some property originally purchased on 1 January 20X0 for CU40 million was reduced from 25 to 20 years.
In the draft accounts both of the above items have been dealt with as adjustments to the retained earnings brought forward at 1 January 20X2. Retained earnings as restated are shown as CU35 million in the draft accounts. (2) During the current year the group has expanded into the computer-based training market. This has been achieved in two ways. (i)
30
Via the acquisition on 1 January 20X2 of 60% of Newtrain Ltd, a company which already had a portfolio of CD-Rom training products. To integrate Newtrain Ltd into the group, Rosetta Ltd planned substantially to reorganise its operations over the first three months of ownership, so at
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
the acquisition date a reorganisation provision of CU1.2 million was recognised. Goodwill arising in the business combination was then measured at CU6 million. In the draft accounts the goodwill has been amortised over its estimated useful life of twenty years. An impairment review at 31 December 20X2 revealed its recoverable amount to be CU4.1 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 and the final product was successfully launched on 30 November 20X2. At that date the following costs were capitalised as an intangible non-current asset. IT hardware (purchased 1 February 20X2, useful life 48 months) Employment costs of those developing the product Costs incurred in training staff to deliver the new product
CU 600,000 1,800,000 480,000 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 the technical feasibility and financial viability of the product were confirmed. A competitor has recently approached Rosetta Ltd and offered CU6 million for the know-how embodied in the product. As a result, the intangible asset has been revalued to CU6 million in the draft financial statements, 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 of CU2,100,000. Accumulated impairment losses in relation to that goodwill at 1 January 20X2 were CU300,000. 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 financial statements 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 retained earnings 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 in relation 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 the ordinary share capital of Islay Ltd. On 1 December 20X0 Arran Ltd purchased 30% of the ordinary share capital of Millport Ltd. On 31 January 20X1 Arran Ltd disposed of its entire holding in Islay Ltd for CU2.5 million.
© The Institute of Chartered Accountants in England and Wales, March 2009
31
Preparation of extracts from financial statements The draft income statements of the four companies for the year ended 31 May 20X1 were as follows.
Revenue Cost of sales Operating expenses Profit before tax Tax Profit for the period
Arran Ltd CU 10,000,000 (7,400,000) 2,600,000 (1,100,000) 1,500,000 (450,000) 1,050,000
Jura Ltd CU 6,500,000 (4,500,000) 2,000,000 (650,000) 1,350,000 (400,000) 950,000
Islay Ltd CU 3,900,000 (2,700,000) 1,200,000 (390,000) 810,000 (240,000) 570,000
Millport Ltd CU 14,500,000 (10,000,000) 4,500,000 (1,700,000) 2,800,000 (840,000) 1,960,000
Arran Ltd acquired its holding in Islay Ltd for CU1,600,000 when the fair value of the net assets of 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 of CU96,000 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 of 331/3%. 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. CU 5,500,000 3,400,000 1,200,000 200,000
Arran Ltd Jura Ltd Islay Ltd Millport Ltd
The directors had planned to carry out an impairment review of certain items of plant at 31 May 20X1. However, they were too busy to do this and the review was therefore carried out in June 20X1. It revealed the following in respect of machines owned by Jura Ltd and Millport Ltd.
Carrying amount Fair value Costs to sell Value in use
Jura Ltd CU 500,000 400,000 50,000 390,000
Millport Ltd CU 100,000 80,000 10,000 60,000
No falls below carrying amounts were identified at that date in respect of the plant and machinery of Arran Ltd. However, a fire at one of Arran Ltd’s processing units on 1 July 20X1 destroyed much of the 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 to recover 50% of this amount. Depreciation and impairments on plant and machinery are charged to cost of sales. The income statement extracts above do not reflect the above issues. All falls in value are considered to have taken 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 for the 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
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© The Institute of Chartered Accountants in England and Wales, March 2009
(12 marks)
QUESTION BANK
(b) Calculate the carrying amount of property, plant and equipment for inclusion in the consolidated balance sheet of Arran Ltd as at 31 May 20X1 and prepare any relevant extracts from the financial statements 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 June 20X2. 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 by issuing 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 of CU92,000 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 in the year ended 31 October 20X2. These extra shares would be issued on 1 July 20X3. Monans Ltd has achieved increases in revenue over the past five years of 11%, 8%, 10%, 11% and 12% (from the earliest 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 CU1 million higher than carrying amount. Elie Ltd has identified the following matters not recognised in the financial statements of Monans Ltd as at 1 July 20X1.
A legal claim had been made by Monans Ltd against a supplier for damages suffered as a result of faulty goods supplied to Monans Ltd. At the acquisition date the company’s lawyers considered it virtually certain that the claim would succeed. The fair value of the claim was assessed as CU200,000 and this amount was received in December 20X1. Monans Ltd disclosed CU200,000 as 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 line with those of the group. A detailed plan for these changes was not yet in existence and no announcement 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 warehouse on 5 July 20X1. The inventories now have a net realisable value of CU5,000. All inventories in the group at 30 June 20X2 were correctly valued.
The goodwill impairment review at 30 June 20X2 revealed a loss of CU70,000 in relation to this acquisition.
(2) The consolidated income statement currently shows a profit for the period of CU1,456,500 but has not 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 300,000 redeemable and 200,000 irredeemable preference shares during the year. All preference shares were issued at a premium of CU0.20p over their nominal value of CU1 per share and have a coupon rate of 5%. The following ordinary dividends were declared by Elie Ltd. 15 July 20X1 10 July 20X2
10p per share 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.
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements CU 1,000,000 500,000 250,000 5,678,500 7,428,500
Ordinary shares Share premium Revaluation reserve Retained earnings
(3) The revaluation reserve arose in 20X0 when the company’s plant and machinery was revalued. One item of plant, which was purchased on 1 July 20W8 for CU100,000 and was revalued to CU120,000 on 1 July 20X0, was subjected to an impairment review on 30 June 20X2. The review revealed that this 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 on cost or on revalued amount. Elie Ltd makes an annual transfer between the revaluation reserve and retained 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 income statement and includes depreciation on the above impaired asset. No adjustment has been made as yet in respect of the above impairment. If total depreciation had been calculated on cost as opposed to on revalued 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 be carried 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 Ltd for the year ended 30 June 20X2: ordinary share capital, irredeemable preference share capital, share premium and revaluation reserve. (10 marks) (16 marks)
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Wester Ross Ltd On 1 February 20X0 Wester Ross Ltd acquired 75% of the ordinary share capital of Ullapool Ltd, financed by the issue of 2 million CU1 ordinary shares of Wester Ross Ltd at CU7 per share and by CU7 million in cash. On 10 March 20W8 Wester Ross Ltd acquired 30% of the ordinary share capital of Glenelg Ltd for CU2 million cash. The summarised balance sheets of the companies were as follows.
ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets
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At 31 October 20X0 (draft) Wester Ross Ullapool Glenelg Ltd Ltd Ltd CU'000 CU'000 CU'000
At acquisition Ullapool Glenelg Ltd Ltd CU'000 CU'000
42,000 9,000
18,000 –
3,000 –
17,000 –
2,300 –
4,000 8,500 – 63,500
2,500 1,700 700 22,900
500 400 – 3,900
2,000 1,500 300 20,800
300 100 – 2,700
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (CU1 shares) Revaluation reserve General reserve Retained earnings Equity Non-current liabilities Current liabilities Total equity and liabilities
At 31 October 20X0 (draft) Wester Ross Ullapool Glenelg Ltd Ltd Ltd
40,000 10,000 – 3,000 53,000 5,500 5,000 63,500
12,000 2,000 4,000 2,600 20,600 1,000 1,300 22,900
1,500 – – 1,900 3,400 300 200 3,900
At acquisition Ullapool Glenelg Ltd Ltd
12,000 1,500 3,500 2,000 19,000 800 1,000 20,800
1,500 – – 900 2,400 200 100 2,700
Additional information (1) The fair value of freehold property in Glenelg Ltd was CU1.5 million above carrying amount at the date 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 fully accounted 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 CU750,000 on 30 April 20X0. The assets originally cost CU1 million on 30 April 20W5 and are being depreciated over ten years on a straight-line basis. Wester Ross Ltd is depreciating the assets over their remaining useful life. (4) As at 31 October 20X0 the impairment reviews revealed cumulative losses of CU810,000 in relation to the goodwill acquired in the business combination with Ullapool Ltd and of CU276,000 in respect of the investment in Glenelg Ltd. (5) At the time Ullapool Ltd was acquired the company was in dispute with one of its suppliers, giving rise to a contingent liability of CU110,000. The fair value of this liability as at acquisition was assessed as CU98,000 and the liability was still outstanding as at the year end. In addition, at acquisition Ullapool Ltd held raw materials which had cost CU30,000 but which had a replacement cost of CU42,000. This inventory was all sold following the acquisition. (6) After Wester Ross Ltd's draft balance sheet had been prepared, it was decided that the provision for uncollectible 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 Ullapool Ltd Glenelg Ltd
10p per share 5p per share 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 Wester Ross 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 in so 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)
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements
29
Shadowlands Ltd You are the newly-appointed financial controller of Shadowlands Ltd. The directors have asked you to prepare 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. Operating profit Investment income Interest payable Profit before taxation Income tax Profit after taxation
CU 3,500,000 950,000 (50,000) 4,400,000 (1,700,000) 2,700,000
Current assets and liabilities at 31 December 20X7 and 31 December 20X6 and the depreciation charges for those years were as follows. 20X7 20X6 CU CU Inventories 350,600 460,700 Trade and other receivables 279,600 256,900 Cash and cash equivalents 10,500 7,850 Trade and other payables 178,500 182,300 Depreciation charges 356,000 372,000 (2) On 1 January 20X7 Shadowlands Ltd entered into a finance lease for a machine with a fair value of CU105,000. On that date the company paid a deposit of CU10,000. On 31 December 20X7 the company 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 for CU300,000 and has treated Bacardi Ltd as an associated undertaking since that date. Bacardi Ltd’s capital and reserves have been as follows. At 31 December 20X7 At acquisition CU CU Ordinary share capital 500,000 500,000 Retained earnings 200,000 650,300 In the year to 31 December 20X7 Bacardi Ltd took CU110,200 to retained earnings. Shadowlands Ltd disposed of its holding in Bacardi Ltd on 30 June 20X7 for CU750,000. The directors have credited this amount to investment income. Up until 31 December 20X6 Shadowlands Ltd had recognised impairments 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 20X7 which 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 would be disclosed in the financial statements. Use the sum-of-the-digits basis to allocate interest. Notes to the 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 the group accounts and Shadowlands Ltd’s individual accounts. (5 marks) (15 marks)
Note: Ignore taxation.
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
30
Scribo Ltd Scribo Ltd is a large publishing company which is organised into several divisions. The financial controller has asked you, as assistant accountant, to prepare certain items of information for the financial statements for 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 June 20X6. This is made up of the following. Revenue CU 356,700 789,400 3,450,800 367,700 4,964,600
Division Magazine subscriptions Magazines sold via newsagents Book sales Advances for books yet to be published
The company publishes one magazine, sales of which commenced on 1 March 20X6. Magazine subscriptions are purchased on an annual basis for CU30 each and magazines are despatched on the first working day of the month. 50% of the above revenue from magazine subscriptions arose prior to the 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 the next month’s delivery newsagents are required to return any unsold magazines for the previous month, together with a returns note detailing how many copies are being returned. Within the next week they are invoiced by Scribo Ltd for the previous month’s purchases. Returns notes received by Scribo 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 recorded within non-current assets at 30 June 20X5 in respect of intangible assets. Cost Goodwill Publishing titles Technical know-how
CU 450,000 120,000 300,000
Accumulated amortisation/impairments CU 120,000 12,000 90,000
The goodwill was acquired on the purchase of a sole trader on 1 July 20X2. At that time it was estimated that the goodwill had a useful life of ten years. The technical know-how, which relates to Scribo 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, including customer 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 financial statements for the year ended 30 June 20X6. (4 marks) (7 marks)
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of extracts from financial statements
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© The Institute of Chartered Accountants in England and Wales, March 2009
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. ASSETS Non-current assets Property, plant and equipment Investment in Steinbeck Ltd Investment in Innes Ltd
Hemmingway Ltd CU'000 CU'000 6,720 1,540 1,200
Steinbeck Ltd CU'000 CU'000 820 – –
9,460
Current assets Inventories Trade and other receivables Amount due from Steinbeck Ltd Cash and cash equivalents
360 370 75 15
Total assets EQUITY AND LIABILITIES Capital and reserves Issued CU1 ordinary shares Revaluation reserve Retained earnings Equity Non-current liabilities Borrowings Current liabilities Trade and other payables Amount due to Hemmingway Ltd
170 230 – 10 820 10,280
410 1,230
5,000 200 1,210 6,410
600 40 220 860
3,200
50
670 –
270 50 670 10,280
Total equity and liabilities
820
320 1,230
Additional information (1) Hemmingway Ltd acquired 450,000 CU1 ordinary shares in Steinbeck Ltd on 1 July 20X2 for CU1.54 million. At that date the balance on Steinbeck Ltd's retained earnings was a credit of CU140,000 and the balance 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 July 20X2. This plant is to be depreciated over five years from the acquisition date on a straight-line basis, with no residual value. (4) Hemmingway Ltd sold plant to Steinbeck Ltd on 1 July 20X3 for CU96,000; the plant had cost CU100,000 on 1 July 20X2 and had a carrying amount of CU80,000. The plant is to be depreciated over its estimated remaining 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 not received by Steinbeck Ltd until 5 July 20X4. Hemmingway Ltd calculates selling price at a mark-up of 25% on cost.
© The Institute of Chartered Accountants in England and Wales, March 2009
39
Preparation of full consolidated financial statements Requirements (a)
Prepare the consolidated balance sheet of Hemmingway Ltd at 30 June 20X4. Note: Work to the nearest CU'000.
(15 marks)
(b) Hemmingway Ltd is considering the purchase of more shares in Innes Ltd which will make Innes Ltd an associate of Hemmingway Ltd. State briefly and justify the appropriate accounting treatment in the consolidated balance sheet of Hemmingway Ltd if Innes Ltd becomes an associate. (3 marks) (18 marks)
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Highland Ltd The draft summarised balance sheets of Highland Ltd and Lowland Ltd at 31 December 20X2 are set out below. On 31 March 20X2 Highland Ltd acquired for cash 75% of the CU1 ordinary shares in Lowland Ltd. The retained earnings of the two companies at 1 January 20X2 were CU2,800,000 and CU1,500,000 respectively. ASSETS Non-current assets Property, plant and equipment Investment in Lowland Ltd Current assets Inventories Trade receivables – group Trade receivables – other Cash and cash equivalents
Highland Ltd CU'000 CU'000
Lowland Ltd CU'000 CU'000
3,560 2,940 6,500 1,150 400 1,500 100
2,800 – 2,800 550 – 800 50
Total assets
3,150 9,650
EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Retained earnings Equity
3,500 700 3,500 7,700
900 170 2,300 3,370
1,100
110
Non-current liabilities Borrowings Current liabilities Trade payables – group Trade payables – other Dividends Total equity and liabilities
– 700 150
850 9,650
400 240 80
1,400 4,200
720 4,200
Additional information (1) The fair value of Lowland Ltd's property on 31 March 20X2 was CU200,000 above its carrying amount. All of 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 carrying amount was CU300,000. At 31 December 20X2 30% of these raw materials remained in inventory. The rest 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; half of these goods remained in the inventories of Lowland Ltd at 31 December 20X2. Highland Ltd calculated the transfer price of the goods at cost plus a mark-up of 25%.
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
(5) It is the accounting policy of Highland Ltd to undertake annual reviews for goodwill impairment. At 31 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. Note: Work to the nearest CU'000.
(18 marks)
(b) Explain the purpose of group financial statements and the concepts underlying their preparation. (6 marks) (24 marks)
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Ullapool Ltd Ullapool Ltd acquired 70% of the ordinary share capital of Kyle Ltd on 1 May 20X7. The consideration comprised 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 on 1 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. ASSETS Non-current assets Property, plant and equipment Investments
Ullapool Ltd CU'000 CU'000 6,500 2,840
Kyle Ltd CU'000 CU'000 2,900 –
9,340 Current assets Inventories Trade receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Capital and reserves Issued CU1 ordinary shares Issued 25p ordinary shares Share premium Retained earnings Equity Current liabilities Trade payables Total equity and liabilities
900 430 330
1,660 11,000
Portree Ltd CU'000 CU'000 1,800 –
2,900 830 350 120
1,300 4,200
1,800 420 130 150
700 2,500
–
1,700
800
4,750 1,250 2,200 8,200
– – 1,850 3,550
– – 1,200 2,000
2,800 11,000
650 4,200
500 2,500
Additional information (1) The CU2,840,000 investments in the balance sheet of Ullapool Ltd comprise CU2,250,000 in respect of Kyle 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 staff time. 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 carrying amount. In addition inventories included raw materials at an original cost of CU150,000, which had a replacement 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 acquisition of Portree Ltd.
© The Institute of Chartered Accountants in England and Wales, March 2009
41
Preparation of full consolidated financial statements (5) At the dates of acquisition the retained earnings of Kyle Ltd and Portree Ltd were CU1.25 million and CU1 million respectively. (6) The inventories of Ullapool Ltd include goods purchased from Kyle Ltd for CU51,000 on 10 October 20X7. Kyle Ltd applies a mark-up of 50% on the cost of its goods. Ullapool Ltd had paid for CU31,000 of these goods on 20 October. The final CU20,000 was paid on 30 October 20X7, but Kyle Ltd did not receive 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)
Note: Work to the nearest CU'000.
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Law Ltd Law Ltd acquired holdings in Balgay Ltd and Newtyle Ltd as follows. Balgay Ltd Newtyle Ltd
70% of the ordinary share capital on 1 July 20X0 for CU5.5 million cash. 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.
ASSETS Non-current assets Property, plant and equipment Investments Intangibles Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Preference share capital (irredeemable) Revaluation reserve Retained earnings/(losses) Current liabilities Trade and other payables Dividends Total equity and liabilities
Law Ltd CU'000
Balgay Ltd CU'000
Newtyle Ltd CU'000
7,500 6,500 100
6,000 – 120
2,500 – –
1,000 1,100 200 16,400
500 450 50 7,120
200 190 90 2,980
10,000 2,000 – 3,000 15,000
6,000 – 500 (280) 6,220
1,000 – – 1,820 2,820
700 700 16,400
720 180 7,120
110 50 2,980
Additional information (1) The intangibles carried by Balgay Ltd are CU70,000 goodwill acquired on the acquisition of the net assets and trade of an unincorporated business in 20W9, and CU50,000 relating to legal rights acquired in the same year over specialised machinery, without which Balgay Ltd cannot operate.
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
(2) The reserves of the companies on the dates of acquisition of share capital were as follows. Revaluation reserve CU'000 Newtyle Ltd Balgay Ltd
10 May 20W7 1 July 20X0
500
Retained earnings CU'000 900 600
(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 the goodwill arising in the business combination with Balgay Ltd and CU120,000 in respect of the investment in Newtyle Ltd. Goodwill in respect of Balgay Ltd was originally estimated to have a useful life of five years. (5) Balgay Ltd sold a property to Law Ltd on 1 September 20X0 for CU400,000. The property had a carrying amount of CU300,000 in the accounts of Balgay Ltd as at 1 September 20X0, with an original cost of CU600,000 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 year end. Ordinary shares CU'000 500 180 50
Law Ltd Balgay Ltd Newtyle Ltd
Preference shares CU'000 200
Law Ltd has not yet accounted for any dividends receivable. Requirement Prepare the consolidated balance sheet of Law Ltd as at 31 August 20X1. Note: Work to the nearest CU'000.
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(17 marks)
Heeley Ltd Heeley Ltd, a listed company, has investments in two companies, Sothall Ltd and Aughton Ltd. The draft summarised balance sheets of the three companies at 31 December 20X3 are shown below. Heeley Ltd CU'000 CU'000 ASSETS Non-current assets Property, plant and equipment Investments
5,200 18,600
Sothall Ltd CU'000 CU'000
4,000 – 23,800
Current assets Inventories Trade and other receivables Amount due from Sothall Ltd Cash and cash equivalents
Aughton Ltd CU'000 CU'000
8,000 – 4,000
8,000
2,300
1,600
4,500
4,800
2,400
3,700
500 1,100
– 300
– 400
8,700 32,500
4,300 8,300
8,600 16,600
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full consolidated financial statements Heeley Ltd CU'000 CU'000 EQUITY AND LIABILITIES Capital and reserves Issued CU1 ordinary shares Retained earnings/(losses) Equity Non-current liabilities Borrowings Current liabilities Trade and other payables Taxation Amount due to Heeley Ltd
20,000
5,000
6,500
Aughton Ltd CU'000 CU'000 6,000
(1,000)
5,000
26,500
4,000
11,000
–
2,000
–
3,700 2,300 –
Total equity and liabilities
Sothall Ltd CU'000 CU'000
1,500 500 300 6,000 32,500
4,200 1,400 – 2,300 8,300
5,600 16,600
Additional information (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 per share. Aughton Ltd should be accounted for as an associate. The draft profit of Aughton Ltd for the year ended 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 acquisition of 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 the date of acquisition. (5) Impairment reviews carried out since acquisition have revealed the following losses in relation to goodwill and the investment in the associate. For year ended 31 December 20X1 20X2 20X3
Sothall Ltd CU'000 300 800 700
Aughton Ltd CU'000 1,500
(6) On 27 December 20X3 Sothall Ltd sent a cash payment of CU200,000 to Heeley Ltd. Heeley Ltd received the 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 of these goods remained in the inventory of Sothall Ltd at the year end. Heeley Ltd calculates the price of the 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 been recognised for sales totalling CU200,000 made on the last three days of the accounting period, even though the relevant goods had been despatched to customers and excluded from Aughton Ltd's inventories at 31 December 20X3. Requirement Prepare the consolidated balance sheet of Heeley Ltd as at 31 December 20X3. Note: Work to the nearest CU'000.
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© The Institute of Chartered Accountants in England and Wales, March 2009
(16 marks)
QUESTION BANK
36
Harris Ltd Harris Ltd has investments in two companies, Scalpay Ltd and Auskerry Ltd. The draft, summarised balance sheets of the three companies at 31 December 20X5 are shown below. Harris Ltd
Scalpay Ltd
Auskerry Ltd
CU'000 20,200 20,000 4,000
CU'000 15,100 – –
CU'000 8,600 – –
Current assets Inventories Trade receivables Cash and cash equivalents Total assets
3,500 2,300 200 50,200
2,700 1,600 300 19,700
1,400 900 100 11,000
Capital and reserves Issued CU1 ordinary shares Retained earnings
35,000 6,000
15,000 2,300
8,000 1,900
6,000
1,000
500
3,200 – 50,200
1,200 200 19,700
600 – 11,000
ASSETS Non-current assets Property, plant and equipment Investment in Scalpay Ltd Investment in Auskerry Ltd
Non-current liabilities Debentures Current liabilities Trade payables Dividends Total equity and liabilities Additional information
(1) Harris Ltd acquired 75% of the CU1 ordinary shares in Scalpay Ltd on 1 October 20X3. At that date the balance 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 for Auskerry Ltd for the year ended 31 December 20X5 was CU600,000, and this profit accumulated evenly over the year. Auskerry Ltd paid no dividends in the year ended 31 December 20X5. Auskerry Ltd should be 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 sum has been charged to the income statement of Harris Ltd. This comprises CU120,000 allocated overheads from 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 of acquisition. (5) Harris Ltd has not recognised the dividend receivable from Scalpay Ltd in its draft balance sheet at 31 December 20X5. (6) At 1 October 20X3 Scalpay Ltd had a contingent liability relating to a legal claim against the company of CU400,000, for which the fair value was estimated at CU300,000. An out of court settlement was agreed on 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 impairment loss of CU100,000 was recognised on the goodwill relating to Scalpay Ltd, but there have been no further impairment losses identified. (8) Scalpay Ltd sold goods to Harris Ltd valued at CU800,000 during the year ended 31 December 20X5 and a quarter of these goods have been re-sold by Harris Ltd. Scalpay Ltd calculated the transfer price of the goods 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 asset of CU200,000. This sum was received on 31 January 20X6. This should now be accounted for as an adjusting event after the balance sheet date.
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full consolidated financial statements Requirements (a)
Prepare the consolidated balance sheet of Harris Ltd at 31 December 20X5.
(15 marks)
Note: Work to the nearest CU'000. (b) Explain in what circumstances, if any, Auskerry Ltd could have been considered to be an associated company of Harris Ltd if the shareholding had been 15%, rather than 30%. (4 marks) (19 marks)
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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 of Aviemore Ltd was CU4 million (represented by share capital of CU3,800,000 and retained earnings of CU200,000).
30 November 20X7
65% of Buchan Ltd for CU2 million when the carrying amount of the net assets of Buchan Ltd was CU1.6 million (represented by share capital of CU1,200,000 and retained earnings of CU400,000).
The income statements of the companies for the year ended 31 March 20X8 were as follows.
Revenue Cost of sales Gross profit Net operating expenses Finance cost Investment income Profit/(loss) before tax Income tax expense Profit/(loss) for the year
Lowland Ltd CU'000 5,000 (3,000) 2,000 (1,000) – 230 1,230 (300) 930
Aviemore Ltd CU'000 3,000 (2,300) 700 (500) (50) – 150 (50) 100
Buchan Ltd CU'000 2,910 (2,820) 90 (150) (210) – (270) – (270)
Extracts from the statements of changes in equity of the companies (all relating to retained earnings) for the year ended 31 March 20X8 were as follows.
Net profit/(loss) for the year Interim dividends on ordinary shares Balance brought forward Balance carried forward
Lowland Ltd CU'000 930 (200) 730 1,500 2,230
Aviemore Ltd CU'000 100 (50) 50 240 290
Buchan Ltd CU'000 (270) – (270) 580 310
Additional information (1) On 1 April 20X7 Buchan Ltd issued CU2.1 million 10% loan stock to Lowland Ltd. Interest is payable twice yearly on 1 October and 1 April. Lowland Ltd has accounted only for the interest received on 1 October 20X7. (2) On 1 April 20X7 Aviemore Ltd sold a freehold property to Lowland Ltd for CU800,000 (land element CU300,000). The property originally cost CU900,000 (land element CU100,000) on 1 April 20W7. The property's total useful life was 50 years on 1 April 20W7 and there has been no change in the useful life since 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 of ten years. Buchan Ltd has not adjusted its accounting records to reflect fair values.
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© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
(4) Lowland Ltd charges Aviemore Ltd an annual fee of CU85,000 for management services. This has been recognised 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 further loss of CU180,000 has been identified in the current year. In addition, the impairment review in relation to 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 the movement on retained earnings and minority interest as they would appear in the consolidated statement of changes in equity for the year ended 31 March 20X8. (22 marks) Note: Work to the nearest CU'000.
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Vanguard Ltd Vanguard Ltd owns 75% of the ordinary share capital of Formidable Ltd and 45% of the ordinary share capital of Albion Ltd. The draft income statements of the three companies for the year ended 31 March 20X4 were as follows. Vanguard Ltd CU 346,932 (261,023) 85,909 (53,811) 32,098 (2,301) 24,244 54,041 (15,753) 38,288
Revenue Cost of sales Gross profit Net operating expenses Profit from operations Finance cost Investment income Profit before tax Income tax expense Profit for the period
Formidable Ltd CU 289,028 (202,319) 86,709 (55,606) 31,103 (1,500) 3,242 32,845 (6,982) 25,863
Albion Ltd CU 75,201 (55,342) 19,859 (9,765) 10,094 (1,121) – 8,973 (1,863) 7,110
Extracts from the statements of changes in equity of the companies (all relating to retained earnings) for the year ended 31 March 20X4 were as follows. Vanguard Ltd CU 38,288 (9,000) 29,288 539,260 568,548
Net profit for the year Interim dividends on ordinary shares Balance brought forward Balance carried forward
Formidable Ltd CU 25,863 (20,500) 5,363 327,530 332,893
Albion Ltd CU 7,110 (5,500) 1,610 25,850 27,460
Additional information (1) Details of intra-group trading are as follows. Sales by Vanguard Ltd to Formidable Ltd Cost to Formidable Ltd of inventory items purchased from Vanguard Ltd At 31 March 20X3 At 31 March 20X4
CU 35,908 5,600 8,350
Vanguard Ltd has a standard mark-up on cost of 25% for sales to Formidable Ltd. Vanguard Ltd held no inventories 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.
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full consolidated financial statements (3) Formidable Ltd was acquired on 1 April 20X0 for CU415,000 when the carrying amount of its net assets was 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 assets which were not recognised in the financial statements of Formidable Ltd. The fair values were measured reliably at CU15,000. The useful life of these intangible assets was estimated at 20 years. No other fair value adjustments were identified. (5) Albion Ltd was acquired in April 20X2 for CU53,000 when its retained earnings were CU3,500 and the carrying amount of its net assets was CU90,000. There was no material difference between the carrying amount 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 Ltd of CU12,000 was recognised in the financial statements for the year ended 31 March 20X3. A further loss of CU4,000 still needs to be recognised in the current year financial statements. A current year impairment loss of CU1,250 still needs to be recognised in the financial statements in respect of the investment 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 the movement on retained earnings as it would appear in the consolidated statement of changes in equity for the year ended 31 March 20X4. (16 marks)
(b) Calculate the carrying amount of goodwill in respect of Formidable Ltd that would appear in the consolidated balance sheet of Vanguard Ltd as at 31 March 20X4. (2 marks) (18 marks)
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Heaton Ltd Heaton Ltd has investments in two companies, Sharston Ltd and Ardwick Ltd. Extracts from the draft financial statements of the three companies for the year ended 31 March 20X4 are shown below. Income statements
Revenue Cost of sales Gross profit Expenses Profit from operations Finance cost Dividend received Profit before tax Income tax expense Profit for the period
Heaton Ltd CU'000 23,700 (17,580) 6,120 (2,870) 3,250 (220) 320 3,350 (1,230) 2,120
Sharston Ltd CU'000 12,500 (9,770) 2,730 (700) 2,030 (50) – 1,980 (650) 1,330
Ardwick Ltd CU'000 5,200 (3,350) 1,850 (430) 1,420 (40) – 1,380 (480) 900
Extracts from statement of changes in equity (retained earnings)
Net profit for period Ordinary share dividends Balance brought forward Balance carried forward
Heaton Ltd CU'000 2,120 (1,000) 1,120 4,250 5,370
The only equity reserve of each company is retained earnings.
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© The Institute of Chartered Accountants in England and Wales, March 2009
Sharston Ltd CU'000 1,330 (400) 930 2,200 3,130
Ardwick Ltd CU'000 900 – 900 1,450 2,350
QUESTION BANK
Additional information (1) The issued share capital of each company is CU1 ordinary shares 6 million 5 million 4 million
Heaton Ltd Sharston Ltd Ardwick Ltd 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 CU1.97 million. 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 amount at the date of acquisition. The remaining useful life of the plant and equipment was assessed at five years from that date. (6) The impairment reviews relating to Sharston Ltd and Ardwick Ltd revealed the following losses.
Year ended 31 March
Sharston Ltd CU'000 300 300
20X3 20X4
Ardwick Ltd CU'000 – 20
(7) Heaton Ltd sold goods at a transfer price of CU2 million to Ardwick Ltd in January 20X4; one half of these goods remained in Ardwick Ltd's inventories at the year end. Heaton Ltd calculates the price of the goods 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 in equity of Heaton Ltd for the year ended 31 March 20X4. (5 marks) (c)
Explain the single entity concept.
(2 marks) (15 marks)
Note: Work to the nearest CU'000.
40
Jerome Ltd Jerome Ltd acquired 400,000 ordinary shares of George Ltd ten years ago for CU1,820,000. The share capital of George Ltd was 500,000 CU1 ordinary shares. Goodwill acquired in the business combination was CU800,000. On 1 July 20X7 Jerome Ltd acquired 40,000 of Harris Ltd's 100,000 CU1 ordinary share capital for CU4 million. The carrying amount of the assets at acquisition was CU8,500,000. No fair value adjustments were identified.
© The Institute of Chartered Accountants in England and Wales, March 2009
49
Preparation of full consolidated financial statements The results for these companies for the year ended 31 December 20X7 are as follows. Jerome Ltd George Ltd CU'000 CU'000 Revenue 3,268 2,500 Cost of sales (1,840) (1,375) Gross profit 1,428 1,125 Distribution costs (115) (190) Administrative expenses (93) (245) Profit from operations 1,220 690 Finance cost (50) (15) Investment income 335 – Profit before tax 1,505 675 Income tax expense (315) (175) Profit after tax 1,190 500
Harris Ltd CU'000 1,500 (1,050) 450 (25) (45) 380 (20) – 360 (100) 260
Extracts from the statement of changes in equity (all relating to retained earnings) for the year ended 31 December 20X7 are as follows. Jerome Ltd George Ltd Harris Ltd CU'000 CU'000 CU'000 Profit for the year 1,190 500 260 Dividends 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 12,520 340 Balance 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 Ltd had purchased this asset on 1 January 20X3 for CU30,000. The asset had a total useful life of ten years with 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 of George Ltd, but that an impairment loss of CU31,000, which has not yet been accounted for, was required 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 changes in 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 the consolidated balance sheet of Jerome Ltd at 31 December 20X7. (2 marks) (17 marks)
Note: Work to the nearest CU'000.
50
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
41
Hardmead Ltd Hardmead Ltd prepares its consolidated financial statements in accordance with BFRS. Hardmead Ltd has investments 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
Hardmead Ltd CU'000 10,040 (8,760) 1,280 (400) 880 80 960 (400) 560
Revenue Cost of sales Gross profit Operating expenses Profit from operations Dividends received Profit before taxation Income tax expense Net profit for year
Stony Ltd
Stratford Ltd
CU'000 7,500 (6,900) 600 (420) 180 – 180 (60) 120
CU'000 4,600 (3,000) 1,600 (1,120) 480 – 480 (160) 320
Extracts from statements of changes in equity Hardmead Ltd CU'000 2,500 560 (600) 2,460
Balance brought forward Net profit for period Ordinary share dividends Balance carried forward
Retained earnings Stony Ltd CU'000 6,400 120 (100) 6,420
Stratford Ltd CU'000 2,000 320 – 2,320
Additional information (1) The issued share capital of each company is: Hardmead Ltd Stony Ltd Stratford Ltd
CU1 ordinary shares 2 million 1 million 3 million
(2) Hardmead Ltd acquired 80% of the CU1 ordinary shares in Stony Ltd on 30 September 20X1 for CU6 million. 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 CU4 million. 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 has not 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 at the date of acquisition. The remaining useful life of the plant and equipment was assessed at four years from that date. (6) Stony Ltd sold goods to Hardmead Ltd at a transfer price of CU180,000 during the year ended September 20X5. The transfer price was based on a mark-up of 50% on cost. One third of the goods remained in the inventory of Hardmead Ltd at the year end.
30
(7) Hardmead Ltd's inventory includes 5,000 finished goods items with a carrying amount of CU100 each. The normal 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 October 20X5. No selling commissions will be incurred under this contract. (8) Hardmead Ltd has undertaken annual impairment reviews of goodwill. At 30 September 20X4 impairment losses 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 30 September 20X5.
© The Institute of Chartered Accountants in England and Wales, March 2009
51
Preparation of full consolidated financial statements Requirements (a)
Prepare the consolidated income statement of Hardmead Ltd for the year ended 30 September 20X5.(14 marks) Note: You should assume that the disposal of Stratford Ltd constitutes a discontinued operation in accordance 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 consolidated statement 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 business combination. 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 Ltd had 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.
Revenue Cost of sales Operating expenses Dividends received Profit before tax Income tax expense Profit after tax
Tain Ltd CU'000 10,600 (7,400) 3,200 (1,700) 375 1,875 (460) 1,415
Banchory Ltd CU'000 5,500 (3,700) 1,800 (900)
Dornoch Ltd CU'000 4,700 (3,520) 1,180 (700)
900 (280) 620
480 (140) 340
Nairn Ltd CU'000 5,900 (4,130) 1,770 (880) 890 (290) 600
Additional information (1) Banchory Ltd had the following balances on its reserves.
1 November 20X4 31 October 20X8
Retained earnings CU'000 1,600 2,000
Revaluation reserve CU'000 300 400
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 and 2 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 Ltd has 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 of one third. Tain Ltd had CU200,000 of these goods in its inventory at 31 October 20X9.
52
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
(5) The goodwill impairment review in relation to the acquisition of Banchory Ltd revealed cumulative impairments of CU142,000 at 31 October 20X8. In addition, the 20X9 review in relation to the investment 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 CU500,000 respectively. (7) Retained earnings at 31 October 20X8 for the other group companies were as follows. CU'000 2,356 152 562
Tain Ltd Dornoch Ltd Nairn Ltd These companies have no other equity reserves. Requirement
Prepare the consolidated income statement and consolidated statement of changes in equity of Tain Ltd for the year 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 in accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations. You are not required to provide any additional disclosure notes required by BAS 28 Investments in Associates. Work to the nearest CU'000. (18 marks)
43
Glencoe Ltd Glencoe Ltd acquired holdings in other companies as follows. Date of acquisition Cost of acquisition Percentage of ordinary share capital acquired Carrying amount of net assets at date of acquisition (equal to fair value)
Rannoch Ltd 1 September 20X7 CU3 million 75%
Leven Ltd 1 May 20X6 CU10 million 80%
CU4 million
CU11.7 million
The companies' draft income statements for the year ended 31 August 20Y0 and draft balance sheets as at that date were as follows. Income statements for the year ended 31 August 20Y0
Revenue Cost of sales Operating expenses Profit before tax Income tax expense Profit after tax
Glencoe Ltd CU'000 50,000 (32,000) 18,000 (10,000) 8,000 (2,500) 5,500
Rannoch Ltd CU'000 11,000 (7,000) 4,000 (2,000) 2,000 (600) 1,400
Leven Ltd CU'000 35,000 (23,000) 12,000 (7,000) 5,000 (1,500) 3,500
CU'000
CU'000
CU'000
3,500
10,000
5,900 9,400
8,000 18,000
Balance sheets as at 31 August 20Y0 ASSETS Non-current assets Property, plant and equipment Investments Current assets Total assets
29,500 (3,000) 36,000 62,500
© The Institute of Chartered Accountants in England and Wales, March 2009
53
Preparation of full consolidated financial statements Glencoe Ltd CU'000
EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Retained earnings
35,000 17,500 52,500 10,000 62,500
Current liabilities Total equity and liabilities
Rannoch Ltd CU'000
Leven Ltd CU'000
4,000 1,400 5,400 4,000 9,400
7,000 9,000 16,000 2,000 18,000
Additional information (1) Glencoe Ltd disposed of its entire holding in Leven Ltd for CU14 million on 1 June 20Y0. It has not yet accounted for this disposal except to debit bank and credit the sales proceeds to investments. Profits in Leven 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 its financial year. The only accounting entries made have been, as for Leven Ltd, to debit bank and credit the sales proceeds to investments. (3) As at 31 August 20X9 the impairment reviews revealed cumulative losses of CU256,000 in relation to the acquisition 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 operating expenses 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 the consolidated balance sheet as at that date. Note: You should assume that the disposal of Leven Ltd constitutes a discontinued operation in accordance with BFRS 5 Non-Current Assets Held for Sale and Discontinued Operations but that the disposal of Rannoch Ltd does 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 per share. At that date the balance on Sandygate Ltd's retained earnings was CU5,000,000. On 1 October 20X2 Herdings Ltd acquired 1,500,000 CU1 ordinary shares in Abbeydale Ltd for CU4 cash per share. Abbeydale Ltd should be accounted for as an associate. The draft summarised balance sheets of the three companies at 31 March 20X3 are shown below. Herdings Ltd CU'000 CU'000 ASSETS Non-current assets Property, plant and equipment Investments
13,100 23,500
Sandygate Ltd CU'000 CU'000
16,400 – 36,600
Current assets Inventories Trade receivables Cash and cash equivalents Total assets
54
8,100 6,850 3,750
18,700 55,300
Abbeydale Ltd CU'000 CU'000
12,200 – 16,400
5,230 4,950 150
© The Institute of Chartered Accountants in England and Wales, March 2009
10,330 26,730
12,200 3,000 4,140 50
7,190 19,390
QUESTION BANK
Herdings Ltd CU'000 CU'000 EQUITY AND LIABILITIES Capital and reserves Issued CU1 ordinary shares Retained earnings Non-current liabilities 7% secured bank debt Current liabilities Trade payables Taxation Dividends
12,000
10,000
9,740
5,560 1,700 300
Total equity and liabilities
Sandygate Ltd CU'000 CU'000
Abbeydale Ltd CU'000 CU'000 5,000
8,200
9,000
21,740
18,200
14,000
26,000
2,000
–
7,560 55,300
5,450 880 200
6,530 26,730
4,600 790 –
5,390 19,390
Additional information (1) The fair value of the plant of Sandygate Ltd was CU2,000,000 in excess of its carrying amount at the date of 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 an environmental damages claim. An independent expert quantified the fair value of the claim as CU100,000 at 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 an impairment 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 goods remained in the inventories of Herdings Ltd at the year end. Sandygate Ltd calculated the transfer price of the 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 for CU3,500,000. 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 CU4,000,000 respectively 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 should continue to classify its investment in Abbeydale Ltd as an associate. (2 marks) (23 marks)
Note: Work to the nearest CU'000.
© The Institute of Chartered Accountants in England and Wales, March 2009
55
Preparation of full consolidated financial statements
45
Camden Ltd Camden Ltd holds 72% of the ordinary share capital of Kentish Ltd (acquired on 1 March 20X5) and 60% of the ordinary share capital of Tufnell Ltd (acquired on 1 October 20X3). Camden Ltd paid CU2 million and CU3 million respectively for these investments. Retained earnings of Tufnell Ltd on acquisition were CU450,000. Camden Ltd has no other investments and none of the companies has any preference share capital. Kentish Ltd has 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.
Revenue Cost of sales and expenses (after crediting dividends received from Kentish Ltd and Tufnell Ltd) Profit from operations Income tax expense Profit for the period
Camden Ltd CU'000 151,360
Kentish Ltd CU'000 32,400
Tufnell Ltd CU'000 95,040
(134,904) 16,456 (5,436) 11,020
(28,750) 3,650 (1,250) 2,400
(83,750) 11,290 (3,820) 7,470
Additional information (1) The three companies paid interim dividends of CU2,820,000, CU336,000 and CU2,460,000 respectively on 1 May 20X5. Retained earnings at 1 October 20X4 were as follows. Camden Ltd Kentish Ltd Tufnell Ltd
CU'000 11,820 5,430 8,210
(2) On 30 June 20X5 Camden Ltd sold half of its shares in Tufnell Ltd for CU5 million but retained significant influence 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 in June 20X5 from Camden Ltd, which the latter company had invoiced at a 20% gross profit margin. These were the only goods sold by Camden Ltd to Kentish Ltd. During the year, prior to the sale of shares in Tufnell Ltd, Camden Ltd made sales of CU345,000 to Tufnell Ltd, none of which were included in inventory at the year end. Requirements (a)
Prepare a consolidated income statement and extracts from the statement of changes in equity for Camden Ltd (retained earnings and minority interests columns only) for the year ended 30 September 20X5. You should assume that the partial disposal of Tufnell Ltd does not constitute a discontinued operation 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 at 30 September 20X5. (2 marks) (c)
Explain your accounting treatment of the following items in the consolidated income statement of Camden 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)
Note: Work to the nearest CU'000.
56
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
46
Gallant Ltd Gallant Ltd has a number of subsidiary companies and one associated company. There have been no changes in the holdings of any of these investments for a number of years. The following are the draft consolidated financial statements for Gallant Ltd for the year ended 31 December 20X7. Gallant Ltd has not yet prepared its consolidated statement of changes in equity. Consolidated income statement for the year ended 31 December 20X7 CU 5,680,500 (3,120,600) 2,559,900 (987,800) (458,000) 1,114,100 (75,000) 345,600 1,384,700 (420,000) 964,700
Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance cost Share of profits of associate Profit before tax Income tax expense Profit for the period Attributable to Equity holders of Gallant Ltd Minority interest
617,900 346,800 964,700
Balance sheet as at 31 December 20X7 CU ASSETS Non-current assets Property, plant and equipment Intangibles Investments in associates Current assets Inventories Trade and other receivables Cash and cash equivalents
670,500 269,000 30,700
EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (CU1 shares) Share premium account Revaluation reserve Retained earnings Attributable to the equity holders of Gallant Ltd Minority interest Equity Non-current liabilities Finance lease liabilities
Total equity and liabilities
CU
CU
8,396,200 420,000 1,795,800 10,612,000
Total assets
Current liabilities Trade and other payables Taxation Finance lease liabilities Ordinary dividend payable
20X7
970,200 11,582,200
20X6
CU 7,078,400 540,500 1,678,900 9,297,800
865,100 244,500 20,200
1,129,800 10,427,600
4,000,000 1,300,000 400,000 1,357,800 7,057,800 2,345,900 9,403,700
2,400,000 2,050,000 236,800 1,393,100 6,079,900 2,948,200 9,028,100
376,000
–
768,500 410,000 124,000 500,000
639,500 360,000 – 400,000 1,802,500 11,582,200
1,399,500 10,427,600
© The Institute of Chartered Accountants in England and Wales, March 2009
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Preparation of full consolidated financial statements Additional information (1) The intangibles balance relates to goodwill arising on acquisition of subsidiaries, in respect of which certain impairment losses have been written off during the year. (2) On 1 January 20X7 Gallant Ltd made a 1 for 3 bonus issue of ordinary shares. This was followed, later in the 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 plant with a carrying amount of CU760,500 was sold for CU800,000. Total depreciation charges for the year were CU970,600. (4) The finance cost in the consolidated income statement relates to the group's only finance lease, which was taken out at the start of the year, with the first instalment of CU100,000 being paid on the last day of the year. 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 from operations for Gallant Ltd for the year ended 31 December 20X7, in accordance with BAS 7 Cash Flow Statements, 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 the year ended 30 June 20X7 and the balance sheet of Kay Ltd as at the date of acquisition. Slick Ltd has not yet prepared its consolidated statement of changes in equity. Consolidated income statement for the year ended 30 June 20X7 (extract) CU'000 (611) (25) (636) (20) (656)
Loss from operations Finance cost Loss before tax Income tax expense Loss for the period Attributable to Equity holders of Slick Ltd Minority interest
(686) 30 (656)
Balance sheets Slick Ltd consolidated 30 June 20X7 30 June 20X6 CU'000 CU'000 ASSETS Non-current assets Property, plant and equipment Intangibles Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets
58
Kay Ltd at acquisition CU'000
2,145 215 2,360
1,980 130 2,110
500 – 500
670 520 10 3,560
590 610 35 3,345
130 200 50 880
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
Slick Ltd consolidated 30 June 20X7 30 June 20X6 CU'000 CU'000 EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (CU1 shares) Share premium account Retained earnings Minority interest Equity Current liabilities Trade and other payables Taxation Total equity and liabilities
Kay Ltd at acquisition CU'000
1,500 700 367 2,567 341 2,908
800 500 1,064 2,364 352 2,716
500 110 120 730 – 730
521 131 3,560
489 140 3,345
100 50 880
Additional information (1) Slick Ltd issued 500,000 CU1 ordinary shares at a premium of 25p and paid a substantial cash sum, in consideration for 80% of Kay Ltd's shares. At the date of acquisition all of Kay Ltd's assets and liabilities were recorded at their fair values, with the exception of property, plant and equipment which had a fair value of CU100,000 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 plant with a carrying amount of CU500,000 was sold for CU420,000. Total depreciation charges for the year were CU657,000. (4) Intangibles comprise the goodwill arising on the acquisition of Kay Ltd, which has suffered no subsequent impairment, and research and development expenditure capitalised in accordance with BAS 38 Intangible Assets. The costs relate to a single project which is now complete and in respect of which amortisation commenced during the year. Requirement Prepare a consolidated cash flow statement, note reconciling profit/loss before tax to cash generated from operations and note showing the effects of the acquisition of Kay Ltd for Slick Ltd for the year ended 30 June 20X7, in accordance with BAS 7 Cash Flow Statements, using the indirect method. Note: Work to the nearest CU'000.
48
(20 marks)
Senorita Ltd Senorita Ltd has two subsidiary companies, both of which were acquired several years ago. On 1 April 20X5 Senorita Ltd sold its 75% interest in Amigo Ltd for cash of CU500,000. The following are the draft consolidated financial statements for Senorita Ltd for the year ended 31 December 20X5. Senorita Ltd has not yet prepared its consolidated statement of changes in equity. Consolidated income statement for the year ended 31 December 20X5 (extract) Continuing operations Profit before tax Income tax expense Profit for the period from continuing operations Discontinued operations Profit for the period from discontinued operations Profit for the period Attributable to Equity holders of Senorita Ltd Minority interest
CU'000 950 (130) 820 100 920 770 150 920
© The Institute of Chartered Accountants in England and Wales, March 2009
59
Preparation of full consolidated financial statements Consolidated balance sheet as at 31 December 20X5
ASSETS Non-current assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (CU1 shares) Share premium account Retained earnings Minority interest Equity Current liabilities Trade and other payables Taxation Bank overdraft Dividends payable to minority Total equity and liabilities
20X5 CU'000
20X4 CU'000
3,457
3,045
570 420 45 4,492
490 310 – 3,845
1,000 600 1,664 3,264 740 4,004
800 300 1,019 2,119 1,052 3,171
221 167 – 100 4,492
339 150 35 150 3,845
Additional information (1) The net assets of Amigo Ltd on 1 April 20X5 were as follows. Property, plant and equipment Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Taxation
CU'000 450 120 145 12 (132) (15) 580
(2) An analysis of the movement on group property, plant and equipment during the year showed that new plant was purchased for cash of CU1,350,000 and old plant was sold for cash of CU600,000. Total depreciation charges for the year were CU257,000. (3) The profit for the period from discontinued operations, all of which is attributable to the disposal of Amigo Ltd, can be analysed as follows. Profit before tax Income tax expense Profit on disposal
CU'000 45 (10) 65 100
Requirement Prepare a consolidated cash flow statement, note reconciling profit before tax to cash generated from operations and note showing the effects of the disposal of Amigo Ltd for Senorita Ltd for the year ended 31 December 20X5, in accordance with BAS 7 Cash Flow Statements using the indirect method. (18 marks) Note: Work to the nearest CU'000.
60
© The Institute of Chartered Accountants in England and Wales, March 2009
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 to BFRS Framework for the Preparation and Presentation of Financial Statements? (1) Freedom from bias (2) Freedom from material error (3) Faithful representation (4) Consistency
2
A
All of the above
B
(1), (2) and (3)
C
(1), (2) and (4)
D
(3) and (4)
Which two of the following, per BFRS Framework for the Preparation and Presentation of Financial Statements, 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
3
A
(1) and (3)
B
(2) and (3)
C
(1) and (4)
D
(3) and (5)
Which of the following are the four principal qualitative characteristics of financial information as set out 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
© The Institute of Chartered Accountants in England and Wales, March 2009
61
Single entity financial statements: objective test questions 4
5
According to BFRS Framework for the Preparation and Presentation of Financial Statements which of the following 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
Which of the following does BFRS Framework for the Preparation and Presentation of Financial Statements regard 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
6
A
(1) and (2)
B
(2) only
C
(3) only
D
All of the above
Which of the following does BFRS Framework for the Preparation and Presentation of Financial Statements regard 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
62
A
(1) and (3)
B
(2) only
C
(4) only
D
(3) and (4)
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
7
According to BFRS Framework for the Preparation and Presentation of Financial Statements, which of the following characteristics should make financial information relevant to users? (1) Materiality (2) Predictive value and confirmatory value (3) Completeness (4) Faithful representation (5) Comparability
8
A
(1), (2) and (3)
B
(2) and (4)
C
(1) and (2)
D
(4) and (5)
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
9
A
(1) and (2)
B
(1) and (3)
C
(2) and (4)
D
(3) and (4)
Which of the following capital maintenance concepts is most closely associated with historic cost accounting? A
Real financial capital maintenance
B
Money financial capital maintenance
C
Operating capital maintenance
D
Physical capital maintenance
© The Institute of Chartered Accountants in England and Wales, March 2009
63
Single entity financial statements: objective test questions 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 these sales 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 with CU2,000 accrued expenses at the year end. How much profit did Brodie Ltd make for the year under the accrual basis and under the cash accounting basis?
11
Accrual basis
Cash accounting basis
A
CU85,000
CU68,000
B
CU83,000
CU70,000
C
CU83,000
CUnil
D
CU48,000
CU40,000
Doyle Ltd made a profit of CU100,000 for 20X4 based on historic cost accounting principles. General price 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?
12
A
CU100,000 under real financial capital maintenance, CU95,000 under money financial capital maintenance, and CU90,000 under physical capital maintenance
B
CU100,000 under money financial capital maintenance, CU90,000 under real financial capital maintenance, and CU95,000 under physical capital maintenance
C
CU100,000 under money financial capital maintenance, CU95,000 under real financial capital maintenance, and CU90,000 under physical capital maintenance
D
CU90,000 under money financial capital maintenance, CU100,000 under real financial capital maintenance, and CU95,000 under physical capital maintenance
Gene Ltd has the following assets and liabilities at 31 December 20X5. Fixtures and fittings at carrying amount Receivables Cash and cash equivalents Payables
Note (1) (2)
CU 10,000 8,000 1,000 (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 CU500 would need to be made. At what amount would the net assets be stated in the balance sheet of Gene Ltd at 31 December 20X5 under the break-up basis and under the cash accounting basis?
64
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
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
13
Which of the following contribute to the qualitative characteristic of comparability, according to BFRS Framework for the Preparation and Presentation of Financial Statements? (1) Neutrality (2) Corresponding information (3) Disclosure of accounting policies (4) Materiality
14
A
All of the above
B
(1), (2) and (3)
C
(1), (2) and (4)
D
(2) and (3)
Sam Ltd owns a building with a fair value and carrying amount on 30 June 20X3 of CU500,000. On 1 July 20X3 Sam Ltd sold this building to Tyler Ltd for CU400,000. The sale agreement provides for Sam Ltd to repurchase the building in four years’ time for CU600,000, when the fair value of the building is estimated to be at least CU700,000. How should the above transaction be accounted for in the financial statements of Sam Ltd for the year ended 30 June 20X4?
15
16
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
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
The BFRS Framework for the Preparation and Presentation of Financial Statements defines a number of elements of financial statements. Which of the following represents those elements of the financial statements directly related to the measurement 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
© The Institute of Chartered Accountants in England and Wales, March 2009
65
Single entity financial statements: objective test questions
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 financial statements (2) Inappropriate accounting policies can be rectified by disclosure of the policies used or by the inclusion of explanatory material (3) Companies may choose to prepare their financial statements (except for the cash flow statement) on either the accrual basis or the cash basis
2
A
All of the above
B
(1) and (2)
C
(2) and (3)
D
(1) only
According to BAS 1 Presentation of Financial Statements which of the following items can appear in a company’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
3
A
All of the above
B
(1), (2) and (3)
C
(1), (3) and (4)
D
(2) and (4)
BAS 1 Presentation of Financial Statements requires certain items to be disclosed on the face of the financial 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
4
66
A
(1) and (4)
B
(3) and (5)
C
(2) and (3)
D
(2) and (4)
BAS 1 Presentation of Financial Statements suggests two possible formats for the income statement, the difference between them being whether expenses are classified by their nature or by their function.
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
Which of the following items will be disclosed on the face of the income statement if a manufacturing entity 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
5
A
(1), (3) and (4)
B
(2) and (4)
C
(1) and (5)
D
(2), (3) and (5)
Bromyard Ltd had a balance of CU700,000 on its retained earnings at 1 January 20X7. During the year ended 31 December 20X7 the company:
Revalued property with a cost of CU1 million and accumulated depreciation of CU600,000 to CU1.2 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 ended 31 December 20X7. In accordance with BAS 1 Presentation of Financial Statements, what is the closing balance on retained earnings in Bromyard Ltd’s statement of changes in equity for the year ended 31 December 20X7?
6
A
CU750,000
B
CU850,000
C
CU1,100,000
D
CU1,650,000
Worcester Ltd had a balance of CU2 million as its total equity at 1 January 20X2. During the year ended 31 December 20X2 the company:
Revalued property with a cost of CU2 million and accumulated depreciation of CU1,600,000 to CU1.5 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 31 December 20X2. In accordance with BAS 1 Presentation of Financial Statements, what is the closing balance on total equity in 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
© The Institute of Chartered Accountants in England and Wales, March 2009
67
Single entity financial statements: objective test questions 7
Finstock Ltd, a company which builds houses, has a normal operating cycle of 18 months and a year end of 30 June 20X5. According to BAS 1 Presentation of Financial Statements, which of the following assets should be classified 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
51
A
(1) and (2)
B
(2) and (3)
C
(1) and (3)
D
All of the above
BAS 2 Inventories 1
In accordance with BAS 2 Inventories, the cost of interchangeable inventories must be arrived at using cost 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
2
A
(1), (3) and (4)
B
(1) and (4)
C
(2) only
D
(3) and (4)
Which of the following items should be included in arriving at the cost of the inventory of finished goods 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
68
A
(1), (3), (4) and (6)
B
(1), (2), (4), (5) and (6)
C
(3), (4) and (6)
D
(2), (3) and (5)
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
3
During the year ended 30 September 20X6, Kidderminster Ltd produced 10,000 widgets, compared to a 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. CU Raw materials 100,000 Direct labour 50,000 Variable overheads 40,000 Fixed overheads 120,000 In accordance with BAS 2 Inventories, what is the value of Kidderminster Ltd’s finished goods at 30 September 20X6?
4
A
CU19,000
B
CU25,000
C
CU29,000
D
CU31,000
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 builds motorway bridges
5
A
(1) only
B
(1) and (2)
C
(1) and (3)
D
All of the above
Tintagel Ltd commenced business on 1 October 20X5. During its first year of trading the company produced 10,000 widgets, compared to an anticipated normal production level of 15,000 widgets. At 30 September 20X6 there were 1,000 finished widgets in closing inventory. Production costs incurred for the year were as follows. CU 100,000 50,000 40,000 120,000
Raw materials Direct labour Variable overheads Fixed overheads
In accordance with BAS 2 Inventories, how much of the above costs will be carried forward in inventory at 30 September 20X6 and how much will have been recognised in the income statement for 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
© The Institute of Chartered Accountants in England and Wales, March 2009
69
Single entity financial statements: objective test questions 6
Wythenshawe Ltd commenced business on 1 June 20X4 manufacturing a single type of widget, which had a selling price throughout that year of CU45. During the year the company made 10,000 widgets and incurred the following costs. CU 150,000 75,000 50,000 37,500 40,000
Materials Labour Variable production overheads Fixed production overheads Administrative, selling and distribution costs
Towards the end of Wythenshawe Ltd’s first year of trading, market conditions deteriorated and the company was left with 3,000 finished widgets in inventory at its year end. These widgets can be sold for 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 ended 30 June 20X5?
7
A
CU49,500
B
CU56,250
C
CU74,250
D
CU67,500
Newcastle Ltd has the following units in inventory at the end of 20X5. Units Raw materials Work in progress Finished goods
7,000 2,500 1,000
Cost per unit CU 20 25 30
Finished items usually sell for CU35 per unit. However, difficult trading conditions have meant that the company expects to have to discount its finished items by 20% and to incur selling costs of CU2 per item. 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 sheet of Newcastle Ltd as at the end of 20X6?
70
A
CU232,500
B
CU233,500
C
CU224,750
D
CU230,500
© The Institute of Chartered Accountants in England and Wales, March 2009
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 shares at CU2 per share and used part of the proceeds of this issue to repay long-term borrowings of CU4,100. In accordance with BAS 7 Cash Flow Statements, what is the net cash flow from financing activities in Drewstead Ltd’s cash flow statement for the year ended 31 December 20X7?
2
A
CU2,900
B
CU9,900
C
CU11,100
D
CU18,100
Parrot Ltd had the following balances in its accounts at 30 April 20X6 and 30 April 20X7. 30 April 20X6 CU 1,000 41,627 – 50,000
Cash in hand Bank overdraft Cash at bank Long-term bank loan
30 April 20X7 CU 1,100 – 21,932 25,000
In accordance with BAS 7 Cash Flow Statements, what amount should be shown under net change in cash and cash equivalents in the company’s cash flow statement for the year ended 30 April 20X7?
3
A
CU16,695 decrease
B
CU63,659 increase
C
CU63,559 increase
D
CU20,295 decrease
The summarised balance sheets of Anteater Ltd were as follows. 31 December 20X7 CU CU Non-current assets Cost Accumulated depreciation Current assets Inventories and trade receivables Cash and cash equivalents
Share capital Retained earnings Current liabilities: Trade payables
31 December 20X6 CU CU
28,000 (10,000) 18,000 55,000 1,000
56,000 74,000 30,000 30,000 14,000 74,000
27,000 (8,000) 19,000 48,000 8,000
56,000 75,000 30,000 25,000 20,000 75,000
Assume that no interest, tax or dividends were paid or charged during the year, and that no noncurrent assets were sold.
© The Institute of Chartered Accountants in England and Wales, March 2009
71
Single entity financial statements: objective test questions What is the cash generated from or used in operations in accordance with BAS 7 Cash Flow Statements which would appear in Anteater Ltd’s cash flow statement for the year ended 31 December 20X7?
4
A
CU6,000 generated
B
CU8,000 generated
C
CU(6,000) used
D
CU(8,000) used
Which of the following items would appear in the reconciliation of profit before tax to cash generated from 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
5
A
(1) and (2)
B
(1) and (3)
C
(2) and (3)
D
(2) and (4)
The proposed final dividend for Zebra Ltd for the year ended 30 April 20X2 was CU25,000. This was paid in May 20X2. The interim dividend for the year ended 30 April 20X3 was CU15,000 and the declared final dividend for the year then ended was CU30,000. The final dividend for 30 April 20X3 was declared on 25 April 20X3. In accordance with BAS 7 Cash Flow Statements, what is the figure for dividends paid which will appear in the cash flow statement for Zebra Ltd for the year ended 30 April 20X3?
6
A
CU25,000
B
CU30,000
C
CU40,000
D
CU70,000
The accounting records of Tiger Ltd for 20X6 show the following amounts. Carrying amount of property, plant and equipment at 31 December 20X5 Proceeds of sales of property, plant and equipment Depreciation charged on property, plant and equipment Profit on sale of property, plant and equipment Carrying amount of property, plant and equipment at 31 December 20X6
CU 330,000 60,000 90,000 15,000 270,000
In accordance with BAS 7 Cash Flow Statements, what amount would appear in Tiger Ltd’s cash flow statement for 20X6 for purchase of property, plant and equipment?
72
A
CU90,000
B
CU75,000
C
CU60,000
D
CU30,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
7
During 20X1 Lion Ltd issued 200,000 ordinary CU1 shares at CU1.20 per share and 100,000 redeemable CU1 preference shares at CU1.10 per share. During 20X1 Lion Ltd also made a 1 for 4 bonus 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 flow statement for 20X1 in respect of proceeds from the issue of equity share capital in respect of the above share issues?
8
A
CU200,000
B
CU240,000
C
CU350,000
D
CU550,000
Gazelle Ltd’s balance sheets at 31 December 20X6 and 20X7 showed income tax payable of CU10,000 and CU15,500 respectively. Income tax charges in the relevant income statements were CU11,000 and CU16,000 respectively. How will income tax be reflected in Gazelle Ltd’s cash flow statement and reconciliation of profit before tax to cash generated from operations for 20X7 in accordance with BAS 7 Cash Flow Statements?
9
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
Moonbeam Ltd’s balance sheets showed the following liabilities. 31 December 20X7 20X6 CU CU
Non-current liabilities Borrowings Current liabilities Accrued interest
30,000
25,000
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’s cash flow statement and reconciliation of profit before tax to cash generated from operations for 20X7? 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 profit before tax
C
CU800 as an operating outflow, CU5,000 as an investing inflow, CU600 added back to profit before tax
D
CU5,000 as a financing inflow, CU800 as an operating outflow
© The Institute of Chartered Accountants in England and Wales, March 2009
73
Single entity financial statements: objective test questions 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 operations for 20X1?
11
A
CU29,500
B
CU31,300
C
CU72,700
D
CU74,500
The following information relates to Magi Ltd.
Ordinary shares of CU1 each Share premium account
30 September 20X7 20X6 CU CU 50,000 40,000 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 for cash. How much should appear in Magi Ltd’s cash flow statement for the year ended 30 September 20X7 in respect of these transactions?
12
13
A
CU8,300
B
CU10,000
C
CU12,300
D
CU16,300
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
Golden Ltd’s balance sheets at 30 June 20X6 and 20X7 showed carrying amounts of property, plant and equipment of CU225,600 and CU301,700 respectively. During the year ended 30 June 20X7 Golden Ltd revalued an asset with a carrying amount of CU16,500 to CU31,000. It disposed of assets for a price of CU40,000, making a profit of CU10,100 on the transactions. What should appear in Golden Ltd’s cash flow statement for the year ended 30 June 20X7 in respect of purchase of property, plant and equipment?
74
A
CU91,500
B
CU101,600
C
CU106,000
D
CU116,100
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
14
The schedule of accruals and prepayments for Metallic Ltd for the years ended 30 April 20X7 and 20X8 show the following. 30 April 20X8 30 April 20X7 CU CU Accrued interest 610 590 Other accruals 1,560 1,670 Prepayments 2,550 2,300 In accordance with BAS 7 Cash Flow Statements, what is the net effect of the above on Metallic Ltd’s reconciliation of profit before tax to cash generated from operations for the year ended 30 April 20X8?
15
A
Deduct CU340
B
Deduct CU360
C
Add back CU340
D
Add back CU360
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 cash flows from financing activities in the cash flow statement of Tara Ltd for 20X6 in accordance with BAS 7 Cash Flow Statements? Cash inflow/(outflow) Investing Financing activities activities CU CU
16
A
21,000
(25,000)
B
(99,000)
95,000
C
(99,000)
145,000
D
(124,000)
120,000
On 1 July 20X5 Verity Ltd entered into a finance lease agreement. The terms of the agreement provided for annual payments of CU5,000 on 1 July each year. The asset had a fair value at the inception of the lease of CU25,000. CU750 of interest in relation to this agreement was paid and charged 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 of CU6,500. In accordance with BAS 7 Cash Flow Statements, how should the above be reflected in Verity Ltd’s cash flow 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
© The Institute of Chartered Accountants in England and Wales, March 2009
75
Single entity financial statements: objective test questions 17
Veronica Ltd prepares its financial statements to 31 December. During 20X8 Veronica Ltd made sales of CU850,000 and incurred costs of CU610,500. At the beginning of 20X8 customers owed CU125,500 and at the end of the year they owed CU135,400. At the beginning of 20X8 Veronica Ltd owed 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 operating activities under the direct method for the year ended 31 December 20X8?
53
A
CU258,700
B
CU233,800
C
CU219,800
D
CU219,300
BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 1
2
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, rather than writing them off as incurred
D
Adopting an accounting policy for a new type of transaction not previously dealt with
According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which of the following items 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
3
76
A
All of the above
B
(2) and (3)
C
(1) and (3)
D
(1) and (4)
In accordance with BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how is a change in 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
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
4
5
Which one of the following would be regarded as a change of accounting policy under BAS 8 Accounting 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 previously wrote 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 the current year, a provision has been made for the same legal claim
According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how are each of the following types of transactions dealt with? (1) Change in accounting policy (2) Change in accounting estimate (3) Correction of a material prior period error
6
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
From the years ended 31 December 20X6 to 31 December 20X8 Zorro Ltd capitalised CU10,000 of finance 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, just prior to calculating the annual depreciation charge, when the carrying amount of plant stood at CU250,000, Zorro Ltd decided to change its accounting policy to write-off such finance costs as incurred. 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 the following figures be stated at in Zorro Ltd’s financial statements for the year ended 31 December 20X9? Profit for the year CU
Retained earnings brought forward CU
Carrying amount of plant 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
© The Institute of Chartered Accountants in England and Wales, March 2009
77
Single entity financial statements: objective test questions 7
Harriet Ltd has proposed the following changes to its current accounting practices to be used in its next financial statements. (1) Motor vehicles have always been depreciated on a straight-line basis. The company has now decided to change to the reducing balance basis as it now believes that this better reflects the consumption of economic benefits. (2) In preparing its income statements, Harriet Ltd has previously classified depreciation on directors’ motor vehicles as administrative expenses. These depreciation charges are now to be classified as distribution costs as the company now believes that this gives a more reliable and relevant presentation. According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which, if any, of these changes represent a change in accounting policy?
54
A
(1) only
B
(2) only
C
Neither of the above
D
Both of the above
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 in those 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 sheet date, the directors decide to liquidate the company
78
A
All three statements are correct
B
(1) and (2)
C
(1) and (3)
D
(2) and (3)
© The Institute of Chartered Accountants in England and Wales, March 2009
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 that company’s premises early in 20X4 (2) A customer who owed CU116,000 at the balance sheet date went bankrupt owing a total of CU138,000 (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 unexpectedly expropriated by the Government In accordance with BAS 10 Events After the Balance Sheet Date what is Georgina Ltd’s profit for 20X3 after making the necessary adjustments for the above events?
3
A
CU1,399,000
B
CU1,579,000
C
CU1,664,000
D
CU1,557,000
The financial statements of Anna Ltd for the year ended 31 January 20X5 were approved for publication on 15 May 20X5. According to BAS 10 Events After the Balance Sheet Date which of the following would be treated as a non-adjusting event in the financial statements for the year ended 31 January 20X5?
4
A
Notice was received on 31 March 20X5 that a major customer of Anna Ltd’s had ceased trading and 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 20X5 for CU20,000
C
During 20X4, a customer commenced legal action against Anna Ltd. At 31 January 20X5, Anna Ltd’s legal advisers were of the opinion that Anna Ltd would lose the case, so Anna Ltd created a provision of CU200,000 for the damages claimed by the customer. On 27 April 20X5, the court awarded 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 Anna Ltd’s total inventory
The financial statements of Louise Ltd for the year ended 31 December 20X1 were approved for publication 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 has 200,000 CU1 ordinary shares in issue. (2) An insurance claim for storm damage to property, caused by unusually high winds, was under negotiation at the balance sheet date. The claim was settled with the insurers in March 20X2 leaving uninsured damage amounting to CU75,000. What liabilities should be recognised in the financial statements of Louise Ltd for the year ended 31 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
© The Institute of Chartered Accountants in England and Wales, March 2009
79
Single entity financial statements: objective test questions 5
55
According to BAS 10 Events After the Balance Sheet Date, which of the following would be a nonadjusting post balance sheet event when preparing Gawain Ltd’s group financial statements as at 31 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 the share 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 declared bankrupt on 8 April 20X5
D
An insurance claim is agreed on 10 June 20X5 for compensation for a fire in March which destroyed part of Gawain Ltd’s inventory
BAS 16 Property, Plant and Equipment 1
The components of the cost of a major item of equipment are given below. Purchase price Import duties Sales tax (refundable) Site preparation Installation costs Pre-production costs Initial operating losses before the asset reaches planned performance Estimated cost of dismantling and removal of the asset, recognised as a provision under BAS 37 Provisions, Contingent Liabilities and Contingent Assets
CU 780,000 117,000 78,000 30,000 28,000 18,000 50,000 100,000 1,201,000
In accordance with BAS 16 Property, Plant and Equipment what amount should be recognised as the cost of the asset?
80
A
CU956,000
B
CU1,055,000
C
CU1,073,000
D
CU1,201,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
2
According to BAS 16 Property, Plant and Equipment, which, if any, of the following statements about depreciation 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 be debited 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 when this 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 be accounted for as such
3
A
(1) and (4)
B
(2) and (3)
C
(4) only
D
None of the statements is correct
Mario Ltd purchased a machine for CU50,000 on 1 January 20X1. The machine was judged to have a five-year life with a residual value of CU5,000. On 31 December 20X2 CU15,000 was spent on an upgrade to the machine. This extended its remaining useful life to five years, with the same residual value. During 20X3, the market for the product declined and the machine was sold on 1 January 20X4 for CU7,000. According to BAS 16 Property, Plant and Equipment, what was the loss on disposal?
4
A
CU31,000
B
CU35,000
C
CU31,600
D
CU35,600
Gray Ltd purchased a machine on 1 April 20X2 for CU16,000. In the years ended 31 March 20X3 and 31 March 20X4 Gray Ltd depreciated the machine at 25% per annum on a straight-line basis. On 1 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 on Gray 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
© The Institute of Chartered Accountants in England and Wales, March 2009
81
Single entity financial statements: objective test questions 5
White Ltd owns many items of property, plant and equipment and accounts for them on a revaluation basis. In the year ended 31 March 20X2 White Ltd revalued three of its assets, all of which are in current use, as set out below. Carrying amount Valuation CU CU Turning machine (asset number 1001) 10,000 7,500 Turning machine (asset number 1007) 12,000 9,000 Finishing 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. This balance of CU6,500 relates to the following assets. Turning machine (asset number 1001) Turning machine (asset number 1008) Finishing machine (asset number 1015)
CU3,000 CU1,500 CU2,000
In accordance with BAS 16 Property, Plant and Equipment what amount should be charged to the income statement for the year ended 31 March 20X2 in respect of the above revaluations?
6
A
CU500
B
CU2,500
C
CU4,000
D
CU4,500
On 1 July 20X7 Brown Ltd bought a machine for CU48,000. The machine was depreciated at 25% per annum 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 useful life is now three years. According to BAS 16 Property, Plant and Equipment, what should the depreciation charge for the year ended 30 June 20Y0 and the minimum balance on the revaluation reserve as at 30 June 20Y0 be?
7
Depreciation charge
Revaluation reserve
A
CU8,000
CU4,000
B
CU8,000
CU6,000
C
CU10,000
CU4,000
D
CU10,000
CU6,000
Captain Ltd purchased a piece of land during the year ended 30 June 20X5 for CU1 million and revalued this land on 30 June 20X5 to CU1.3 million. On 1 March 20X6 the land was sold for CU1.4 million. In accordance with BAS 16 Property, Plant and Equipment what is the net amount in respect of this land which will appear in Captain Ltd’s statement of changes in equity for the year ended 30 June 20X5 and year ended 30 June 20X6? Year ended 30 June
82
20X5
20X6
A
CU300,000
CU400,000
B
CUNil
CU400,000
C
CU300,000
CU100,000
D
CUNil
CU100,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
8
On 1 January 20X1, Barbosa Ltd purchased an item of plant for CU300,000 which was to be depreciated 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 its remaining 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 be included in Barbosa Ltd’s income statement for the year ended 31 December 20X6?
9
A
CU200,000
B
CU260,000
C
CU300,000
D
CU400,000
Sparrow Ltd owns a building, currently carried in its accounting records at CU800,000. It has agreed to exchange this building for a building owned by Turner Ltd. The building currently owned by Sparrow Ltd has a fair value of CU1 million. The building currently owned by Turner Ltd has a fair value of CU1.1 million. Sparrow Ltd has agreed to pay the legal costs of the transfer which amount to CU10,000. According to BAS 16 Property, Plant and Equipment at what value should the building currently owned by Turner Ltd be recorded at initially in Sparrow Ltd’s accounting records?
10
A
CU800,000
B
CU1 million
C
CU1.1 million
D
CU990,000
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 materially different 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
© The Institute of Chartered Accountants in England and Wales, March 2009
83
Single entity financial statements: objective test questions
56
BAS 17 Leases 1
Obi Ltd purchased a machine via a finance lease. The terms of the agreement provided for a primary period of four years and a secondary period of two years. Payments are CU20,000 per annum over the primary period. The cash price of the plant is CU60,000 and its expected life is five years. Under normal circumstances there is an expectation that the secondary period will be used. Residual value is expected to be insignificant. According to BAS 17 Leases on what value should the depreciation charge on the machine be based and over what period should depreciation be charged?
2
Value
Period
A
CU80,000
4 years
B
CU80,000
6 years
C
CU60,000
4 years
D
CU60,000
5 years
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 at 31 December 20X4?
3
4
A
CU1,200
B
CU1,230
C
CU1,365
D
CU1,500
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
On 1 June 20X5 Aretoo Ltd acquired a machine under a finance lease. The machine would have had a cash price of CU24,000 but Aretoo Ltd agreed to pay a deposit of CU6,000 and ten quarterly repayments of CU2,600 each, starting on 31 August 20X5. The charge for interest is to be spread over 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 quarterly repayment?
84
A
CU1,067
B
CU1,018
C
CU800
D
CU582
© The Institute of Chartered Accountants in England and Wales, March 2009
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 December 20X4. 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 at 31 December 20X4?
6
A
CU1,550
B
CU1,230
C
CU1,320
D
CU1,700
In respect of an operating lease BAS 17 Leases requires which of the following to be disclosed in a company’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
7
8
A
(1) and (2)
B
(2) only
C
(2) and (3)
D
(3) only
In accordance with BAS 17 Leases which of the following is true with regard to leases of land and buildings? A
Leases of land will always be treated as operating leases; leases of buildings will always be treated as finance leases
B
Leases of buildings will always be treated as operating leases; leases of land will always be treated as 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 its substance.
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 three annual 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 31 December 20X5 and what balance is reflected in the balance sheet as at 31 December 20X5 in respect of 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
© The Institute of Chartered Accountants in England and Wales, March 2009
85
Single entity financial statements: objective test questions 9
10
The treatment of leases in accordance with BAS 17 Leases follows which of the qualitative characteristics of the BFRS Framework for the Preparation and Presentation of Financial Statements? A
Reliability
B
Relevance
C
Comparability
D
Understandability
On 1 January 20X7 Darth Ltd entered into a finance lease agreement. The terms of the lease were as follows. CU Cash price 36,000 Less: Deposit payable on 1 January 20X7 (12,000) 24,000 Interest at 9% for two years 4,320 Balance 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 statement for the year ended 31 December 20X7?
57
A
CU2,160
B
CU2,880
C
CU3,240
D
CU4,320
BAS 18 Revenue 1
Northanger Ltd’s draft balance sheet at 30 June 20X7 includes inventories of CU110,000 and trade receivables of CU190,000. Trade receivables include goods sent out on sale or return at a selling price of 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 trade receivables be stated on 30 June 20X7?
86
Inventories
Trade receivables
A
CU125,000
CU175,000
B
CU125,000
CU170,000
C
CU130,000
CU175,000
D
CU130,000
CU170,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
2
On 1 July 20X7 Mansfield Ltd entered into a CU5 million contract for the supply of computer software and five years of after-sales support. The cost of providing after-sales support is estimated at CU500,000 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 income statement for the year ended 30 June 20X8 in respect of the above contract?
3
A
CU1.75 million
B
CU2.4 million
C
CU2.5 million
D
CU5 million
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 income statement for the year ended 30 June 20X6 in respect of the above contract?
4
A
CU4 million
B
CU3 million
C
CU3.25 million
D
CU2.25 million
On 31 December 20X7 Darcy Ltd sold goods to Willoughby Ltd for CU300,000. These goods had a cost of CU250,000. Willoughby Ltd has been granted interest-free credit and will pay for these goods in full on 31 December 20X9. At the date of sale the fair value of the CU300,000 receivable was CU290,000. In accordance with BAS 18 Revenue how much revenue should be included in Darcy Ltd’s income statement for the year ended 31 December 20X7 in respect of the above sale?
5
A
CUNil
B
CU250,000
C
CU290,000
D
CU300,000
Lydia Ltd has entered into a fixed-price contract for the provision of services to Jane Ltd. The contract commenced in July 20X1 and will be completed in 20X2. The contract price is CU1 million and costs are recoverable as incurred. At 31 December 20X1, Lydia Ltd’s year end, costs of CU300,000 had been incurred and the contract has been assessed as 40% complete. Costs to complete are estimated at CU500,000. All figures are reliable estimates. In accordance with BAS 18 Revenue how much revenue should be included in Lydia Ltd’s income statement for the year ended 31 December 20X1 in respect of this contract? A
CUNil
B
CU300,000
C
CU400,000
D
CU1 million
© The Institute of Chartered Accountants in England and Wales, March 2009
87
Single entity financial statements: objective test questions 6
Rochester Ltd has entered into a fixed-price contract for the provision of services to Adele Ltd. The contract commenced in September 20X2 and will be completed in 20X3. The contract price is CU2 million and costs are recoverable as incurred. At 31 December 20X2, Rochester Ltd’s year end, costs of CU500,000 have been incurred. The contract 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 income statement for the year ended 31 December 20X2 in respect of this contract?
7
A
CUNil
B
CU500,000
C
CU600,000
D
CU2 million
Rainorshine Ltd produces a series of outdoor theatre productions each spring/summer. The company’s year end is 30 June. For the 20X6 season, five productions are planned, one in each month from May through to September. A season ticket covering all five events costs CU100. Due to adverse weather 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 for the 20X6 season in Rainorshine Ltd’s income statement for the year ended 30 June 20X6?
58
A
CUNil
B
CU100
C
CU40
D
CU20
BAS 32 and BAS 39 Financial Instruments 1
On 3 October 20X6 Corbin Ltd issued 100,000 5% redeemable CU1 preference shares. These shares are redeemable on 3 October 20Y1. In accordance with BAS 32 Financial Instruments: Presentation how will these shares and their related dividend be shown in Corbin Ltd’s financial statements for the year ended 31 December 20X6?
88
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
© The Institute of Chartered Accountants in England and Wales, March 2009
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 related dividend be shown in Marchant Ltd’s financial statements for the year ended 31 March 20X7?
3
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
According to BAS 32 Financial Instruments: Presentation which of the following could be classified as financial assets? (1) Bank overdraft (2) Cash at bank (3) Inventories (4) A current asset investment (5) A forward contract
4
A
(1), (2) and (5)
B
(2), (4) and (5)
C
(2) and (4)
D
(3), (4) and (5)
According to BAS 39 Financial Instruments: Recognition and Measurement at what amount should a financial 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
© The Institute of Chartered Accountants in England and Wales, March 2009
89
Single entity financial statements: objective test questions
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 or part of a loss on a previously revalued asset should be charged against any related revaluation surplus (3) If the fair value less costs to sell exceeds the carrying amount of an asset there is no need to estimate value in use
2
A
(1) and (2)
B
(1) and (3)
C
(2) and (3)
D
(1), (2) and (3)
A non-current asset has a carrying amount of CU20,000. It could be sold for CU18,500 with selling costs 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?
3
A
CU18,000
B
CU20,000
C
CU22,000
D
CU50,000
Chloe Ltd purchased equipment on 1 April 20X2 for CU100,000. The equipment was depreciated using the reducing balance method at 25% per annum. Chloe Ltd prepares accounts to 31 March annually. Depreciation was charged up to and including 31 March 20X6. At that date, the recoverable amount of this equipment was CU22,000. According to BAS 36 Impairment of Assets what was the impairment loss on this equipment calculated on 31 March 20X6?
4
A
CUNil
B
CU3,000
C
CU9,640
D
CU20,187
Lauren Ltd bought some land on 1 January 20X4 for CU500,000. On 31 December 20X5 this land was revalued to CU700,000. On 31 December 20X7 the fair value less costs to sell of this land was estimated 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 of Lauren Ltd for the year ended 31 December 20X7 in respect of the impairment loss on this land?
90
A
CUNil
B
CU50,000
C
CU200,000
D
CU250,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
5
Alayna Ltd bought a machine on 1 January 20X2 for CU50,000. The useful life of this machine was assessed 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 its remaining useful life. On 31 December 20X6 the machine was identified as impaired and revalued to CU20,000. Alayna Ltd makes a transfer between the revaluation reserve and retained earnings each year as a result of the revaluation in accordance with best practice. According to BAS 36 Impairment of Assets what amount will be included in the income statement of Alayna Ltd for the year ended 31 December 20X6 in respect of this impairment loss?
6
A
CUNil
B
CU5,000
C
CU25,000
D
CU30,000
In accordance with BAS 36 Impairment of Assets which of the following assets must be tested for impairment 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
60
A
(1) only
B
(2) only
C
(2) and (3)
D
(2), (3) and (4)
BAS 37 Provisions, Contingent Liabilities and Contingent Assets 1
According to BAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the following statements 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 continuing staff (4) A restructuring provision may only be made when a company has a detailed plan for the reconstruction 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)
© The Institute of Chartered Accountants in England and Wales, March 2009
91
Single entity financial statements: objective test questions 2
According to BAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the following criteria must 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
3
A
(1), (2) and (3)
B
(1) and (2)
C
(1) and (3)
D
(2) and (3)
Which of the following statements about contingencies, if any, are correct according to BAS 37 Provisions, Contingent Liabilities and Contingent Assets? (1) A contingent liability should be disclosed by note if it is probable that an obligation will arise and its 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
4
A
None of the statements is correct
B
(1) and (2)
C
(2) and (3)
D
All of the statements are correct
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 March 20X6? (1) A board decision was made on 15 March 20X6 to close down a division. Potential costs are CU100,000. 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 of CU60,000. 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 June 20X6 onwards costing CU85,000
92
A
(1) and (2)
B
(2) and (3)
C
(2) only
D
(3) only
© The Institute of Chartered Accountants in England and Wales, March 2009
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 was started 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 Ltd report these legal actions in its financial statements for the year ended 31 March 20X5?
6
7
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
In accordance with BAS 37 Provisions, Contingent Liabilities and Contingent Assets which one of the following would 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 January 20X6. Wally Ltd’s directors have agreed that this will require a large number of staff to be retrained. At 31 October 20X5, the directors were waiting on a report they had commissioned that would identify the actual training requirements
B
At the balance sheet date, Wally Ltd was negotiating with its insurance provider about the amount of an insurance claim that it had filed. On 20 November 20X5, the insurance provider agreed to pay CU200,000
C
Although it has no legal obligation to do so, Wally Ltd makes refunds to customers for any goods returned 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 by Wally Ltd. Wally Ltd is contesting the claim and, at 31 October 20X5, the directors have been advised by the company’s legal advisers that the company is very unlikely to lose the case
Flyaway Ltd operates a low-cost airline. One of its aircraft will require a major refit in 20X6, at a cost of CU500,000, to upgrade the on-board facilities. At the same time, the aircraft will also have additional safety equipment fitted, at a cost of CU200,000, to allow the company to comply with new legislation 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 correct treatment 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
© The Institute of Chartered Accountants in England and Wales, March 2009
93
Single entity financial statements: objective test questions 8
Charlotte Ltd has been awarded a contract to build an office block for Kylie Ltd. The site preparation work was sub-contracted to George Ltd. George Ltd’s work was sub-standard and this has caused a delay in contract completion. As a result of the delay the client is claiming CU10 million in damages from Charlotte Ltd who has commenced legal action against George Ltd for CU8 million. Charlotte Ltd’s lawyers have advised that it is probable that both actions will be successful. In accordance with BAS 37 Provisions, Contingent Liabilities and Contingent Assets how should Charlotte Ltd account for these legal actions in its financial statements?
61
Claim against Charlotte Ltd
Claim by Charlotte Ltd
A
Provide
Recognise asset
B
Provide
Disclose
C
Disclose
Ignore
D
Ignore
Disclose
BAS 38 Intangible Assets 1
In accordance with BAS 38 Intangible Assets and BFRS 3 Business Combinations which of the following statements 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 that growth (4) Internally developed brands must not be capitalised
2
A
(1) and (4)
B
(2) and (3)
C
(3) only
D
(4) only
During the year ended 30 June 20X3, Emily Ltd spent CU300,000 on the development of a new range of garden machinery. In order to carry out this work, Emily Ltd purchase some highly specialised equipment, on 1 July 20X2 at a cost of CU100,000. The equipment is expected to have a useful life of five 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 forward as development expenditure as at 30 June 20X3?
94
A
CU100,000
B
CU300,000
C
CU320,000
D
CU400,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
3
4
5
According to BAS 38 Intangible Assets which of the following conditions would preclude any part of the development 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 its cost
C
Funds are unlikely to be available to complete the development
D
The development is expected to give rise to more than one product
According to BAS 38 Intangible Assets which of the following types of research and development expenditure 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
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 to ensure that the carrying amount does not differ from the fair value at the balance sheet date
6
A
(1) only
B
(2) only
C
(1) and (2)
D
Neither of the above
During the current accounting period Jack Ltd considered the recognition of the following costs as intangible 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’s business cannot function In accordance with BAS 38 Intangible Assets what is the maximum amount that Jack Ltd could recognise as intangible assets? A
CU60,000
B
CU100,000
C
CU110,000
D
CU150,000
© The Institute of Chartered Accountants in England and Wales, March 2009
95
Single entity financial statements: objective test questions 7
During the current accounting period Silver Ltd considered the recognition of the following costs as intangible assets. (1) CU50,000 spent on development expenditure on Project X. The directors are confident of the financial, 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 net assets of Gold Ltd What is the maximum amount that Silver Ltd could recognise as intangible assets in its consolidated financial statements in accordance with BAS 38 Intangible Assets?
8
A
CU50,000
B
CU56,000
C
CU86,000
D
CU30,000
In order for an asset to be recognised as an intangible asset in accordance with BAS 38 Intangible Assets which 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
9
96
A
(1) and (3)
B
(2) and (3)
C
(1), (2) and (3)
D
(2), (3) and (4)
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 an intangible asset
D
Intangible assets should initially be recognised at cost
© The Institute of Chartered Accountants in England and Wales, March 2009
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 December 20X4 the board made the decision to sell Darren Ltd’s manufacturing division. A buyer is expected to be 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 20X5 how should this division be treated in accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations?
2
3
4
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
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what is the minimum disclosure which must be made on the face of the income statement in respect of discontinued 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 on related assets
C
Revenue, expenses, pre-tax profit or loss and tax on operations and any post-tax gain or loss on related assets
D
Revenue, expenses, pre-tax profit or loss and tax on operations, any pre-tax gain or loss on related assets and tax on that gain or loss
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what is the minimum disclosure which must be made on the face of the cash flow statement in respect of discontinued operations? A
Cash flows attributable to the operating, investing and financing activities of the discontinued operations
B
Net cash flows arising from the operation of the discontinued operations and the sale of related assets
C
Cash flows arising from the sale of the assets of the discontinued operations
D
No separate disclosure is required
Gary Ltd operates a number of divisions and has a year end of 30 June. On 30 June 20X7 the board made and announced the decision to sell Gary Ltd’s retail division. The sale is expected to be completed within six months. In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, how should the retail division’s property, plant and equipment be classified in the balance sheets as at 30 June 20X6 and 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
© The Institute of Chartered Accountants in England and Wales, March 2009
97
Single entity financial statements: objective test questions 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 the business. 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-current Assets Held for Sale and Discontinued Operations?
6
A
Neither division
B
Both divisions
C
Division A only
D
Division B only
At a board meeting held on 30 October 20X7 Rosa Ltd made the decision to sell a major division. The actual closure took place on 12 February 20X8. In the year ended 31 December 20X7 the division reported a loss of CU100,000. Costs of redundancies relating to the division to be incurred in 20X8 are expected to be CU30,000. In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what will be reported in Rosa Ltd’s income statement for the year ended 31 December 20X7 in respect of this division?
7
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
On 30 September 20X1 the directors of Guido Ltd decided to sell the company’s services division and the division was classified as held for sale. The sale is expected to be completed, along with the sales of related assets, in early December 20X1. One item of plant within this division had originally cost CU30,000 and had a carrying amount of CU15,000 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 using a monthly rate of 1%. In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amount will be recognised in the balance sheet of Guido Ltd as at 30 October 20X1 in respect of this plant?
98
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
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
8
Valerie Ltd acquired a machine on 1 January 20X2 for CU70,000. On 1 January 20X5, when the carrying amount of the machine was CU40,000, the machine was classified as held for sale. Its fair value was estimated at CU30,000 and costs to sell at CU500. The asset was sold on 30 June 20X5 for CU32,000. In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amounts will be recognised in respect of this asset in Valerie Ltd’s income statement for the year ended 31 December 20X5?
9
Impairment loss
Profit on sale
A
CU8,000
CUNil
B
CU10,500
CU2,500
C
CUNil
CU8,000
D
CU10,000
CU2,000
Paul Ltd acquired a building on 1 January 20W7 for CU800,000. The building had a useful life of 50 years and was being depreciated on a straight-line basis. On 1 January 20X9 the building was classified as held for sale. Its fair value was estimated at CU600,000 and costs to sell at CU10,000. The building was sold on 30 June 20X9 for CU580,000. In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amounts will be recognised in respect of this building in Paul Ltd’s income statement for the year ended 31 December 20X9?
10
Impairment loss
Loss on sale
A
CU28,000
CUNil
B
CU18,000
CU2,000
C
CUNil
CU28,000
D
CU18,000
CU10,000
Michael Ltd bought a piece of land on 1 January 20X5 for CU1 million. The company revalued this land on 31 December 20X6 to CU1.5 million. On 1 September 20X7 the land was classified as held for sale. Its fair value was estimated at CU1.7 million and costs to sell at CU20,000. The land was sold on 15 February 20X8 for CU1.8 million. In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what amounts will be recognised in respect of this land in Michael Ltd’s income statement and revaluation reserve for the 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
© The Institute of Chartered Accountants in England and Wales, March 2009
99
Single entity financial statements: objective test questions 11
Harry Ltd revalued a machine on 1 January 20X6 to CU280,000. The machine had cost CU200,000 on 1 January 20X5 and was being depreciated on a reducing balance basis at a rate of 25%. The depreciation policy was unchanged after revaluation. On 1 January 20X8 the machine was classified as held for sale. Its fair value was estimated at CU80,000 and costs to sell at CU5,000. The machine was sold on 30 June 20X8 for CU75,000. In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what amounts will be recognised in respect of this machine in Harry Ltd’s income statement and revaluation reserve for the year ended 31 December 20X8?
100
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
© The Institute of Chartered Accountants in England and Wales, March 2009
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 CUm 68
Net assets (at fair values) Ordinary share capital Retained earnings
10 58 68
Kestrel Ltd CUm 25 10 15 25
On 1 January 20X8 Falcon Ltd had purchased 80% of the ordinary share capital of Kestrel Ltd for CU24 million. The fair value of the net assets of Kestrel Ltd was CU20 million at that date. The goodwill arising on consolidation was impaired by 100%. At what amount will retained earnings be stated in Falcon Ltd's consolidated balance sheet as at 31 December 20X8?
2
A
CU55 million
B
CU54 million
C
CU50 million
D
CU62 million
Ploughshare Ltd acquired 80% of the ordinary share capital of Sword Ltd on 30 September 20X1. On 31 December 20X1, the share capital and retained earnings of Sword Ltd were as follows. Ordinary shares of 50p each Retained earnings at 1 January 20X1 Retained profit for the year ended 31 December 20X1
CU'000 300 80 40 420
The profits of Sword Ltd have accrued evenly throughout 20X1. Goodwill arising on the acquisition of Sword 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
© The Institute of Chartered Accountants in England and Wales, March 2009
101
Consolidated financial statements: objective test questions 3
Xanthe Ltd owns 75% of the ordinary share capital of QED Ltd. At the group's year end, Xanthe Ltd held inventories valued at CU160,000 and QED Ltd held inventories valued at CU90,000. The inventories held by Xanthe Ltd included CU20,000 of goods purchased from QED Ltd at a profit margin of 30%. There were also inventories in transit between the two entities; this amounted to a further CU10,000 at selling price. To the nearest CU'000, at what value should inventories appear in the year end consolidated balance sheet?
4
A
CU251,000
B
CU253,000
C
CU254,000
D
CU255,000
Xiao Ltd owns 80% of Yacht Ltd and 75% of Zebra Ltd. At 31 December 20X5, the three companies had declared the following dividends for the year ended on that date. Xiao Ltd Yacht Ltd Zebra Ltd
CU 60,000 30,000 20,000
Xiao Ltd had also paid an interim dividend of CU15,000. What is the total liability for dividends payable in the consolidated balance sheet of Xiao Ltd as at 31 December 20X5?
5
A
CU56,000
B
CU60,000
C
CU71,000
D
CU110,000
Woolf Ltd acquired 80% of the ordinary share capital of Stephen Ltd on the incorporation of that company many years ago. No goodwill arose on the acquisition. At 31 December 20X9, the retained earnings of Woolf Ltd were CU202,000 and the consolidated retained 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?
102
A
CU30,000
B
CU32,000
C
CU33,000
D
CU40,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
6
Outlook Ltd has one subsidiary. On 1 January 20X7 Outlook Ltd purchased 30% of the ordinary share capital of View Ltd for CU12 million. The summarised balance sheet of View Ltd as at 31 December 20X7 was as follows. CUm 30
Net assets (at carrying amount) Ordinary share capital (CU1 shares) Retained earnings at 1 January 20X7 Net profit for the year ended 31 December 20X7
10 15 5 30
At 1 January 20X7 the fair value of the net assets of View Ltd was CU5 million greater than their carrying amount. The difference, which has not been recorded in View Ltd's books, relates to land which 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 balance sheet as at 31 December 20X7?
7
A
CU12 million
B
CU13.5 million
C
CU17 million
D
CU9 million
On 1 January 20X2 Alfie Ltd purchased 40% of the equity share capital of Bailey Ltd for CU60,000. At this date the retained earnings of Bailey Ltd stood at CU30,000. During the year ended 31 December 20X4 Alfie Ltd sold goods to Bailey Ltd for CU10,000. These goods were still in inventory at the year end. 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. Net assets Ordinary share capital Retained earnings
CU'000 320 100 220 320
At what amount should Alfie Ltd's interest in Bailey Ltd be stated in its consolidated balance sheet at 31 December 20X4? A
CU135,000
B
CU135,200
C
CU136,000
D
CU147,000
© The Institute of Chartered Accountants in England and Wales, March 2009
103
Consolidated financial statements: objective test questions 8
On 1 January 20X4, Geranium Ltd acquired 60% of the equity share capital of Rose Ltd for CU5 million. At that date, the net assets of Rose Ltd were CU8 million. On 1 July 20X9 Geranium Ltd sold 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. Ordinary share capital (CU1 shares) Retained earnings at 1 January 20X9 Retained profit for the year ended 31 December 20X9
CU'000 5,000 6,500 2,000 13,500
At what amount should the investment in Rose Ltd be shown in Geranium Ltd's consolidated balance sheet as at 31 December 20X9?
9
A
CU750,000
B
CU1,725,000
C
CU1,875,000
D
CU1,925,000
Aster Ltd owns a controlling interest in Chrysanthemum Ltd and exerts significant influence over Flower 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 of the goods to Flower Ltd was CU60,000. 25% of the goods remained in Aster Ltd's inventories at 30 April 20X5. Which of the following is the correct consolidation adjustment in respect of these inventories?
10
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
Dartmoor Ltd controls another entity, Clydesdale Ltd, owning 60% of that company's ordinary share capital. At the group's year end, 31 December 20X5, Clydesdale Ltd included CU6,000 in its receivables in respect of goods supplied to Dartmoor Ltd. However, the payables of Dartmoor Ltd included only CU4,000 in respect of amounts due to Clydesdale Ltd. The difference arose because, on 31 December 20X5, Dartmoor Ltd sent a cheque for CU2,000 to Clydesdale Ltd, which was not received by Clydesdale Ltd until 3 January 20X6. Which of the following sets of consolidation adjustments to current assets and current liabilities is correct?
104
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, and include cash in transit of CU2,000
D
Deduct CU6,000 from consolidated receivables and CU4,000 from consolidated payables, and include inventories in transit of CU2,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
11
Ella Ltd acquired 75% of the ordinary shares in Frances Ltd on 1 April 20X2. Ella Ltd has prepared a consolidated balance sheet at 31 March 20X3, which shows goodwill of CU200,000 and consolidated retained earnings of CU400,000. However, this consolidated balance sheet has ignored the fair value of an item of plant held by Frances Ltd which at the date of acquisition was CU120,000 in excess of its carrying 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 retained earnings in Ella Ltd's consolidated balance sheet as at 31 March 20X3? Goodwill CU'000
12
Retained earnings CU'000
A
80
376
B
110
382
C
110
376
D
200
382
Zara Ltd is the sole subsidiary of Anne Ltd. Zara Ltd's balance sheet at 31 December 20X1 can be summarised as follows. CU'000 1,000
Total assets Ordinary share capital Retained earnings Equity Redeemable preference share capital Total equity and liabilities
500 200 700 300 1,000
Anne Ltd holds 70% of Zara Ltd's ordinary shares and 60% of Zara Ltd's redeemable preference shares. All shares were acquired when Zara Ltd's retained earnings were CU100,000. What is the minority 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
© The Institute of Chartered Accountants in England and Wales, March 2009
105
Consolidated financial statements: objective test questions 13
Sandra Ltd has a number of subsidiary companies. On 1 January 20X5 Sandra Ltd acquired 30% of the 10,000 CU1 ordinary shares of Fiona Ltd for CU14,000. The balance on Fiona Ltd's retained earnings on 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 goodwill arising on its investment in Fiona Ltd. At what value will the investment in Fiona Ltd be shown in the consolidated balance sheet of Sandra Ltd as at 31 December 20X9?
14
A
CU14,400
B
CU15,600
C
CU16,400
D
CU20,400
The summarised balance sheets of Mandy Ltd and Len Ltd at 31 December 20X7 are shown below.
Total assets Ordinary share capital Retained earnings Liabilities Total equity and liabilities
Mandy Ltd CU 349,600
Len Ltd CU 140,000
48,000 244,800 56,800 349,600
24,000 96,000 20,000 140,000
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 been identified by Mandy Ltd in the value of goodwill arising on the acquisition of Len Ltd. What is the amount of consolidated retained earnings at 31 December 20X7?
106
A
CU340,800
B
CU259,200
C
CU268,800
D
CU331,200
© The Institute of Chartered Accountants in England and Wales, March 2009
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 held inventories 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 ended 31 December 20X3? Profit attributable to Equity holders of Betty Ltd Minority interest
2
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
Pumpkin Ltd has held 90% of the equity share capital of Squash Ltd for many years. Cost of sales for each company for the year ended 31 December 20X3 was as follows. Pumpkin Ltd Squash Ltd
CU 100,000 80,000
During the year, Squash Ltd sold goods costing CU5,000 to Pumpkin Ltd for CU8,000. At the year end, all of these goods remained in inventories. What figure should be shown as cost of sales in the consolidated income statement of Pumpkin Ltd for the year ended 31 December 20X3?
3
A
CU169,000
B
CU172,000
C
CU175,000
D
CU176,000
Zante Ltd purchased 80% of Corfu Ltd's ordinary shares on 1 July 20X0 for CU2,360,000 when the fair value of Corfu Ltd's net assets was CU2,240,000. As at 30 June 20X2 Zante Ltd had recognised impairments 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 Corfu Ltd 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 consolidated income statement of Zante Ltd for the year ended 30 June 20X3? A
CU384,000
B
CU484,000
C
CU952,000
D
CU270,000
© The Institute of Chartered Accountants in England and Wales, March 2009
107
Consolidated financial statements: objective test questions 4
On 1 January 20X4, Geranium Ltd acquired 60% of ordinary shares of Rose Ltd for CU5 million. At that date, the fair value of the net assets of Rose Ltd was CU8 million. On 1 July 20X9 Geranium Ltd sold 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. Share capital (CU1 ordinary shares) Retained earnings at 1 January 20X9 Retained profit for the year ended 31 December 20X9
CU'000 5,000 6,500 2,000 13,500
What is the profit or loss on disposal of the shares in Rose Ltd which should be included in the consolidated income statement of Geranium Ltd for the year ended 31 December 20X9?
5
A
CU675,000 profit
B
CU725,000 loss
C
CU725,000 profit
D
CU3,025,000 loss
Magic Ltd acquired 90% of the ordinary share capital of Wizard Ltd many years ago. On 1 April 20X4 Magic Ltd sold one-third of its investment in Wizard Ltd. Wizard Ltd's profit for the year ended 31 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 year ended 31 December 20X4?
6
A
CU14,400
B
CU187,200
C
CU192,000
D
CU230,400
On 1 April 20X3, Bibury Ltd acquired 70% of the ordinary shares of Barnsley Ltd. The following figures relate to the year ended 31 December 20X3. Bibury Ltd Barnsley Ltd CU CU Revenue 769,000 600,000 Cost 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 Bibury Ltd for the year ended 31 December 20X3?
108
Revenue CU
Gross profit 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
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
7
Alexander Ltd acquired 30% of Bucephalus Ltd's ordinary shares in 20X5 for CU450,000 when the fair value of Bucephalus Ltd's net assets was CU1 million. No impairment in the value of the investment has been identified since that date. On 30 June 20X9 Alexander Ltd disposed of all of its shares in Bucephalus Ltd for CU600,000 when Bucephalus Ltd's net assets amounted to CU1.2 million. Bucephalus Ltd's profit for the year to 31 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 in Alexander Ltd's consolidated income statement for the year ended 31 December 20X9?
8
Share of associate's profits CU
Profit on disposal of associate CU
A
18,000
90,000
B
36,000
90,000
C
18,000
240,000
D
36,000
240,000
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 20X9 Chloe Ltd sold all of its shares in Charlotte Ltd. Charlotte Ltd's profit for the year to 31 December 20X9 was CU60,000, which accrued evenly over that year. What amount will appear as a deduction from the minority interest column in Chloe Ltd's consolidated statement of changes in equity for the year ended 31 December 20X9 in respect of Charlotte Ltd?
9
A
CU4,500
B
CU30,000
C
CU34,500
D
CU36,000
Shadow Ltd acquired 80% of the ordinary shares of Pip Ltd in 20X6. On 31 December 20X8 Pip Ltd's net assets amounted to CU400,000. On 30 September 20X9 Shadow Ltd sold one quarter of its shares in Pip Ltd. Pip Ltd's profit for the year to 31 December 20X9 was CU120,000, which accrued evenly over that year. What amount will be added to the minority interest column in Shadow Ltd's consolidated statement of changes in equity for the year ended 31 December 20X9 in respect of Shadow Ltd's decrease in holding in Pip Ltd? A
CU30,000
B
CU80,000
C
CU98,000
D
CU104,000
© The Institute of Chartered Accountants in England and Wales, March 2009
109
Consolidated financial statements: objective test questions 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 the following dividends. Alayna Ltd Ellen Ltd Lauren Ltd
CU 500,000 200,000 100,000
What will be the total amount shown in Alayna Ltd's consolidated statement of changes in equity for the year ended 30 June 20X8 in respect of dividends paid?
11
A
CU500,000
B
CU550,000
C
CU580,000
D
CU700,000
Parent Ltd owns 80% of the issued ordinary share capital of Subsidiary Ltd. For the year ended 31 December 20X6 Subsidiary Ltd reported a net profit of CU55 million. During 20X6, Subsidiary Ltd sold goods to Parent Ltd for CU15 million at cost plus 20%. At the year end half these goods are still held by Parent Ltd. In the consolidated income statement for the year ended 31 December 20X6 what will be the amount for profit attributable to the minority interest?
65
A
CU8 million
B
CU10.7 million
C
CU10.75 million
D
CU11 million
Consolidated cash flow statements 1
The consolidated financial statements of Paulo Ltd for the year ended 31 March 20X4 showed the following. Minority interest in the consolidated balance sheet at 31 March 20X4 was CU6 million (CU3.6 million at 31 March 20X3). Minority interest in the consolidated income statement for the year ended 31 March 20X4 was CU2 million. During the year ended 31 March 20X4, the group acquired a new 75% subsidiary whose net assets at the date of acquisition were CU6.4 million. On 31 March 20X4, the group revalued all its properties and the minority interest in the revaluation surplus was CU1.5 million. There were no dividends payable 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 shareholders that will be shown in the consolidated cash flow statement of Paulo Ltd for the year ended 31 March 20X4?
110
A
CU1.2 million
B
CU2.7 million
C
CU4.5 million
D
CU7.5 million
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
2
Nigel Ltd acquired 30% of the shares of Nick Ltd a number of years ago and the investment has since been accounted for as an associate in Nigel Ltd's consolidated financial statements. Both Nigel Ltd and Nick 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 of CU230,000. Nigel Ltd's consolidated balance sheet at 31 October 20X4 showed investments in associates of CU700,000 (20X3 CU635,000). In accordance with BAS 7 Cash Flow Statements what amount will be shown as dividends received from associates in the consolidated cash flow statement of Nigel Ltd for the year ended 31 October 20X4?
3
A
CU165,000
B
CU765,000
C
CU4,000
D
CU295,000
Julie Ltd has one associated company, Andrew Ltd, in which Julie Ltd holds 40% of the issued 100,000 CU1 ordinary shares. The financial controller of Julie Ltd is unsure how the following transactions should be reflected in the consolidated cash flow statement and has asked you to confirm the overall impact. (1) In the previous accounting period, Julie Ltd had made a cash advance of CU100,000 to Andrew Ltd. 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 machinery at 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 on Julie 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's plant CU20,000
C
Cash from repayment of cash advance from associate CU30,000; dividend received from associate CU8,000
D
Dividend received from associate CU8,000
© The Institute of Chartered Accountants in England and Wales, March 2009
111
Consolidated financial statements: objective test questions 4
On 1 June 20X5 Faraday Ltd sold its wholly owned subsidiary, Electric Ltd. Faraday Ltd received cash of CU2 million in respect of this sale on 1 July 20X5. A further CU500,000 is payable in cash on 1 January 20X6 if Electric Ltd exceeds certain profit targets. On 1 June 20X5 the net assets of Electric Ltd were as follows. Property, plant and equipment Inventories Receivables Cash and cash equivalents Liabilities Net assets acquired
CU 650,000 450,000 200,000 20,000 (130,000) 1,190,000
In accordance with BAS 7 Cash Flow Statements what amount should be shown in the investing activities section of the consolidated cash flow statement of Faraday Ltd for the year ended 31 December 20X5?
5
A
CU2,000,000
B
CU2,480,000
C
CU2,500,000
D
CU1,980,000
On 30 September 20X8 Dougal Ltd acquired 80% of the ordinary shares of Lucy Ltd. The consideration was made up of 100,000 of Dougal Ltd's ordinary shares, issued at a price of CU1.25 per share and cash of CU400,000.
On 30 September 20X8 the net assets of Lucy Ltd were as follows. Property, plant and equipment Inventories Receivables Cash and cash equivalents Other liabilities Net assets acquired
CU 450,000 250,000 130,000 (40,000) (230,000) 560,000
In accordance with BAS 7 Cash Flow Statements what amount should be shown in the investing activities section of the consolidated cash flow statement of Dougal Ltd for the year ended 31 December 20X8?
112
A
CU360,000
B
CU440,000
C
CU432,000
D
CU565,000
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
6
On 1 January 20X3 Judith Ltd's consolidated balance sheet showed property, plant and equipment of CU257,900. By 31 December 20X3 this figure was CU578,900. The following transactions in relation to 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 consolidated financial statements for 20X3, included CU40,000 in relation to assets acquired under finance leases and CU35,000 in relation to assets acquired on the acquisition of a subsidiary during the year. (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 consolidated cash flow statement for 20X3 as a cash outflow under investing activities in respect of transactions in property, plant and equipment?
7
A
CU375,000
B
CU413,000
C
CU448,000
D
CU488,000
The financial controller of Judith Ltd is drafting the note to the consolidated cash flow statement reconciling group profit before tax to cash generated from operations for the year ended 31 December 20X8. He has asked you to assist him with calculating the movement on receivables and payables. The following information is available. Consolidated 31 December 31 December 20X8 20X7 CU'000 CU'000 340 235 (275) (135)
Receivables Payables
Acquired with subsidiary on 1 June 20X8 CU'000 90 (165)
In accordance with BAS 7 Cash Flow Statements what amount will be shown in Judith Ltd's reconciliation of profit before tax to cash generated from operations for 20X8 in respect of receivables 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
© The Institute of Chartered Accountants in England and Wales, March 2009
113
Consolidated financial statements: objective test questions 8
On 30 June 20X8, Parry Ltd sold its investment in its only associate, Sasha Ltd, for a cash sum of CU460,000. 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 assets of Sasha Ltd on 30 June 20X8 were as follows. Property, plant and equipment Inventories Receivables Cash and cash equivalents Other liabilities
CU 357,000 170,000 45,000 5,000 (87,000) 490,000
Parry Ltd's consolidated balance sheet at 31 December 20X7 reflected investments in associates of CU120,600. In accordance with BAS 7 Cash Flow Statements what amount will be shown as an investing inflow in Parry Ltd's consolidated cash flow statement for the year ended 31 December 20X8 in respect of its investment in Sasha Ltd?
66
A
CU460,000
B
CU455,000
C
CU225,600
D
CU685,600
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 local personnel for several months. This situation is unlikely to be resolved in the near future. Wally Ltd is an 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 Business Combinations which of these companies must be consolidated by Sarah Ltd at 31 December 20X3?
114
A
Ulysses Ltd only
B
Wally Ltd only
C
Both Ulysses Ltd and Wally Ltd
D
Neither Ulysses Ltd nor Wally Ltd
© The Institute of Chartered Accountants in England and Wales, March 2009
QUESTION BANK
2
Consul Ltd owns the following equity shareholdings in the following companies and has a seat on the board of each of those companies. Admiral Ltd Sultan Ltd Warrior Ltd
25% 20% 25%
Consul Ltd holds the largest shareholding in Admiral Ltd, where no other shareholdings are larger than 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 entity holds the remaining 75% of Warrior Ltd's equity shares and has a seat on its board. In accordance with BAS 28 Investments in Associates, which entities are likely to be associates of Consul Ltd?
3
A
Admiral Ltd only
B
Admiral Ltd and Sultan Ltd
C
Admiral Ltd and Warrior Ltd
D
Admiral Ltd, Sultan Ltd and Warrior Ltd
On 1 January 20X5 Plane Ltd acquired 60% of the ordinary shares of Sycamore Ltd. Goodwill of CU100,000 arose on the acquisition. Sycamore Ltd's performance for the years ended 31 December 20X5 and 31 December 20X6 slightly exceeded budget. However, in the year ended 31 December 20X7 it made substantial losses that had not been forecast. According to BFRS 3 Business Combinations when should the goodwill arising on the acquisition of Sycamore Ltd be reviewed for impairment?
4
A
Annually
B
In 20X5 only
C
In 20X7 only
D
In 20X5 and in 20X7
The following statements refer to a situation where an investing entity (Kyle Ltd) seeks to exert control or influence over another entity (Lyle Ltd). Assume that Kyle Ltd is required to prepare consolidated 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 Ltd is 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 an associate of Kyle Ltd (3) If Lyle Ltd is an associate of Kyle Ltd, then any amounts payable by Lyle Ltd to Kyle Ltd are not eliminated 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
© The Institute of Chartered Accountants in England and Wales, March 2009
115
Consolidated financial statements: objective test questions 5
On 1 March 20X5, Pompadour Ltd, a listed entity, acquired 80% of the three million issued ordinary shares of Madame Ltd. The consideration for each share acquired comprised a cash payment of CU1.20, 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 to CU1.60 by the company's year end on 31 March 20X5. Professional fees paid to Pompadour Ltd's external 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 this acquisition, for inclusion in Pompadour Ltd's own financial statements for the year ended 31 March 20X5?
6
A
CU10,080,000
B
CU10,480,000
C
CU10,560,000
D
CU10,960,000
On 30 September 20X5, Gary Ltd purchased 80% of the ordinary share capital of Jerry Ltd for CU1.45 million. The carrying amount of Jerry Ltd's net assets at the date of acquisition was CU1.35 million. A valuation exercise showed that the fair value of Jerry Ltd's property, plant and equipment at that date was CU100,000 greater than carrying amount, and Jerry Ltd immediately incorporated this revaluation into its own books. Jerry Ltd's financial statements at 30 September 20X5 contained notes referring to a contingent liability (which had a fair value of CU200,000). Gary Ltd acquired Jerry Ltd with the intention of restructuring the latter's production facilities. The estimated costs of the restructuring plan totalled CU115,000. According to BFRS 3 Business Combinations what is the amount of goodwill arising on the acquisition of Jerry Ltd?
116
A
CU290,000
B
CU450,000
C
CU530,000
D
CU542,000
© The Institute of Chartered Accountants in England and Wales, March 2009
Answer Bank
© The Institute of Chartered Accountants in England and Wales, March 2009
117
118
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK
Preparation of full single entity financial statements
1
Howells Ltd Marking guide Marks
(a)
(b)
Income statement Revenue Cost of sales Other operating income Administrative expenses Distribution costs Finance costs Investment income Income tax expense Presentation Statement of changes in equity Headings Transfer Profit Ordinary dividends Preference dividends Balances brought forward Presentation Notes Note 1 Note 2 Total available Maximum Paras 2 and 5 Other valid points (each) Total available Maximum
1 ½ ½ ½ ½ ½ 1 3½ ½ 21½
20
1 ½ 5 4 24
(a) Income statement for the year ended 31 December 20X8 Revenue Cost of sales (W1) Gross profit Other operating income (W2) Distribution costs (W1) Administrative expenses (W1) Profit from operations Finance cost Investment income Profit before tax Income tax expense Profit for the period
½ 4½ 1 3½ 1 ½ ½ ½ 1
Note
(1)
CU 1,600,047 (963,351) 636,696 39,045 (33,891) (166,256) 475,594 (6,260) 11,000 480,334 (22,500) 457,834
© The Institute of Chartered Accountants in England and Wales, March 2009
119
Preparation of full single entity financial statements
Statement of changes in equity for the year ended 31 December 20X8 Attributable to the equity holders of Howells Ltd Recognised directly in equity Transfer between reserves Total recognised directly in equity Profit for the period Total recognised income and expense for the period 20X7 final dividends on ordinary shares 20X8 dividends on preference shares Balance brought forward Balance carried forward
Ordinary share capital CU
Preference share capital (irredeemable) CU
General reserve
Retained earnings
CU
Total
CU
CU
– – –
– – –
10,000 10,000 –
(10,000) (10,000) 457,834
– – 457,834
–
–
10,000
447,834
457,834
–
–
–
(12,500)
(12,500)
– – 100,000 100,000
– – 50,000 50,000
– 10,000 10,000 20,000
(2,500) 432,834 66,015 498,849
(2,500) 442,834 226,015 668,849
Notes to the financial statements (extracts) (1) The profit from operations is arrived at after charging (crediting) Operating lease rentals Gain on sale of property Depreciation (6,700 + 8,200) (W1) Impairment of brand Employee benefits (126,232 + 24,291 + 54,117)
CU 6,002 (25,040) 14,900 8,500 204,640
(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 presentation involves
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 will result in fair presentation. BAS 1 requires the financial statements to present fairly the financial position and performance of an entity rather than to give a true and fair view. Present fairly is further described as representing faithfully 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 fair presentation and true and fair view interchangeably in its discussion of the application of the principal qualitative characteristics of financial information.
120
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK WORKINGS (1) Allocation of costs
Opening inventories Purchases Administrative salaries Salesmen's salaries Factory wages Operating lease rentals Administrative expenses Selling and distribution costs Closing inventories (68,000 – (1,000 CU3)) Depreciation Buildings ((450,000 – 115,000) 50) Plant ((22,000 10) + ((60,000 – 18,000) 7)) Impairment of brand (20,500 – 12,000)
Cost of sales CU 58,045 907,989
Admin expenses CU
Distrib costs CU
126,232 24,291
54,117
6,002 18,822 9,600
(65,000) 6,700 8,200 963,351
8,500 166,256
33,891
(2) Other operating income Royalties Gain on sale of property
CU 14,005 25,040 39,045
© The Institute of Chartered Accountants in England and Wales, March 2009
121
Preparation of full single entity financial statements
2
Berwick Ltd Marking guide Marks
Balance sheet PPE Inventories Receivables Cash Ordinary share capital Share premium Revaluation reserve Retained earnings Non-current borrowings Payables Taxation Current borrowings Presentation Statement of changes in equity Gain on revaluation Transfer Profit Ordinary dividends Preference dividends Balances brought forward Presentation Total available Maximum
5½ ½ 1½ ½ ½ ½ ½ ½ ½ 1½ ½ ½ 1 1 2 2 ½ ½ 1 1 22 20
Balance sheet as at 31 January 20X5 ASSETS Non-current assets Property, plant and equipment (W1) Current assets Inventories Trade and other receivables (W4) Cash and cash equivalents Total assets
122
© The Institute of Chartered Accountants in England and Wales, March 2009
CU
CU 2,023,000
370,000 497,000 249,000 1,116,000 3,139,000
ANSWER BANK EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Revaluation reserve Retained earnings Equity Non-current liabilities Borrowings (200,000 – 40,000) Current liabilities Trade and other payables (W5) Taxation Borrowings (200,000 5)
850,000 50,000 552,000 712,000 2,164,000 160,000 640,000 135,000 40,000 815,000 3,139,000
Total equity and liabilities Statement of changes in equity for the year ended 31 January 20X5 Ordinary share capital CU Recognised directly in equity Gain on property revaluation (W2) Transfer between reserves (W2) Total recognised directly in equity Profit for the period (W3) Total recognised income and expense for the period Final dividends on ordinary shares Interim dividends on ordinary shares Balance brought forward Balance carried forward
Share premium
Revaluation reserve
CU
CU
Retained earnings
Total
CU
CU
– – –
– – –
564,000 (12,000) 552,000 –
12,000 12,000 18,000
– 564,000 18,000
– –
– –
552,000 –
30,000 (66,000)
582,000 (66,000)
– – 850,000 850,000
– – 50,000 50,000
– 552,000 – 552,000
(22,000) (58,000) 770,000 712,000
(22,000) 494,000 1,670,000 2,164,000
WORKINGS (1) Property, plant and equipment
Per TB Value Depreciation b/f Depreciation for year ((1,500 – 300) 40) (650 10%) ((250 – 90) 20%)
Land and buildings CU
Plant and machinery CU
Motor vehicles CU
1,500,000
650,000 (160,000)
250,000 (90,000)
Total CU
(30,000) (65,000) 1,470,000
425,000
(32,000) 128,000
2,023,000
(2) Transfer from revaluation reserve to retained earnings New value of buildings 1 February 20X4 (1,500 – 300) Carrying amount of buildings 1 February 20X4 (800 46/50) Surplus on buildings Transfer to retained earnings per annum (464 1/40) Total surplus on revaluation = 464 + 100 on land = CU564,000
CU 1,200,000 (736,000) 464,000 12,000
© The Institute of Chartered Accountants in England and Wales, March 2009
123
Preparation of full single entity financial statements (3) Profit for the period CU 370,000 (127,000) (135,000) (20,000) (70,000) 18,000
Draft for year Less Depreciation (30 + 65 + 32) (W1) Tax Bad debt Development expenditure (4) Trade and other receivables
CU 400,000 97,000 497,000
Trade receivables (420,000 – 20,000) Prepayments (5) Trade and other payables
CU 380,000 100,000 50,000 110,000 640,000
Trade payables Accruals VAT Bank overdraft
Note: We are not told of any right of set-off between the bank balance and the overdraft, so it would be wrong to offset them in the balance sheet and show only a net figure.
3
Angus Ltd Marking guide Marks
(a)
(b)
124
Income statement Revenue Operating expenses (including depreciation) Provision Income tax expense Loss from discontinued operations Note Presentation Statement of changes in equity Headings Revaluation Transfer Profit Dividends Balances as previously stated Correction of error Presentation Total available Maximum Para 1 Each other valid point or example Total available Maximum
© The Institute of Chartered Accountants in England and Wales, March 2009
½ 2 ½ ½ 3 1 1 1 1½ 1½ ½ ½ 1 ½ 1 16 15 1 ½ 7½
6 21
ANSWER BANK (a)
Financial statements (i)
Income statement for the year ended 28 February 20X7
CU'000
Continuing operations Revenue (W3) Operating expenses (W3) Provision for costs of reorganisation Profit before tax Income tax expense Profit for the period from continuing operations
180,000 (143,965) (1,250) 34,785 (6,000) 28,785
Discontinued operations Loss for the period from discontinued operations (W3) (Note) Profit for the period
(16,430) 12,355
Note: The results for the year of the European operations (the intended sale of which has been announced) were (W3): revenue CU20,000,000, expenses CU36,230,000, loss before tax CU16,230,000, loss on measurement of non-current assets held for sale at fair value less costs to sell CU200,000. (ii)
Statement of changes in equity for the year ended 28 February 20X7 Ordinary share capital CU'000 Recognised directly in equity Revaluation of non-current assets (W1) Transfer between reserves re depreciation on revaluations (W2) Total recognised directly in equity Profit for the period Total recognised income and expense for the period Final dividends on ordinary shares Balance brought forward As previously stated Correction of error Balance carried forward
Revaluation reserve
Retained earnings
Total
CU'000
CU'000
CU'000
–
6,800
–
6,800
– – –
(120) 6,680 –
120 120 12,355
– 6,800 12,355
– – –
6,680 – 6,680
12,475 (2,000) 10,475
19,155 (2,000) 17,155
200,000 – 200,000
– – 6,680
300,000 (355) 310,120
500,000 (355) 516,800
(b) Objectives of financial statements The objective of financial statements as set out in BFRS Framework is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range 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 present and potential investors. This is because much of the financial information that is relevant to investors will also be relevant to other users. Information about financial position is primarily provided by the balance sheet which will allow users to assess:
The entity's ability to generate cash (e.g. for a manufacturing company, from a strong non-current asset base)
How future cash flows will be distributed (e.g. disclosed borrowings with applicable rates of interest)
© The Institute of Chartered Accountants in England and Wales, March 2009
125
Preparation of full single entity financial statements
Requirements for future finance (e.g. disclosed expansion plans)
The ability to meet financial commitments as they fall due (e.g. disclosed due dates of borrowings)
Information about financial performance is primarily provided by the income statement and statement of changes in equity. For example, the disclosure of continuing and discontinued operations will provide 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 show where the company's cash has come from (e.g. from operating cash flows or only from one-off sources such as sales of non-current assets) and its need to use what is generated (e.g. in meeting loan repayment schedules). WORKINGS (1)
Revaluation surplus CU'000 20,000 (13,200) 6,800
Revalued amount Less Carrying amount (16,000 – 2,800)
Tutorial note Under para 17 BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors the initial application of a policy 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'000 400 (280) 120
Revalued depreciation charge ((20,000 – 4,000) 40 years) Less Historical cost depreciation charge (3)
Allocation of revenue/operating expenses Total Revenue (90:10) Operating expenses (W5, split 80:20) Correction of error re inventories
CU'000 200,000 (180,400) 355 (180,045)
Operating lease termination and other costs (50 + 100) Revenue less expenses Remeasurement of non-current assets held for sale (W4) Loss for the period (4)
Carrying amount before classification Depreciation charge in operating expenses Buildings element = CU20m – CU4m = CU16m Depreciation charge = CU16m ÷ 40 = CU400,000 Total operating expenses = CU180m + CU0.4m = CU180.4m
126
Discontinued operations CU'000 20,000 (36,080) – (36,080) (150) (36,230) (16,230) (200) (16,430)
Impairment loss and other costs from disposal Fair value on classification as held for sale Less Costs to sell
(5)
Continuing operations CU'000 180,000 (144,320) 355 (143,965)
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 2,850 (50) 2,800 3,000 (200)
ANSWER BANK
4
Goblins Ltd Marking guide Marks
(a)
(b)
(a)
Income statement Revenue Change in inventories Raw materials and consumables Employee benefits Depreciation Other expenses Finance costs Income tax expense Presentation Balance sheet PPE Intangibles Inventories Receivables Cash Ordinary share capital Revaluation reserve Retained earnings Redeemable preference share capital Payables Dividend Presentation Total available Maximum Each explanation of asset for each measurement basis Each explanation of liability for each measurement basis Total available Maximum
½ 1½ ½ 1 3 1 ½ 1 1 3 1 1½ 1½ ½ ½ 1½ 1½ ½ 1 ½ 1 24 22 ½ ½ 4 4 26
Income statement for the year ended 31 December 20X4 Revenue Change in inventories of finished goods and work in progress (W2) Raw materials and consumables used (W2) Employee benefits expense (W2) Depreciation and amortisation expense (W2) Other expenses (W2) Profit from operations Finance costs (W8) Profit before tax Income tax expense (W4) Profit for the period
CU 1,740,600 34,400 (294,500) (620,400) (45,000) (107,765) 707,335 (6,000) 701,335 (107,600) 593,735
© The Institute of Chartered Accountants in England and Wales, March 2009
127
Preparation of full single entity financial statements Balance sheet as at 31 December 20X4
CU
ASSETS Non-current assets Property, plant and equipment (W1) Intangibles (W5)
CU 365,000 40,000 405,000
Current assets Inventories (W6) Trade and other receivables (W7) Cash and cash equivalents
315,500 356,535 515,200 1,187,235 1,592,235
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Revaluation reserve (W9) Retained earnings (W9) Equity Non-current liabilities Preference share capital (redeemable) Current liabilities Trade and other payables (W8) Dividend payable (W9) Taxation
500,000 115,000 576,035 1,191,035 120,000 86,200 75,000 120,000 281,200 1,592,235
Total equity and liabilities
(b) The four measurement bases
128
Measurement basis
Assets recorded/carried at
Liabilities recorded/carried at
Historical cost
The amount of cash or cash equivalents paid, or the fair value of the consideration given, at the time of acquisition.
The amount of the proceeds received in exchange for the obligations or the amount expected to be paid to settle the liabilities in the ordinary course of business.
Current cost
The amount of cash or cash equivalents payable if the same or equivalent assets were acquired currently.
The undiscounted amount that would be required to settle the obligations currently.
Realisable (settlement) value
The amount of cash or cash equivalents currently obtainable by selling assets in an orderly disposal.
The undiscounted amount expected to be paid to settle the liabilities in the normal course of business.
Present value
The discounted present value of the future net cash inflows expected to be generated by the assets in the normal course of business.
The discounted present value of the future net cash outflows expected to be required to settle the liabilities in the normal course of business.
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK WORKINGS (1) Property, plant and equipment Cost Revaluation Depreciation B/f Revaluation Charge (W2 & W3) C/f NBV c/f (2) Allocation of costs
Depn and amortn CU
Staff costs Leasehold (W3) Computers (50,000 5) Patents (60,000 3) Directors' emoluments Raw materials Bad and doubtful debts (45,000 + 18,765 (W7)) Finished games (180,000 – (10 CU450) – 155,600) Work in progress (140,000 – 125,500) Consultancy fees
Raw materials CU
15,000 10,000 20,000 294,500
Leasehold CU 300,000 60,000 360,000
Computers CU 50,000 – 50,000
Total CU
60,000 (60,000) 15,000 15,000 345,000
20,000 – 10,000 30,000 20,000
365,000
Employee benefits CU 260,400
Changes in inventories CU
Other expenses CU
360,000 63,765 (19,900) (14,500)
45,000
294,500
620,400
(34,400)
44,000 107,765
(3) Depreciation on leasehold =
Carrying amount Remaining useful life
=
CU360,000 24 years
=
CU15,000
Total of 30 years. At 1 January 20X4 CU60,000 depreciation charged based on (CU300,000 30) CU10,000 per year. Therefore buildings have 24 years remaining.
Annual transfer from revaluation reserve = CU15,000 – CU10,000 = CU5,000. (4) Income tax For year Overprovision re previous year
CU 120,000 (12,400) 107,600
(5) Intangibles B/f Amortisation for the year (W2) C/f
CU 60,000 (20,000) 40,000
© The Institute of Chartered Accountants in England and Wales, March 2009
129
Preparation of full single entity financial statements (6)
Inventories CU 175,500 140,000 315,500
Finished games (180,000 – (10 CU450)) WIP (7) Trade and other receivables
CU 420,300 (45,000) 375,300 (18,765) 356,535
Per TB Less Bad debt write off Less
Specific allowance @ 5%
(8) Trade and other payables CU 80,200 6,000 86,200
Per TB Accrued interest on preference shares (120,000 5%) (9) Reserves
B/f Profit for the period Revaluation (360,000 – (300,000 – 60,000)) Ordinary dividends (50,000 + (15p 500,000)) Depreciation transfer (W3) C/f
130
© The Institute of Chartered Accountants in England and Wales, March 2009
Retained earnings CU 102,300 593,735 – (125,000) 5,000 576,035
Revaluation reserve CU – – 120,000 (5,000) 115,000
ANSWER BANK
5
Harry Ltd Marking guide Marks
Income statement Revenue Change in inventories Work capitalised Raw materials and consumables Employee benefits Depreciation/amortisation Other expenses Impairment Finance costs Income tax expense Presentation Balance sheet PPE Intangibles Inventories Receivables Cash Ordinary share capital Share premium Revaluation reserve Retained earnings Redeemable preference share capital Non-current finance lease liabilities Dividend Payables Taxation Current finance lease liabilities Presentation Total available Maximum
1 ½ ½ ½ 1 3½ ½ 1 1 ½ 1 3½ ½ 1 1 ½ ½ 1 1 1 ½ 1 1 ½ ½ 2 1 27½ 25
Income statement for the year ended 31 December 20X5 Revenue (3,500,000 – 1,000) Changes in inventories of finished goods and work in progress (W1) Work performed by the enterprise and capitalised (W2) Raw materials and consumables used Employee benefits expense (1,250,500 + 10,000) Other expenses (bad debt) Depreciation and amortisation expense (W3) Impairment of intangibles (15,000 – 750 (W3) – 14,000) Profit from operations Finance costs (W7) Profit before tax Income tax expense Profit for the period
CU 3,499,000 5,200 74,500 (1,570,000) (1,260,500) (9,000) (95,025) (250) 643,925 (6,800) 637,125 (250,000) 387,125
© The Institute of Chartered Accountants in England and Wales, March 2009
131
Preparation of full single entity financial statements Balance sheet as at 31 December 20X5 CU
ASSETS Non-current assets Property, plant and equipment (W2) Intangibles
CU 5,181,725 14,000 5,195,725
Current assets Inventories (W1) Trade and other receivables (37,500 – 10,000) Cash and cash equivalents
64,200 27,500 263,500 355,200 5,550,925
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital (W5) Share premium account (W5) Revaluation reserve (W4) Retained earnings (W4)
600,000 110,000 2,040,000 2,295,725 5,045,725
Non-current liabilities Preference share capital (redeemable) Finance lease liabilities (W6)
120,000 36,667 156,667
Current liabilities Dividend payable (W4) Trade and other payables (25,400 + 4,800 (W7)) Taxation Finance lease liabilities (45,000 – 36,667 (W6))
60,000 30,200 250,000 8,333 348,533 5,550,925
Total equity and liabilities WORKINGS (1) Change in inventories
CU 59,000 (64,200) (5,200)
Opening (45,600 + 13,400) Closing (50,200 + 15,000 – 1,000) (2) Property, plant and equipment
Cost B/f Additions (54,000 + 20,500) Revaluation C/f Acc dep B/f Revaluation Charge (W3) C/f NBV c/f
132
Freehold CU
Plant CU
Equipment CU
3,600,000 – 1,400,000 5,000,000
520,000 53,000 – 573,000
Sold (W3) 74,500 – 74,500
640,000 (640,000) 40,000 40,000
375,000 – 39,600 414,600
Sold (W3) – 11,175 11,175
4,960,000
158,400
63,325
© The Institute of Chartered Accountants in England and Wales, March 2009
Total CU
5,181,725
ANSWER BANK (3) Depreciation and amortisation expense CU 3,500 11,175 39,600 40,000 750 95,025
Loss on scrapped office equipment (32,000 – 28,500) Depreciation on new furniture (74,500 (W2) 15%) Depreciation on plant ((573,000 (W2) – 375,000) 20%) Depreciation on buildings (1,000,000 4%) Amortisation of patent (15,000 20) (4) Reserves Retained earnings CU 1,968,600 – (60,000) 387,125 2,295,725
B/f Revaluation (5,000,000 – (3,600,000 – 640,000)) Ordinary dividends (600,000 (W5) 10p) For year
Revaluation reserve CU – 2,040,000 – – 2,040,000
(5) Bonus issue Ordinary shares CU 500,000 – 100,000 600,000
B/f Directors' time Bonus issue
Share premium CU 200,000 10,000 (100,000) 110,000
(6) Finance lease CU 60,000 (53,000) 7,000
Lease payments (6 CU10,000) Fair value of asset Total interest SOTD =
n (n 1) 67 = = 21 2 2
Year ended 31 December 20X5 20X6
B/f CU 53,000 45,000
(6/21 CU7,000) (5/21 CU7,000)
Interest CU 2,000 1,667
Payment CU (10,000) (10,000)
C/f CU 45,000 36,667
(7) Finance charges Lease (W6) Preference dividend (120,000 4%)
CU 2,000 4,800 6,800
© The Institute of Chartered Accountants in England and Wales, March 2009
133
Preparation of full single entity financial statements
6
Frodo Ltd Marking guide Marks
(a)
(b)
134
Income statement Revenue Cost of sales Administrative expenses Distribution costs Finance costs Income tax expense Presentation Balance sheet PPE Inventories Receivables Cash Non-current assets held for sale Ordinary share capital Irredeemable preference share capital Retained earnings Non-current borrowings Payables Dividend Taxation Current borrowings Provisions Presentation Total available Maximum Objective of most directors is to maximise profits Not-for-profit entities have other considerations For each example of a not-for-profit entity with explanation of objectives (to maximum of 2 marks) Success will be subject to non-profit measures Example of non-profit measures Reporting requirements: BFRS for companies Sector specific regulation Foreign Donations Regulations 1978 IPSASs for public sector bodies Total available Maximum
© The Institute of Chartered Accountants in England and Wales, March 2009
1½ 3½ 1½ ½ ½ ½ 1 3½ 1 1 ½ ½ ½ ½ 1½ ½ 1 ½ ½ ½ ½ 1 22½
21
½ ½ 1 ½ ½ 1 ½ 1 ½ 7 5 26
ANSWER BANK (a)
Income statement for the year ended 31 March 20X6
CU 6,450,000 (4,570,400) 1,879,600 (540,500) (375,000) 964,100 (35,000) 929,100 (350,000) 579,100
Revenue (W5) Cost of sales (W1) Gross profit Administrative expenses (W1) Distribution costs (W1) Profit from operations Finance costs Profit before tax Income tax expense Profit for the period Balance sheet as at 31 March 20X6 ASSETS Non-current assets Property, plant and equipment (W2) Current assets Inventories (W1) Trade and other receivables (37,500 – 10,000) Cash and cash equivalents Non-current assets held for sale
CU
CU 2,211,000
110,000 27,500 63,500 201,000 5,000 206,000 2,417,000
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Preference share capital (irredeemable) Retained earnings (W4)
500,000 200,000 581,600 1,281,600
Non-current liabilities Borrowings (200,000 9/10) Current liabilities Trade and other payables (W3) Taxation Dividend payable (W4) Borrowings (200,000 1/10) Provisions
180,000 275,400 350,000 210,000 20,000 100,000 955,400 2,417,000
Total equity and liabilities (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 the shareholders' 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 pay as much out as a 'cost' of charitable awards
Public sector schools – whose objective will be to add as much value as possible to their pupils whilst operating within their means (i.e. not to make a profit but to achieve good results whilst not 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 in league tables (exam results for schools, patient survival rates for hospitals).
© The Institute of Chartered Accountants in England and Wales, March 2009
135
Preparation of full single entity financial statements 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 local legislation and accounting regulation, such as Companies Act and BFRS.
In addition, many not-for-profit entities will need to comply with regulation specific to their sector. For example, in Bangladesh, NGOs are required to comply with the Foreign Donations Regulations 1978.
Public sector bodies will be subject to International Public Sector Accounting Standards (IPSASs) where there is no national legislation.
WORKINGS (1) Allocation of costs
Manufacturing costs Administrative salaries Selling and distribution costs Opening inventories Depreciation (W2) Provision Bad debt Closing inventories (120,000 – (50,000 0.25/1.25)) Impairment on held-for-sale asset (120,000 – 48,000 – 11,000 – 5,000)
Cost of sales CU 4,450,000 – – 113,400 61,000 – – (110,000)
Admin CU – 410,500 – – 20,000 100,000 10,000
Distribution CU – – 375,000 – – – –
56,000 4,570,400
540,500
375,000
Freehold CU
Plant CU
Total CU
2,550,000
620,000 (120,000) 500,000
(2) Property, plant and equipment
Cost B/f Held for sale C/f Acc depn B/f For year ((2,550,000 – 1,750,000) 40) On held for sale asset (120,000 10% 11/12) Held for sale asset ((120,000 10% 4) + 11,000) On other plant (500,000 10%) C/f NBV c/f
2,550,000 480,000 20,000
337,000
500,000
11,000 (59,000) 50,000 339,000
2,050,000
161,000
2,211,000
(3) Trade and other payables Per TB Fees in advance (W5) Advances (W5)
CU 25,400 150,000 100,000 275,400
(4) Retained earnings B/f Ordinary dividend (500,000/50p 20p) Preference dividend (200,000 5%) For year
136
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 212,500 (200,000) (10,000) 579,100 581,600
ANSWER BANK (5) Revenue Per TB Less Fees in advance (300,000 5/10) Advances
7
CU 6,700,000 (150,000) (100,000) 6,450,000
Plodder Ltd Marking guide Marks
Cash flow statement Interest paid Income tax paid Purchase of PPE Purchase of investments Proceeds from sales of PPE Proceeds from sales of intangibles Interest received Redemption of borrowings Dividends paid Proceeds from issue of ordinary shares Opening and closing cash Reconciliation PBT Investment income Finance charge Depreciation charge Amortisation charge Profit on disposal of PPE Loss on disposal of intangibles Change in inventories Change in receivables Change in prepayments Change in payables Change in accruals Change in provisions Presentation Total available Maximum
1½ 1½ 3 ½ ½ ½ ½ ½ 1½ 1 ½ ½ ½ ½ 1½ 1½ 1½ 1½ ½ ½ ½ 1 1 ½ 1 24 22
© The Institute of Chartered Accountants in England and Wales, March 2009
137
Preparation of full single entity financial statements Cash flow statement for the year ended 30 November 20X0 CU
Cash flows from operating activities Cash generated from operations Interest paid (W5) Income tax paid (W7) Net cash from operating activities
CU
1,780,000 (93,000) (115,000) 1,572,000
Cash flows from investing activities Purchase of property, plant and equipment (W3) Purchase of investments Proceeds from sales of property, plant and equipment Proceeds from sales of intangible assets Interest received Net cash used in investing activities
(1,323,000) (406,000) 424,000 12,000 55,000
Cash flows from financing activities Dividends paid (W8) Proceeds from issue of ordinary shares (W1) Redemption of borrowings
(1,238,000)
(50,000) 242,000 (500,000)
Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
(308,000) 26,000 200,000 226,000
Note: Reconciliation of profit before tax to cash generated from operations Profit before tax Investment income Finance charge Depreciation charge (W4) Amortisation charge (W2) Profit on disposal of property, plant and equipment (W7) Loss on disposal of intangible assets (W9) Increase in inventories (685,000 – 598,000) Increase in trade and other receivables (480,000 – 465,000) Decrease in prepayments (126,000 – 96,000) Increase in trade and other payables ((749,000 – 351,000) – (427,000 – 106,000)) Increase in accruals ((131,000 – 50,000) – (108,000 – 25,000)) Decrease in provisions (140,000 – 120,000) Cash generated from operations
CU 756,000 (55,000) 68,000 1,100,000 19,000 (98,000) 3,000 (87,000) (15,000) 30,000 77,000 2,000 (20,000) 1,780,000
WORKINGS (1)
SHARE CAPITAL AND PREMIUM CU C/d (1,100,000 + 342,000)
(2)
CU 1,200,000 242,000 1,442,000
INTANGIBLES – ACCUMULATED AMORTISATION Disposals C/d
138
1,442,000 1,442,000
B/d (1,000,000 + 200,000) Cash ()
CU 40,000 333,000 373,000
B/d Income statement ()
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 354,000 19,000 373,000
ANSWER BANK (3)
PPE – COST OR VALUATION B/d Revaluation Cash () C/d
(4)
CU 6,375,000 375,000 1,323,000 351,000 8,424,000
B/d Disposals C/d
CU 106,000 479,000 7,839,000 8,424,000
PPE – ACCUMULATED DEPRECIATION Disposals (W7) C/d
(5)
CU 153,000 4,921,000 5,074,000
B/d Income statement ()
CU 3,974,000 1,100,000 5,074,000
FINANCE CHARGE Cash () C/d
(6)
CU 93,000 25,000 118,000
B/d Income statement
CU 50,000 68,000 118,000
INCOME TAX Cash () C/d
(7)
CU 115,000 282,000 397,000
B/d Income statement
CU 165,000 232,000 397,000
PPE – DISPOSALS Income statement () Cost
(8)
CU 98,000 479,000 577,000
Acc depn (479,000 – 326,000) Cash
CU 153,000 424,000 577,000
RETAINED EARNINGS Dividends () C/d
(9)
CU 50,000 1,785,000 1,835,000
B/d Income statement
CU 1,311,000 524,000 1,835,000
INTANGIBLES – DISPOSALS Cost (938,000 – 883,000)
CU 55,000 55,000
Accumulated amortisation Cash Income statement ()
CU 40,000 12,000 3,000 55,000
© The Institute of Chartered Accountants in England and Wales, March 2009
139
Preparation of full single entity financial statements
8
Copeland Ltd Marking guide Marks
Cash flow statement Interest paid Income tax paid Purchase of PPE Purchase of intangibles Purchase of investments Proceeds from sales of PPE Interest received Dividends paid Proceeds from issue of ordinary shares Redemption of borrowings Opening and closing cash Reconciliation PBT Investment income Finance charge Depreciation charge Amortisation charge Loss on disposal of PPE Change in inventories Change in receivables Change in prepayments Change in payables Presentation Total available Maximum
140
© The Institute of Chartered Accountants in England and Wales, March 2009
1½ 1½ 3 1½ 1 3 1½ 1½ 1½ ½ ½ ½ ½ ½ 2 1 ½ ½ 1 ½ 1 1 26
24
ANSWER BANK Cash flow statement for the year ended 31 May 20X2 CU
Cash flows from operating activities Cash generated from operations Interest paid (W11) Income tax paid (W7) Net cash from operating activities
CU 6,441,000 (675,000) (546,000) 5,220,000
Cash flows from investing activities Purchase of property, plant and equipment (W1) Purchase of intangible assets (W4) Purchase of investments (W6) Proceeds from sales of property, plant and equipment (W3) Interest received (W10) Net cash used in investing activities Cash flows from financing activities Dividends paid (W12) Proceeds from issue of ordinary shares (W8) Redemption of borrowings Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
(1,752,000) (339,000) (2,018,000) 221,000 76,000
(3,812,000)
(163,000) 422,000 (1,500,000) (1,241,000) 167,000 322,000 489,000
Note: Reconciliation of profit before tax to cash generated from operations Profit before tax Investment income Finance charge Depreciation charge (W2) Amortisation charge (W5) Loss on disposal of property, plant and equipment Increase in inventories (1,112,000 – 1,086,000) Increase in trade and other receivables ((948,000 – 165,000 – 10,000) – (840,000 – 79,000 – 8,000)) Decrease in prepayments (108,000 – 95,000) Decrease in trade and other payables (1,417,000 – 376,000 – 896,000) Cash generated from operations
CU 3,420,000 (78,000) 563,000 1,260,000 975,000 189,000 (26,000) (20,000) 13,000 145,000 6,441,000
WORKINGS (1)
PPE – COST OR VALUATION B/d Cash () Revaluation reserve (W9)
(2)
CU 4,347,000 1,752,000 266,000 6,365,000
CU PPE – disposals C/d
1,201,000 5,164,000 6,365,000
PPE – ACCUMULATED DEPRECIATION CU PPE – disposals (1,201,000 – 496,000) Revaluation reserve (W9) C/d
705,000 358,000 2,198,000 3,261,000
B/d Income statement ()
CU 2,001,000 1,260,000 3,261,000
© The Institute of Chartered Accountants in England and Wales, March 2009
141
Preparation of full single entity financial statements (3)
PPE – DISPOSALS B/d PPE – cost or valuation
CU 79,000 1,201,000 1,280,000
(4)
PPE – acc dep (1,201,000 – 496,000) Income statement Cash () C/d
INTANGIBLES – COST CU 8,645,000 339,000 376,000 9,360,000
B/d Cash () C/d (5)
CU C/d
9,360,000 9,360,000
INTANGIBLES – ACCUMULATED AMORTISATION CU C/d
(6)
3,690,000 3,690,000
B/d Income statement ()
CU 2,715,000 975,000 3,690,000
INVESTMENTS B/d Cash ()
(7)
CU 127,000 2,018,000 2,145,000
CU C/d
2,145,000 2,145,000
INCOME TAX Cash () C/d
(8)
CU 546,000 641,000 1,187,000
B/d Income statement
CU 503,000 684,000 1,187,000
SHARE CAPITAL AND PREMIUM CU C/d (1,800,000 + 1,543,000)
(9)
3,343,000 3,343,000
B/d (1,000,000 + 1,421,000) Retained earnings Cash ()
CU 2,421,000 500,000 422,000 3,343,000
REVALUATION RESERVE CU C/d
(10)
1,880,000 1,880,000
B/d PPE cost (1,000,000 – 734,000) Acc depn ()
CU 1,256,000 266,000 358,000 1,880,000
INVESTMENT INCOME B/d Income statement
142
CU 705,000 189,000 221,000 165,000 1,280,000
CU 8,000 78,000 86,000
Cash () C/d
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 76,000 10,000 86,000
ANSWER BANK (11)
FINANCE CHARGE Cash () C/d
(12)
CU 675,000 225,000 900,000
CU 337,000 563,000 900,000
B/d Income statement
DIVIDENDS Cash () C/d
CU 163,000 180,000 343,000
CU 100,000 243,000 343,000
B/d Retained earnings
Tutorial note The retained earnings T account, which was not needed as a working, is as follows. RETAINED EARNINGS Share capital and premium (W8) Dividends payable () C/d
9
CU 500,000
CU 746,000 2,736,000
B/d Income statement
243,000 2,739,000 3,482,000
3,482,000
Pippin Ltd Marking guide Marks
Cash flow statement Interest paid Income tax paid Purchase of PPE Purchase of intangibles Proceeds from sales of PPE Proceeds from issue of ordinary shares Proceeds from issue of redeemable preference shares Dividends paid Opening and closing cash Reconciliation PBT Finance charge Depreciation charge Amortisation charge Profit on disposal of PPE Change in inventories Change in receivables Change in payables Presentation Total marks available Maximum
1½ 1½ 2 1½ ½ 1 1 1½ 1½ ½ ½ ½ 1½ 1 ½ ½ 1 1 19 18
© The Institute of Chartered Accountants in England and Wales, March 2009
143
Preparation of full single entity financial statements Cash flow statement for the year ended 31 December 20X7 CU
Cash flows from operating activities Cash generated from operations Interest paid (W2) Income tax paid (W1) Net cash from operating activities
1,890,600 (77,000) (300,000)
Cash flows from investing activities Purchase of property, plant and equipment (W3) Purchase of intangibles (W4) Proceeds from sale of property, plant and equipment Net cash used in investing activities
(1,583,000) (77,500) 600,000
CU
1,513,600
Cash flows from financing activities Proceeds from issue of ordinary share capital (5,200,000 – 4,450,000) Proceeds from issue of redeemable preference share capital (500,000 – 400,000) Dividends paid (W7) Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period (12,400 + 20,200) Cash and cash equivalents at end of period (25,000 + 10,700)
(1,060,500) 750,000 100,000 (1,300,000)
(450,000) 3,100 32,600 35,700
Note: Reconciliation of profit before tax to cash generated from operations Profit before tax Finance charge Depreciation charge Amortisation charge (W4) Profit on disposal of property, plant and equipment (600,000 – 560,500) Decrease in inventories (765,100 – 560,500) Increase in trade and other receivables (169,000 – 144,500) Increase in trade and other payables (W6) Cash generated from operations
CU 886,100 75,000 750,600 27,300 (39,500) 204,600 (24,500) 11,000 1,890,600
WORKINGS (1)
INCOME TAX Cash () C/d
(2)
CU 300,000 410,000 710,000
CU 360,000 350,000 710,000
FINANCE CHARGE Cash () C/d
CU 77,000 5,000 82,000
(3)
B/d Income statement
CU 7,000 75,000 82,000
PPE B/d Revaluation reserve (W5) Cash ()
144
B/d Income statement
CU 6,950,300 278,200 1,583,000 8,811,500
Disposals Income statement C/d
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 560,500 750,600 7,500,400 8,811,500
ANSWER BANK (4)
INTANGIBLES B/d Cash
(5)
CU 300,500 77,500 378,000
CU 27,300 350,700 378,000
Income statement () C/d
REVALUATION RESERVE Retained earnings C/d
CU 15,000 500,000 515,000
CU 236,800 278,200 515,000
B/d PPE ()
(6) Trade and other payables
CU 132,500 143,500 11,000
Opening (139,500 – 7,000) Closing (148,500 – 5,000)) Increase (7)
ORDINARY DIVIDENDS Cash () C/d
10
CU 1,300,000 500,000 1,800,000
CU 400,000 1,400,000 1,800,000
B/d Retained earnings
Merry Ltd Marking guide Marks
(a)
(b)
Cash flow statement Interest paid Income tax paid Purchase of PPE Purchase of investments Proceeds from sales of PPE Proceeds from issue of ordinary shares Payment of finance lease liabilities Dividends paid Opening and closing cash Gross operating cash flows Cash received from customers Cash paid to suppliers Cash paid to employees Presentation Total available Maximum For each item Total available Maximum
½ 1½ ½ 1 3½ 3½ 1½ 1½ ½ 1½ 6 ½ 1 23 ½ 4
21
4 25
© The Institute of Chartered Accountants in England and Wales, March 2009
145
Preparation of full single entity financial statements (a)
Cash flow statement for the year ended 31 March 20X5 CU
Cash flows from operating activities Cash generated from operations Interest paid Income tax paid (W4) Net cash from operating activities
CU
1,711,600 (89,000) (347,600) 1,275,000
Cash flows from investing activities Purchase of property, plant and equipment Purchase of investments (172,000 – 156,000 + 12,000) Proceeds from sale of property, plant and equipment (496,300 (W6) – 55,000) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of ordinary share capital (1,020,000 (W7) + 380,000 (W8)) Payment of finance lease liabilities (W3) Dividends paid (W5) Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
(2,057,000) (28,000) 441,300 (1,643,700)
1,400,000 (516,000) (500,500) 383,500 14,800 120,200 135,000
Note: Gross operating cash flows CU 5,626,000 (1,264,400) (2,650,000) 1,711,600
Cash received from customers (W1) Cash paid to suppliers (W9) Cash paid to and on behalf of employees Cash generated from operations (b) Note: Reconciliation of profit before tax to cash generated from operations Profit before tax Finance charge Depreciation charge Impairment write off Loss on disposal of property, plant and equipment Increase in inventories (460,600 – 365,100) Increase in trade and other receivables (269,000 – 244,500) Increase in trade and other payables (348,500 – 289,600) Cash generated from operations
CU 866,100 89,000 750,600 12,000 55,000 (95,500) (24,500) 58,900 1,711,600
WORKINGS (1)
TRADE RECEIVABLES B/d Income statement
146
CU 244,500 5,650,500 5,895,000
Cash () C/d
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 5,626,000 269,000 5,895,000
ANSWER BANK (2) Purchases CU 3,460,600 978,800 256,000 (12,000) (365,100) (750,600) (55,000) 460,600 3,973,300
Cost of sales Administrative expenses Distribution costs Adjustments: Impairment write off Opening inventory Depreciation Loss on sale Closing inventory (3)
FINANCE LEASE LIABILITIES Cash () C/d
(4)
CU 516,000 556,000 1,072,000
B/d PPE
CU 472,000 600,000 1,072,000
INCOME TAX Cash () C/d
(5)
CU 347,600 300,000 647,600
B/d Income statement
CU 350,000 297,600 647,600
RETAINED EARNINGS Cash – dividends paid () C/d
CU 500,500 142,500 643,000
(6)
B/d Income statement
CU 74,500 568,500 643,000
PPE B/d Cash Finance lease liabilities
(7)
CU 2,950,300 2,057,000 600,000 5,607,300
Income statement Disposals () C/d
CU 750,600 496,300 4,360,400 5,607,300
SHARE CAPITAL CU C/d
(8)
3,000,000 3,000,000
B/d Bonus issue Cash ()
CU 1,800,000 180,000 1,020,000 3,000,000
SHARE PREMIUM Bonus issue (W7) C/d
(9)
CU 180,000 1,050,000 1,230,000
B/d Cash ()
CU 850,000 380,000 1,230,000
TRADE PAYABLES Cash to suppliers () Cash to employees C/d
CU 1,264,400 2,650,000 348,500 4,262,900
B/d Income statement (W2)
CU 289,600 3,973,300 4,262,900
© The Institute of Chartered Accountants in England and Wales, March 2009
147
Preparation of full single entity financial statements
148
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK
Preparation of extracts from financial statements
11
Montrose Ltd Marking guide Marks
(a)
(b)
(a)
Raw materials calculation (W1) WIP calculation (W2) Cost of conversion calculations (W3) NRV calculations (W5) Costed units (W4) Note to IS Presentation Total available Maximum Statement of two main concepts (each) Explanation of financial capital maintenance Monetary or CPP terms (each) Example of monetary terms Explanation and example of CPP terms (each) Explanation of operating capital maintenance Example of operating capital maintenance Total available Maximum
2 2 3 4 ½ ½ 1 13 12 ½ 1 ½ 1 1 1 1 8 6 18
Extracts from the financial statements for the year ended 30 September 20X4 Note to balance sheet – inventories Raw materials and consumables (100,000 units @ CU7.50 (W1)) Work in progress (W2) Finished goods and goods for resale (W4)
CU 750,000 460,312 503,177 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 capital maintenance (also called operating capital maintenance). Financial capital maintenance measures capital as the equity in the balance sheet. So profit will be measured as the increase in capital over the period, after allowing for any inflows or outflows to or from the owners of the business. This increase in capital can either be measured in monetary terms or in terms of constant purchasing power.
© The Institute of Chartered Accountants in England and Wales, March 2009
149
Preparation of extracts from financial statements For example, say a business commenced on 1 January 20X1 with a contribution of CU1,000 from its owners. During the year, this cash was used to purchase 100 units for CU10 each. These units were then sold for CU1,100 cash. Opening capital is CU1,000 and closing capital is CU1,100. Profit for the year would therefore be measured as CU100. However, the constant purchasing power variation of this system would also look at adjusting opening capital in order to maintain the general purchasing power of the business. In the above example, say that 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 entity paid 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 of CU1,050 (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 that particular entity (or industry). The physical capital maintenance concept therefore looks at adjusting opening capital in order to maintain the physical productive capacity of the business. It uses specific as opposed to general price changes. In the example, it may therefore be that these units actually now cost CU10.75 each to buy. Therefore an 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
Purchase cost Import duty Transport to factory Storage and handling costs
Cost per unit CU 5.00 1.00 0.50 1.00 7.50
(2) Work in progress 25,000 units @ (7.50 (W1) + (75% 2.73) (W3)) 25,000 units @ (7.50 (W1) + (50% 2.73) (W3)) 50,000 units
CU 238,687 221,625 460,312
(3) Cost of conversion and of bringing inventories to present location/condition Direct labour Production overheads (660,000 + 100,000) Design and marketing overheads
CU 1,000,000 760,000 150,000 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 50,000 units @ 10.23 (W3) Less Provision (W5)
150
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 511,500 (8,323) 503,177
ANSWER BANK
(5) Net realisable value Units Order M147 Order M293 Order M467 Order M364 Order M191 Other ()
1,800 5,555 6,500 4,630 3,240 28,275 50,000
NRV CU 22,000 55,000 60,000 54,000 40,000 329,000 560,000
Cost CU 56,828 66,495
NRV CU 55,000 60,000
NRV per unit CU 12.22 9.90 9.23 11.66 12.35 11.64
Therefore reduce cost of finished goods for
Order M293: 5,555 units @ 10.23 (W3) Order M467: 6,500 units @ 10.23 (W3)
Provision CU 1,828 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 a finished goods unit, because it represents normal capacity. It is not appropriate to use the actual level of production when it has been affected by the interruption to the supply of raw materials (BAS 2 para 13). The use of 700,000 units results in more cost being recognised as an expense in the year than if the 500,000 had been used. (2) The exclusion of the CU100,000 compensation received from the finished goods unit calculation has the effect of leaving it as a credit in the income statement, to offset the abnormal additional expenses written off under (1) above (BAS 2 para 16(a)). (3) Design and marketing overheads have been included in the calculation on the grounds that the company manufactures to customers' requirements for all orders, and on the assumption that there are 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 are internal overheads which have been incurred in bringing the product to its present location/condition.
© The Institute of Chartered Accountants in England and Wales, March 2009
151
Preparation of extracts from financial statements
12
Gandalf Ltd Marking guide Marks
(a)
(b)
(c)
(a)
Draft profit Ordinary dividend Amortisation Depreciation on freehold Finance charge Depreciation on plant Total available Maximum Statement of changes in equity Headings Revaluation Transfer Profit Final ordinary dividends Interim ordinary dividends Preference dividends Issue of share capital Balances brought forward as reported Adjustment to prior year Presentation Total available Maximum Explanation of accrual basis: each valid point ½ mark, maximum Explanation of cash basis: each valid point ½ mark, maximum Example illustrating accrual basis, maximum Example illustrating cash basis, maximum Explanation of break-up basis: each valid point ½ mark, maximum Total available Maximum
4 1 1 1½ ½ ½ ½ ½ 2 2 ½ 2 12 11
3½ 3 3 3 2 14½
8 23
Revised profit for the period Draft profit for the period Add back: Ordinary dividend charged to profit in error Amortisation of intangible (10% 42,500) Less: Depreciation on freehold land and buildings (W) Finance charge on redeemable preference shares (5% 50,000) Depreciation on plant ((357,800 – 125,700) 25%)
152
½ ½ ½ ½ 1 1 4
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 135,500 30,000 4,250 (8,000) (2,500) (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 Ltd Preference share capital Share Revaluation (irredeemable) premium reserve Retained earnings CU CU CU CU CU
Ordinary share capital CU Recognised directly in equity Revaluation of non-current assets (W) Transfer between reserves (W) Total recognised directly in equity Profit for the period Total recognised income and expenditure for the period Final dividends on ordinary shares Interim dividends on ordinary shares Dividends on irredeemable preference shares (100,000 7%) Issue of share capital (75,000 – 5,000 – 3,000) Balance brought forward – as reported Adjustment to correct prior year error As restated Balance carried forward
(c)
–
–
–
–
–
–
– –
– –
– –
–
–
–
550,000
Total CU
–
550,000
5,000
–
545,000 –
5,000 101,225
550,000 101,225
–
545,000
106,225
651,225
–
–
–
(25,000)
(25,000)
–
–
–
–
(30,000)
(30,000)
–
–
–
–
(7,000)
(7,000)
300,000 300,000
100,000 100,000
67,000 67,000
– 545,000
– 44,225
500,000
–
120,000
420,000
347,500
– – 800,000
– – 100,000
– – 187,000
– – 965,000
(42,500)
(5,000)
467,000 1,056,225 1,387,500 (42,500)
305,000 349,225
2,401,225
Different bases of accounting Under the accrual basis, transactions are recognised when they occur, not when the related cash flows into 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 up for 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 a depreciation 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 respect of credit sales.
Expenses will only be recorded when the cash is paid, so there will be no payables in respect of credit purchases and no inventory adjustment.
No depreciation will be charged on non-current assets as the purchase of an asset will be treated as 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 from its owners. That cash was used to buy goods costing CU400 and a machine with a useful life of four years for CU200. Goods costing CU300 were purchased on credit and the business made cash sales of CU500 and sales on credit of CU400. Closing inventory at cost is CU50.
© The Institute of Chartered Accountants in England and Wales, March 2009
153
Preparation of extracts from financial statements
Accrual basis CU Income statement Revenue (400 + 500) Purchases (400 + 300) Closing inventory Depreciation charge/purchase of non-current asset (200 ÷ 4) Profit/(loss) Balance sheet Non-current asset (200 – 50) Inventory Trade receivables Cash (1,000 – 400 – 200 + 500) Trade payable Capital Retained earnings
Cash basis CU
900 (700) 50 (50) 200
500 (400) – (200) (100)
150 50 400 900 (300) 1,200
– – – 900 – 900
1,000 200 1,200
1,000 (100) 900
The break-up basis is primarily relevant to the balance sheet. It reflects the fact that the business is no longer 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 forced sale such values are likely to be less than cost.
WORKING Revaluation Fair value (600,000 + 400,000) Less Carrying amount (500,000 – 50,000) Revaluation surplus arising
Revaluation surplus due to building (400,000 – (200,000 – 50,000)) Therefore annual reserve transfer = CU250,000 / 50 years = CU5,000 pa
154
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 1,000,000 (450,000) 550,000 CU 250,000
ANSWER BANK
13
Cagreg Ltd Marking guide Marks
(a)
(b)
(a)
Cost Brought forward Additions Revaluation Held for sale Accumulated depreciation Brought forward Held for sale Depreciation charges for year Buildings Held for sale plant Plant held throughout year Addition Computer Presentation Total available Maximum Each valid point Max for any one qualitative characteristic Total available Maximum
1 ½ 1 ½ 1 ½ 2 3½ 3 1 2 1 17
16
½ 3 8½ 6 22
Non-current asset note Property, plant and equipment Freehold land CU 100,000 – 30,000 – 130,000
Buildings CU 200,000 – – – 200,000
Plant and machinery CU 200,000 60,000 – (20,000) 240,000
Computer CU 60,000 – – – 60,000
Total CU 560,000 60,000 30,000 (20,000) 630,000
– – – –
20,000 3,214 – 23,214
72,000 67,280 (13,760) 125,520
10,500 7,200 – 17,700
102,500 77,694 (13,760) 166,434
Carrying amount At 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
Cost or valuation At 1 October 20X8 Additions Revaluation surplus Classified as held for sale At 30 September 20X9 Depreciation At 1 October 20X8 Charge for year (W1-3) Classified as held for sale (W2a) At 30 September 20X9
© The Institute of Chartered Accountants in England and Wales, March 2009
155
Preparation of extracts from financial statements (b) Qualitative characteristics and BAS 16 Understandability Information must be readily understandable to users so that they can perceive its significance. This is dependent 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 of assets 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 by showing 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 that reflects their reality. Although the revaluation model gives relevant information this information is generally seen to be less reliable than the cost model – the other measurement model allowed by BAS 16. The cost model is based 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 another entity. 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 facilitate comparison between two companies who have adopted different models) by requiring equivalent cost information to be disclosed under the revaluation model. It also requires disclosures (in accordance with BAS 8) of the effect of a change in an accounting estimate such as useful lives or depreciation rates. 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 asset CU Cost 1 October 20X6 Depreciation to 1 October 20X7 (40% 20,000) 1 October 20X8 (40% (20,000 – 8,000)) Depreciation to 1 February 20X9 (40% 4/12 7,200) NBV on classification as held for sale Total depreciation at date of reclassification (12,800 + 960)
CU 20,000
Charge for year CU
8,000 4,800 (12,800) 7,200 (960) 6,240
960
13,760
Note: There will also be an impairment loss of 6,240 – 5,600 = CU640 to be charged against profits for this plant, but the impairment loss does not have to be disclosed in the PPE note.
156
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK
(b) Plant held throughout year
Total at 1 October 20X8 Less Disposal Plant held throughout year Charge for year (40% (180,000 – 59,200)) (c)
Cost CU 200,000 (20,000) 180,000
Depn CU 72,000 (12,800) 59,200 48,320 107,520
48,320
Addition Cost 1 January 20X9 Charge for year (40% 9/12 60,000)
60,000 (18,000) 42,000
Total charge for year
18,000 67,280
(3) Computer CU 60,000 (10,500) 49,500 (4,500) 45,000
Cost Depreciation to 1 October 20X8 Carrying amount at 1 October 20X8 Less Estimated residual value Amount to be depreciated Remaining useful life (40,000 – 10,000)
= 30,000 hours
Current usage
= 4,800 hours
Charge for year
= (
CU7,200
14
4,800 45,000) = 30,000
Roberts Ltd Marking guide Marks
(a)
(b)
Carrying amount of land and buildings Original cost Fees Accumulated depreciation to 31 Dec 20X3 Revaluation surplus Accumulated depreciation to 31 Dec 20X4 Revaluation reserve Balance at 31 Dec 20X3 Annual transfer Total available Maximum Calculation of impairment on land and buildings Calculation of impairment on specialised machinery Narrative to note Impairment disclosure Total available Maximum
1 ½ 1 1 1 ½ 1 6 1½ 4½ ½ ½ 7
6
7 13
© The Institute of Chartered Accountants in England and Wales, March 2009
157
Preparation of extracts from financial statements (a)
Carrying amount of land and buildings
Cost Fees Acc depn to 31 December 20X3 (1,780 20/360) Carrying amount 31 December 20X3 Revaluation surplus () Revalued amount (60%/40%) Acc depn to 31 December 20X4 (3,120 12/460*) Carrying amount 31 December 20X4
Land CU'000 2,600 – 2,600 – 2,600 2,080 4,680 – 4,680
Buildings CU'000 1,700 80 1,780 (99) 1,681 1,439 3,120 (81) 3,039
Total CU'000
7,800
* Revised total life = 480 months and the factory has been occupied for 20 months – remaining life is 460 months. Revaluation reserve CU'000 Balance as at 31 December 20X3 (2,080 + 1,439) Annual transfer Depn based on value Depn based on cost (1,681 12/460)
CU'000 3,519
81 (44) (37) 3,482
Balance as at 31 December 20X4 (b) Income statement charges and disclosure Note to the financial statements The profit from operations is arrived at after charging
CU'000 3,187
Impairment of non-current assets (2,737 (W1) + 450 (W2)) WORKINGS (1) Impairment of land and buildings
CU'000 7,719 (1,500) 6,219 (3,482) 2,737
Carrying amount at 31 December 20X4 (4,680 + 3,039) Recoverable amount Charged to revaluation reserve Charge to income statement (2) Impairment of specialised machinery Carrying amount (2,800,000 40/96) Fair value less costs to sell Gross selling price (1,167 65%) Less Repair costs (CU38.40 100/120 600) Transport costs Insurance
CU'000
CU'000 1,167
759 (19) (21) (2) 717
158
Value in use (given)
600
Impairment (1,167 – 717)
450
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK
15
Dumfries Ltd Marking guide Marks
(a)
Each valid point Total available Maximum Income statements Operating lease payments Depreciation Finance charges Balance sheet Non-current finance lease liabilities Current finance lease liabilities Notes Additions Depreciation charge Assets held under finance leases (in heading) Gross basis analysis Net basis analysis Commitments Presentation Total available Maximum
(b)
(a)
½ 7 6 1 1 3 1 1 ½ ½ ½ 1½ 1 1 2 14
14 20
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 to transfer economic benefits, i.e. to make lease payments. Under most lease contracts the lessee will not be 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.
© The Institute of Chartered Accountants in England and Wales, March 2009
159
Preparation of extracts from financial statements Measurement The two main bases of measurement are historical cost and current cost. Leased assets are basically included at historical cost, i.e. the minimum lease payments, although these are discounted to show cost in 'today's pounds'. (b) Extracts from the income statements for the years ended 30 April Profit from operations is stated after charging Operating lease payments Depreciation (109,1405) Finance cost Finance charges re finance lease (W)
20X5 CU
20X6 CU
20X7 CU
20X8 CU
20X9 CU
15,000 21,828
15,000 21,828
15,000 21,828
– 21,828
– 21,828
7,784
5,432
2,844
–
–
Extracts from the balance sheet as at 30 April 20X5 CU Non-current liabilities Finance lease liabilities (W) Current liabilities Finance lease liabilities (W)
54,324 31,300
Notes to the balance sheet (1) Property, plant and equipment Cost At 1 May 20X4 Additions At 30 April 20X5 Accumulated depreciation At 1 May 20X4 Charge for year 30 April 20X5 Carrying amount At 30 April 20X5 At 30 April 20X4
Plant and machinery held under finance leases CU X 109,140 X X 21,828 X X X
(2) Analysis of finance lease liabilities Gross basis Finance lease liabilities include Gross payments due within One year Two to five years (2 31,300) Less Finance charges allocated to future periods ()
160
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 31,300 62,600 93,900 (8,276) 85,624
ANSWER BANK
Net basis Finance lease liabilities include
CU
Amounts due within One year Two to five years
31,300 54,324 85,624
(3) Commitments The minimum lease payments under non-cancellable operating leases are as follows. CU 15,000 15,000 30,000
Within one year Within two to five years
WORKING Finance charges Year to 30 April
20X5 20X6 20X7 20X8
B/f CU 109,140 85,624 59,756 31,300
Payment CU (31,300) (31,300) (31,300) (31,300)
Capital CU 77,840 54,324 28,456 –
Interest accrued @ 10% CU 7,784 5,432 2,844 –
C/f CU 85,624 59,756 31,300 –
Total CU85,624
Non-current CU54,324
Current () CU31,300
© The Institute of Chartered Accountants in England and Wales, March 2009
161
Preparation of extracts from financial statements
16
Crieff Ltd Marking guide Marks
(a)
(b)
(a)
Qualitative characteristic of reliability Faithful representation therefore substance Substance different from form Finance lease as example: risk and rewards transferred but not legal title Definition and recognition of asset Definition and recognition of liability As elements of financial statements Total available Maximum Income statement Finance cost Note to income statement Depreciation Operating lease payments Balance sheet Non-current finance lease liabilities Current finance lease liabilities Notes to balance sheet Additions Depreciation charge Assets held under finance leases Net basis analysis Gross basis analysis Presentation Total available Maximum
½ ½ ½ ½ ½ ½ ½ 3½
3
3 2 1 3 1½ 1 1 ½ 2½ 3½ 2 21
20 23
BAS 17 concepts BAS Framework sets out the qualitative characteristics of financial statements, one of which is reliability. One aspect of reliability is that of faithful representation. For information to represent transactions faithfully, those transactions should be accounted for in accordance with substance and economic reality, not merely legal form. Substance is not always consistent with legal form. An example of this is a finance lease, where substantially all the risks and rewards relating to a non-current asset are transferred to the lessee even though 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 the lessee to recognise these elements in its financial statements.
162
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK
(b) Disclosure re leases Income statement CU 67,593
Finance cost (10,598 (W1) + 9,583 (W3) + 47,412 (W5)) Notes to the income statement (1) Profit from operations is stated after charging Depreciation of leased assets (49,470 (W4) + 13,203 (balance sheet note (1) below)) Operating lease payments (75,000 (W2) + 6,000)
CU 62,673 81,000
Balance sheet Current liabilities CU 116,050
Finance lease liabilities (40,000 (W1) + 22,050 (W3) + 54,000 (W5)) Non-current liabilities
CU 647,933
Finance lease liabilities (103,078 (W1) + 77,323 (W3) + 467,532 (W5)) Notes to the balance sheet (1) Property, plant and equipment Land and buildings CU X 528,120 (X) X
Plant and machinery CU X 292,270 (X) X
X (X) 13,203 X
X (X) 49,470 X
Carrying amount At 30 June 20X8
X
X
At 30 June 20X7
X
X
Cost At 1 July 20X7 Additions (172,480 + 119,790) Disposals At 30 June 20X8 Accumulated depreciation At 1 July 20X7 Eliminated on disposals Charge for the year (528,120 ÷ 40) (W4) At 30 June 20X8
Of the carrying amount of non-current assets CU757,717 relates to assets held under finance leases. (2) Analysis of finance lease liabilities Net basis Finance lease liabilities include Amounts due within One year Two to five years (W6) Over five years (W6)
CU 116,050 214,033 433,900 763,983
© The Institute of Chartered Accountants in England and Wales, March 2009
163
Preparation of extracts from financial statements Gross basis Finance lease liabilities include
CU
Gross payments due within One year (40,000 + 30,000 + 54,000) Two to five years ((40,000 3) + (30,000 3) + (54,000 4)) Over five years (34 54,000) Less
124,000 426,000 1,836,000 2,386,000 (1,622,017) 763,983
Finance charges allocated to future periods () (143,078 + 99,373 + 521,532)
WORKINGS (1) Cutting machine (finance lease) Payment table Year ended
B/f CU 172,480 143,078
30 June 20X8 30 June 20X9
Payment
Capital
CU (40,000) (40,000)
CU 132,480 103,078
Interest @ 8% CU 10,598 8,246
C/f CU 143,078 111,324
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 CU 119,790 99,373
30 June 20X8 30 June 20X9
Interest @ 8% CU 9,583 7,950
Payment CU (30,000) (30,000)
Total liability CU99,373
Non-current CU77,323
Current CU22,050 ()
(4) Depreciation – plant and machinery Cutting machine (172,480 5) Packing machine (119,790 8)
164
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 34,496 14,974 49,470
Capital c/f CU 99,373 77,323
ANSWER BANK
(5) Buildings (finance lease) Payment table Year ended 30 June 20X8 30 June 20X9
B/f CU 528,120 521,532
Payment
Capital
CU (54,000) (54,000)
CU 474,120 467,532
Interest @ 10% CU 47,412 46,753
C/f CU 521,532 514,285
Total liability CU521,532
Non-current CU467,532
Current CU54,000 ()
(6) Net basis analysis CU
Two to five years Cutting machine Packing machine Buildings (per below)
103,078 77,323 33,632 214,033
Over five years Buildings (W5) Less Years 2 – 5 () More than 5 years (W7)
467,532 (33,632) 433,900
(7) Continuation of buildings payment table Year ended 30 June 20Y0 30 June 20Y1 30 June 20Y2 30 June 20Y3
B/f CU 514,285 506,314 497,545 487,900
Payment
Capital
CU (54,000) (54,000) (54,000) (54,000)
CU 460,285 452,314 443,545 433,900
Interest @ 10% CU 46,029 45,231 44,355
C/f CU 506,314 497,545 487,900
Tutorial notes (1) As the office equipment operating lease is cancellable at any time by either party, no operating lease commitment 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 the outset 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.
© The Institute of Chartered Accountants in England and Wales, March 2009
165
Preparation of extracts from financial statements
17
ITC Solutions Ltd Marking guide Marks
(a)
Meaning of elements Elements relevant to balance sheet Elements relevant to income statement Conditions for recognition Meaning of recognition Total available Maximum Revenue calculations Transaction (1), discussion of revenue recognition Transaction (1), discussion of costs recognition and resultant loss Transaction (2) Transaction (3), discussion of revenue recognition Transaction (3), discussion of treatment of deposits as liability Total available Maximum
(b)
(a)
1½ 1 1 1 1 5½ 4 2 2 2 2½ 2 1½ 12
12 16
Recognition of elements of financial statements Financial statements portray the financial effects of transactions and other events. BFRS Framework splits these transactions into broad classes according to their economic characteristics. These classes are referred to as the 'elements' of financial statements. Elements relevant to the measurement of financial position in the balance sheet are: assets, liabilities and equity. Elements relevant to the measurement of financial performance in the income statement are: income and 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 the entity, 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 the item 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 the whole of this CU120,000 will flow to the entity. There is only certainty over the CU50,000 which is considered to be recoverable and can be reliably measured (being part of actual costs incurred of 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 and can be reliably measured (as actual costs) should also have been recognised (as an expense). As a result, a loss of CU10,000 will be recognised in the current year.
166
© The Institute of Chartered Accountants in England and Wales, March 2009
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 whole CU300,000 does not flow to ITC – as ITC has to remit 85% of this back to ProMarket Ltd. ITC's inflow is only 15% of this. ITC should therefore recognise only the 15% commission as revenue. It should not recognise the total 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 and therefore has no probability of any economic benefit. The revenue should only be recognised when the computers are delivered to the customer and the receipt of the final instalment can be reliably measured. ITC will have to refund the deposits if the supplier fails to deliver. There is therefore a future obligation which meets the definition of a liability. Hence the deposits of CU75,000 should be shown in the balance sheet as 'deferred' under current liabilities.
18
Withington Ltd Marking guide Marks
(a)
(b)
Presentation Opening provision Utilised in year Income statement charge Closing provision Faulty goods narrative Compensation claim narrative Rectification costs narrative Onerous contract narrative Restructuring narrative Contingent asset note Total available Maximum 1 mark each calculation Maximum
1 ½ ½ 1 4½ 1 1 1½ 1½ 1 1½ 15 3
15 3 18
© The Institute of Chartered Accountants in England and Wales, March 2009
167
Preparation of extracts from financial statements (a)
Notes to the financial statements as at 31 December 20X0 (extracts) (1) Provisions for liabilities Provision re faulty goods CU'000 At 1 January 20X0 Utilised in the year Income statement charge (bal fig) At 31 December 20X0 (W)
Provision for compensation claim CU'000
Provision for rectification costs CU'000
Provision for onerous contract CU'000
Provision for restructuring CU'000
– –
– –
– –
– –
Total CU'00 0 1,000 (800)
1,300
9,000
1180
126
3,300
13,906
1,500
9,000
180
126
3,300
14,106
1,000 (800)
The provision in respect of faulty goods relates to the supply of faulty electrical transformer units during 20X0. The provision is based on the level of claims anticipated to succeed, based on legal advice. The compensation claim provision is in respect of a claim made by a customer for damages as a result of a faulty mechanical transformer unit supplied by the company. It represents the present value 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 metal ore in Didland. Withington Ltd has a five year operating licence issued by the Didland government and has estimated that the cost of cleaning up the extracted ore hole will be CU400,000 at the end of those five years. A provision of CU80,000 is to be made each year. In addition, 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 which Withington Ltd entered into on 1 July 20X0. Due to unforeseen cost increases and production problems, a loss on this contract is now anticipated. The provision is based on the amount of this loss up to the end of the contract, which is less than the compensation which would be payable in the event of the contract not being fulfilled. During the year Withington Ltd announced and commenced a restructuring of its Chuckholder division. Details of the restructuring have been fully communicated to those affected. The cost of the 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 against the supplier of parts for the affected transformer. Legal advice is that this claim is likely to succeed and should amount to around 40% of the total damages (CU3.6 million). (b) Depreciation charge for 20X0 Electric machine ((200,000 – 40,000) ÷ 20 years) Lining (40,000 ÷ 4 years) Infrastructure ((200,000 + 100,000) ÷ 5 years))
CU 8,000 10,000 60,000
WORKING Closing provisions Provision re faulty goods (75% 2,000 CU1,000) Provision for rectification costs (400,000 ÷ 5 years + 100,000) Onerous contract (18 months 1,000 per month CU7) Restructuring (1,000,000 + 2,300,000)
168
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 1,500,000 180,000 126,000 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 37 definition of a provision, as it is not a legal or constructive obligation at the balance sheet date. No obligation to replace the lining exists independent of the company's future actions, because the company 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 the compensation 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 the amount 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 demonstrably committed. However, the only provisions which should be made are those for the direct expenditure necessarily entailed in the reorganisation and not associated with ongoing activities. Redundancy costs and lease terminations match this definition, but the other expenditures listed will benefit ongoing operations and do not qualify for recognition in 20X0.
19
Islay Ltd Marking guide Marks
Balance sheet Intangibles Share capital Revaluation reserve Retained earnings Intangibles note Opening cost Additions Opening impairment/amortisation Charge for year SOCIE Headings Revaluation Transfer Profit Brought forward balances Total available Maximum
½ ½ ½ ½ 1½ ½ 1 ½ 1 ½ ½ 1½ 2 11 11
© The Institute of Chartered Accountants in England and Wales, March 2009
169
Preparation of extracts from financial statements Consolidated balance sheet as at 31 May 20X9 (extracts) CU
Non-current assets Intangibles Capital and reserves Called up share capital Revaluation reserve Retained earnings
976,000 5,000,000 540,000 676,000 6,216,000
Disclosure note for intangibles Non-current assets – intangibles Cost At 1 June 20X8 Additions At 31 May 20X9 Impairment/amortisation At 1 June 20X8 Charge for the year At 31 May 20X9 Carrying amount At 31 May 20X9 At 31 May 20X8
Goodwill (W1) CU 730,000 260,000 990,000
Patent rights CU 70,000 – 70,000
Total CU 800,000 260,000 1,060,000
20,000 50,000 70,000
7,000 7,000 14,000
27,000 57,000 84,000
920,000 710,000
56,000 63,000
976,000 773,000
Consolidated statement of changes in equity attributable to equity holders of Islay Ltd for the year ended 31 May 20X9 Ordinary share capital CU Recognised directly in equity Revaluation of non-current assets Transfer between reserves re depreciation on revaluations Total recognised directly in equity Profit for the period (W5) Total recognised income and expense for the period Balance brought forward (W6) Balance carried forward
Revaluation reserve CU
Retained earnings CU
Total CU
–
600,000
–
600,000
– – –
(60,000) 540,000 –
60,000 60,000 118,500
– 600,000 118,500
– 5,000,000 5,000,000
540,000 – 540,000
178,500 497,500 676,000
718,500 5,497,500 6,216,000
Savalight (W2) CU 80,000 (20,000) – 60,000
Green Goods (W3) CU 650,000 – (50,000) 600,000
Smart IT Ltd (W4) CU 260,000 – – 260,000
WORKINGS (1) Goodwill
Goodwill Impairment b/f Impairment in the year C/f
170
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Total CU 990,000 (20,000) (50,000) 920,000
ANSWER BANK
(2) Savalight CU 580,000 (500,000) 80,000 (20,000) 60,000
Cost Less Net assets acquired at fair value Goodwill Impairment at 1 June 20X8 Carrying amount b/f and c/f
(3) Green Goods CU Cost Less Net assets acquired at fair value Existing goodwill Goodwill – carrying amount b/f Impairment in the year Carrying amount c/f
CU 1,800,000
1,300,000 (150,000) (1,150,000) 650,000 (50,000) 600,000
(4) Smart IT Cost Less Net assets acquired at fair value (1,200,000 70%) Goodwill – carrying amount c/f
CU 1,100,000 (840,000) 260,000
(5) Revised profit for the year Original profit for the year Less Goodwill impairment in the year (W1) Patent amortisation in the year (70,000 10)
CU 175,500 (50,000) (7,000) 118,500
(6) Retained earnings b/f Original retained profit b/f (700,000 – 175,500) Less Goodwill impairment b/f (W1) Patent amortisation b/f (70,000 10)
CU 524,500 (20,000) (7,000) 497,500
© The Institute of Chartered Accountants in England and Wales, March 2009
171
Preparation of extracts from financial statements
20
Greenstones Ltd Marking guide Marks
(a)
(b)
(c)
(a)
Explanation of relevance Explanation of reliability Explanation of conflict Example Total available Maximum Explanation of criteria for carry forward Evaluation against reliability Evaluation against relevance BAS 38 approach to conflict Total available Maximum Income statement Revenue Balance sheet PPE Intangibles SOCIE Prior year errors Operating profit note R&D write-offs Amortisation Impairment Presentation Total available Maximum
½ ½ 1 1 3
3
2 1 1 1 5
4
1 ½ 3 1 2 1 1½ 1 11
10 17
Relevance and reliability Information is relevant if it influences the economic decisions of users. Information is reliable if it is free 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 only be made in relation to future events, so forward-looking information is very relevant to users of financial statements. But much forward-looking information is of very limited reliability, because it relates to what might happen, but might not. A classic example of the possible conflict is how to reflect in financial statements a substantial claim for damages lodged against an entity. Many different estimates can be made of the outcome of such a claim; which should be recognised in the statements, and when? Relevance argues for early recognition, reliability for recognition only when it would not present a potentially misleading picture of 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 a number of stringent conditions. These relate to the technical feasibility of the project, how the probable future economic benefits will be generated and the availability of resources to complete the development. It must also be possible to measure the development expenditure reliably.
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ANSWER BANK
The most reliable information would be provided if the costs are recognised in the income statement as they are incurred (indeed this is the approach to be taken to research expenditure and to development expenditure where the recognition criteria are not met). However, this does not provide relevant information where benefits from the expenditure will flow into the entity over several accounting periods. However, the reliability of this more relevant information can be seriously compromised where there are uncertainties surrounding the future outcome of the project. Hence, BAS 38 adopts the relevance approach but only where the information backing up that approach 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 CU 93,800 (257,150)
Revenue (67,000 (W1) 140%) Cost of sales (W1) Balance sheet
CU Non-current assets Property, plant and equipment Intangibles (W2)
140,000 477,850
Statement of changes in equity CU At the beginning of the year As previously reported Prior year errors (160,000 + 470,000) Restated
Retained earnings CU
X (630,000) X
Note to the financial statements Operating profit is stated after charging Research and development expenditure written off (W1) Amortisation of development expenditure (W2) Impairment of property, plant and equipment (W3)
CU 147,000 25,150 85,000
WORKINGS (1) Cost of sales Project Alpha write off (22,000 + 45,000) Project Beta write off (15,000 + 65,000) Project Gamma amortisation (W2) Impairment (W3)
CU 67,000 80,000 147,000 25,150 85,000 257,150
© The Institute of Chartered Accountants in England and Wales, March 2009
173
Preparation of extracts from financial statements (2)
Intangible assets CU
Cost Gamma costs from 1 April 20X7 to 31 December 20X7 correctly capitalised (650,000 – 470,000) Gamma costs in year (98,000 + 75,000) Depreciation on specialised equipment used from 1 April 20X7 to 30 September 20X8 (18/60 CU500,000)
180,000 173,000
Accumulated amortisation (503,000 0.25 ) 5
(25,150)
150,000 503,000
477,850
(3) Impairment of specialised equipment CU 225,000 (140,000) 85,000
Carrying amount at 1 October 20X8 (500,000 27/60) Recoverable amount
Tutorial note Research and development costs written off or amortised in the year and the impairment of the specialised equipment have all been charged to cost of sales. Other classifications would also be marked as correct.
21
Okehampton Ltd Marking guide Marks
(a)
(b)
(c)
174
Carrying amounts Revaluation reserve Total available Maximum Depreciation Impairment losses Total available Maximum Income statement amounts Revaluation reserve Total available Maximum
© The Institute of Chartered Accountants in England and Wales, March 2009
4 5 9 9 2 2 4 2 2 4
4
4 17
ANSWER BANK
(a)
Balances at 31 December 20X6 George House Carrying amount as non-current asset at 30 June 20X6 (300,000 – (6,000 50%)) Fair value at 30 June 20X6 Increase in revaluation surplus Carrying amount at 31 December 20X6 (320,000 – 9,000 costs to sell) Elizabeth House Carrying amount as non-current asset at 30 June 20X6 (400,000 – (12,000 50%)) Fair value at 30 June 20X6 Decrease in revaluation surplus – charged to revaluation reserve as balance re this asset is sufficient (50,000 – 2,000 excess deprecation, per below) Carrying amount at 31 December 20X6 (360,000 – 8,000 costs to sell) Axford plant Carrying amount as non-current asset at 30 June 20X6 (200,000 – (20,000 50%)) Fair value less costs to sell at 30 June 20X6 (140,000 – 9,000) Impairment loss – to income statement Carrying amount at 31 December 20X6 Waterman plant Carrying amount as non-current asset at 30 June 20X6 (600,000 – (90,000 50%)) Fair value less costs to sell at 30 June 20X6 (620,000 – 15,000) No change to carrying amount Carrying amount at 31 December 20X6 Revaluation reserve Balance at 1 January 20X6 Transfer 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% Elizabeth House (12,000 – 8,000) 50% Revaluation surplus/(deficit) at 30 June 20X6: George House (as above) Elizabeth House (as above) Balance at 31 December 20X6
CU 297,000 320,000 23,000 311,000 394,000 360,000 (34,000) 352,000 190,000 131,000 (59,000) 131,000 555,000 605,000 555,000 370,000 (1,000) (2,000) 23,000 (34,000) 356,000
(b) Income statement for year ended 31 December 20X6 Depreciation ((6,000 + 12,000 + 20,000 + 90,000) 50%) Impairment loss (9,000 + 8,000 costs to sell re land and buildings and 59,000 re Axford) (c)
CU (64,000) (76,000)
Income statement and revaluation reserve in 20X7 Income statement Profit on sale of non-current assets held for sale George House (350,000 – 311,000) Elizabeth House (310,000 – 352,000) Axford plant (120,000 – 131,000) Waterman plant (635,000 – 555,000) Revaluation reserve Balance at 1 January 20X7 Transfer to retained earnings of surpluses re assets now disposed of George House (100,000 – 1,000 + 23,000) Elizabeth House (50,000 – 2,000 – 34,000) Balance at 31 December 20X7
CU 39,000 (42,000) (11,000) 80,000 66,000 356,000 (122,000) (14,000) 220,000
© The Institute of Chartered Accountants in England and Wales, March 2009
175
Preparation of extracts from financial statements
22
Banchory Ltd Marking guide Marks
(a)
(b)
(c)
(a)
Contingent asset note Warranties narrative note Warranties movement note Total available Maximum Contingent asset Legal costs Provision (2) Provision (3) Goodwill impairment Profit on factory Impairment loss on factory on classification as held for sale Additional depreciation on machine Total available Maximum Headings Revaluation Revaluation on classification as held for sale Transfers Issue of share capital Brought forward balances Presentation Total available Maximum
1½ 1 1½ 4 4 ½ ½ ½ ½ 1½ 1 ½ 1½ 6½ 6
1 ½ 1 3 2 1 1 9½
8 18
Notes to the financial statements Contingent asset The company is currently involved in litigation with one of its suppliers under product liability for a claim of CU500,000. Legal costs, currently CU40,000, may also be reimbursed. The legal costs have been 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 by the 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. CU Movement during year Balance as at 1 May 20W9 Increase during the year Balance as at 30 April 20X0 (2/6 6,000,000 10%)
176
© The Institute of Chartered Accountants in England and Wales, March 2009
– 200,000 200,000
ANSWER BANK
(b) Revised consolidated profit before tax CU 2,665,000 (500,000) (40,000) (200,000) (12,500) (1,800,000) (50,000) (60,000) 300,000 100,000 402,500
Per question Less Contingent asset (1) Legal costs (1) Provision (2) Impairment of goodwill (4) (W4) Profit on sale of factory unit (3,100,000 – 1,300,000) (5) Impairment loss on asset reclassified as held for sale (5) 'Additional' depreciation on machine (6) (W1) Add back Provision (3) Add profit on sale of held for sale asset (3,100,000 – 3,000,000)
(c)
Consolidated statement of changes in equity for the year ended 30 April 20X0 Ordinary share capital CU
Recognised directly in equity Revaluation of non-current assets Revaluation on classification as held for sale (3,050,000 – 2,100,000) Transfer between reserves (W2) Total recognised directly in equity Profit for the period Total recognised income and expense for the period Issue of share capital (W3) Balance brought forward Balance carried forward
Share premium CU
–
–
Revaluation reserve CU 500,000
Retained earnings CU
Total CU
–
500,000
– 200,000 200,000 –
– (200,000) (200,000) –
950,000 (1,755,000) (305,000) –
– 1,755,000 1,755,000 402,500
950,000 – 1,450,000 402,500
200,000 550,000 2,000,000 2,750,000
(200,000) 412,500 450,000 662,500
(305,000) – 800,000 495,000
2,157,500 – 3,672,000 5,829,500
1,852,500 962,500 6,922,000 9,737,000
WORKINGS (1) Depreciation on machine CU 300,000 (360,000) (60,000)
Charge per draft income statement (1/6 1,800,000) Charge needed (¼ 1,440,000) Adjustment (2) Transfer between reserves
CU Extra depreciation re revalued asset since date of revaluation (500,000 ÷ 50 6/12) Balance re revalued asset sold in the year (800,000 + 950,000)
5,000 1,750,000 1,755,000
(3) Share issues
B/f Bonus issue (2,000,000 ÷ 10) Rights issue (2,200,000 ÷ 4)
Ordinary shares CU 2,000,000 200,000 2,200,000 550,000 2,750,000
CU0.75
Share premium CU 450,000 (200,000) 250,000 412,500 662,500
© The Institute of Chartered Accountants in England and Wales, March 2009
177
Preparation of extracts from financial statements (4) Goodwill – impairment write down CU 962,500 (950,000) 12,500
Cost of acquisition (550,000 + 412,500) (W3) Less Fair value
Tutorial note The fact that the carrying amount of property at the date of sale is based on cost means that a measurement adjustment under BFRS 5 at the time of the decision to sell would only have been made if fair value less costs to sell had been below the then carrying amount. With the ultimate selling price so much in excess of cost, it was unlikely that any such adjustment would have been necessary. This is the reason why the question did not contain any information about values at the time the decision to sell was made.
23
Banff Ltd Marking guide Marks
(a)
(b)
178
Balance sheet Owned plant Leased plant Inventories Trade and other receivables Non-current assets held for sale Current finance lease liabilities Provision Current deferred income Non-current finance lease liabilities Non-current deferred income Income statement Revenue Cost of sales Loss on termination Finance cost Presentation Total available Maximum Income statement amount Balance sheet amount Total available Maximum
© The Institute of Chartered Accountants in England and Wales, March 2009
4 1 1½ ½ 2 1 1 ½ 3 ½ 3 2 ½ ½ 1 22
21
1 1 2 2 23
ANSWER BANK
(a)
Extracts from the financial statements Balance sheet as at 30 April 20X1 CU Non-current assets Property, plant and equipment Plant and machinery (W1)
195,000
Plant and machinery held under finance leases (780,000 – 780,000 ) 6 Current assets Inventories (W4) Trade and other receivables (W4)
650,000 250,000 2,250,000 X
Non-current assets held for sale (W5) Current liabilities Finance lease liabilities (W2) Provision for closure costs (250,000 + 100,000) Deferred income (500,000 150%)
781,250 150,000 350,000 750,000
Non-current liabilities Finance lease liabilities (W2) Deferred income (750,000 2)
553,333 1,500,000
Income statement for the year ended 30 April 20X1 CU 3,800,000 (1,750,000) (350,000) (23,333)
Revenue (1,750,000 (W3) + 2,050,000 (W4)) Cost of sales (W4) Loss on termination of operations Finance cost (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 Materials Labour costs Factory staff Less Abnormal costs (should be expensed in the year) Factory supervision – incremental costs Professional fees Installation costs Less Depreciation of component re overhauls (80,000 ÷ 4) Depreciation of remainder (230,000 – 80,000) ÷ 10)
100,000 (20,000)
CU 100,000
80,000 15,000 22,000 13,000 230,000 (20,000) (15,000) 195,000
© The Institute of Chartered Accountants in England and Wales, March 2009
179
Preparation of extracts from financial statements (2) Finance lease CU 850,000 (780,000) 70,000
Total payments (100,000 + (5 150,000)) Less Fair value of asset Finance charge 5 (5 1) Sum of digits allocation = = 15 (lease is payable in advance) 2 Year 20X1 20X2
B/f CU 780,000 703,333
Payment CU (100,000) (150,000)
Capital CU 680,000 553,333
Interest CU 23,333 (5/15 70,000) 18,667 (4/15 70,000)
C/f CU 703,333 572,000
Total liability at 30 April 20X1 CU703,333
Non-current liability CU553,333
Current liability () CU150,000
(3) Hardware revenue CU 4,000,000 (3,000,000) 1,000,000
Total revenue Support service (500,000 x 150% x 4 years) Attributable to hardware Support services pa (500,000 x 150%) Hardware
750,000 1,000,000 1,750,000
(4) Software revenue and costs CU 3,000,000 (2,600,000) 400,000
Estimated profit on contract Price Costs estimated (200,000 + 2,000,000 + 400,000) To date CU 2,250,000 (1,950,000) 300,000
Revenue (75% x 3,000,000) Costs () Profit (75% x 400,000)
20X0 CU 200,000 (200,000) –
20X1 CU 2,050,000 (1,750,000) 300,000 CU 2,200,000 (1,950,000) 250,000
Inventories Costs incurred to date (200,000 + 2,000,000) Recognised in income statement
(5) Held for sale asset Lower of: Carrying amount at classification (1,000,000 6 Fair value less costs to sell (900,000 97%)
180
CU 1
4
8 )
© The Institute of Chartered Accountants in England and Wales, March 2009
781,250 873,000
ANSWER BANK
24
Skinner Ltd Marking guide Marks
(a)
(b)
(c)
Cost Brought forward Revaluation Additions Depreciation Brought forward Revaluation Charge Notes Valuation Leased assets Presentation Total available Maximum Current liabilities Non-current liabilities Analysis of gross lease payments Finance cost Financing activities Operating activities Presentation Total available Maximum Cost NRV Total available Maximum
½ ½ 1 ½ ½ 5 1 ½ 1 10½ 10
1 1 2 ½ ½ ½ 1 6½
6
2½ 1½ 4 3 19
(a) Notes to the financial statements as at 30 June 20X3 (extracts) Property, plant and equipment
Cost or valuation At 1 July 20X2 Revaluation Additions (W3) At 30 June 20X3 Depreciation At 1 July 20X2 Revaluation Charge for the year (W1) At 30 June 20X3 Carrying amount At 30 June 20X3 At 30 June 20X2
Freehold land and buildings CU
Plant and machinery CU
Total CU
1,620,000 740,000 – 2,360,000
1,278,000 – 849,900 2,127,900
2,898,000 740,000 849,900 4,487,900
148,800 (148,800) 20,000 20,000 2,340,000 1,471,200
539,600 – 210,788 750,388 1,377,512 738,400
688,400 (148,800) 230,788 770,388 3,717,512 2,209,600
© The Institute of Chartered Accountants in England and Wales, March 2009
181
Preparation of extracts from financial statements The freehold land and buildings were valued for the purposes of the 20X3 financial statements at open market valuation. This valuation was made by ………………. . The historical cost of the land and buildings 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 liabilities Finance lease liabilities (W2)
CU 46,205
Non-current liabilities Finance lease liabilities (W2)
CU 329,690
Notes to the financial statements as at 30 June 20X3 (extracts) Analysis of finance leases – gross basis Finance lease liabilities include Gross lease payments due within One year Two to five years (65,000 4) Over five years (65,000 2) Less Finance charges allocated to future periods ((65,000 8) – 419,900 – 20,995) or ()
CU 65,000 260,000 130,000 455,000 (79,105) 375,895
Income statement for the year ended 30 June 20X3 (extracts) Finance cost (W2)
CU 20,995
Cash flow statement for the year ended 30 June 20X3 (extracts) Cash flows from operating activities Finance costs paid Cash flows from financing activities Payment of finance lease liabilities (65,000 – 20,995) (c)
(44,005)
Closing inventory Cost Variable cost Share of overheads (0.60 + 0.40 + 1.40) Net realisable value Selling price Less Selling, marketing and distribution costs (1.20 + 0.40)
Value at lower of cost and net realisable value (4,000 CU28.40)
182
CU (20,995)
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 26.00 2.40 28.40 32.00 (1.60) 30.40 CU 113,600
ANSWER BANK
WORKINGS (1) Depreciation charge Buildings CU 2,360,000 (1,600,000) 760,000
Valuation Land element Buildings
Years 50
Original useful life Elapsed ( 148,800 50) 620,000 Remaining useful life
(12) 38
760,000 Depreciation charge = = CU20,000 per annum 38 years Plant and machinery CU 1,278,000 (150,000) 1,128,000 @ 10%
Cost at 1 July 20X2 Less Revised useful life asset Asset with revised useful life Depreciation charge = Carrying amount = 150,000 80% Revised useful life 5 years
Depreciation CU
112,800 24,000
Additions – 430,000 10% for 6 months Leased asset
21,500
Depreciation charge = 419,900 8 years
52,488 210,788
(2) Leased grinding machine PV of MLP = CU419,900 Representing
419,900 100 = 93% of the fair value of the asset 450,000
Year ended
B/f CU 419,900 375,895
30 June 20X3 30 June 20X4
Interest @ 5% CU 20,995 18,795
Payment CU (65,000) (65,000)
Capital c/f CU 375,895 329,690
Total CU375,895 Capital > 1 year CU329,690
(3) Additions Plant and machinery purchases Leased machine
Capital < 1 year CU46,205 ()
CU 430,000 419,900 849,900
© The Institute of Chartered Accountants in England and Wales, March 2009
183
Preparation of extracts from financial statements
25
Rosetta Ltd Marking guide Marks
(a)
(b)
(a)
Cost Brought forward Additions Amortisation/impairment Brought forward Charge Presentation Total available Maximum Revised pre-tax profit Adjustments re depreciation Adjustments re goodwill Adjustments re development costs Retained earnings brought forward Total available Maximum
½ 3 ½ 2 1 7
6
4 2 4 1½ 11½ 11 17
Notes to the financial statements for the year ended 31 December 20X2 (extracts) Intangibles Cost At 1 January 20X2 Additions At 31 December 20X2 Amortisation/impairment At 1 January 20X2 Charge for year At 31 December 20X2 Carrying amount At 31 December 20X2 At 31 December 20X1
Development costs CU
Goodwill CU
Total CU
2,100,000 4,800,000 6,900,000
(W2)
757,500 (W3) 757,500
2,100,000 5,557,500 7,657,500
300,000 900,000 1,200,000
(W2)
10,521 (W3) 10,521
300,000 910,521 1,210,521
5,700,000 1,800,000
746,979
6,446,979 1,800,000
(b) Revised pre-tax profit Per draft financial statements Depreciation adjustments (1) (150,000 + 44,444) (W1) Acquisition (2)(i) Goodwill amortisation added back (6,000,000 ÷ 20 years) Provision for reorganisation added back to goodwill Capitalised development costs (2)(ii) Amortisation added back (2,880,000 1/72) Employment costs (1,800,000 60%) Staff training costs Depreciation of computer equipment not capitalised (W3) Revaluation gain reversed Correct amortisation of development costs (W3) Goodwill impairments in year (W2)
184
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 17,000,000 (194,444) 300,000 (1,200,000) 40,000 (1,080,000) (480,000) (100,000) (3,160,000) (10,521) (900,000) 10,215,035
ANSWER BANK
Retained earnings brought forward CU 35,000,000 1,400,000 36,400,000
As incorrectly restated Add back Depreciation adjustment (600,000 + 800,000) (W1)
WORKINGS (1) Depreciation charges Carrying amount at 1 January 20X2 Cost Acc depn 15% 12,000,000
Equipment CU 12,000,000
Property CU 40,000,000
(1,800,000)
40,000,000 2 years 25
(3,200,000)
Depreciation charge for year (÷ 4 / ÷ 18) Treatment per draft accounts
10,200,000
36,800,000
2,550,000
2,044,444
Dr CU
Cr CU
Equipment Statement of changes in equity ( 12,000,000 – 1,800,000) 5 12,000,000 Income statement ( ) 5 Acc depn Property Statement of changes in equity (( 40,000,000 2 years) – 3,200,000) 20 Income statement ( 40,000,000 ) 20 Acc depn
600,000 2,400,000 3,000,000
800,000 2,000,000 2,800,000
Additional charge needed 150,000 + 44,444
(2) Goodwill arising in year and impairments of goodwill As calculated Less Reorganisation provision Recoverable amount Impairment Impairment re b/f goodwill Total impairments in year
CU 6,000,000 (1,200,000) 4,800,000 (4,100,000) 700,000 200,000 900,000
© The Institute of Chartered Accountants in England and Wales, March 2009
185
Preparation of extracts from financial statements
(3) Development costs CU Employment costs after 31 August 20X2 (40% 1,800,000) Amortisation of IT hardware * from 31 August 20X2 to 30 November 20X2 (600,000 3/48)
720,000 37,500 757,500 10,521
Amortisation in year ( 1/72) * 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 correctly released to the income statement but the original provision set up of CU1.2 million was not charged. Once the adjustment of CU1.2 million has been actioned (Dr Income statement, Cr Goodwill) the income statement will have borne the true post-acquisition cost of CU0.8 million.
26
Arran Ltd Marking guide Marks
(a)
(b)
(c)
186
Cost of sales Profit on disposal Share of profits of associate Tax charge Total available Maximum PPE calculation Operating profit note Events after the balance sheet date note Total available Maximum Cost of sales Profit on disposal Share of profits of associate Tax charge Total available Maximum
© The Institute of Chartered Accountants in England and Wales, March 2009
2½ 4½ 3 2 12 12 1½ ½ 1½ 3½ 3 2 2 2 1 7 6 21
ANSWER BANK
(a)
Calculation of amounts for the consolidated income statement for the year ended 31 May 20X1 (i)
Cost of sales
CU 7,400,000
Arran Ltd Jura Ltd Per question Impairment of PPE (500,000 – 390,000) Islay Ltd (2,700,000 8/12) (ii)
Profit on disposal of Islay Ltd Sales proceeds Less Share of net assets at disposal Net assets at 1 June 20X0 Profit to 31 January 20X1 (8/12 570,000)
4,500,000 110,000 1,800,000 13,810,000 CU 1,700,000 380,000 2,080,000
CU 2,500,000
80%
Less Carrying amount of goodwill at disposal (W3)
(1,664,000) (384,000) 452,000
(iii) Share of profits of associates Share of profit after tax ((1,960,000 6/12) – (100,000 - 70,000) 30%) Less Share of PURP (60,000 (W2) 30%)
CU 285,000 (18,000) 267,000
(iv) Tax charge CU 450,000 400,000 160,000 1,010,000
Arran Ltd Jura Ltd Islay Ltd (240 8/12)
(b) Calculation of property, plant and equipment for the consolidated balance sheet as at 31 May 20X1 Arran Ltd Jura Ltd (3,400,000 – 110,000 (a))
CU 5,500,000 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 Impairment of property, plant and equipment
CU 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 fire destroyed 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 a loss of CU500,000 is anticipated in the current year.
© The Institute of Chartered Accountants in England and Wales, March 2009
187
Preparation of extracts from financial statements (c)
Rationale for treatment Cost of sales This should reflect the cost of goods sold outside the group, comprising parent and entities controlled by the parent, i.e. its subsidiaries. Applying the single entity concept, the only amounts to be included are those for the period during which the parent controls the subsidiaries. Associates are not controlled by the investor (the investor only has significant influence over the investee), 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 original cost plus post acquisition profits. Any unimpaired goodwill arising on acquisition should be derecognised, as this part of the cost of acquiring 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 dividend income 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 amount must 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 sheet date as appropriate – as profits earned up to these dates are included.
WORKINGS (1) Group structure
Arran Ltd 75%
80% 30%
Jura Ltd
(2) PURP SP Cost GP
188
Islay Ltd Disposed of 31 Jan 20X1
Millport Ltd
8/12 incl
Acquired 1 Dec 20X0 6/12 incl
% 1331/3 (100) 331/3
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 240,000 (180,000) 60,000
(½ 480)
ANSWER BANK
(3) Goodwill in respect of Islay Ltd CU 1,600,000 (1,120,000) 480,000 (96,000) 384,000
Cost of investment Less Share of net assets acquired (80% 1,400) Goodwill Impairment prior to start of year Goodwill at disposal date
27
Elie Ltd Marking guide Marks
(a)
(b)
(a)
Cost of investment Fair value of net assets acquired Impairment Total available Maximum Presentation Impairment recognised against revaluation reserve Transfer of excess depreciation Share issues Brought forward balances Total available
4 2 ½ 6½ 6
1½ 3½ 1 2½ 1½
10 16
Goodwill calculation CU Cost of investment Shares (200,000 CU17) Professional fees Contingent share element (24,000 CU17) Deferred cash consideration Less
Fair value of net assets acquired Carrying amount Unrecognised asset – the legal claim Fair value adjustments
Goodwill Less Goodwill impaired to date Goodwill for the consolidated balance sheet
CU 3,400,000 90,000 408,000 92,000 3,990,000
3,000,000 200,000 1,000,000 4,200,000 80%
(3,360,000) 630,000 (70,000) 560,000
© The Institute of Chartered Accountants in England and Wales, March 2009
189
Preparation of extracts from financial statements
(b)
Statement of changes in equity for the year ended 30 June 20X2 (extract) Ordinary share capital CU Recognised directly in equity Impairment of non-current asset previously revalued (W3) Transfer between reserves (45,000 – 2,000 (W2)) Total recognised income and expense for the period Issue of share capital (W1) Balance brought forward Balance carried forward
Attributable to the Equity Holders of Elie Ltd Preference share capital Share Revaluation (irredeemable) premium reserve CU CU CU
–
–
–
(38,000)
–
–
–
(43,000)
– 200,000 200,000 1,000,000 1,200,000
– 200,000 200,000 – 200,000
– 3,240,000 3,240,000 500,000 3,740,000
(81,000) – (81,000) 250,000 169,000
WORKINGS (1) Share issues
B/f Acquisition of Monans Ltd
Ordinary shares CU 1,000,000 200,000
Irredeemable preference shares 1,200,000
Irredeemable preference shares CU
200,000 200,000
(2) Revaluation surplus on impaired asset Cost on 1 July 20W8 Depreciation to 30 June 20X0 @ 10% 2 Revalued on 1 July 20X0 Surplus Transfer to retained earnings y/e 30 June 20X1 Depreciation based on revalued amount (10% 120,000) Depreciation based on cost (10% 100,000) In revaluation reserve on 1 July 20X1 (3) Impairment of asset Revalued amount on 1 July 20X0 Depreciation to 30 June 20X1 @ 10% Recoverable amount at 30 June 20X2 Charge to revaluation reserve (W2) Charge to income statement
190
© The Institute of Chartered Accountants in England and Wales, March 2009
Share premium CU ( CU16) ( 20p)
CU
3,200,000 40,000 3,240,000
CU 100,000 (20,000) 80,000 120,000 40,000
12,000 (10,000) (2,000) 38,000
CU 120,000 (12,000) 108,000 (50,000) (38,000) 20,000
ANSWER BANK
28
Wester Ross Ltd Marking guide Marks
(a)
(b)
(c)
(a)
Goodwill Investments in associates Retained earnings Total available Maximum Cash flow extracts Acquisition Dividends from associates Dividends paid Note Narrative Minority interest Current liabilities All other amounts (not totals or sub-totals) Total available Maximum Purpose Key concepts Discussion of single entity concept Discussion of substance over form Total available Maximum
4½ 2 5 11½ 11 1 1 1 1 1 1 3 9 9
2 1 1½ 1 5½
5 25
Calculation of balance sheet amounts at 31 October 20X0 (i)
Goodwill arising on Ullapool Ltd Cost of acquisition ((2,000 CU7) + 7,000) Less Fair value of net assets acquired Ordinary share capital Revaluation reserve General reserve Retained earnings Fair value adjustments To inventory (42 – 30) Re contingent liability 75%
CU'000 21,000
12,000 1,500 3,500 2,000 12 (98) 18,914 (14,185) 6,815
Goodwill Less Impairment to date Goodwill for consolidated balance sheet (ii)
CU'000
(810) 6,005
Investments in associates Cost Share of post acquisition change in net assets (30% (1,900 – 900)) Less Impairment to date
CU'000 2,000 300 2,300 (276) 2,024
© The Institute of Chartered Accountants in England and Wales, March 2009
191
Preparation of extracts from financial statements (iii) Retained earnings Wester Ross Ltd Less Provision for uncollectible trade receivables Ullapool Ltd (363,000 (W1) 75%) Glenelg Ltd (ii) Less Goodwill impairment to date (276 + 810)
CU'000 3,000 (400) 2,600 272 300 (1,086) 2,086
(b) Consolidated cash flow statement for the year ended 31 October 20X0 (extracts) Cash flows from investing activities Acquisition of Ullapool Ltd net of cash acquired (Note 1) Dividends received from associate (W3)
CU'000 (6,700) 90
Cash flows from financing activities Dividends 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 fair value of assets acquired and liabilities assumed were as follows.
Goodwill ((a) (i)) Property, plant and equipment Inventories (2,000 + 12 ((a) (i))) Trade and other receivables Cash Non-current liabilities Current liabilities (1,000 + 98) Minority interest (18,914 (a) (i) 25%) Total purchase price Less Non cash consideration Cash consideration Less Cash acquired Cash flow on acquisition
(c)
CU'000 6,815 17,000 2,012 1,500 300 (800) (1,098) (4,729) 21,000 (14,000) 7,000 (300) 6,700
Group accounts Purpose The purpose of group financial statements is to provide comprehensive information to investors on a company which uses resources to invest in other companies. Group financial statements give information to users on the abilities of management to produce an acceptable return on the capital employed. Specific rules on consolidations contained in BAS 27 Consolidated and Separate Financial Statements result in only the profits of subsidiaries earned in the post acquisition period being reported in the consolidated income statement. Managers are therefore held accountable for their performance after acquisition and not on the profits 'bought in'.
192
© The Institute of Chartered Accountants in England and Wales, March 2009
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 as a single economic unit. Therefore all the resources at the group’s disposal and the return on those resources can be seen in one set of financial statements. Without this users would be presented with various sets of individual company financial statements based on the legal form that each company is a separate legal entity. The preparation of group financial statements under the single entity concept underlines the application of 'substance over form', which is a fundamental principle in the preparation of financial statements. 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 the results of trading with entities outside the group are shown; this provides a more meaningful basis for assessing management’s performance. WORKINGS (1) Post-acquisition retained earnings of Ullapool Ltd CU'000 2,600 (12) (225) (2,000) 363
Per individual company balance sheet Less Reduction in profit re inventories NCA PURP (W2) Pre-acquisition profits
(2) PURP in non-current asset transfer CU'000 Carrying amount at 30 April 20X0 Cost Less Accumulated depreciation (5 years 10%) Carrying amount Disposal proceeds Unrealised profit Less Effect of excess depreciation Normal depreciation (CU1m 10) New depreciation (CU750 ÷ 5 years remaining) For half a year Net effect – adjust against retained earnings of seller (Ullapool Ltd)
CU'000 1,000 (500) 500 750 250
100 150 (50)
(25) 225
(3) Dividends Wester Ross Ltd – paid – ordinary (10p 40,000,000) Glenelg Ltd – paid to Wester Ross Ltd – ordinary (20p 1,500,000 30%)
CU'000 4,000 90
© The Institute of Chartered Accountants in England and Wales, March 2009
193
Preparation of extracts from financial statements
29
Shadowlands Ltd Marking guide Marks
(a)
(b)
(c)
(a)
Profit before tax Depreciation charge Profit on disposal of associate All other adjustments (1 mark each) Total available Maximum Total finance charge calculation Sum of digits calculation Lease payments table Disclosure Total available Maximum Individual accounts Group accounts Proceeds Share of net assets Goodwill Total available Maximum
2 ½ ½ 3 7 1 ½ 1½ 1 4
7
4
1½ ½ 1½ 2 5½ 5 15
Note reconciling profit before tax to cash generated from operations CU 3,680,000 60,000 (200,000) 356,000 (351,440) 110,100 (22,700) (3,800) 3,628,160
Profit before tax (4,400,000 + 40,000 – 10,000 (b) – 750,000) Finance cost (50,000 + 10,000 (b)) Investment income (950,000 – 750,000) Depreciation charge Profit on disposal of associate (c) Decrease in inventories (460,700 – 350,600) Increase in trade and other receivables (279,600 – 256,900) Decrease in trade and other payables (182,300 – 178,500) Cash generated from operations
(b) Finance lease CU 10,000 120,000 (105,000) 25,000
Deposit Instalments (4 CU30,000) Fair value of asset Finance charge
SOD =
n (n 1) 45 = = 10 2 2 Year ended
31 December 20X7 31 December 20X8
194
B/f CU 105,000 75,000
Interest CU 4 10,000 ( /10 25,000) 3 7,500 ( /10 25,000)
© The Institute of Chartered Accountants in England and Wales, March 2009
Payment CU (40,000) (30,000)
C/f CU 75,000 52,500
ANSWER BANK
(c)
Disclosed as Current liabilities Finance lease liability (75,000 – 52,500)
CU 22,500
Non-current liabilities Finance lease liability
52,500
Disposal of Bacardi Ltd In the individual accounts of Shadowlands Ltd
CU
Cost Less Impairments to date of sale Carrying amount at disposal Proceeds Profit on disposal In the group accounts
300,000 (20,000) 280,000 750,000 470,000 CU
Proceeds Less Share of net assets to date of sale Share capital Retained earnings (650,300 – (½ 110,200))
CU 750,000
500,000 595,200 1,095,200 30%
Less Goodwill not yet impaired Original cost Less Share of net assets acquired (30% (500,000 + 200,000)) Less Impaired to date
300,000 (210,000) 90,000 (20,000) (70,000) 351,440
Profit on disposal
30
(328,560)
Scribo Ltd Marking guide Marks
(a)
(b)
Magazine subscriptions Magazines sold via newsagents Book sales Total available Maximum Cost Brought forward Additions Amortisation/impairment Brought forward Charge for year Presentation Total available Maximum
2 1 ½ 3½ 3 ½ 1 ½ 1½ 1 4½ 4 7
© The Institute of Chartered Accountants in England and Wales, March 2009
195
Preparation of extracts from financial statements (a)
Calculation of revenue CU 96,607 757,900 3,450,800 4,305,307
Magazine subscriptions (W1) Magazines sold via newsagents (W2) Book sales (b) Intangible assets movements note Goodwill Cost At 1 July 20X5 Additions At 30 June 20X6 Accumulated amortisation/impairment At 1 July 20X5 Charge for year (120,000 ÷ 5) At 30 June 20X6 Carrying amount At 30 June 20X6 At 1 July 20X5
Publishing titles CU
Technical know-how CU
Customer lists CU
450,000 100,000 550,000
120,000 45,000 165,000
300,000 – 300,000
– 30,000 30,000
870,000 175,000 1,045,000
120,000
12,000
90,000
–
222,000
50,000 170,000
24,000 36,000
30,000 120,000
– –
104,000 326,000
380,000 330,000
129,000 108,000
180,000 210,000
30,000 –
719,000 648,000
CU
Total CU
WORKINGS (1) Magazine subscriptions revenue Pre March (50% CU356,700 4/12) March (25% CU356,700 3/12) April (25% CU356,700 2/12)
CU 59,450 22,294 14,863 96,607
(2) Magazines on sale or return revenue Total Less June returns (10,500 CU3)
196
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 789,400 (31,500) 757,900
ANSWER BANK
Preparation of full consolidated financial statements
31
Hemmingway Ltd Marking guide Marks
(a)
(b)
CBS PPE Intangibles/goodwill Investment Inventories Trade and other receivables Cash and cash equivalents Share capital Revaluation reserve Retained earnings Minority interest Borrowings Trade and other payables Other workings Group structure (W1) Net assets (W2) PPE PURP (W8) Presentation Total available Maximum Carried at cost plus share of post-acquisition profits Increase consolidated earnings by share of post-acquisition profits less impairments Equity method used where significant influence Do not add assets and liabilities to those of parent as no control No minority interest Total available Maximum
1½ 1 ½ 1½ ½ ½ ½ 1 1½ ½ ½ ½ ½ 2 2 1 15½ 1
15
1 ½ ½ ½ 3½ 3 18
© The Institute of Chartered Accountants in England and Wales, March 2009
197
Preparation of full consolidated financial statements (a)
Consolidated balance sheet at 30 June 20X4 CU'000
ASSETS Non-current assets Property, plant and equipment (6,720 + 820 + (200 – 80 (W2)) – 12 (W8)) Intangibles (W3) Investments
CU'000
7,648 814 1,200 9,662
Current assets Inventories (360 + 170 – 5 (W5) + 25 (W7)) Trade and other receivables (370 + 230) Cash and cash equivalents (15 + 10)
550 600 25
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Revaluation reserve (W6) Retained earnings (W5) Attributable to equity holders of Hemmingway Ltd Minority interest (W4) Equity Non-current liabilities Borrowings (3,200 + 50) Current liabilities Trade and other payables (670 + 270) Total equity and liabilities
1,175 10,837
5,000 209 1,193 6,402 245 6,647 3,250 940 10,837
WORKINGS (1) Group structure
Hemmingway Ltd 75% Steinbeck Ltd
(2) Net assets
Steinbeck Ltd Revaluation reserve Share capital Retained earnings Fair value adjustment Depn thereon (40% 200)
198
At balance sheet date CU'000 40
Acquisition CU'000 28
Post acq CU'000 12
600 220 200 (80) 940
600 140 200 – 940
– 80 – (80) –
980
968
12
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK
(3) Intangibles – goodwill Cost of investment Less Share of net assets acquired (75% 968 (W2))
CU'000 1,540 (726) 814
(4) Minority interest CU'000 245
25% 980 (W2) (5) Retained earnings Hemmingway Ltd Inventory PURP (25 25/125) PPE PURP (W8)
CU'000 1,210 (5) (12) 1,193
(6) Revaluation reserve Hemmingway Ltd Steinbeck Ltd (75% 12 (W2))
CU'000 200 9 209
(7) Inter-company balances Hemmingway Ltd receivable Inventory in transit Steinbeck Ltd payable
CU'000 75 (25) 50
(8) PPE PURP Carrying amount after transfer (96 – (96 25%)) Carrying amount without transfer (100 – (100 20% 2))
CU'000 72 (60) 12
(b) Innes Ltd as an associate If Innes Ltd became an associate of Hemmingway Ltd, then the investment would be carried in the consolidated 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 of the 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 an associate. The individual assets and liabilities are not added to those of the parent company as there is no control over them. There is no 'minority interest' as only the parent company's share of the net assets is included in the consolidated balance sheet, unlike a subsidiary where 100% of the assets and liabilities are included even though the ownership may be less than 100%.
© The Institute of Chartered Accountants in England and Wales, March 2009
199
Preparation of full consolidated financial statements
32
Highland Ltd Marking guide Marks
(a)
(b)
(a)
CBS PPE Intangibles/goodwill Inventories Trade receivables Cash and cash equivalents Share capital Share premium Retained earnings Minority interest Borrowings Trade payables Dividends payable Other workings Net assets (W2) Presentation Total available Maximum Purpose Comprehensive information Ability of management to produce acceptable return Only post-acquisition profits allowed Therefore managers assessed on only post-acquisition performance Concepts Single entity and explanation of how accounts would differ without this Explanation of calculation of intra-group items Substance over form and explanation Total available Maximum
6 1 18½ 18 ½ ½ ½ ½ 2 1½ 1½ 7 6 24
Consolidated balance sheet as at 31 December 20X2 ASSETS Non-current assets Property, plant and equipment (3,560 + 2,800 + 200 – 6 (W2)) Intangibles (W3) Current assets Inventories (1,150 + 550 – 80 (W6) + (100 – 70 (W2))) Trade receivables (1,500 + 800) Cash and cash equivalents (100 + 50) Total assets
200
1½ 1½ 1½ ½ ½ ½ ½ 2½ ½ ½ ½ 1
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000
CU'000 6,554 602 7,156
1,650 2,300 150
4,100 11,256
ANSWER BANK
EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium account Retained earnings (W6) Attributable to equity holders of Highland Ltd Minority interest (W4) Equity Non-current liabilities Borrowings (1,100 + 110) Current liabilities Trade payables (700 + 240) Dividends payable (W7)
CU'000
CU'000 3,500 700 3,838 8,038 898 8,936 1,210
940 170 1,110 11,256
Total equity and liabilities
(b) Group accounts Purpose The purpose of group financial statements is to provide comprehensive information to investors on a company which uses resources to invest in other companies. Group financial statements give information to users on the abilities of management to produce an acceptable return on the capital employed. Specific rules on consolidations contained in BAS 27 Consolidated and Separate Financial Statements result in only the profits of subsidiaries earned in the post acquisition period being reported in the consolidated 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 as a single economic unit. Therefore all the resources at the group's disposal and the return on those resources can be seen in one set of financial statements. Without this users would be presented with various sets of individual company financial statements based on the legal form that each company is a separate legal entity. The preparation of group financial statements under the single entity concept underlines the application of 'substance over form', which is a fundamental principle in the preparation of financial statements. 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 the results of trading with entities outside the group are shown; this provides a more meaningful basis for assessing management's performance.
© The Institute of Chartered Accountants in England and Wales, March 2009
201
Preparation of full consolidated financial statements WORKINGS (1) Group structure
Highland Ltd 75% Lowland Ltd
(2)
Net assets of Lowland Ltd
Share capital Share premium Fair value adjustment on property Fair value adjustment on inventory (400 – 300) Retained earnings Less Additional depreciation on property (200 4% 9/12) Inventory disposed of (70% 100)
Balance sheet date CU'000
CU'000 900 170 200
2,300
100
2,224 3,594
100
–
1,720 3,090
504 504
Goodwill on acquisition of Lowland Ltd CU'000 2,940 (2,318) 622 (20) 602
Cost of investment Less Share of net assets acquired (75% 3,090 (W2)) Impairment to date Balance c/f (4)
Minority interest CU'000 898
Share of net assets (3,594 (W2) 25%) (5)
Retained earnings CU'000 3,500 60 378 (80) (20) 3,838
Highland Ltd Add Dividend from Lowland Ltd (80 75%) Lowland Ltd (504 (W2) 75%) Less PURP (W6) Goodwill impairment to date
(6)
PURP SP (800 ½) Cost GP
202
Post acq CU'000 – – –
(6) (70)
(1,500 + 220 (W8))
(3)
Acquisition CU'000 900 170 200
© The Institute of Chartered Accountants in England and Wales, March 2009
% 125 (100) 25
CU'000 400 (320) 80
ANSWER BANK
(7) Dividends Highland Ltd Lowland Ltd – minority interest (80 25%)
CU'000 150 20 170
(8) Pre/post acquisition profits Retained profit for the year (2,300 – 1,500) Add back Dividend Total profits for the year Pre-acquisition (3/12 880) Post-acquisition ((9/12 880) – 80)
33
CU'000 800 80 880 220 580 800
Ullapool Ltd Marking guide Marks
CBS PPE Investments in associates Inventories Trade receivables Cash and cash equivalents Share capital Share premium Retained earnings Minority interest Trade payables Other workings Net assets (W2) Presentation Total available Maximum
1½ 1½ 1½ 1 1 ½ ½ 2½ ½ ½ 3 1 15 14
© The Institute of Chartered Accountants in England and Wales, March 2009
203
Preparation of full consolidated financial statements Consolidated balance sheet as at 31 October 20X7 CU'000 ASSETS Non-current assets Property, plant and equipment (6,500 + 2,900 + 290) Investments in associates (W7)
CU'000 9,690 649 10,339
Current assets Inventories (900 + 830 – 17 (W6)) Trade receivables (430 + 350 – 20) Cash and cash equivalents (330 + 120 + 20)
1,713 760 470 2,943 13,282
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Share premium Retained earnings (W5) Attributable to the equity holders of Ullapool Ltd Minority interest (W4) Equity Current liabilities Trade payables (2,800 + 650) Total equity and liabilities
4,750 1,250 2,685 8,685 1,147 9,832 3,450 13,282
WORKINGS (1) Group structure
Ullapool Ltd 70% Kyle Ltd
30% Portree Ltd
(2) Net assets Kyle Ltd Share capital Retained earnings Per question PURP (W6) FV adj – inventory FV adj – land
Portree Ltd Share capital Retained earnings
204
Balance sheet date CU'000 CU'000 1,700
Acquisition CU'000 CU'000 1,700
1,850 (17) –
Post acq CU'000 –
1,250 – 32 1,833 290 3,823
1,282 290 3,272 Balance sheet date CU'000 800 1,200 2,000
© The Institute of Chartered Accountants in England and Wales, March 2009
Acquisition CU'000 800 1,000 1,800
551 – Post acq CU'000 200
ANSWER BANK
(3) Goodwill – Kyle Ltd CU'000 2,250 (2,290) (40)
Cost of investment as recorded (2,840 – 590) Less Share of net assets acquired (70% 3,272 (W2)) Discount on acquisition
(4) Minority interest CU'000 1,147
Kyle Ltd (30% 3,823 (W2))
(5) Retained earnings CU'000 2,200 386 60 (1) 40 2,685
Ullapool Ltd Kyle Ltd (70% 551 (W2)) Portree Ltd (30% 200 (W2)) Less Impairment to date Add Discount on acquisition (W3)
(6) PURP % 150 (100) 50
SP Cost GP
CU'000 51 (34) 17
(7) Investments in associates Cost Share of post acquisition change in net assets (30% 200 (W2)) Less Impairment to date
CU'000 590 60 650 (1) 649
Tutorial note In accordance with BFRS 3 the staff costs re acquisition should be included in cost of investment only if directly attributable to the acquisition. As the staff would have been paid irrespective of whether the acquisition was made, the cost is recognised in profit or loss.
© The Institute of Chartered Accountants in England and Wales, March 2009
205
Preparation of full consolidated financial statements
34
Law Ltd Marking guide Marks
CBS PPE Intangibles Investments in associates Inventories Trade and other receivables Cash and cash equivalents Ordinary share capital Preference Retained earnings Minority interest Trade and other payables Dividends payable Other workings Net assets (W2) Presentation Total available Maximum
2½ 2 1 ½ 1 ½ ½ ½ 3 ½ ½ 1 3½ 1 18 17
Consolidated balance sheet as at 31 August 20X1 CU'000 ASSETS Non-current assets Property, plant and equipment (7,500 + 6,000 – 80 (W6)) Intangibles (100 + 50 + 463 (W3)) Investments in associates (W7) Current assets Inventories (1,000 + 500) Trade and other receivables (1,100 + 450 + 20 (W5)) Cash and cash equivalents (200 + 50)
13,420 613 1,248 15,281 1,500 1,570 250
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Preference share capital Retained earnings (W5) Attributable to the equity holders of Law Ltd Minority interest (W4) Equity Current liabilities Trade and other payables (700 + 720) Dividends payable (700 + 180 – 126 (W5)) Total equity and liabilities
206
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000
3,320 18,601
10,000 2,000 2,606 14,606 1,821 16,427 1,420 754
2,174 18,601
ANSWER BANK
WORKINGS (1) Group structure
Law Ltd 40% 70%
Newtyle Ltd
Balgay Ltd
(2) Net assets Balgay Ltd Share capital Revaluation reserve Retained earnings/(losses) Per question FV adjs Goodwill NCA PURP (W6)
Balance sheet date CU'000 CU'000 6,000 500
Acquisition CU'000 CU'000 6,000 500
(280)
600
(70) (80)
(70) –
Newtyle Ltd Share capital Retained earnings
(430) 6,070 1,000 1,820 2,820
(3) Goodwill Balgay Ltd Cost of investment Less Share of net assets acquired (70% 7,030) (W2)) Less Impairment to date Balance c/f (4) Minority interest – Balgay Ltd Share of net assets (30% 6,070 (W2)) (5) Retained earnings Law Ltd Dividends receivable Balgay Ltd (180 70%) Newtyle Ltd (50 40%) Balgay Ltd (70% 960 (W2)) Newtyle Ltd (40% 920 (W2)) Less Goodwill impairment to date (116 + 120)
Post acq CU'000 – –
530 7,030
(960)
1,000 900 1,900
– 920
CU'000 5,500 (4,921) 579 (116) 463
CU'000 1,821
CU'000 3,000 126 20 (672) 368 (236) 2,606
© The Institute of Chartered Accountants in England and Wales, March 2009
207
Preparation of full consolidated financial statements
(6) NCA PURP Carrying amount after transfer (400 4/5) Carrying amount as if transfer never occurred (300 – 600 ) 10
(7) Investments in associates Cost Share of post acquisition change in net assets (40% 920 (W2)) Less Impairment to date
35
CU'000 320 (240) 80
CU'000 1,000 368 1,368 (120) 1,248
Heeley Ltd Marking guide Marks
CBS PPE Intangibles Investment in associates Inventories Trade and other receivables Cash and cash equivalents Share capital Retained earnings Minority interest Borrowings Trade and other payables Taxation Other workings Group structure (W1) Net assets (W2) Presentation Total available Maximum
208
© The Institute of Chartered Accountants in England and Wales, March 2009
1 1½ 2 1½ ½ 1 ½ 3 ½ ½ ½ ½ ½ 3 1 17½ 16
ANSWER BANK
Consolidated balance sheet as at 31 December 20X3 CU'000
ASSETS Non-current assets Property, plant and equipment (5,200 + 4,000 + 1,000) Intangibles (W3) Investments in associates (W9)
CU'000
10,200 1,200 10,480 21,880
Current assets Inventories (2,300 + 1,600 – 150 (W6)) Trade and other receivables (4,800 + 2,400) Cash and cash equivalents (1,100 + 300 + 200 (W7))
3,750 7,200 1,600 12,550 34,430
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Retained earnings (W5) Attributable to the equity holders of Heeley Ltd Minority interest (W4) Equity Non-current liabilities Borrowings Current liabilities Trade and other payables (3,700 + 1,500) Taxation (2,300 + 500)
20,000 2,430 22,430 2,000 24,430 2,000 5,200 2,800 8,000 34,430
Total equity and liabilities
WORKINGS (1) Group structure
Heeley Ltd
60% Sothall Ltd
40% Aughton Ltd
© The Institute of Chartered Accountants in England and Wales, March 2009
209
Preparation of full consolidated financial statements (2) Net assets Balance sheet date CU'000 5,000 (1,000) 1,000 5,000
Sothall Ltd Share capital Retained earnings FV adj – land
Aughton Ltd Share capital Retained earnings Uninvoiced sales
Balance sheet date CU'000 CU'000 6,000 5,000 200 5,200 11,200
Acquisition CU'000 5,000 4,000 1,000 10,000
At acquisition CU'000 CU'000 6,000 500* – 500 6,500
Post acq CU'000 – (5,000) – Post acq CU'000 –
4,700
* The retained earnings of Aughton Ltd at the date of acquisition are the unadjusted retained earnings at 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 Cost of investment (3,000 CU3) Less Share of net assets acquired (60% 10,000 (W2))
CU'000 9,000 (6,000) 3,000 (1,800) 1,200
Impairment to date (300 + 800 + 700) Balance c/f
(4) Minority interest – Sothall Ltd CU'000 2,000
Share of net assets (40% 5,000 (W2))
(5) Retained earnings CU'000 6,500 (150) 500 6,850 (3,000) 1,880 (3,300) 2,430
Heeley Ltd Less PURP (W6) Add Professional fees (W8) Sothall Ltd (60% 5,000 loss (W2)) Aughton Ltd (40% 4,700 (W2)) Less Goodwill impairment to date (1,800 (W3) + 1,500)
(6) PURP SP (1,000 ¾) Cost GP
210
© The Institute of Chartered Accountants in England and Wales, March 2009
% 100 (80) 20
CU'000 750 (600) 150
ANSWER BANK
(7)
Cash in transit The cash in transit needs recording in the consolidated financial statements, and the inter-company balances need eliminating. Dr Amount due to Heeley Ltd Dr Cash Cr Amount due from Sothall Ltd
CU'000 300 200
CU'000 500
(8) Professional fees CU'000 500
Dr Investment in Aughton Ltd Cr Retained earnings
CU'000 500
(9) Investments in associates – Aughton Ltd CU'000 9,600 500 10,100 1,880 11,980 (1,500) 10,480
Cost (2,400 CU4) Professional fees (W8) Share of post acquisition change in net assets (40% 4,700 (W2)) Less Impairment to date
36
Harris Ltd Marking guide Marks
(a)
(b)
CBS PPE Intangibles Investment in associates Inventories Trade receivables Cash and cash equivalents Share capital Retained earnings Minority interest Debentures Trade payables Dividends payable Other workings Net assets (W2) Presentation Total available Maximum Significant influence presumed at 20%, so 15% not usually associated Only if exercised significant influence Via ½ mark each Majority/substantial holding of remaining 85% would not preclude significant influence Total available Maximum
1 1½ 2 1½ ½ ½ ½ 3½ ½ ½ ½ ½ 2½ 1 16½ 1 ½ ½
15 (max 2½)
½ 4½ 4 19
© The Institute of Chartered Accountants in England and Wales, March 2009
211
Preparation of full consolidated financial statements (a)
Consolidated balance sheet at 31 December 20X5 ASSETS Non-current assets Property, plant and equipment (20,200 + 15,100 + 1,000) Intangibles (W3) Investments in associates (W7)
CU'000 36,300 6,775 4,125 47,200
Current assets Inventories (3,500 + 2,700 – 120 (W6)) Trade receivables (2,300 + 1,600) Other receivables (W5) Cash and cash equivalents (200 + 300)
6,080 3,900 200 500 57,880
EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Retained earnings (W5) Attributable to the equity holders of Harris Ltd Minority interest (W4) Equity Non-current liabilities Debentures (6,000 + 1,000) Current liabilities Trade payables (3,200 + 1,200) Dividends payable (25% 200) Total equity and liabilities
35,000 6,885 41,885 4,545 46,430 7,000 4,400 50 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 Auskerry Ltd, 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 influence over 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 not necessarily preclude Auskerry Ltd from being an associate. WORKINGS (1) Group structure
Harris Ltd 75% Scalpay Ltd
212
30% Auskerry Ltd
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK
(2) Net assets – Scalpay Ltd
Share capital Retained earnings PURP (W6) Fair value adj re land Fair value adj contingent liability
Balance sheet date CU'000 15,000 2,300 (120) 1,000 – 18,180
Acquisition
Post acq
CU'000 15,000 1,800 – 1,000 (300) 17,500
CU'000 – 500 (120) – 300 680
(3) Goodwill – Scalpay Ltd CU'000 20,000 (13,125) 6,875 (100) 6,775
Cost of investment Less Share of net assets acquired (75% 17,500 (W2)) Less Impairment to date
(4) Minority interest – Scalpay Ltd CU'000 4,545
Share of net assets (25% 18,180 (W2)) (5) Retained earnings
CU'000 6,000 150 80 200 6,430 510 45 (100) 6,885
Harris Ltd Add Dividends receivable from Scalpay Ltd (75% 200) Professional fees Contingent asset Scalpay Ltd (75% 680 (W2)) Auskerry Ltd (30% 150 (W7)) Less Goodwill impairment to date
(6) PURP % 125 (100) 25
SP (800 ¾) Cost GP
CU'000 600 (480) 120
(7) Investments in associates – Auskerry Ltd Cost of investment Professional fees Share of post acquisition profits (3/12 600 = 150 30%)
CU'000 4,000 80 4,080 45 4,125
© The Institute of Chartered Accountants in England and Wales, March 2009
213
Preparation of full consolidated financial statements
37
Lowland Ltd Marking guide Marks
CIS Revenue Cost of sales Operating expenses Finance cost Investment income Tax Minority interest Presentation CSCE Profit for period Dividends Arising on acquisition Brought forward Presentation Other workings Freehold PURP (W4) Depreciation adjustment (W5) Interest on loan stock (W6) Total available Maximum
1 1 3 1½ 2 ½ 1 1 ½ 1 2½ 3 1 2½ 1 1 23½ 22
Consolidated income statement for the year ended 31 March 20X8 Revenue (W2) Cost of sales (W2) Gross profit Net operating expenses (W2) Finance cost (W2) Investment income (W2) Profit before tax Income tax expense (W2) Profit after tax Attributable to equity holders of Lowland Ltd () Minority interest (W3)
214
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 8,970 (6,240) 2,730 (1,816) (50) 140 1,004 (350) 654 680 (26) 654
ANSWER BANK
Consolidated statement of changes in equity for the year ended 31 March 20X8 (extract) Retained earnings CU'000 680 (200) 480 – 452 932
Profit/(loss) for the period Interim dividends on ordinary shares (50 20%) Arising on acquisition of subsidiary (W9) Balance brought forward (W7 and W8) Balance carried forward
Minority interest CU'000 (26) (10) (36) 613 808 1,385
WORKINGS (1) Group structure
Lowland Ltd 80%
65% 4/12 (30 November 20X7)
Aviemore Ltd
Buchan Ltd
(2) Consolidation schedule
Revenue C of S Op expenses Per question PURP (W4) Depn adj (W5) Impairment of GW (180 + 102) Finance cost (W6) Inv income Per question (230 – (80% 50)) Accrued loan stock interest (W6) Tax PAT/(loss)
Lowland Ltd CU'000 5,000 (3,000) (1,000)
Aviemore Ltd CU'000 3,000 (2,300) (500) (64)
Buchan Ltd 4/12 CU'000 970 (940) (50)
(50)
(70)
190 105
70 (85) (70)
(50) 36
(95)
Consol CU'000 8,970 (6,240)
85
(5)
(282)
(300)
Adj CU'000
(1,816) (50) 140 (350)
(3) Minority interest Aviemore Ltd (20% 36 (W2)) Buchan Ltd (35% (95) (W2))
CU'000 7 (33) (26)
Tutorial note A share of the loss for the year in Buchan Ltd can be allocated to the minority only because overall Buchan Ltd has net assets. If Buchan Ltd were to have net liabilities overall, the minority could only be allocated their share of those net liabilities if they were to have a binding obligation to make an additional investment over the losses, and are able to do so.
© The Institute of Chartered Accountants in England and Wales, March 2009
215
Preparation of full consolidated financial statements (4) PURP on freehold property – Aviemore Ltd (i)
Profit on sale Proceeds Less Carrying amount of land and property at disposal Land Property Cost Less
(ii)
CU'000
Accum depn ( 800 10 yrs) 50
CU'000
CU'000 800
100 800 (160)
Depreciation adjustment Annual depreciation Without transfer (800 50) Actual depreciation with transfer ((800 – 300) 40)
640
(740) 60
16 (12) 4 64
(5) Depreciation adjustment – Buchan Ltd CU'000
(500 350) 4 /12 Fair value adjustment 10 years
5
(6) Interest on loan stock
Loan of CU2.1m with interest @ 10% Annual interest Split Pre-acq 8/12 Post-acq 4/12
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'000 210,000 140,000 70,000
(7) Retained earnings b/f Lowland Ltd Aviemore Ltd (80% (240 – 200)) Buchan Ltd Impairment of goodwill
CU'000 1,500 32 –
(1,080) 452
(8) Minority interest b/f – Aviemore Ltd Share capital Retained earnings b/f Net assets b/f 20%
216
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 3,800 240 4,040 808
ANSWER BANK
(9) Minority interest arising on acquisition of subsidiary – Buchan Ltd Share capital Retained earnings at 1 April 20X7 Loss to date of acquisition (400 – 580)
CU'000
CU'000 1,200
580 (180)
Fair value adjustment (500 – 350) 35%
400 150 1,750 613
Tutorial note It would be possible to accrue two months' loan stock interest for Lowland Ltd (CU35,000) for preacquisition interest, instead of per W6.
38
Vanguard Ltd Marking guide Marks
(a)
(b)
CIS Revenue Cost of sales Operating expenses Finance cost Investment income Share of profits of associates Tax Minority interest Presentation CSCE Profit for period Dividends Brought forward Presentation Other workings PURP (W4) Intangible amortisation (W5) Total available Maximum Cost of acquisition Share of fair value of net assets acquired Accumulated impairment losses Total available Maximum
1 2 1 ½ 1½ 1 ½ ½ 1 ½ ½ 4 ½ 2 1 17½ ½ 1 ½ 2
16
2 18
© The Institute of Chartered Accountants in England and Wales, March 2009
217
Preparation of full consolidated financial statements (a)
Consolidated income statement for the year ended 31 March 20X4 CU 600,052 (428,734) 171,318 (113,417) 57,901 (3,801) 9,636 1,950 65,686 (22,735) 42,951
Revenue (W2) Cost of sales (W2) Gross profit Net operating expenses (W2) Profit from operations Finance cost (W2) Investment income (W2) Share of profit of associates (W6) Profit before tax Income tax expense (W2) Profit for period
36,673 6,278 42,951
Attributable to equity holders of Vanguard Ltd () Minority interest (W3)
Consolidated statement of changes in equity for the year ended 31 March 20X4 (extract) Retained earnings CU 36,673 (9,000) 27,673 667,657 695,330
Profit for the period Interim dividends on ordinary shares Balance brought forward (W7) Balance carried forward (W9) (b) Carrying amount of goodwill re Formidable Ltd Cost of acquisition Less Share of fair value of net assets acquired (75% (485,000 + 15,000)) Less Accumulated impairment losses (12,000 + 4,000) Goodwill in consolidated balance sheet WORKINGS (1) Group structure
Vanguard Ltd 75% Formidable Ltd
218
45% Albion Ltd
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 415,000 (375,000) 40,000 (16,000) 24,000
ANSWER BANK
(2) Consolidation schedule
Revenue C of S Per question PURP (W4) Amortisation of intangibles (W5) Op expenses Per question Impairment loss (current year) Finance cost Investment income (W8) Tax
Vanguard Ltd CU 346,932
Formidable Ltd CU 289,028
Adj CU (35,908)
(261,023) (550)
(202,319)
35,908
(53,811) (4,000) (2,301) 6,394 (15,753)
(55,606)
PAT
(750)
Consol CU 600,052
(428,734) (113,417) (3,801) 9,636 (22,735)
(1,500) 3,242 (6,982) 25,113
(3) Minority interest CU 6,278
Formidable Ltd (25% 25,113 (W2)) (4) PURP
% 125 (100) 25
SP Cost GP
Opening inventories CU 5,600 (4,480) 1,120
Closing inventories CU 8,350 (6,680) 1,670
Movement CU 550
(5) Intangible amortisation Intangible – FV adjustment Amortisation b/f (15,000 3/20) Amortisation in current year (15,000 1/20) Intangible c/f
CU 15,000 (2,250) 12,750 (750) 12,000
(6) Share of profit of associates Share of profit after tax (45% 7,110) Less Current year impairment loss
CU 3,200 (1,250) 1,950
(7) Retained earnings b/f Vanguard Ltd Formidable Ltd (75% (327,530 – 150,000 – 2,250 (W5))) Albion Ltd (45% (25,850 – 3,500)) Less Impairment losses PURP on opening inventories (W4)
CU 539,260 131,460 10,057 (12,000) (1,120) 667,657
(8) Non-group investment income in Vanguard Ltd Total per income statement Less From Formidable Ltd (20,500 75%) From Albion Ltd (5,500 45%)
CU 24,244 (15,375) (2,475) 6,394
© The Institute of Chartered Accountants in England and Wales, March 2009
219
Preparation of full consolidated financial statements (9) Proof of retained earnings c/f (for tutorial purposes only) CU 568,548 134,920 10,782 (17,250) (1,670) 695,330
Vanguard Ltd Formidable Ltd (75% (332,893 – 150,000 – 3,000 (W5))) Albion Ltd (45% (27,460 – 3,500)) Less Goodwill impairment to date (12,000 + 4,000 + 1,250) PURP on closing inventories (W4)
39
Heaton Ltd Marking guide Marks
(a)
(b)
(c)
(a)
Revenue Cost of sales Expenses Finance cost Share of profit of associates Tax Minority interest Presentation Total available Maximum Profit for period Dividends Brought forward Total available Maximum Consolidation as if single entity Represents substance not legal form Substance is that shareholders invest in subsidiaries via parent therefore interested in whole group Total available Maximum
½ 1 4 5½
8
5 1 1 1 3 2 15
Consolidated income statement for the year ended 31 March 20X4 Revenue (W2) Cost of sales (W2) Gross profit Expenses (W2) Profit from operations Finance cost (W2) Share of profits of associates (W5) Profit before tax Income tax expense (W2) Profit for period Attributable to equity holders of Heaton Ltd () Minority interest (W3)
220
1½ 3 ½ ½ 1½ ½ ½ 1 9
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 35,900 (27,510) 8,390 (3,570) 4,820 (270) 115 4,665 (1,880) 2,785 2,539 246 2,785
ANSWER BANK
(b) Statement of changes in equity for the year ended 31 March 20X4 (extract) Retained earnings CU'000 2,539 (1,000) 1,539 5,130 6,669
Profit for the period (part (a)) Dividends (400 20%) Balance brought forward (W6 and W7) Balance carried forward (W9) and (20% 8,430 (W8))
(c)
Minority interest CU'000 246 (80) 166 1,520 1,686
The single entity concept Group financial statements consolidate the results and net assets of group members to present the financial 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 each company is a separate legal entity. However, in substance, the shareholders of the parent company are investing in the subsidiaries through their investment in the parent company, and as such are interested in the financial performance and position of all members of the group.
WORKINGS (1) Group structure
Heaton Ltd 80% 30% (6/12 incl) Sharston Ltd
Ardwick Ltd
(2) Consolidation schedule
Revenue Adjustment re Ardwick Ltd's inventory (2,000 50% 30%) Cost of sales Per question Adjustment re Ardwick Ltd's inventory (300 100/125) Depn adj (W4) Subsid goodwill impairment – current year Expenses Finance cost Tax (3) Minority interest Share of profit after tax (20% 1,230 (W2))
Heaton Ltd CU'000 23,700 (300)
Sharston Ltd CU'000 12,500
(17,580) 240
(9,770)
(300) (2,870) (220) (1,230)
Consol CU'000 35,900
(100) (700) (50) (650) 1,230
(27,510) (3,570) (270) (1,880)
CU'000 246
© The Institute of Chartered Accountants in England and Wales, March 2009
221
Preparation of full consolidated financial statements (4) Depreciation adjustment The fair value adjustment needs to be depreciated. The uplift is CU500,000 so the depreciation is CU100,000 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 associates
CU'000 135 (20) 115
Share of profit after tax (6/12 900 30%) Less Impairment losses
(6) Retained earnings b/f
CU'000 4,250 1,180 (300) 5,130
Heaton Ltd Sharston Ltd (80% (2,200 – 100 (W4) – 625) Impairment of goodwill b/f
(7) Minority interest b/f CU'000 5,000 2,200 400 7,600
Share capital Retained earnings Fair value adjustment (W4) Net assets 20%
1,520
(8) Net assets Balance sheet date CU'000 Sharston Ltd Share capital Retained earnings – per question Fair value adj (W4) Ardwick Ltd Share capital Retained earnings – per question
Acquisition CU'000
Post acq CU'000
5,000 3,130 300 8,430
5,000 625 500 6,125
– 2,505 (200) 2,305
4,000 2,350 6,350
4,000 1,900 5,900
– 450 450
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)). (9) Proof of retained earnings c/f (for tutorial purposes only) Heaton Ltd (5,370 – 300 + 240) Sharston Ltd (80% 2,305 (W8)) Ardwick Ltd (30% 450 (W8)) Impairment of goodwill (300 + 300 + 20)
222
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 5,310 1,844 135 (620) 6,669
ANSWER BANK
40
Jerome Ltd Marking guide Marks
(a)
(b)
(c)
(a)
Revenue Cost of sales Distribution cost Administrative expenses Finance cost Investment income Share of profit of associates Tax Minority interest Presentation Group structure (W1) Total available Maximum Profit for period Dividends Brought forward Presentation Total available Maximum Cost of investment Share of post acquisition change in net assets Impairment to date Total available Maximum
½ ½ ½ 2 1 1½ 1½ ½ ½ 1 ½ 10 ½ ½ 5 ½ 6½
9
6
½ 1 ½ 2 2 17
Consolidated income statement for the year ended 31 December 20X7 Revenue (W2) Cost of sales (W2) Gross profit Distribution costs (W2) Administrative expenses (W2) Profit from operations Finance cost (W2) Investment income (W2) Share of profit of associates (W5) Profit before tax Income tax expense (W2) Profit for period Attributable to equity holders of Jerome Ltd () Minority interest (W3)
CU'000 5,768 (3,215) 2,553 (305) (337) 1,911 (55) 85 21 1,962 (490) 1,472 1,372 100 1,472
© The Institute of Chartered Accountants in England and Wales, March 2009
223
Preparation of full consolidated financial statements (b) Consolidated statement of changes in equity for the year ended 31 December 20X7 (extract) Retained earnings CU'000 1,372 (200) 1,172 14,701 15,873
Profit for the period (from (a)) Final dividends on ordinary shares Balance brought forward (W8) Balance carried forward (W10) (c)
Carrying amount of investment in Harris Ltd in consolidated balance sheet at 31 December 20X7 CU'000 4,000 52 4,052 (31) 4,021
Cost of investment Share of post acquisition change in net assets (W5) Less Impairment to date
WORKINGS (1) Group structure
Jerome plc
400 400 = 80% = 80% 500 500 George Ltd
40 6 = 40% on 1 July 20X7 /12 incl 100 Harris Ltd
(2) Consolidation schedule
Revenue C of S Distribution costs Administrative expenses Per question Depn adj on NCA (W4) Finance cost Investment income (W6) Tax PAT
Jerome Ltd CU'000 3,268 (1,840) (115)
George Ltd CU'000 2,500 (1,375) (190)
(93)
(245) 1 (15)
(50) 95 (315)
(175) 501
Adj CU'000
10 (W7) (10)(W7)
Consol CU'000 5,768 (3,215) (305) (337) (55) 85 (490)
(3) Minority interest George Ltd (501 (W2) 20%)
224
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 100
ANSWER BANK
(4) Depreciation adjustment to non-current asset transferred Depreciation without transfer (30 10) Depreciation with transfer (28 7) Excess depreciation in year to be eliminated
CU'000
3
4 1
Carrying amount at 31 December 20X6 without transfer (30 6/10) Carrying amount at 31 December 20X6 with transfer (28 6/7)
18 24 (6)
Carrying amount at 31 December 20X7 without transfer (30 5/10) Carrying amount at 31 December 20X7 with transfer (28 5/7)
15 20 (5)
(5) Share of profits of associates – Harris Ltd Share of profit after tax (260 x /12 40%) Less Impairment losses 6
CU'000 52 (31) 21
(6) Investment income – Jerome Ltd Per question Less Dividends received from George Ltd (300 80%)
CU'000 335 (240) 95
(7) Intra group investment income/finance cost Loan to George Ltd (100 10%)
CU'000 10
(8) Retained earnings b/f Jerome Ltd George Ltd (80% (12,520 – 775 (W9) – 6 (W4)))
CU'000 5,310 9,391 14,701
(9) Retained earnings on acquisition – George Ltd CU'000 1,820 (400) (800) 620
Cost of investment Less Share capital (80% 500) Goodwill 80% of retained earnings 100
/80
775
(10) Proof of retained earnings c/f (for tutorial purposes only) Jerome Ltd George Ltd (80% (12,720 – 775 (W9) – 5 (W4))) Harris Ltd (W5)
CU'000 6,300 9,552 21 15,873
© The Institute of Chartered Accountants in England and Wales, March 2009
225
Preparation of full consolidated financial statements
41
Hardmead Ltd Marking guide Marks
(a)
(b)
(c)
(a)
Revenue Cost of sales Operating expenses Tax Loss from discontinued operations Minority interest Profit split Presentation Total available Maximum Profit for period Dividends Eliminated on disposal Brought forward Presentation Total available Maximum Mark each point per answer Total available Maximum
½ 1 1 5 ½ 8
14
7 ½ 2½ 2 23
Consolidated income statement for the year ended 30 September 20X5 Continuing operations Revenue (W2) Cost of sales (W2) Gross profit Operating expenses (W2) Profit before tax Income tax expense (W2) Profit for period from continuing operations Discontinued operations Loss for the period from discontinued operations (160 (W4) – 446 (W6)) Profit for the period Attributable to Equity holders of Hardmead Ltd () Minority interest (W3)
226
1 5 1 ½ 5 1 ½ 1 15
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 17,360 (15,640) 1,720 (850) 870 (460) 410 (286) 124 50 74 124
ANSWER BANK
(b) Consolidated statement of changes in equity for the year ended 30 September 20X5 (extracts) Retained earnings CU'000 50 (600) – (550) 2,090 1,540
Profit for the period Dividends on ordinary shares (100 20%) Eliminated on disposal of subsidiary (W12) Balance brought forward (W9 & W11) Balance carried forward (W10 & W13) (c)
Minority interest CU'000 74 (20) (2,064) (2,010) 3,490 1,480
Underlying principles re disposal
The concept of control is an example of the substance over form concept. The subsidiary is consolidated 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 is relinquished.
40% of the results for the first six months are acknowledged as belonging to the minority interest which 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 even though it is not recognised in Stratford Ltd's own balance sheet.
WORKINGS (1) Group structure
Hardmead Ltd 80% Stony Ltd
60% Disposed of 31 March 20X5 (6/12 incl) Stratford Ltd
(2) Consolidation schedule for continuing operations
Revenue Cost of sales Per question Inventory NRV adj (W8) PURP (W7) Fair value adj (200/4) Operating expenses Per question Impairment loss Tax PAT
Hardmead Ltd CU'000 10,040 (8,760) (90)
Stony Ltd CU'000 7,500 (6,900)
Adjs CU'000 (180) 180
Total CU'000 17,360 (15,640)
(20) (50) (400) (30) (400)
(420)
(850)
(60) 50
(460)
(3) Minority interest Stony Ltd (20% 50 (W2)) Stratford Ltd (40% 160 (W4))
CU'000 10 64 74
© The Institute of Chartered Accountants in England and Wales, March 2009
227
Preparation of full consolidated financial statements (4) Profit for Stratford Ltd for year to disposal CU'000 160
PAT = 320 6/12 = (5) Goodwill – Stratford Ltd CU'000 Cost of investment Less Share of fair value of net assets acquired Share capital Retained earnings
CU'000 4,000
3,000 3,000 6,000 60%
Goodwill Impairment brought forward Goodwill at date of disposal
(3,600) 400 (50) 350
(6) Group loss on disposal of Stratford Ltd CU'000 Sales proceeds Less Share of net assets at disposal Share capital Retained earnings (2,000 + 160 (W4))
CU'000 3,000
3,000 2,160 5,160 60%
Less Carrying amount of goodwill at disposal (W5) Loss on disposal
(3,096) (96) (350) (446)
(7) PURP SP Cost GP
% 150 (100) 50
(8) Inventory NRV adjustment Contract (2 70) Remainder ((5 – 2) (120 – 30)) Current carrying amount (5 100) Provision needed (9) Consolidated retained earnings brought forward Hardmead Ltd – per question Stony Ltd (80% (6,400 – 6,000 + 200 – 150)) Stratford Ltd (60% (2,000 – 3,000)) Impairment (120 + 50)
CU'000 (180 1/3) 60 (40) 20 CU'000 140 270 410 500 90 CU'000 2,500 360 (600) (170) 2,090
(10) Consolidated retained earnings carried forward (for tutorial purposes only) Hardmead Ltd – per question NRV adjustment (W8) Loss on investment (4,000 – 3,000) Stony Ltd (80% (6,420 – 6,000 + 200 – 200 – 20)) Impairment (120 + 30)
228
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 2,460 (90) (1,000) 320 (150) 1,540
ANSWER BANK
(11) Minority interest brought forward CU'000 1,490 2,000 3,490
Stony Ltd ((1,000 + 6,400 + 200 – 150) 20%) Stratford Ltd ((3,000 + 2,000) 40%) (12) Minority interest eliminated on disposal of Stratford Ltd
CU'000 2,000 64 2,064
Brought forward (W11) MI in profit of year (W3) (13) Minority interest carried forward (for tutorial purposes only) – Stony Ltd
CU'000 1,490 10 (20) 1,480
Brought forward (W11) In year (W3) Less Dividends to MI in year
42
Tain Ltd Marking guide Marks
CIS Revenue Cost of sales Operating expenses Share of profits of associate Tax Profit from discontinued operations Minority interest Profit split Presentation Group structure CSCE Profit for period Dividends Brought forward Presentation Total available Maximum
1 2 ½ 1½ ½ 5 1 ½ 1½ ½ ½ ½ 3½ ½ 19
18
© The Institute of Chartered Accountants in England and Wales, March 2009
229
Preparation of full consolidated financial statements Consolidated income statement for the year ended 31 October 20X9 CU'000
Continuing operations Revenue (W2) Cost of sales (W2) Gross profit Operating expenses (W2) Share of profit of associates (W9) Profit before tax Tax (W2) Profit for the period from continuing operations Discontinued operations Profit for the period from discontinued operations (620 (W4) + 526 (W6)) Profit for the period Attributable to equity holders of Tain Ltd (balancing figure) Minority interest (W3)
14,800 (10,470) 4,330 (2,400) 71 2,001 (600) 1,401 1,146 2,547 2,196 351 2,547
Consolidated statement of changes in equity for the year ended 31 October 20X9 (extract) Ordinary share capital CU'000 – – – 5,000 5,000
Profit for the period Dividends Balance brought forward (W8) Balance carried forward WORKINGS (1) Group structure
Tain Ltd
55% 75%
Banchory Ltd Disposed of 31 October 20X9 ( 1212 incl)
230
Domoch Ltd
30%
Nairn Ltd Acq 1 May 20X9 ( 612 incl)
© The Institute of Chartered Accountants in England and Wales, March 2009
Retained earnings CU'000 2,196 (700) 1,496 2,488 3,984
Total CU'000 2,196 (700) 1,496 7,488 8,984
ANSWER BANK
(2) Consolidation schedule for continuing operations Tain Ltd CU'000 10,600
Revenue Cost of sales Per Q PURP (W7) Operating expenses Tax PAT
(7,400) (1,700) (460)
Dornoch Ltd CU'000 4,700
Adj CU'000 (500)
(3,520) (50) (700) (140) 290
500
Consol CU'000 14,800 (10,470) (2,400) (600)
(3) Minority interest CU'000 72 279 351
Dornoch Ltd (25% 290 (W2)) Banchory Ltd (45% 620 (W4)) (4) Profit of Banchory Ltd for year to disposal
CU'000 620
PAT = 620 12/12 (5) Goodwill Banchory Ltd Cost of investment Less Share of fair value of net assets acquired Share capital Retained earnings Revaluation reserve
CU'000
CU'000 2,500
2,000 1,600 300 3,900 55%
(2,145) 355 (142) 213
Goodwill Impairment brought forward Goodwill at date of disposal (6) Group profit on disposal of Banchory Ltd Sales proceeds Less Share of net assets at disposal Share capital Revaluation reserve Retained earnings (2,000 + 620)
CU'000
CU'000 3,500
2,000 400 2,620 5,020 55%
(2,761) 739 (213) 526
Less Carrying amount of goodwill at disposal (W5) Profit on disposal (7) PURP
% 1331/3 (100) 331/3
SP Cost GP
CU'000 200 (150) 50
(8) Retained earnings b/f Tain Ltd Banchory Ltd ((2,000 – 1,600) 55%) Dornoch Ltd ((152 – 80) 75%) Less Goodwill impairment to date (Banchory Ltd)
CU'000 2,356 220 54 (142) 2,488
© The Institute of Chartered Accountants in England and Wales, March 2009
231
Preparation of full consolidated financial statements (9) Share of profits of associates Share of profit after tax (30% 600 6/12) Less Impairment loss
43
CU'000 90 (19) 71
Glencoe Ltd Marking guide Marks
CIS Revenue Cost of sales Operating expenses Profit on sale of interest in subsidiary Tax Profit from discontinued operations Minority interest Presentation Group structure CBS PPE Current assets Share capital Retained earnings Minority interest Current liabilities Presentation Total available Maximum
232
© The Institute of Chartered Accountants in England and Wales, March 2009
½ ½ 1 2½ ½ 4½ 1 1 ½ ½ ½ ½ 3 ½ ½ 1 18½ 17
ANSWER BANK
Consolidated income statement for the year ended 31 August 20Y0 Continuing operations Revenue (W2) Cost of sales (W2) Gross profit Operating expenses (W2) Operating profit Profit on sale of interest in subsidiary (W9) Profit before tax Income tax expense (W2) Profit for the period from continuing operations
CU'000 61,000 (39,000) 22,000 (12,200) 9,800 1,220 11,020 (3,100) 7,920
Discontinued operations Profit for the period from discontinued operations (2,625 (W3) + 1,516 (W4)) Profit for the period
4,141 12,061 11,236 825 12,061
Attributable to equity holders of Glencoe Ltd () Minority interest (W6) Balance sheet as at 31 August 20Y0 ASSETS Non-current assets Property, plant and equipment (29,500 + 3,500) Current assets (36,000 + 5,900) Total assets
CU'000 33,000 41,900 74,900
EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Retained earnings (W7) Attributable to the equity holders of Glencoe Ltd Minority interest (W8) Equity Current liabilities (10,000 + 4,000 + 200) Total equity and liabilities
35,000 23,620 58,620 2,080 60,700 14,200 74,900
WORKINGS (1) Group structure
Glencoe Ltd (15% sold 31 August 20Y0) 75% 60%
Rannoch Ltd
80% Sold 1 June 20Y0 (9/12 incl)
Leven Ltd
© The Institute of Chartered Accountants in England and Wales, March 2009
233
Preparation of full consolidated financial statements (2) Consolidation schedule for continuing operations
Revenue C of S Op expenses – per question – omitted invoices Tax PAT
Glencoe Ltd CU'000 50,000 (32,000) (10,000) (2,500)
Rannoch Ltd CU'000 11,000 (7,000) (2,000) (200) (600) 1,200
Consol CU'000 61,000 (39,000) (12,200) (3,100)
(3) Profit of Leven Ltd for year to disposal CU'000 2,625
PAT= 3,500 9/12 (4) Group profit on disposal of Leven Ltd CU'000 Sales proceeds Less Share of net assets at date of disposal At 1 September 20X9 (16,000 – 3,500) Add Profit to 1 June 20Y0 (W3)
12,500 2,625 15,125 80%
Less Carrying amount of goodwill at disposal (W5) Profit on disposal
CU'000 14,000
(12,100) 1,900 (384) 1,516
(5) Goodwill on acquisition Rannoch Ltd Cost Less Net assets acquired (4,000 75%)
CU'000 3,000 (3,000) –
Leven Ltd Cost of investment Less Share of fair value of net assets acquired (11,700 80%)
CU'000 10,000 (9,360) 640 (256) 384
Impairment brought forward
(6) Minority interest – income statement Leven Ltd (20% 2,625 (W3)) Rannoch Ltd (25% 1,200 (W2))
CU'000 525 300 825
(7) Consolidated retained earnings Glencoe Ltd Profits on disposal omitted in error ((14,000 – 10,000) + (2,000 – (15/75 3,000))) Rannoch Ltd (60% (1,400 – 200))
234
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 17,500 5,400 720 23,620
ANSWER BANK
(8) Minority interest – balance sheet CU'000 2,080
Rannoch Ltd ((5,400 – 200) 40%)
(9) Group profit on partial disposal of Rannoch Ltd CU'000 2,000 (780) – 1,220
Sales proceeds Less Share of net assets at date of disposal disposed of ((5,400 – 200) 15%) Less Carrying amount of goodwill at disposal (W5) Profit on disposal
44
Herdings Ltd Marking guide Marks
(a)
(b)
(c)
Sales proceeds Share of net assets disposed of Goodwill disposed of Total available Maximum CBS PPE Intangibles Investments in associates Inventories Trade receivables Cash and cash equivalents Ordinary share capital Retained earnings Minority interest Bank debt Trade payables Taxation Provisions Dividends payable Other workings Group structure (W1) Net assets (W2) Presentation Total available Maximum Explanation of significant influence Impact of third party holding 60% Conclusion Total available Maximum
½ 2 ½ 3
3
1½ 2 1 1½ ½ ½ ½ 2½ ½ ½ ½ ½ ½ 1 ½ 4 1 19 1½ 1 ½ 3
18
2 23
© The Institute of Chartered Accountants in England and Wales, March 2009
235
Preparation of full consolidated financial statements (a)
Group profit on disposal of shares in Sandygate Ltd Sales proceeds Less Share of net assets disposed of at date of disposal Net assets at 31 March 20X3 Fair value adjustment (2,000 8/10) Add back Dividend Less Profit for 6 months (3,000 6/12)
Less
CU'000 18,200 1,600 200 (1,500) 18,500 10%
Carrying amount of goodwill on disposal relating to shares disposed of (W3)
CU'000 3,500
(1,850) 1,650 (600) 1,050
(b) Consolidated balance sheet as at 31 March 20X3 CU'000 ASSETS Non-current assets Property, plant and equipment (13,100 + 16,400 + 1,600 (W7)) Intangibles (W3) Investments in associates (W8) Current assets Inventories (8,100 + 5,230 – 150 (W6)) Trade receivables (6,850 + 4,950) Cash and cash equivalents (3,750 + 150)
31,100 4,200 6,600 41,900 13,180 11,800 3,900 28,880 70,780
Total assets EQUITY AND LIABILITIES Capital and reserves Ordinary share capital Retained earnings (W5) Attributable to equity holders of Herdings Ltd Minority interest (W4) Equity Non-current liabilities 7% secured bank debt (26,000 + 2,000) Current liabilities Trade payables (5,560 + 5,450) Taxation (1,700 + 880) Provisions Dividends payable (300 + (200 – 140)(W5)) Total equity and liabilities (c)
CU'000
12,000 10,865 22,865 5,865 28,730 28,000 11,010 2,580 100 360
14,050 70,780
Classification of investment in Abbeydale Ltd The key issue in defining an associate in BAS 28 Investments in Associates is whether an investor has significant influence over the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over those policies. If the investor holds 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 and operating policies of Abbeydale Ltd. If one party has control and can govern those policies, it is reasonable to question whether another investor could ever have significant influence. However, BAS 28 states that this does not necessarily preclude another investor from having significant influence. The 20% test is not definitive, and the investor should consider other evidence such as board representation.
236
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK
WORKINGS (1) Group structure
Herdings Ltd 8,000 80% 10,000 7,000 70% 10,000
30% =
Sandygate Ltd
1,500 on 1 October 20X2 (6/12 incl) 5,000
Abbeydale Ltd
(2) Net assets Balance sheet date CU'000 CU'000 10,000
Sandygate Ltd Share capital Retained earnings Per question PURP (W6) Depreciation adjustment (W7)
Acquisition CU'000 10,000
Post acq CU'000 –
8,200 (150) (400)
Fair value adjustments PPE (W7) Contingent liability
7,650
5,000
2,650
2,000 (100) 19,550
2,000 (100) 16,900
– – 2,650
Abbeydale Ltd Share capital Retained earnings
5,000 5,000 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 Cost of original investment (8,000 CU2.50) Less Share of fair value of net assets acquired (80% 16,900 (W2)) Impairment to 31 March 20X2 Balance at disposal Less Disposed of (1/8) Balance c/f
CU'000 20,000 (13,520) 6,480 (1,680) 4,800 (600) 4,200
(4) Minority interest – Sandygate Ltd Share of net assets (30% 19,550 (W2))
CU'000 5,865
(5) Retained earnings Herdings Ltd Add Dividend not recorded (70% 200) Sandygate Ltd (70% 2,650 (W2)) Abbeydale Ltd (30% 2,000 (W2)) Less Goodwill impairment to date on shares retained (1,680 7/8)
CU'000 9,740 140 9,880 1,855 600 (1,470) 10,865
© The Institute of Chartered Accountants in England and Wales, March 2009
237
Preparation of full consolidated financial statements (6) PURP SP (3,300 ½) Cost GP
% 110 (100) 10
CU'000 1,650 (1,500) 150
(7) Fair value adjustment – PPE At acquisition the PPE needs revaluing upwards by CU2,000,000. The additional depreciation to date will be for two years. CU'000 400 1,600
Accumulated depreciation = 2/10 2,000,000 Net adjustment to PPE (8)
Investments in associates CU'000 6,000 600 6,600
Cost Share of post acquisition change in net assets (30% 2,000 (W2))
45
Camden Ltd Marking guide Marks
(a)
(b)
(c)
238
CIS Revenue Cost of sales and expenses Profit on sale of interest in subsidiary Share of profits of associate Tax Minority interest Split of profit Presentation Group structure CSCE Profit for period Dividends Added on acquisition Eliminated on disposal Brought forward Presentation Total available Maximum Cost Share of post-acquisition change in net assets Total available Maximum Consolidation of Kentish Ltd Dividends received by Camden Ltd Intra group trading Unrealised profit in inventories Total available Maximum
© The Institute of Chartered Accountants in England and Wales, March 2009
1½ 3½ 4½ 1½ 1 1 ½ 1 ½ ½ 1½ 1½ 2 1½ 1 23 ½ 1½ 2
22
2
1½ 2½ 1½ 2 7½ 6 30
ANSWER BANK
(a)
Consolidated income statement for the year ended 30 September 20X5 CU'000 240,955 (215,668) 229 560 26,076 (9,030) 17,046
Revenue (W2) Cost of sales and expenses (W2) Profit on sale of interest in subsidiary (W10) Share of profits of associate (W7) Profit before tax Income tax expense (W2) Profit for the period
14,413 2,633 17,046
Attributable to equity holders of Camden Ltd () Minority interest (W4)
Consolidated statement of changes in equity for the year ended 30 September 20X5 (extracts)
Net profit for the period Interim dividends on ordinary shares (W5) Added on acquisition of subsidiary (W6) Eliminated on disposal of subsidiary (W8) Balance brought forward (11,820 + (60% (8,210 – 450))) (W8) Balance carried forward
Retained earnings CU'000 14,413 (2,820) – – 11,593 16,476 28,069
Minority interest CU'000 2,633 (1,078) 2,080 (5,141) (1,506) 3,884 2,378
(b) Carrying amount of Tufnell Ltd in consolidated balance sheet as at 30 September 20X5 Cost (3,000 30/60) Share of post acquisition change in net assets (30% (8,210 + 7,470 – 2,460 – 450))
(c)
CU'000 1,500 3,831 5,331
Explanation of accounting treatment (i)
(ii)
Consolidation of Kentish Ltd
As Camden Ltd acquired 72% of Kentish Ltd on 1 March 20X5, it is on this date that Camden Ltd gains control, and from this date that 100% of Kentish Ltd's costs and revenues should be taken into the consolidated income statement, as Camden Ltd controls the whole of Kentish Ltd.
Therefore the consolidated income statement includes seven months of the results of Kentish Ltd.
28% of Kentish Ltd is later appropriated to the minority interest because this is the proportion not owned by Camden Ltd.
Dividends received by Camden Ltd
The dividend income from subsidiaries in Camden Ltd's own income statement should be ignored 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 and therefore controls the entire results made, not just those distributed as dividends.
As the results should be brought in, the intra-group dividends received should be eliminated, to avoid double counting.
© The Institute of Chartered Accountants in England and Wales, March 2009
239
Preparation of full consolidated financial statements (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 the sale 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 outside the 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 (within cost of sales) are reduced to their cost to the group.
WORKINGS (1) Group structure
Camden Ltd (Acq 1 March 20X5 7/12 incl) 72%
Kentish Ltd
60% 30% (on 30 June 20X5 9/12 incl)
Tufnell Ltd
(2) Consolidation schedule Camden Ltd
Revenue C of S and expenses Per Q Divs received from Kentish Ltd (72% 336) Tufnell Ltd (60% 2,460) PURP (W3) Tax PAT
CU'000
Kentish Ltd 7 /12 CU'000
Tufnell Ltd 9 /12 CU'000
151,360
18,900
71,280
(134,904)
(16,771)
(62,812)
(729) 1,400
(2,865) 5,603
(242) (1,476) (48) (5,436)
Adj
Consol
CU'000 (240) (345)
CU'000 240,955
240 345
(215,668) (9,030)
(3) PURP SP Cost GP
240
© The Institute of Chartered Accountants in England and Wales, March 2009
% 100 (80) 20
CU'000 240 (192) 48
ANSWER BANK
(4) Minority interest in profit for the year CU'000 392 2,241 2,633
Kentish Ltd (28% 1,400 (W2)) Tufnell Ltd (40% 5,603 (W2)) Cost
(5) Dividends to minority CU'000 94 984 1,078
Kentish Ltd (28% 336) Tufnell Ltd (40% 2,460)
(6) Minority interest added on acquisition CU'000 2,080
Kentish Ltd (28% (1,000 + 5,430 + (5/12 2,400))
(7) Share of profits of associate CU'000 560
Share of profit after tax (30% 7,470 3/12) (8) Minority interest eliminated on disposal
CU'000 3,884 2,241 (984) 5,141
MI brought forward (40% (8,210 + 1,500)) MI for year (W4) Less Dividend paid to MI (W5)
(9) Minority interest carried forward (for tutorial purposes only) CU'000 2,378
Kentish Ltd (28% (1,000 + 5,430 + 2,400 – 336)
(10) Group profit on part disposal of Tufnell Ltd CU'000 Sales proceeds Less Share of net assets disposed of at date of disposal Net assets at 1 October 20X4 (1,500 + 8,210) Profit to 30 June 20X5 (7,470 9/12) Dividends paid Less Carrying amount of goodwill on disposal relating to shares Cost Share of fair value of net assets acquired (60% (1,500 + 450)) Original goodwill Now disposed of 30/60
9,710 5,603 (2,460) 12,853 30%
CU'000 5,000
(3,856) 1,144
3,000 (1,170) 1,830 (915) 229
© The Institute of Chartered Accountants in England and Wales, March 2009
241
Preparation of full consolidated financial statements
46
Gallant Ltd Marking guide Marks
Cash flow statement Interest paid Income tax paid Purchase of PPE Proceeds from sales of PPE Dividends from associates Proceeds from issue of ordinary shares Payment of finance lease liabilities Dividends paid to MI Dividends paid Opening and closing cash Presentation Reconciliation Each item ½ mark (max 4½) Total available Maximum
½ 1 3 ½ 1½ 2 ½ 1½ 1½ ½ 1 4½ 18 17
Consolidated cash flow statement for the year ended 31 December 20X7 CU Cash flows from operating activities Cash generated from operations (see Note) Interest paid Income tax paid (W2) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (W5) Proceeds from sale of property, plant and equipment Dividends received from associates (W1) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of ordinary share capital (W8) Payment of finance lease liabilities (100,000 – 75,000) Dividends paid to minority interests (W4) Dividends paid (W7) Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
242
© The Institute of Chartered Accountants in England and Wales, March 2009
CU
2,464,800 (75,000) (370,000) 2,019,800 (2,360,700) 800,000 228,700 (1,332,000) 850,000 (25,000) (949,100) (553,200) (677,300) 10,500 20,200 30,700
ANSWER BANK
Note: Reconciliation of profit before tax to cash generated from operations Profit before tax Share of profits from associates Finance charge Depreciation charge Impairment losses (540,500 – 420,000) Profit on disposal of property, plant and equipment (800,000 – 760,500) Decrease in inventories (865,100 – 670,500) Increase in trade and other receivables (269,000 – 244,500) Increase in trade and other payables (768,500 – 639,500) Cash generated from operations
CU 1,384,700 (345,600) 75,000 970,600 120,500 (39,500) 194,600 (24,500) 129,000 2,464,800
WORKINGS (1)
INVESTMENTS IN ASSOCIATES B/d Share of profits (IS)
(2)
CU 1,678,900 345,600 2,024,500
Cash () C/d
CU 228,700 1,795,800 2,024,500
INCOME TAX Cash () C/d
(3)
CU 370,000 410,000 780,000
B/d IS
CU 360,000 420,000 780,000
RETAINED EARNINGS Dividends C/d
(4)
CU 653,200 1,357,800 2,011,000
B/d IS
CU 1,393,100 617,900 2,011,000
MINORITY INTEREST Cash () C/d
(5)
CU 949,100 2,345,900 3,295,000
B/d IS
CU 2,948,200 346,800 3,295,000
PPE B/d Leased assets (376,000 + 124,000 + 25,000) Additions () Revaluation (W6)
CU 7,078,400 525,000 2,360,700 163,200 10,127,300
Disposals IS – Depn charges C/d
CU 760,500 970,600 8,396,200 10,127,300
© The Institute of Chartered Accountants in England and Wales, March 2009
243
Preparation of full consolidated financial statements (6)
REVALUATION RESERVE CU C/d
(7)
400,000 400,000
CU 236,800 163,200 400,000
B/d PPE ()
DIVIDENDS (GALLANT LTD) Cash () C/d
(8)
CU 553,200 500,000 1,053,200
CU 400,000 653,200 1,053,200
B/d SCE (W3)
SHARE CAPITAL AND PREMIUM CU
CU 4,450,000 800,000 850,000 6,100,000
B/d (2,400,000 + 2,050,000) Bonus issue C/d (4,000,000 + 1,300,000)
47
800,000 5,300,000 6,100,000
Bonus Issue (2,400,000 3) Cash ()
Slick Ltd Marking guide Marks
Cash flow statement Interest paid Income tax paid Acquisition of subsidiary Purchase of PPE Proceeds from sales of PPE Proceeds from issue of ordinary shares Dividends paid to MI Dividends paid Opening and closing cash Presentation Reconciliation Inventories Trade and other receivables Trade and other payables Each other item ½ Note re acquisition of sub Each item other than totals ½ mark (max 5) Total available Maximum
244
© The Institute of Chartered Accountants in England and Wales, March 2009
½ 1½ ½ 2½ ½ 1½ 2½ 1 ½ 1 1 1 1 2½ 5 22½ 20
ANSWER BANK
Consolidated cash flow statement for the year ended 30 June 20X7 Cash flows from operating activities Cash generated from operations (Note (1)) Interest paid Income tax paid (W4) Net cash from operating activities Cash flows from investing activities Acquisition of subsidiary Kay Ltd net of cash acquired (Note (2)) Purchase of property, plant and equipment (W1) Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of ordinary share capital (W2) Dividends paid to minority interests (W3) Dividends paid (W5) Net cash from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
CU'000
CU'000
413 (25) (79) 309 (89) (722) 420 (391) 275 (207) (11)
57 (25) 35 10
Notes to the cash flow statement (1) Reconciliation of loss before tax to cash generated from operations Loss before tax Finance charge Depreciation charge Amortisation charge (130 – 115) Loss on disposal of property, plant and equipment (500 – 420) Decrease in inventories (670 – 590 – 130) Decrease in trade and other receivables (520 – 610 – 200) Decrease in trade and other payables (521 – 489 – 100) Cash generated from operations
CU'000 (636) 25 657 15 80 50 290 (68) 413
(2) Acquisition of subsidiary During the year the group acquired subsidiary Kay Ltd. The fair value of the assets acquired and liabilities assumed were as follows. Property, plant and equipment (500 + 100) Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Taxation Minority interest (W3) Goodwill Total purchase price Less Cash and cash equivalents of Kay Ltd Non-cash consideration – shares issued (500 CU1.25) Cash flow on acquisition net of cash acquired
CU'000 600 130 200 50 (100) (50) (166) 664 100 764 (50) (625) 89
© The Institute of Chartered Accountants in England and Wales, March 2009
245
Preparation of full consolidated financial statements WORKINGS (1)
PPE B/d On acq of sub (500 + 100) Additions ()
(2)
CU'000 1,980 600 722 3,302
CU'000 657 500 2,145 3,302
SHARE CAPITAL AND PREMIUM CU'000 C/d (1,500 + 700)
(3)
2,200 2,200
B/d (800 + 500) Acq of sub Cash ()
CU'000 1,300 625 275 2,200
MINORITY INTEREST CU'000 Dividends to MI () C/d
(4)
207 341 548
B/d Acq of sub ((880 + 100 – 150) 20%) IS
CU'000 352 166 30 548
INCOME TAX CU'000 Cash () C/d
(5)
79 131 210
B/d IS Acq of sub
CU'000 140 20 50 210
RETAINED EARNINGS Dividends () IS C/d
246
IS Depn Disposals C/d
CU'000 11 686 367 1,064
B/d
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 1,064 1,064
ANSWER BANK
48
Senorita Ltd Marking guide Marks
Cash flow statement Income tax paid Disposal of subsidiary Purchase of PPE Proceeds from sales of PPE Proceeds from issue of ordinary shares Dividends paid to MI Dividends paid Opening cash Closing cash Presentation Reconciliation Profit before tax Depreciation charge Profit on disposal Inventories Trade and other payables Note re disposal of sub Each item other than totals ½ mark (max 4½) Total available Maximum
1½ ½ ½ ½ 1 2 1 ½ ½ 1 1 ½ 2½ 1 1 4½ 19½ 18
Consolidated cash flow statement for the year ended 31 December 20X5 CU'000 Cash flows from operating activities Cash generated from operations (Note (1)) Income tax paid (W1) Net cash from operating activities Cash flows from investing activities Disposal of subsidiary Amigo Ltd net of cash disposed of (Note (2)) Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of ordinary share capital ((1,000 + 600) – (800 + 300)) Dividends paid to minority interests (W3) Dividends paid (W2) Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
CU'000
442 (108) 334 488 (1,350) 600 (262) 500 (367) (125) 8 80 (35) 45
© The Institute of Chartered Accountants in England and Wales, March 2009
247
Preparation of full consolidated financial statements Notes to the cash flow statement (1) Reconciliation of profit before tax to cash generated from operations Profit before tax (950 + 45) Depreciation charge Profit on disposal of property, plant and equipment (600 – 231 (W4)) Increase in inventories (570 – 490 + 120) Increase in trade and other receivables (420 – 310 + 145) Increase in trade and other payables (221 – 339 + 132) Cash generated from operations
CU'000 995 257 (369) (200) (255) 14 442
(2) Disposal of subsidiary During the year the group disposed of subsidiary Amigo Ltd. The book value of the assets and liabilities disposed of were as follows. CU'000 450 120 145 12 (132) (15) (145) 435 65 500 (12) 488
Property, plant and equipment Inventories Trade and other receivables Cash and cash equivalents Trade and other payables Taxation Minority interest (580 25%) Profit on disposal Total sales proceeds Less Cash and cash equivalents of Amigo Ltd Cash flow on disposal net of cash disposed of WORKINGS (1)
INCOME TAX On disposal Cash () C/d
(2)
CU'000 15 108 167 290
CU'000 150 140 290
RETAINED EARNINGS Dividends paid () C/d
(3)
CU'000 125 1,664 1,789
B/d IS
CU'000 1,019 770 1,789
MINORITY INTEREST Dividends paid () Disposal (Note (2)) C/d (740 + 100)
CU'000 367 145 840 1,352
(4)
B/d (1,052 + 150) IS
CU'000 1,202 150 1,352
PPE B/d Additions
CU'000 3,045 1,350 4,395
248
B/d IS (130 + 10)
Disposal of sub Disposals () IS – Depn charge C/d
© The Institute of Chartered Accountants in England and Wales, March 2009
CU'000 450 231 257 3,457 4,395
ANSWER BANK
Single entity financial statements: objective test questions
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 an accrual basis (accrual basis of accounting) and that the business is expected to continue in operation for the foreseeable future (going concern).
3
C
The four principal qualitative characteristics are relevance, reliability, comparability and understandability.
4
D
The income statement measures financial performance, the balance sheet measures financial position 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 which economic benefits are expected to flow to the entity'. An item might meet the definition of an asset (3) but can only be recognised if both (1) and (3) are true. Rights to future economic benefits do not need to be legally enforceable (a lessee does not have legal ownership of a finance 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 is expected to result in an outflow from the entity of resources embodying economic benefits'. The amount of the liability need not be certain (e.g. a provision). The obligation need not be legally enforceable (it may be a constructive obligation). Settlement of the obligation must involve an outflow of economic resources, but not necessarily cash.
7
C
The qualitative characteristic of relevance is dependent on materiality and predictive and confirmatory values. Completeness and faithful representation are characteristics of the qualitative characteristic of reliability not relevance. Comparability is a separate qualitative characteristic.
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 maintain either 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 profit under that system is CU100,000. A system of real financial capital maintenance adjusts for general price 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 price changes (i.e. the CU100,000 is reduced by an allowance for the 10% specific price changes, giving profit 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 the characteristic of relevance.
14
D
The substance of the arrangement is that of a loan secured on the building. A portion of the interest of CU200,000 (CU600,000 - CU400,000) should be charged in each of the four years so that by the repurchase date the loan account stands at CU600,000.
15
D
GAAP stands for 'generally accepted accounting practice'. © The Institute of Chartered Accountants in England and Wales, March 2009
249
Single entity financial statements: objective test questions 16
50
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. Income and expenses are directly related to the measurement of profit.
BAS 1 Presentation of Financial Statements 1
D
Inappropriate accounting policies cannot be rectified by disclosure of the policies used or by the inclusion of explanatory material. Companies must prepare their financial statements (except for the 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 whichever format is used. Depreciation will appear on the face of an income statement where expenses are classified by nature but would be subsumed within other categories (cost of sales, administrative expenses, distribution cost) where expenses are classified by function. Closing inventory appears on the face of the balance sheet but will be subsumed within cost of sales or changes in inventories in the income statement.
4
B
This is the most commonly seen form of the income statement, which includes cost of sales and distribution 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'000 2,000 1,100 600 750 4,450
Brought forward Revaluation (1,500 – (2,000 – 1,600)) Share issue (500 + 100) Profit Carried forward
The dividend was not declared until after the year end so does not reduce equity this year. 7
51
A
The inventory is expected to be realised within the normal operating cycle of 18 months therefore is classified as current. Because Finstock Ltd builds houses, the house is inventory as opposed to property and hence, since it will be realised within the normal operating cycle, is classified as current. According to BAS 1, marketable securities are classified as current if they are expected to be realised within 12 months of the balance sheet date. This is not the case here so the securities are classified as non-current.
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 do not 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
Raw materials (CU100,000 ÷ 10,000) Direct labour (CU50,000 ÷ 10,000) Variable overheads (CU40,000 ÷ 10,000) Fixed overheads (CU120,000 ÷ 12,000) 4
250
A
Cost per widget CU 10 5 4 10 29
1,000 widgets = CU29,000
BAS 2 applies to all inventories except work-in-progress under construction contracts, financial instruments (e.g. shares, bonds) and biological assets.
© The Institute of Chartered Accountants in England and Wales, March 2009
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 Revenue ((10,000 – 3,000) CU45) Costs Closing inventory at NRV* (3,000 CU29) Net profit
CU 315,000 (352,500) 87,000 49,500
*Cost per unit = 312,500/10,000 = CU31.25 therefore NRV of CU29 (35 – 6) is lower 7
C Raw materials (7,000 CU20) Work in progress at NRV (2,500 ((35 80%) – 2 – 2.50)) Finished goods at NRV (1,000 ((35 80%) – 2))
52
CU 140,000 58,750 26,000 224,750
BAS 7 Cash Flow Statements (single company only) 1
2
3
4
B Issue of shares (7,000 CU2) Repay long-term borrowings Net cash flow from financing activities
CU 14,000 (4,100) 9,900
Increase in cash in hand (1,100 – 1,000) Increase in cash at bank (21,932 + 41,627) Net increase
CU 100 63,559 63,659
Profit before tax (30,000 – 25,000) Increase in inventories and trade receivables (55,000 – 48,000) Decrease in trade payables (20,000 – 14,000) Depreciation charge (10,000 – 8,000) Cash used in operations
CU 5,000 (7,000) (6,000) 2,000 (6,000)
B
C
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 and hence are adjusted for in the reconciliation.
© The Institute of Chartered Accountants in England and Wales, March 2009
251
Single entity financial statements: objective test questions 5
C DIVIDENDS PAYABLE CU 40,000 30,000
Cash () C/d – Final for 20X3
B/d – Final for 20X2 Income statement Interim for 20X3 Final for 20X3
70,000 6
CU 25,000 15,000 30,000 70,000
B PROPERTY, PLANT AND EQUIPMENT – NBV B/d Cash ()
CU 330,000 75,000 405,000
Depn Disposals (W) C/d
CU 90,000 45,000 270,000 405,000
WORKING DISPOSALS Income statement NBV () 7
B
CU 15,000 45,000 60,000
Cash
CU 60,000 60,000
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 will be classified as proceeds from issue of borrowing, not proceeds from issue of equity share capital.
8
C
The reconciliation starts with profit before tax so tax does not appear within it. Income taxes paid were CU10,500. WORKING INCOME TAX PAID Cash () C/d
9
B
10
C
CU 10,500 15,500 26,000
B/d Income statement
Issue of non-current interest-bearing borrowings of (30,000 – 25,000) CU5,000 shown as an inflow under financing activities. Interest paid of (700 + 600 – 500) CU800 shown as an outflow under operating activities. The finance cost of CU600 is added back to profit before tax in the reconciliation.
Profit before tax Depreciation charge Increase in trade receivables Increase in trade payables Cash generated from operations
252
CU 10,000 16,000 26,000
© The Institute of Chartered Accountants in England and Wales, March 2009
CU 52,000 21,600 (15,500) 14,600 72,700
ANSWER BANK 11
C SHARE CAPITAL CU C/d
50,000 50,000
CU 40,000 4,000 6,000 50,000
B/d Bonus issue (40,000 ÷ 10) Cash ()
SHARE PREMIUM CU 4,000 27,500 31,500
Bonus issue C/d
CU 25,200 6,300 31,500
B/d Cash ()
Therefore, total cash received for shares (6,000 + 6,300) 12
D
13
A
12,300
It would not feature in the statement at all, but would appear in the reconciliation note.
PROPERTY, PLANT AND EQUIPMENT – NBV B/d Revaluation (31,000 – 16,500) Additions () 14
CU 225,600 14,500 91,500 331,600
Disposals (40,000 – 10,100) C/d
CU 29,900 301,700 331,600
B Profit before tax Increase in prepayments (2,550 – 2,300) Decrease in accruals* (1,670 – 1,560) Deduct
CU X (250) (110) (360)
* other than accrued interest which is adjusted for in arriving at interest paid. 15
B
Investing activities Sale of property, plant and equipment Purchase of property, plant and equipment
CU 10,000 (109,000) (99,000)
Financing activities Share issue (100,000 CU1.20) Repay loan 16
C
17
D
CU 120,000 (25,000) 95,000
CU6,500 will be shown as purchase of PPE (an investing outflow), CU4,250 (the capital element of the finance lease repayment) will be shown as a financing outflow, and the interest of CU750 will be shown as an operating outflow.
Cash receipts from customers (850,000 + 125,500 – 135,400) Cash paid to suppliers and employees (610,500 + 45,500 – 35,700) Interest paid
CU 840,100 (620,300) (500) 219,300
© The Institute of Chartered Accountants in England and Wales, March 2009
253
Single entity financial statements: objective test questions
53
BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 1
C
A is not a change of accounting policy (the accounting policy is still to carry property under the valuation model as opposed to under the cost model), B is a change of accounting estimate, D is specifically 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 of retrospective 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 dealt with 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
54
55
254
C
(1) is a change in accounting estimate. (2) is not a change in accounting policy, but a change in classification. This is covered by BAS 1 which requires that comparative amounts are also reclassified and certain disclosures given.
BAS 10 Events After the Balance Sheet Date 1
D
Adjusting events are reflected in the financial statements, therefore there is no specific requirement 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 customer ceasing to trade (A) was not received until 31 March 20X5, the customer would have been in difficulties at the balance sheet date and hence the debt was irrecoverable at that date. Although evidence of the inventory’s NRV at below cost was not available until April, NRV is assumed to have 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 of storm damage was in negotiation at the year end so that storm must have occurred by the balance sheet date – hence this is an adjusting event and the uninsured amount of CU75,000 should 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-adjusting event. In B and C, the liquation/bankruptcy would have occurred by the year end; it was just that Gawain Ltd did not know of it until after the year end. In that it had occurred by the year end both matters are adjusting. In D, the fire took place before the year end so is an adjusting event.
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 spread the 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. Depreciation on the surplus may be debited to the revaluation reserve but only as a reserve transfer from retained earnings (2). A change in depreciation method constitutes a change in accounting estimate, not policy per BAS 8 (4).
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK 3
C Original purchase price Depreciation for 20X1 ((50,000 – 5,000) ÷ 5) Depreciation for 20X2 Upgrade 31 December 20X2 NBV at end of 20X2 Depreciation for 20X3 ((47,000 – 5,000) ÷ 5) NBV 1 January 20X4 Disposal proceeds Loss on disposal
4
D Depreciation based on original cost (16,000 25%) Depreciation based on revalued amount (12,000 ÷ 2) Decrease in profit
5
D
6
C
8
CU 48,000 (24,000) 24,000 30,000 6,000 (2,000) 4,000
*Historic cost depreciation charge (24,000 ÷ 3) Depreciation charge on revalued amount (30,000 ÷ 3) Excess depreciation
8,000 (10,000) 2,000
Year ended 30 June 20X5 – on revaluation (1.3m – 1m) Year ended 30 June 20X6 – on disposal (1.4m – 1.3m)
CU 300,000 100,000
C
A Revalued on 1 January 20X5 to Accumulated depreciation to 31 December 20X5 (600,000 ÷ 6) NBV on 1 January 20X6 Sale proceeds Profit on disposal
9
CU 4,000 6,000 2,000
Only asset 1001 has a balance in respect of it in the revaluation reserve. Since its revaluation loss of CU2,500 is less than its balance on the revaluation reserve of CU3,000 the whole of this loss can be charged to the revaluation reserve. The losses on the other two (CU3,000 and CU1,500) must be charged to the income statement.
Cost Depreciation to 30 June 20X9 (48,000 25% 2) Carrying amount at revaluation Revaluation Revaluation reserve Excess depreciation charged to revaluation reserve in y/e 30 June 20Y0* Revaluation reserve at 30 June 20Y0
7
CU 50,000 (9,000) (9,000) 15,000 47,000 (8,400) 38,600 (7,000) 31,600
B
CU 600,000 (100,000) 500,000 700,000 200,000
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 an asset with a fair value of CU1 million, in order to acquire the building previously owned by Turner Ltd. Hence this building should be recorded in Sparrow Ltd’s books at that amount.
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255
Single entity financial statements: objective test questions 10
56
C
This is true for initial revaluations upwards. For a subsequent revaluation upwards which reverses a previous revaluation loss which was recognised in the income statement this will not necessarily hold true. Re A, whole classes of assets must be carried under either the revaluation model or the cost model – it is not permissible to revalue just those assets where carrying amounts and market values are materially different. Re B, assets must be revalued with sufficient regularity such that carrying amounts never differ materially from fair values. Although BAS 16 mentions 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 account alternative uses.
BAS 17 Leases 1
D
2
B
Assets held under finance leases are recorded at their fair value (here, the cash price) and depreciated over the shorter of the lease term and the asset’s useful life. Here, the lease term is six years (the primary period plus the secondary period, since this is expected to be taken up) and the useful life is five years. Year ended 31 Dec 20X4 31 Dec 20X5
B/f CU 2,050 1,730
Payment CU (500) (500)
Capital CU 1,550 1,230
Interest CU (4/10) 180 (3/10) 135
C/f CU 1,730 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 CU 6,000 26,000 (24,000) 8,000
Deposit Instalments (10 CU2,600) Cash price Total interest Allocated to 4th repayment = 7/55 CU8,000 = CU1,018 5
D Year ended 31 Dec 20X4 31 Dec 20X5
B/f CU 2,050 1,700
Interest CU (5/15) 150 (4/15) 120
Payment CU (500) (500)
C/f CU 1,700 1,320
Borrowing over five periods (since paying in arrears) Therefore SOTD = (5 6) ÷ 2 = 15 Total interest = (5 500) – 2,050 = CU450
256
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 of buildings being treated as finance leases this will not always be the case.
© The Institute of Chartered Accountants in England and Wales, March 2009
ANSWER BANK 8
C Cash paid (60,000 + 30,000) Income statement charge ((60,000 + (3 30,000)) ÷ 3)) Prepayment
57
CU 90,000 (50,000) 40,000
9
A
The underlying concept of the treatment of leases is substance over form. This is a consequence of the requirement to present transactions faithfully, part of the qualitative characteristic of reliability.
10
B
CU24,000 (the cash price less the deposit) is owed on 1 January 20X7. This is subject to interest at 12% for 20X7, as no further payment is made until the last day of 20X7. Therefore CU24,000 12% = CU2,880.
BAS 18 Revenue 1
B
Because the risk and rewards of ownership have not yet passed (the goods are unsold at the year end) revenue should not be recognised. Hence the CU20,000 selling price should be removed from revenue and trade receivables and the CU15,000 cost added in to closing inventories (and hence be removed from cost of sales). Inventories = 110,000 + 15,000 = CU125,000 Trade receivables = 190,000 – 20,000 = CU170,000
2
B Total contract price Less: After-sales support (500,000 5 years 130%) Revenue for year re supply of software Revenue for year re after-sales support (500,000 130%)
3
CUm 5.00 (3.25) 1.75 0.65 2.4
C Supply of hardware One year of after-sales support at additional fixed fee (1m ÷ 4 years)
CUm 3.00 0.25 3.25
4
C
Once a sale has been made, the revenue should be measured at the fair value of the consideration receivable, i.e. CU290,000.
5
C
For the rendering of services, BAS 18 requires that revenue is recognised by reference to the stage of completion of the contract (provided revenue, stage of completion and costs can be measured reliably and it is probable that economic benefits will flow to the seller). We are told that all figures are reliable and that the contract is expected to make a profit – hence economic benefits 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 restricted to 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.
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257
Single entity financial statements: objective test questions
58
59
BAS 32 and BAS 39 Financial Instruments 1
A
Redeemable preference shares are classified as liabilities. Dividends on these shares are shown as finance 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 reflected in 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
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 its carrying amount. Recoverable amount is the higher of fair value less costs to sell and value in use so if fair value less costs to sell already exceeds the carrying amount there is no need to estimate 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
C Cost Depreciation: Year ended 31 March 20X3 @ 25% Year ended 31 March 20X4 @ 25% Year ended 31 March 20X5 @ 25% Year ended 31 March 20X6 @ 25% Recoverable amount Impairment loss
4
B
5
B
(25,000) 75,000 (18,750) 56,250 (14,063) 42,187 (10,547) 31,640 (22,000) 9,640
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 the impairment loss can be set against the revaluation reserve, with the remaining CU50,000 charged to the income statement.
Carrying amount at revaluation Depreciation to 31 December 20X6 (80,000 3/8) Carrying amount on 31 December 20X6 Revalued to Impairment loss Charged to revaluation reserve (see below) Charged to income statement (β) Cost 1 January 20X2 Depreciation to 31 December 20X3 (50,000 2/10) Carrying amount on 31 December 20X3 Revalued to To revaluation reserve on 31 December 20X3 Annual transfer of excess depreciation Depreciation based on revalued amount (see above) Depreciation based on historic cost (50,000 3/10) Balance on revaluation reserve on 31 December 20X6
258
CU 100,000
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CU 80,000 (30,000) 50,000 (20,000) 30,000 25,000 5,000 30,000 50,000 (10,000) 40,000 80,000 40,000 (30,000) 15,000 25,000
ANSWER BANK 6
60
61
D
In addition to intangible assets with indefinite useful lives and goodwill acquired in a business combination, which must be tested for impairment annually, other assets are only required to be tested for impairment if there are indications of a possible impairment (such as a fall in market values or evidence of physical damage).
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 be provided for.
4
C
In (1) as the board decision had not been communicated by the year end there is assumed to be no legal or constructive obligation therefore no provision should be made. In (2) as refunds have been made in the past to all customers there is a valid expectation from customers that the refunds will be made therefore the amount should be provided for. In (3) there is no present obligation 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 should be made for the claim against Airedale Ltd. The claim Airedale Ltd has made against a third party is a contingent asset. Contingent assets are only ever disclosed, and only then if it is probable that the 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 the refunds will be made, creating a constructive (as opposed to a legal) obligation. Therefore Wally Ltd 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 contingent asset as opposed to a contingent liability or a provision. Regarding D – since Wally Ltd is unlikely to lose the case, disclosure should be made as a contingent liability, as opposed to a provision being made.
7
D
A provision is recognised under BAS 37, inter alia, where the entity has a present obligation as a result of a past event. At 31 December 20X5 there is no obligating event as neither the refit nor the fitting of the safety equipment has been carried out therefore no provision is needed for either.
8
B
Since it is probable (i.e. 'more likely than not') that the claim against Charlotte Ltd will succeed a provision should be made. Counter-claims should be recognised as separate assets but only where reimbursement is virtually certain. Here reimbursement is only 'probable' so the claim against George Ltd should be disclosed, but not recognised as an asset.
BAS 38 Intangible Assets 1
D
2
C
(1) False – negative goodwill is recognised immediately in profit or loss, not shown on the balance 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 generated goodwill nor internally developed brands can be capitalised.
Development costs Depreciation on equipment used for development (100,000 ÷ 5) 3
C
CU 300,000 20,000 320,000
Regarding A – costs are capitalised throughout the development phase then amortised once development is complete. Regarding B – this says that the project will at least break even – if it was to make a loss, the costs could not be carried forward.
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259
Single entity financial statements: objective test questions
62
260
4
C
C is given as an example of research activities in BAS 38 (para 56 (c)). Research costs are written off as incurred. A is given as an example of development activities in BAS 38 (para 59 (a)) and may therefore be carried forward if certain conditions (para 57) are met. B – the cost of the patent, 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 with reference 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 amount does 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 are written off as incurred. (2) is an acquired intangible and will therefore automatically meet BAS 38’s recognition criteria. Although (3) is not a separable intangible it arises from legal rights and is therefore identifiable and may be recognised provided its cost can be measured reliably (and it can, 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 as BAS 38 prohibits the recognition of internally generated brands. Regarding (3) – although goodwill acquired on a business combination is recognised under BFRS 3 Business Combinations as an intangible asset, per BAS 38 any goodwill recorded in the acquiree’s books cannot be recognised. 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 be identifiable (1). Identifiable means the asset is either separable or arises from contractual or other legal rights – therefore (2) is not correct. Once an asset had met the identifiability test it is only recognised if it is probable (not just 'possible' per (4)) that future benefits from the asset will 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 the revaluation model for each class of intangibles. A is false – intangible assets with indefinite useful lives are not amortised but reviewed for impairment annually. B is false – residual values are assumed to be zero unless a third party is committed to buying the asset at the end of its useful life 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 fact that the asset must be under the control of the entity. Employees’ skills are not controlled by the entity as the employees could decide to leave.
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 complete within one year from the date of classification. This division does not qualify as held for sale in 20X4 as it is not expected to be sold until early 20X6. It will therefore not be disclosed as discontinued 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 the face 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 completed within 12 months the retail division will be classified as a discontinued operation. Until the noncurrent 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 immediately underneath 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 sale are not reclassified as held for sale in any prior periods.
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ANSWER BANK 5
D
Both meet the definition of a component as they have both been reported separately. The closure of Division A does not represent the discontinuance of a separate major line of business as its operations have been moved to another division. Division B does represent this type of discontinuance as its operations have been outsourced.
6
D
Since the sale was completed within one year of classification this is a discontinued operation in the year ended 31 December 20X7. The original loss of CU100,000 will be increased by a provision 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 noncurrent assets held for sale and depreciation on them ceases. Carrying amount on 1 November 20X0 Depreciation up to classification as held for sale (30,000 1% 11)
8
B
On classification as held for sale an asset held under the cost model is measured at the lower of its carrying amount and its fair value less costs to sell. On ultimate disposal any difference between carrying amount and disposal proceeds is treated as a loss or gain under BAS 16. Carrying amount on classification as held for sale Fair value less costs to sell (30,000 – 500) Impairment loss Profit on sale (32,000 – 29,500)
9
CU 40,000 (29,500) 10,500 2,500
D Cost Depreciation to 31 December 20X8 (800,000 ÷ 50 12) Carrying amount on classification as held for sale Fair value less costs to sell (600,000 – 10,000) Impairment loss Loss on sale (590,000 – 580,000)
10
CU 15,000 (3,300) 11,700
B
CU 800,000 (192,000) 608,000 (590,000) 18,000 10,000
Assets held under the revaluation model are revalued to fair value immediately prior to classification as held for sale. Costs to sell are immediately recognised in the income statement as an impairment loss. Immediately before classification as held for sale: Carrying amount Revaluation Credit to revaluation reserve
CUm 1.5 1.7 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 be recognised in the income statement then and the balance in the revaluation reserve in respect of this asset transferred to retained earnings.
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261
Single entity financial statements: objective test questions 11
B Cost Depreciation to 31 December 20X5 (200,000 25%) Carrying amount on revaluation Revalued to Original balance on revaluation reserve Carrying amount on revaluation on 1 January 20X6 Depreciation for 20X6 @ 25% Depreciation for 20X7 @ 25% Carrying amount immediately before classification as held for sale
CU 200,000 (50,000) 150,000 280,000 130,000 280,000 (70,000) 210,000 (52,500) 157,500
Immediately prior to classification as held for sale the asset will be revalued to its fair value of CU80,000, and this fall in value of CU77,500 will be debited to the revaluation reserve. The remaining CU52,500 in the revaluation reserve will be transferred out to retained earnings on sale. The classification as held for sale at below carrying amount brings forward the debit to the revaluation reserve. On classification as held for sale the costs to sell of CU5,000 are recognised in the income statement.
262
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Consolidated financial statements: objective test questions
63
Consolidated balance sheets 1
B Falcon Ltd Kestrel Ltd (80% (15 – 10)) Less: Impairment of goodwill *
Cost of investment Less: Fair value of net assets acquired (80% 20) *Goodwill 2
CUm 58 4 (8) 54 CUm 24 (16) 8
C CU'000 Fair value of net assets acquired Ordinary shares Retained earnings at 1 January 20X1 Retained profit for the 9 months ended 30 September 20X1 (9/12 40)
328 20 348
Group share ( 80%) Add Goodwill Cost of investment 3
A Xanthe Ltd QED Ltd Inventories in transit Less: PURP ((20 + 10) 30%))
4
CU'000 160 90 10 (9) 251
C Dividends payable by parent (Xiao Ltd) Dividends payable to minority Yacht Ltd (20% 30,000) Zebra Ltd (25% 20,000)
5
300 80 30 410
CU 60,000 6,000 5,000 71,000
D Consolidated balance sheet Less Woolf Ltd Add back PURP (5,000 80%) Group share of Stephen Ltd Therefore, retained earnings of Stephen Ltd = 100/80 CU32,000
CU 230,000 (202,000) 4,000 32,000 CU40,000
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263
Consolidated financial statements: objective test questions 6
B Cost of investment Group share of post-acquisition retained earnings (30% 5)
7
A Cost of investment Group share of post-acquisition retained earnings (40% (220 – 30)) Less: PURP (40% 10 25%)
8
D
9
B
10
C
11
B
CU'000 1,875 50 1,925
The unrealised profit is CU5,000 and the inventories are still held by Aster Ltd. Therefore the adjustment 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.
Consolidated retained earnings per question Less: Group share of depreciation of fair value adjustment ((120 ÷ 5) 75%) Goodwill per question Less: Group share of fair value adjustment (120 75%)
B
CU'000 60 76 (1) 135
After the disposal, Geranium Ltd retains a 15% holding in Rose Ltd. This is treated as a simple non-current asset investment and valued at the date of disposal using the equity method. Net assets (15% (5,000 + 6,500 + 6/12 2,000)) Goodwill remaining (1/4 (5,000 – 60% 8,000))
12
CUm 12.0 1.5 13.5
CU'000 400 (18) 382 200 (90) 110
The redeemable preference shares are debt, not equity, so do not feature in the calculation of minority interest. Minority interest = 700,000 30% = CU210,000
13
B Cost of investment Group share of post-acquisition retained earnings (30% 8,000) Less: Goodwill impairment to date (40% 2,000)
Cost of investment Less: Fair value of net assets acquired (30% 40,000) Goodwill
264
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CU 14,000 2,400 (800) 15,600 CU 14,000 (12,000) 2,000
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14
B Mandy Ltd Len Ltd (96,000 – (96,000 – 24,000)) Less: Goodwill impairment (48,000 20%)
Cost of investment Less: Fair value of net assets acquired Goodwill
64
CU 244,800 24,000 (9,600) 259,200 CU 144,000 (96,000) 48,000
Consolidated statements of financial performance 1
A
2
C
The provision for unrealised profit is CU5,000 (30,000 20/120). Since the seller was the subsidiary, the profit is eliminated against the subsidiary's profits, meaning that both the group and the minority interest will bear their share. Pumpkin Ltd Squash Ltd Less: Intra-group sales Add: PURP (8,000 – 5,000)
3
B Sale proceeds Less: Share of net assets at disposal (80% 3,310) Less: Carrying amount of goodwill at date of disposal (2,360 – (80% 2,240) – 100)
4
C Sale proceeds Less: Share of net assets at disposal (45% 12,500) Less: Carrying amount of goodwill at date of disposal ((5,000 – (60% 8,000)) 3/4) Profit on disposal
5
B Pre-disposal (3/12 576,000 10%) Post-disposal (9/12 576,000 40%)
6
B Revenue (769,000 + (9/12 600,000) – 7,000) Cost of sales (568,500 + (9/12 420,000) – 7,000 + 2,000) Gross profit
CU 100,000 80,000 (8,000) 3,000 175,000
CU'000 3,600 (2,648) (468) 484
CU'000 6,500 (5,625) (150) 725
CU'000 14,400 172,800 187,200
CU 1,212,000 (878,500) 333,500
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265
Consolidated financial statements: objective test questions 7
A Share of associate's profits (30% 120,000 6/12) Sales proceeds Less: Share of net assets at disposal (30% 1,200,000) Less: Carrying amount of goodwill at date of disposal (450,000 – (30% 1,000,000)) Profit on disposal of associate
8
C
11
CU 30,000 4,500 34,500
CU 490,000 98,000
B Alayna Ltd – paid to group shareholders Ellen Ltd – paid to minority interest (200,000 25%)
CU 500,000 50,000 550,000
Subsidiary Ltd Less: PURP (15,000 20/120 ½)
CU'000 55,000 (1,250) 53,750
C
10,750
MI share ( 20%)
65
(150,000) 90,000
An adjustment representing the increase in the minority interest on the decrease in holding must be made. This will be the increase in the minority interest in the net assets of Pip Ltd at disposal. Net assets at disposal (400,000 + (9/12 120,000)) increase in minority interest % (was 20% now 40% therefore 20%)
10
600,000 (360,000)
C Minority interest at start of year (10% 300,000) Minority interest in profits of year (10% 60,000 9/12)
9
CU 18,000
Consolidated cash flow statements 1
B MINORITY INTEREST CUm
266
Dividends to MI (β)
2.7
C/d
6.0 8.7
B/d IS Revaluation Acquisition of sub (6.4 25%)
© The Institute of Chartered Accountants in England and Wales, March 2009
CUm 3.6 2.0 1.5 1.6 8.7
ANSWER BANK
2
C INVESTMENTS IN ASSOCIATES CU'000 635 69 704
B/d IS (230 30%)
Dividends from associates (β) C/d
CU'000 4 700 704
3
C
Transactions between associates and the group are not cancelled on consolidation, hence the repayment of the advance of CU30,000 will appear in the consolidated cash flow statement. The cash from sale of the plant will be reflected in the associate's own cash flow statement, but not in the 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 CU20,000 cash 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 less the cash and cash equivalents acquired. However, in this case, Dougal Ltd has acquired Lucy Ltd's overdraft so the net cash effect is the cash consideration of CU400,000 plus the overdraft of CU40,000 = CU440,000.
6
B
The cash outflow will be in respect of cash paid for purchases of PPE. In calculating this figure the PPE acquired under finance leases and the PPE acquired with the subsidiary need to be excluded. The former because the purchase was not for cash, the latter because any cash effect will have already been included in the consolidated cash flow statement as part of the figure for acquisition 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 B/d Finance leases On acquisition of subsidiary Cash additions (β)
7
8
C
D
CU 257,900 40,000 35,000 413,000 745,900
Disposals IS - Depreciation C/d
Increase in receivables (340 – 235 – 90)
15
Decrease in payables (275 – 135 – 165)
25
CU 32,000 135,000 578,900 745,900
Cash received from the sale of CU460,000 will be shown as an investing inflow, along with any dividends received from the associate – which in this case were CU225,600 (see working below). INVESTMENTS IN ASSOCIATES B/d IS (30% 350,000)
CU 120,600 105,000 225,600
Dividends from associates (β) C/d
CU 225,600 – 225,600
© The Institute of Chartered Accountants in England and Wales, March 2009
267
Consolidated financial statements: objective test questions
66
Group accounts accounting standards 1
B
Ulysses Ltd is not consolidated. The civil war means that Sarah Ltd is no longer able to exercise control over Ulysses Ltd; consequently the definition of a subsidiary is not met. Dissimilar activities 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 by another company and, with a 75% holding, that company can do most things, including passing special resolutions, without paying much attention to Consul Ltd. Consul Ltd has the largest shareholding in Admiral Ltd and a board seat, so will be able to exercise significant influence over Admiral Ltd. Sultan Ltd is not so clear cut. However, it is likely that both the other entity and Consul Ltd have significant influence over Sultan Ltd.
3
A
Per BFRS 3 goodwill acquired in a business combination should be reviewed for impairment annually.
4
C
Statement (1) – Untrue – there is a presumption that Lyle Ltd would be an associate of Kyle Ltd at a holding or 20% or over, but this is rebuttable (for example if another party held, say, 70% of the shares whilst Kyle Ltd only held 30%). Statement (2) – True – if Kyle Ltd controls Lyle Ltd then Lyle Ltd will be a subsidiary not an associate. Statement (3) – True – there is no elimination of balances for an associate as the associate is not part of the group.
5
B CU 2,880,000 7,200,000 400,000 10,480,000
Cash (80% 3,000,000 CU1.20) Shares (80% 3,000,000 2 CU1.50) Acquisition fees
6
B
In accordance with BFRS 3, restructuring provisions can only be included in the goodwill calculation if there is an existing liability for the restructuring in accordance with BAS 37 Provisions, Contingent Liabilities and Contingent Assets. In this case Jerry Ltd has no such existing liability and therefore the provision is excluded. Cost of investment Less: Share of fair value of net assets acquired Carrying amount of net assets Fair value adjustment to PPE Contingent liability Group share 80% Goodwill
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