ACCA F7 INT Revision Mock Questions J11

ACCA REVISION MOCK

Financial Reporting (International) June 2011 Question paper

Time allowed

Reading and planning: 15 minutes

Writing: 3 hours

All FIVE questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor.

This question paper must not be removed from the examination hall.

Kaplan Publishing/Kaplan Financial

Pape

r F7

(INT)

PAPER F7 ( INT ) : F INANCIAL REPO RTING

2 KAPLAN PU BL ISHING

© Kaplan Financial Limited, 2011

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REVIS ION MOCK : QU EST IO N S

KAPLAN PU BL ISH ING 3

All FIVE questions are compulsory and MUST be attempted

QUESTION 1

On 1 October 2009 Pip purchased 56 million shares in Squeak. The consideration consisted of two elements: a share exchange of two shares in Pip for every five shares in Squeak and a payment of $30 million to be paid on 1 October 2012. At the date of acquisition shares in Pip had a market value of $4.70 each and the shares of Squeak had a market value of $1.60. Pip’s cost of capital is 8%. Squeak made profit of $9 million in the year ended 30 September 2010. Neither elements of the consideration have been recorded yet in Pip’s financial statements.

On 1 October 2008 Pip paid $15 million (included in Pip’s investments) for 25% of the equity shares of Alf, a company that was incorporated on that date. The statements of financial position of the three entities at 30 September 2010 were as follows:

Pip Squeak Alf Non-current assets: $000 $000 $000 Property, plant and equipment 224,000 100,000 112,000 Investments 33,000 Nil Nil ––––––– ––––––– ––––––– 257,000 100,000 112,000 ––––––– ––––––– ––––––– Current assets: Inventories 40,000 32,000 28,000 Trade receivables 48,800 30,000 32,000 Bank 9,000 8,000 10,000 ––––––– ––––––– ––––––– 97,800 70,000 70,000 ––––––– ––––––– ––––––– Total assets 354,800 170,000 182,000 ––––––– ––––––– ––––––– Equity and liabilities

Equity Equity shares of $1 each 100,000 70,000 60,000 Retained earnings 158,800 39,000 56,000 ––––––– ––––––– ––––––– Total equity 258,800 109,000 116,000 ––––––– ––––––– ––––––– Non-current liabilities: Loan notes 60,000 36,000 42,000 Current liabilities:

Trade payables 30,000 18,000 20,000 Taxation 6,000 7,000 4,000 ––––––– ––––––– ––––––– Total current liabilities 36,000 25,000 24,000 ––––––– ––––––– ––––––– Total equity and liabilities 354,800 170,000 182,000 ––––––– ––––––– –––––––



(i) The directors of Pip carried out a fair value exercise to measure the identifiable assets and liabilities of Squeak at 1 October 2009. The following matters emerged:

Land having a carrying value of $10 million had an estimated market value of $15 million.

Plant and equipment having a carrying value of $40 million had an estimated market value of $44 million. The estimated future economic life of the plant at 1 October 2009 was four years.

The fair value adjustments have not been reflected in the individual financial statements of Squeak.

(ii) The inventories of Pip at 30 September 2010 included components purchased from Squeak during the year at a cost of $20 million to Pip. Squeak supplied these components at cost plus a mark up of one-third.

(iii) The trade receivables of Squeak included $5 million receivable from Pip in respect of the purchase of components. This disagreed with the trade payables of Pip due to cash in transit of $2 million.

(iv) Pip’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Squeak’s share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(v) There has been no impairment of consolidated goodwill.

Required:

(a) Prepare the consolidated statement of financial position of Pip at 30 September 2010. (21 marks)

(b) Explain why there is a difference in the accounting treatment of Squeak and Alf in the consolidated financial statements. (4 marks)

(Total: 25 marks)

QUESTION 2

Below are the draft summarised financial statements of Fizzled, a publically listed company, as at 31 October 2010.

Statement of comprehensive income year ended 31 October 2010 $000 Revenue (note i) 232,500 Cost of sales (117,040) ––––––– Gross profit 115,460 Operating expenses (42,000) ––––––– Profit from operations 73,460 Investment income 1,500 Finance costs (note iii) (5,000) ––––––– Profit before tax 69,960 Tax (note iv) (11,500) ––––––– Profit for the year 58,460 –––––––



Statement of financial position as at 31 October 2010 Non-current assets Land & buildings net book value (at 1 Nov 2009 (note ii)) 80,400 Plant net book value (at 1 Nov 2009 (note ii)) 41,940 Investment property at valuation (at 1 Nov 2009 (note ii)) 30,000 ––––––– 152,340 Current assets Inventory 67,500 Trade receivables 66,000 Cash 9,000 ––––––– 142,500 ––––––– 294,840 ––––––– Equity Ordinary $1 shares 60,000 Retained earnings

– at 1 November 2009 138,000 – profit per draft accounts 58,460 – interim dividend paid (6,000) 190,460

––––––– ––––––– 250,460 Non-current liabilities Deferred tax (note iv) 9,000 Current liabilities Trade payables 24,000 Income tax 11,380 35,380 ––––––– ––––––– 294,840 –––––––

The following information is relevant to the draft financial statements:

(i) Revenue includes $14 million for credit sales made on a sale or return basis. At 31 October 2010 customers who had not paid for the goods had the right to return $6 million of them. Fizzled applied a mark up on cost of 20% on all these sales. Fizzled’s customers have sometimes returned goods under this type of agreement.

(ii) Details of Fizzled’s non-current assets are as follows: Land and buildings Land Buildings $m $m Cost at 1 Nov 2009 42.0 48.0 Accumulated depreciation at 1 Nov 2009 nil 9.6

On 1 November 2009 the open market value of the property was $110 million ($52m for the land and $58m for the building). The directors wish to incorporate this revaluation in the financial statements but no entries regarding the valuation have yet been made. The building was considered to have a useful economic life of 50 years when it was purchased on 1 November 1999 and this has not changed as a result of the revaluation. It is company policy to make a transfer to realised profits in respect of excess depreciation.



Plant and equipment

Included in plant and equipment is an item of plant that originally cost $10 million and had accumulated depreciation of $3.6 million. This plant was made available for sale at the year end. A broker has been found and has concluded that a realistic selling price of the plant is $4 million and the broker will charge commission of 5% of the sales proceeds. The plant is expected to be sold within six months of the year end.

All plant and equipment is depreciated at 20% on the reducing balance basis.

Depreciation on both land and buildings and plant and equipment should be charged to cost of sales.

Investment property

On 31 October 2010 a qualified surveyor valued the investment property at $35 million. Fizzled uses the fair value model in IAS 40 to value its investment property.

(iii) On 1 November 2009 Fizzled entered into a lease for an item of plant which had an estimated life of five years. The lease period is also five years with annual rentals of $3,077,000 payable in advance from 1 November 2009. The plant is expected to have a nil residual value at the end of its life. If purchased the plant would have a cost of $13.5 million and be depreciated on a straight-line basis. The lessor includes a finance cost of 7% per annum when calculating annual rentals.

So far, the only accounting entry made by Fizzled in respect of this lease is to charge the rental expense paid on 1 November 2009 to administrative expenses.

(iv) The carrying amounts of Fizzled’s net assets at 31 October 2010 are $28 million higher than their tax base. The rate of tax is 30%. The income tax charge of $11.5 million does not include the adjustment required to the deferred tax provision which should be charged to the income statement in full.

Required:

Redraft the financial statements of Fizzled, including a statement of changes in equity, for the year ended 31 October 2010 reflecting the adjustments required by notes (i) to (iv) above.

(Total: 25 marks)

QUESTION 3

The financial statements of Canmore Plc, a retailer of electronic products, are given below: Statement of financial position 2011 2010

$000 $000 $000 $000 Non-current assets Property, plant and equipment – cost 27,937 25,325

- acc deprec’n (12,624) (12,104) Intangible assets 1,439 1,765 Financial assets 791 697 ––––––– 17,543 ––––––– 15,683 Current assets Inventory 10,931 9,480 Receivables 4,429 3,892 Cash at bank and in hand 3,658 7,518 ––––––– 19,018 ––––––– 20,890 ––––––– ––––––– 36,561 36,573 ––––––– –––––––



Equity Equity shares of $1 each 450 400 Share premium 1,600 1,500 Retained earnings 8,951 8,824 ––––––– 11,001 ––––––– 10,724 Non-current liabilities 7% loan notes 6,950 1,500 Obligations under finance leases 993 356 Deferred taxation 234 108 ––––––– 8,177 ––––––– 1,964 Current liabilities Trade payables 14,299 23,162 Overdraft 2,123 - Taxation 300 250 Warranty provision 511 428 Obligations under finance leases 150 45 ––––––– 17,383 ––––––– 23,885 ––––––– ––––––– 36,561 36,573 ––––––– ––––––– Statement of comprehensive income for the year ended 31 March 2011 $000

Revenue 83,386 Cost of sales (70,876) ––––––– Gross profit 12,510 Operating expenses (10,446) ––––––– Profit from operations 2,064 Gain on financial assets 44 Finance costs (809) ––––––– Profit before tax 1,299 Taxation (672) ––––––– Profit for the year 627 ––––––– Statement of changes in equity for the year ended 31 March 2011

Share capital

Share premium

Retained earnings

Total

$000 $000 $000 $000 Opening balance 400 1,500 8,824 10,724 Comprehensive income for the year 627 627 Dividends paid (500) (500) Issue of shares 50 100 150 ––––– ––––– ––––– ––––– Closing balance 450 1,600 8,951 11,001 ––––– ––––– ––––– –––––



Additional information:

(i) An item of plant was sold for $915,000 during the year, resulting in a loss of $50,000. Accumulated depreciation on this plant was $1,875,000 at the date of disposal.

(ii) New assets were acquired under finance leases in the year. The fair value of these assets at acquisition was $960,000.

(iii) There were no acquisitions or disposals of intangible assets during the year.

(iv) Canmore gives a 12 month warranty on the majority of the products it sells. The amounts shown in current liabilities as warranty provision are an accurate assessment, based on past experience, of the amount of claims likely to be made in respect of warranties outstanding at each year end. Warranty costs are included in cost of sales.

Required:

(a) Prepare a statement of the movements in cost and accumulated depreciation of Canmore’s property, plant and equipment for the year ended 31 March 2011. (6 marks)

(b) Produce the ‘cash flows from operating activities’ section of the statement of cashflows for Canmore for the year ended 31 March 2011. (9 marks)

(c) The directors of Canmore plc are looking to grow the business and are hoping to raise a mix of equity and debt to finance this growth. Canmore’s price earnings ratio at 31 March 2011 is 4.6 and the industry average is 8.3.

(i) Explain how the price earnings ratio is calculated and what it represents. (2 marks)

(ii) Calculate gearing for 2011 and 2010. For the purpose of calculating debt all finance lease obligations should be treated as long-term interest bearing borrowings. (2 marks)

(iii) Using the gearing ratios calculated in (c)(ii), the extracts from the statement of cash flows and the statement of financial position, comment on Canmore’s cash flow position and their prospects of raising further long term equity and debt finance. (6 marks)

(Total: 25 marks)

QUESTION 4

(a) IAS 36 Impairment of Assets determines the accounting treatment to ensure an entity’s assets are carried at no more than their recoverable amounts.

Required:

Define an impairment loss and explain how frequently assets should be tested for impairment. (5 marks)

(Note: Your answer should NOT describe the possible indicators of impairment.)

(b) Lock, a public limited company, is concerned about the current economic climate and the impact that the macro environment may have on its asset values. They have specific assets on which they are unsure how to account for any impairment. Details of these assets are indicated below:

Pad

Lock owns a machine called the Pad, which was purchased for $10 million on 1 April 2008 with an expected useful life of ten years. On 1 April 2010, it was revalue to $8.8 million



(there was no change to the assets useful life and Lock does not make a transfer to realised profits in respect of excess depreciation). At 31 March 2011, the asset was reviewed for impairment and the recoverable amount was considered to be $5.5 million.

Pin

Lock operates a unit that has suffered a significant drop in income following the introduction of a product developed by a competitor that is more technologically advanced than the one it is currently producing. The carrying amounts of the unit at 31 March 2011 are shown below:

$mGoodwill 3.3Licence (transferable) 2.4Factory 9.2Plant & equipment 5.6 20.5

An impairment review was performed at the year end and it was found that the recoverable amount of the unit was only $14 million. At the 31 March 2011 Lock received an offer of $2 million in respect of the licence, which was considered to be a reasonable offer. The licence value in use was also calculated at that date to be $1.5 million.

Required:

Discuss the impact that the above information may have on the draft financial statements for the year ended 31 March 2011 and where relevant prepare extracts of the financial statements. (10 marks)

Note: It is company policy to depreciate all assets on a monthly basis using the straight line method.

(Total: 15 marks)

QUESTION 5

(a) IAS 11 Construction Contracts deals with accounting requirements for construction contracts whose durations usually span at least two accounting periods. Discuss the issues of revenue and profit recognition relating to construction contracts.

(4 marks) (b) Endeavour is part way through a contract to build a new factory for a customer. The

original details of the contract are as follows:

The contract started on 1 April 2010 and is expected to be completed after the current year end of 31 October 2010. Endeavour quoted and was selected to build the factory based upon a fixed contract price of $20 million and this was based on Endeavour’s expected total contract costs of $14 million.

At 31 October 2010 the details of the contract are as follows:

$000Work certified as complete 15,000Total costs incurred 14,250Total progress payments received 12,500

The costs incurred include $1.25 million rectification costs after sub-standard materials used on the project had to be replaced. These costs were not included in the original estimate and are not recoverable from the customer.



Endeavour calculates profit on construction contracts by using the percentage of completion method. This is based on the value of work certified to date compared to the total contract price.

Required:

Prepare the statement of comprehensive income and statement of financial position extracts in respect of the contract for the year to 31 October 2010. (6 marks)

(Total: 10 marks)

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ACCA F7 INT Revision Mock Questions J11