2010.Dec.acca.F7 Revision Mock Answers With Marks

ACCA

Paper F7 (INT)

Financial Reporting

December 2010

Revision Mock – Answers

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ACCA F7 (INT) Financial Reporting

2 KAPLAN PUBLISHING

© Kaplan Financial Limited, 2010

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Revision Mock Answers

KAPLAN PUBLISHING 3

ANSWER 1

(a) Consolidated Statement of Financial Position for Pierre group as at 31 December 2008

Non-current assets $000 $000Goodwill (W3) 14,000 Property, plant and equipment (144,000 + 100,000 + (5,000 + 4,000 – 1,500 fair value adj (W2))

251,500

Investment in Associate (W6) 28,000 Investments (113,000 – 90,000 (W3) – 15,000 (W3))

8,000

––––––– 301,500 Current assets Inventory (40,000 + 32,000 – 5,000 (W7)) 67,000 Receivables (48,800 + 30,000 – 5,000 intra-company receivable) 73,800 Bank (9,000 + 8,000) 17,000 ––––––– 157,800 ––––––– 459,300 ––––––– Equity Share capital 100,000 Group reserves (W5) 172,800 Non-controlling interests (W4) 24,500 ––––––– 297,300 Non-current liabilities Loan notes (60,000 + 36,000) 96,000 Contingent consideration 10,000 –––––– 106,000 Current liabilities Trade payables (30,000 + 18,000 – 5,000 inter-co payable) 43,000 Taxation (6,000 + 7,000) 13,000 –––––– 56,000 –––––– 459,300 ––––––


4 KAPLAN PUBLISHING

Working paper

(W1) Group structure

Pierre

Simone

(W2) Net assets

@ acq’n @ reporting date

$000 $000 Share capital 70,000 70,000 Retained earnings 30,000 39,000 ––––––– ––––––– 100,000 109,000 Fair value adj: Land (15,000 – 10,000) 5,000 5,000 Plant (44,000 – 40,000) 4,000 4,000 Fair value dep’n: ((4,000 / 4yrs) × 1 ½ years) –

(1,500)

––––––– ––––––– 109,000 116,500 ––––––– ––––––– (W3) (W4)

$7,500

post-acq profit

56,000 / 70,000 = 80% Alberta

01/10/06 = 2 years ago

25%

01/04/07 = 18 months ago


KAPLAN PUBLISHING 5

(W3) Goodwill

$000 Cost of investment – Cash paid – Contingent consideration (at fair value)

90,000

10,000 _______

100,000 Fair value of non-controlling interests

23,000

_______ 123,000 100% net assets at acquisition (W2)

(109,000)

______ Total goodwill 14,000

______

Or;

$000 $000 Cost of investment – Cash paid – Contingent consideration (at fair value)

90,000

10,000 _______

100,000 For: 80% net assets at acquisition (80% × $109,000 (W2))

(87,200)

_______ Goodwill – parents share 12,800 FV of NCI 23,000 For: 20% net assets at acquisition (20% × $109,000 (W2))

(21,800)

_______

Goodwill – NCI share 1,200 ______

Total goodwill 14,000 ______

(W4) Non-controlling interest

$000 Fair value of NCI 23,000 20% post-acquisition profit (20% × ($116,500 – 109,000) (W2))

1,500 ______

24,500 ______


6 KAPLAN PUBLISHING

Or;

$000 20% net asset at reporting date (20% × $116,500 (W2))

23,300

Goodwill – NCI share (W3) 1,200 ______

24,500 ______

(W5) Group reserves

$000 100% Pierre retained earnings 158,800 80% Simone post-acq profit

(80% × ($116,500 – 109,000) (W2))

6,000

25% Alberta post-acq profit

(25% × $56,000 (W2))

14,000

PURP (W7) – Simone (5,000) PURP (W7) – Alberta

(1,000) ______

172,800 ______

(W6) Investment in Associate

Cost of investment 15,000 25% post-acq profit (25% × $56,000 (W2))

14,000

PURP (W7) – Alberta (1,000) ______

28,000 ______

(W7) PURP

$000

Simone

Left in stock $20,000

($20,000 / 133.3 × 33.3)

5,000

Alberta

Left in stock $16,000

($16,000 / 133.3 × 33.3) = $4,000 × 25%

1,000

Tutorial note: Parent = seller therefore goods remain with associate and as the associate was NOT added in on a line by line basis you cannot remove the goods from inventory!

Parent = seller, therefore:

Dr Group reserves – (W5)

Cr Inventory – CSFP

Parent = seller, therefore:

Dr Group reserves – (W5)

Cr Investment in associate – (W6)


KAPLAN PUBLISHING 7

(b) The difference in accounting treatment for Simone and Alberta is primarily due to the weighting of shares that Pierre holds in these companies.

Simone

Pierre has invested in 80% of the equity share capital of Simone which is likely to give them control over the operating and financial policies of the company. Simone is therefore treated as a subsidiary of Pierre. Consolidated statements are required to be prepared from the date of acquisition reflecting the group as a single economic entity.

Alberta

Pierre has invested in 25% of the equity share capital of Alberta which generally will not give control over the company operating and financial policies. Instead Pierre is generally deemed to have a significant influence over Alberta’s policies. The results of Alberta are not required to be consolidated but instead we equity account in accordance with IAS 28.

ANSWER 2

(a) Recalculation of profit for Replica Plc for the year ended 30 September 2009

$000 $000 Retained earnings for the year per draft SFP 98,750 Dividend paid (W6) 10,500 ––––––– Profit for the year per draft financial statements 109,250 Sale and repurchase goods – reversal of profit (W1) (2,000) Sale and repurchase goods – accrual of facilitating fee (W1) (350) Depreciation (W2) – buildings 7,600 – plant 22,125 –––––– (29,725) Loss on investments (W3) (1,500) Slow moving inventory (W4) (3,500) Decrease in deferred tax (W7) 4,100 Accrued finance cost (7% x 50,000 x 1/2) (1,750) ––––––– Re-calculated profit for the year 74,525 –––––––


8 KAPLAN PUBLISHING

(b) Statement of financial position for Replica Plc as at 30 September 2009

$000 $000Non-current assets Property at valuation (241,000 – 7,600 (W2) – 10,400 (W2))

223,000

Plant (W2) 66,375Investments (49,500 – 1,500 (W3)) 48,000 ––––––– 337,375Current assets Inventory (45,100 + 7,000 (W1) – 3,500 (W4)) 48,600 Trade receivables 48,850 Bank 6,550 –––––– 104,000 ––––––– 441,375 –––––––Equity Ordinary shares of 50 cents each 100,000Share premium 70,000Revaluation reserve (27,000 – 10,400 (W2)) 16,600Retained earnings (SOCIE) 111,525 ––––––– 298,125Non-current liabilities 7% Loan note 50,000 Deferred tax (12,500 – 4,100 (W7)) 8,400 –––––– 58,400 Current liabilities 84,850(73,750 + 9,000 (W1) + 350 (W1) + 1,750 (loan int accrual)) ––––––– 441,375 –––––––


KAPLAN PUBLISHING 9

(c) Statement of changes in equity for Replica Plc for the year ended 30 September 2009

S.C S.P R.E R.R Total

Balances at 1 April 2008 75,000 55,000 47,500 27,000 204,500 (β) (β) Share issue (W5) 25,000 15,000 40,000 Retained earnings (from part a) 74,525 74,525

Dividend paid (W6) (10,500) (10,500)

Loss on revaluation (W2) (10,400) (10,400)

––––––– –––––– ––––––– –––––– –––––––

100,000 70,000 111,525 16,600 298,125

––––––– –––––– ––––––– –––––– –––––––

Working Paper

(W1) Sale & repurchase agreement

In substance this is a short-term loan and the facilitating fee is interest

Step 1: Remove sale/record liability

Dr Revenue– SCI – 9,000

Cr Current liabilities – SFP 9,000

Step 2: Put goods back into inventory

Dr Closing inventory – SFP 7,000

Cr Closing inventory – SCI 7,000

Step 3: Record facilitating fee

Dr Finance cost – SCI – 350

Cr Current liabilities – SFP – 350

(W2) Property, plant and equipment

Land & buildings:

Depreciation:

152,000 / 20 years = 7,600 (Dr depreciation expense – SCI Cr Accumulated depreciation – SFP)

Revaluation:

NBV at 30/09/09 – 233,400

(241,000 b/fwd – 7,600 dep’n)

Valuation – 223,000

Fall in property value 10,400 (Dr Revaluation reserve – SFP Cr land & buildings– SFP)


10 KAPLAN PUBLISHING

Plant:

B/fwd NBV 88,500

Depreciation at 25% (22,125) (Dr Depreciation expense – SCI Cr Accumulated dep – SFP)

C/fwd NBV 66,375

(W3) Investments

B/fwd valuation 49,500

C/fwd valuation (48,000)

Loss on investments 1,500 (Dr Investment income – SCI Cr Investments – SFP)

(W4) Inventory

Apply IAS 2 and value at the lower of cost or NRV

Cost = 6,000

NRV = 2,500

Therefore need to reduce overall inventory by 3,500

Dr Closing inventory – SCI Cr Closing inventory – SFP

(W5) Rights issue

Note: The issue has already been recorded so we are only required to determine how many shares were issued and the opening share capital and opening share premium for the SOCIE.

Number of shares at 30/09/09

100,000 / 50 cents = 200,000 shares

Pre-rights number of shares 200,000 / 4 ×3 = 150,000 shares

Therefore 50,000 shares were issued in the rights:

Share capital 50,000 × 50 cents = 25,000

Share premium 50,000 × 30 cents = 15,000

(W6) Dividends paid

Number of shares at 1 June 2009 (prior to rights issue) = 150,000

Dividend paid = 0.07 x 150,000 = 10,500

(W7) Deferred tax

$000

B/fwd deferred tax 12,500

C/fwd deferred tax

(28,000 × 30%)

8,400

Reduction in deferred tax 4,100 Dr Deferred tax – SFP Cr Income tax – SCI


KAPLAN PUBLISHING 11

ANSWER 3

Statement of cash flow for Box Ltd for the year ended 31 March 2010

Cash flows from operating activities Profit from operations (given) 352 Depreciation (W1) 646 Profit on disposal of plant (proceeds 150 – carrying value 114)

(36)

Profit on disposal of buildings (given) (440)

Decrease in inventory (980 – 1,080)

100

Increase in receivables (1,574 – 1,168)

(406)

Increase in payables (1,326 – 1,204)

122

––––– (14) –––––Cash from operations 338 Taxation paid (W2) (642) Interest paid (from income statement) (90) –––––Net cash from operating activities (394)

Cash flows from investing activities Purchase of software (600 – 200) (400) Purchase of property, plant and equipment (W3) (1,260) Proceeds on sale of property plant and equipment (1,600 + 150)

1,750

Proceeds on sale of bonds (360 – 60 + 54)

354

Investment income (given) 30 ––––– Net cash from investing activities 474 Cash flows from financing activities Proceeds from ordinary share issue (1,000 + 300 – 800 – 160)

340

Finance lease payments (W4) (460) Dividends paid (given) (300) ––––– Net cash from financing activities (420) –––––Decrease in cash and cash equivalents (–90 – 250)

(340)

Cash and cash equivalents b/f 250 –––––Cash and cash equivalents c/f (90) –––––



Workings:

(W1) Depreciation

Depreciation

Disposal building (per question) 240 Bal b/f 700 Disposal plant 286 Bal c/f 820 (β) Charge to income statement 646 ––––– ––––– 1,346 1,346 ––––– –––––

(W2) Tax paid

Taxation

(β) Cash paid 642 Bal b/f current tax 426 Bal c/f current tax 166 Bal b/f deferred tax 344 Bal c/f deferred tax 24 Charge per income statement 62 ––––– ––––– 832 832 ––––– –––––

(W3) Purchase of property, plant and equipment

Property , plant and equipment

Bal b/f 2,940 Disposal cost – property 1,400 Finance lease 1,000 Disposal cost – plant 400 (β) Cash paid 1,260 Bal c/f 3,400 ––––– ––––– 5,200 5,200 ––––– –––––

(W4) Finance lease payments

Finance lease

(β) Cash paid 460 Bal b/f non-current liabilities 120 Bal c/f non-current liabilities 580 Bal b/f current liabilities 60 Bal c/f current liabilities 140 Additions in year

(1,300 – 300) 1,000 ––––– ––––– 1,180 1,180 ––––– –––––

(b) From the information in the question and the above statement of cash flows, the following observations can be made:

The (derived) profit from operations of $352,000 is much the same as the cash generated from operations of $338,000. A closer inspection of the figures reveals a more worrying picture. The operating profit has been boosted by some non-recurring items: a large profit of $440,000 on the sale of the company’s freehold and a profit of $36,000 on the sale of some plant. Without these items the profit from operations of $352,000 would have been an operating loss of $124,000.



Overall the company’s profitability should cause concern over the future prospects of the company.

Despite there being positive cash flows from operations of $338,000, this figure is inadequate for the continued liquidity of the company. It is woefully insufficient to pay interest costs of $90,000, a tax bill of $642,000 and the dividends to shareholders of $300,000. If the company had not sold its freehold for $1.6 million and some investments for $354,000 its liquidity and solvency position would be very serious. Even with these sales the company’s bank account has gone from a healthy balance of $250,000 to an overdraft of $90,000.

Other factors that may also be an indication of cash flow difficulties are a move towards leasing rather than purchasing plant, a sizeable reduction in inventory levels (this may be welcomed provided it does not jeopardize future sales) and an increase in the level of trade payables.

In summary Box seems to have undertaken a number of measures that have improved both the current year’s profit and cash flows, but most of these are unsustainable and do not bode well for the future.

ANSWER 4

(a) Accounting for government grants is dealt with by IAS 20 – Accounting for government grants and disclosure of government assistance.

There are two types of government grant highlighted by the standard that are:

• Revenue grants

• Capital grants

Recognition of grants:

The basic principle of IAS 20 is that grants should be recognised as income over the periods necessary to match them with the related costs for which they are intended to compensate, on a systematic basis, this is an application of the accruals concept.

In addition to accruals accounting the application of prudence is required when accounting for government grants, in that the grant income should only be recognised when it is reasonably certain that it will be received.

Presentation of capital grants:

IAS 20 allows a choice over the presentation of a capital grant

• The grant income can be deducted from the cost of the non-current asset and the reduced cost depreciated over the assets useful economic life or;

• The grant income can be treated as a deferred credit and released to the income statement each year in accordance with the useful economic life of the asset.

Both methods will achieve the same net outcome, but the presentation under the first method will result in a lower non-current asset value and smaller depreciation charge whereas the second method will show the actual cost of the asset and a larger depreciation charge and the grant received will be treated as deferred income releasing a portion of income to the income statement each year in accordance with the life of the asset.



(b) Statement of comprehensive income extract for the year ended 31 December 2010

$ Depreciation charge (W3) (32,300) Profit on disposal (W1) 2,000 Government grant amortisation (W4) 16,900

Statement of financial position extract for the year ended 31 December 2010

$ Non-current assets Plant (W2) 219,700 Non-current liabilities Government grants (W4) 83,300 Current liabilities Government grants (W4) 18,800

Workings

(W1) Disposal

$ $ Carrying value: Cost 48,000 Accumulated depreciation ((48,000 – 8,000) / 4 years × 2 years)

(20,000)

––––––– 28,000 Disposal proceeds 30,000 –––––– Profit on disposal 2,000 ––––––

(W2) Plant

$ $ Cost at 1 January 2010 390,000 Additions (95,000 + 12,000 + 3,000)

110,000

Disposals (48,000) ––––––– Cost at 31 December 2010 452,000 Accumulated depreciation at 1 January 2010 220,000 Disposals (W1) (20,000) Charge for the year (W3) 32,300 ––––––– Accumulated depreciation at 31 December 2010 232,300 ––––––– Carrying value at 31 December 2010 219,700 –––––––



(W3) Depreciation charge

(1) Opening assets to be depreciated at 15% per annum on a reducing balance basis

$ $ Cost at 1 January 2010 390,000 Disposal (48,000) ––––––– 342,000 Accumulated depreciation at 1 January 2010 220,000 Disposal (W1) (20,000) ––––––– 200,000 ––––––– Carrying value at 1 January 2010 142,000 Depreciation @ 15% 21,300

(2) Additional plant to be depreciated on a straight line basis over five years (time apportioned)

Additions (95,0000 + 12,000 + 3,000) 110,000 = 22,000 per annum

5 years

× 6 /12

=$11,000

Total depreciation = $21,300 + $11,000 = $32,300

(W4) Government grant

Government grants (deferred income)

$ $ Release to income statement b/f at 1 December 2010 100,000

− Existing grant (given)

− On acquired plant (19,000 / 5 years) × 6/12

15,0001,900

Grant on acquired plant (95,000 × 20%)

19,000

c/f at 31 December 2010 102,100 ––––––– ––––––– 119,000 119,000 ––––––– –––––––



Split between non-current and current liabilities:

$ Current liability on existing grant (given) 15,000 Current liability on acquired plant (19,000 / 5 years)

3,800

Non-current liability (102,100 – 15,000 – 3,800)

83,300

––––––– 102,100 –––––––

ANSWER 5

(a) A discontinued operation is a component of an entity that has either been disposed of, or is classified as held for sale.

Recognition of discontinued operations:

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

• Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or

• Is a subsidiary acquired exclusively with a view to resale

Presentation of discontinued operations:

Once a discontinued operation has been classified an entity shall disclose a single amount in the statement of comprehensive income comprising the

• total post-tax profit or loss of the discontinued operation and;

• post-tax gain or loss on the measurement to fair value less costs to sell or on the disposal of assets or disposal group.

Relevance of discontinued operations:

IFRS 5 helps to achieve the qualitative characteristic of relevance as the user of the financial statements can ignore discontinued operations in assessing likely future performance.



(b) Statement of comprehensive income extract

$m Continuing operations Revenue (86 – 14)

72

Cost of sales (59 – 12)

(47)

–––– Gross profit 25 Operating expenses (21 – 7)

(14)

–––– Profit from continuing operations 11 Discontinued operations Loss on discontinued operations (9) –––– Total profit from all operations 2 ––––

Analysis of discontinued operations

$m Revenue 14 Costs of sales (12) ––––– Gross profit 2 Operating expenses (7) Redundancy costs (2.2) Professional fees (1.8) ––––– Loss on discontinued operations (9) –––––



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2010.Dec.acca.F7 Revision Mock Answers With Marks