F1 CIMA Workbook Q & A - Mapit Accountancy

CIMA F1 Financial Reporting

& Taxation Workbook

�1

Mind Map 1 - Tax I

�2

Illustration 1

In year ended 31/01/X1 Johnboy Co. had Profit Before Tax of $30,000. This was after the deduction of personal expenses that were disallowable for tax purposes worth $4700. In addition Johnboy Co. had $7000 of income exempt from taxation.

Johnboy Co’s Non Current Assets totaled $35,000 and these were being depreciated at 25% on cost.

Tax is Payable at 20%.

Calculate the Tax Payable for the year ended 31/01/X1.

Solution

$

Profit Before Tax 30,000

Add back Personal Expenses 4,700

Less Exempt Income -7,000

Add back Depreciation (35,000 x 25%) 8750

Taxable Profit 36450

Tax Due (36,450 x 20%) 7290

�3

Illustration 2

Jimmy Co. purchased an asset worth $500,000. WDAs are available on the asset at 25% on the reducing balance basis.

Show the tax allowable depreciation (WDAs) for the first 5 years of the asset and the Written Down Value (WDV) at the end of each year. (Round to the nearest $)

Solution

Year O’Bal WDA25% WDV

1 500,000 125,000 375,000

2 375,000 93,750 281,250

3 281,250 70,313 210,938

4 210,938 52,734 158,203

5 158,203 39,551 118,652

�4

Illustration 3

Andy Co. purchased an asset in 20X1 worth $100,000. WDAs are available on the asset at 25% on the reducing balance basis.

At the end of 20X3 Andy Co. sold the asset for $40,000.

Calculate the Balancing Charge/Allowance on the sale

SolutionWDV


X1 100,000 25,000 75,000

X2 75,000 18,750 56,250

X3 56,250

$

Proceeds 40,000

WDV (W1) -56,250

Balancing Allowance -16,250

�5

Illustration 4

Welling Co. had assets at 01/02/20X2 with a carrying value in the financial statements of $600,000 and a tax written down value of 400,000.

Accounting Depreciation was charged on the assets 10% reducing balance. WDAs are available on the at 25% also on the reducing balance basis.

On 31/01/X4 20X4 Welling Co. sold all the assets for $500,000.

In year ended 31/01/X4 Welling Co. had Profit Before Tax of $2,000,000. This was after the deduction of entertainment expenses that were disallowable for tax purposes worth $30,000. In addition Welling Co. had $200,000 of income exempt from taxation.



Process to follow:

Be careful with the year ends.Calculate the WDV at the year end 31/01/X4That enables you to get the Balancing Charge Calculate the Carrying Value at the year end 31/01/X4That enables you to get the Accounting Profit on disposal & Dep’n ChargeFill it all into the Pro-forma

SolutionWDV


31/01/X3 400,000 100,000 300,000

31/01/X4 300,000

$

Proceeds 500,000

WDV (W1) -300,000

Balancing Charge 200,000

�6

Depreciation & Disposal

Tax Computation

Year O’Bal Dep’n CV

31/01/X3 600,000 60,000 540,000

31/01/X4 540,000 54,000 486,000

$

Proceeds 500,000

Carrying Value -486,000

Accounting Profit 14,000

$

Profit Before Tax 2,000,000

Add back Entertainment Expenses 30,000


Add back Depreciation (W2) 54,000

Less Accounting Profit on Disposal (W2) -14,000

Add Balancing Charge (W1) 200,000

Taxable Profit 2,070,000

Tax Due (2,070,000 x 22%) 455,400

�7

Illustration 5

Using the taxable profit for the year ended 31/01/X4 from Illustration 4 of $2,070,000 and tax rates of:

01/04/02 - 01/04/03 - 20%01/04/03 - 01/04/03 - 25%

Assuming that profit accrues evenly across the period:


Solution

$

Tax Due to 01/04/03 ($2,070,000 x 2/12 x 20%) 69000

Tax Due to 31/01/04 ($2,070,000 x 10/12 x 25%) 431250

Total Tax Due 500250

�8

Illustration 6

In Fabbland it is possible to carry back losses to set against trading profit in previous years and then forwards against trading profits in future years.

Kalls Co. has the following results:

Calculate the taxable profit based on the above information in each of the 4 years.

Solution

Year Trading Profit/Loss

1 500,000

2 -1,400,000

3 2,000,000

4 400,000

Year Trading Profit/Loss Loss Allocation Taxable Profits

1 500,000 -500,000 0

2 -1,400,000 0 0

3 2,000,000 -900,000 1,100,000

4 400,000 400,000

Loss Allocated -1,400,000

�9

Illustration 7

In Lalaland it is possible to carry back losses in the year of cessation to set against trading profit in previous years for up to 3 years on a LIFO (most recent first) basis.

Marbles Co. has the following results:

Calculate the taxable profit based on the above information in each of the 4 years.

Solution

Year Trading Profit/Loss

1 500,000

2 600,000

3 200,000

Year of Cessation -900,000

Year Trading Profit/Loss Loss Allocation Taxable Profits

1 500,000 -100,000 400,000

2 600,000 -600,000 0

3 200,000 -200,000 0

4 -900,000 0 0

Loss Allocated -300,000

�10

Objective Test Questions

1. There are certain principles that a tax system should have in an ideal situation. Which of the following is NOT traditionally regarded as a principle of an ideal tax?

A. The cost of collecting the tax should bot outweigh the benefits of it.B. The timing of the tax and the method to pay it should be convenient.C. The amount to be paid should be certain.D. The amount raised should be the maximum amount possible for the government.

Answer D

2. Which of the following best describes Hypothecation?

A. A tax charges on the sale of goods to consumers.B. A tax system that collects the tax at source.C. A tax charge that is imposed directly on an entity and paid to the authorities.D. A tax charge that has the proceeds raised from it earmarked for a specific purpose.

Answer D

3. ABC Ltd. earns profit of $500,000 and pays tax of $100,000. In the same country, CBD Ltd. earns profit of $130,000 and pays tax of $26,000.

The income tax regime in this country could be described as:

A. ProgressiveB. ProportionalC. Regressive D. Fixed Amount

Answer B

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4.In year ended 31/01/X4 Endeavor Co. had Profit Before Tax of $220,000. This was after the deduction of entertainment expenses that were disallowable for tax purposes worth $30,000. In addition Endeavor Co. had $25,000 of income exempt from taxation.

Endeavor Co. had Non Current Assets with a carrying value of $500,000 at the start of the year and these were being depreciated at 10% reducing balance.


What is the tax payable for the year?

A. $47,300B. $71,500C. $60,500D. $49,599

Answer C

Solution

$


Add back Entertainment Expenses 30,000


Add back Depreciation (500,000 x 10%) 50,000

Taxable Profit 275,000

Tax Due (275,000 x 22%) 60,500

�12

Mind Map 2 - Tax II

�13

Illustration 1

In year ended 31/01/X1 ABD Co. decided to sell an asset that they had bought 10 years previously. The asset had cost $40,000 and was sold for $100,000. Indexation allowance of 25% of the cost of the asset was allowed for the effects of inflation.

Capital gains are taxed at 30%

Calculate the capital tax payable.

Solution

Illustration 2

In year ended 31/01/X1 ABD Co. decided to sell an building that they had bought 10 years previously. The building had cost $300,000 plus legal fees of $3,000 and was sold for $600,000. Indexation allowance of 30% of the cost of the asset was allowed for the effects of inflation.

The building had been extended when purchased initially costing $100,000 and costs to sell of $6,000 were incurred on the sale.



$

Proceeds from sale 100,000

Less Original Cost -40,000

Less Indexation Allowance(40,000 x 25%) -10,000

Capital Gain 50,000

Tax Due (50,000 x 30%) 15,000

�14

Solution

$


Less Cost to sell -6,000

Net Proceeds 594,000


Less Costs to Buy -3,000

Less Enhancement Costs -100,000

Less Indexation Allowance((300,000 + 100,000 + 3,000) x 30%) -120,900

Capital Gain 70,100

Tax Due (20%) 14,020

�15

Illustration 3

On 01/01/X5 DFT Co. sold a building they had purchased on 01/01/X0. The building had cost $500,000 plus legal fees of $1,000 and was sold for $900,000.

The building had been extended on 01/01/X3 costing $50,000 and costs to sell of $2,000 were incurred on the sale.

Indexation allowance is available on assets bought/built at the below times at the following rates:

01/01/X1 - 31/12/X2 = 20%01/01/X3 - 01/01/X5 = 15%



Solution

$


Less Cost to sell -2,000

Net Proceeds 898,000


Less Costs to Buy -1,000

Less Enhancement Costs -50,000

Less Indexation Allowance (Building)(500,000 x 20%) -100,200

Less Indexation Allowance (Extension)(50,000 x 15%) -7,500

Capital Gain 239,300

Tax Due (25%) 59,825

�16

Illustration 4

In Fabbland it is not possible to carry back capital losses to set against capital gains in previous years. However losses can be relieved against other current year capital gains, and then forward against future capital gains

Kalls Co. has the following results:

Calculate the taxable gains based on the above information in each of the 4 years.

Solution

Year Capital Gains/(Losses)

1 5,000

2 -12,000

3 10,000

4 7,000

Year Capital Gains/(Losses) Loss Allocation Taxable Gains

1 5,000 0 5000

2 -12,000 0 0

3 10,000 -10,000 0

4 7,000 -2,000 5,000

Loss Allocated -12,000

�17


1. LM recently disposed of a building for £600,000 on 31 December 2009. The original cost of the building was £110,000 which reflected its dilapidated condition. £40,000 was spent to repair the roof on 31 December 2015 to bring it into occupation. ..A further £75,000 was spent on an extension on 31 December 20X7.

The indexation factors are as follows:

20X5 to 20X9 30%20X7 to 20X9 20%

Calculate the capital gains tax arising on the disposal assuming a tax rate of 20% (rounded to the nearest £)

Answer

Proceeds 600000Less cost -110000Less enhancement1 -40000Less enhancement2 -75000Less: Indexation (110K + 40K) * 30% -45000Less: Indexation (75K) * 20% -15000Chargeable Gain 215000Tax @ 20% 43,000

2. MM purchases an asset on 1 April 20X0 for 375,000, incurring legal fees of 12,000 .MM is resident in country X. There was no indexation allowed on the asset. MM sold the asset on 31 March 20X3 for 450,000 incurring transaction charges of 15,000. Tax is charded at 25%.

Calculate the capital gains tax due from MM on the disposal of the asset. (Round to the nearest £)

Answer 12,000

Disposal Proceeds 450,000Costs to sell -15,000Net Proceeds 435,000Cost -375000Duties -12000Taxable gain 48000Tax @ 25% 12000

�18

3. Capital losses in the year must first be offset against capital gains in the year before being carried forward to offset against the first available gains in the future. During the year ended 30 April 20X4 SM made two disposals resulting in a capital gain of 15,000 and a capital loss of 18,000. In the year ended 30 April 20X5, the entity also disposed of a chargeable asset for 90,000. The asset originally cost 30,000 in 20X0 and maintenance costs of 5,000 were incurred in 20X3. In 20X4 there was enhancement expenditure of 10,000.

The indexation factors were:20X0 – 20X240%20X3 – 20X438%20X4 – 20X528%

Which of the following options correctly shows the capital gains tax due for 31 March 20X4 and 20X5. You should assume a tax rate of 20% and no annual exemption throughout.

A. 2004 Nil 2005 7,040B. 2004 (600) 2005 6,440C. 2004 Nil 2005 6,440D. 2004 (3,000) 2005 6,440

Answer C

20X4 Net Capital Loss of 3,000 is assessed as NIL

2005Proceeds 90,000Less Loss b/f -3000Less Original Cost -30,000Less Enhancement -10,000Less IA Cost -12000Less IA Enhance -2800Taxable Gain 32200Tax @ 20% 6440

�19

4. Profit Ltd and Loss Ltd are in a group for corporation tax purposes. Profit Ltd relevant trading profit of 150,000. Loss Ltd relevant trading loss of 90,000 and capital losses of 40,000.

Calculate the group taxable profit.

Answer

Profit Ltd 150,000Loss Ltd (90,000)Group Taxable Profits 60,000

5. An entity makes a taxable profit of 300,000 and pays corporate income tax at 20%.The entity pays a dividend to its shareholders. A shareholder receiving 7,000 dividend then pays the standard personal income tax rate 12% on the divided, paying a further 960 tax.

The tax system could be said to be A A classical systemB An Imputation systemC A partial imputation systemD A split rate system

Answer

A A classical system

�20

Mind Map 3 - Tax III

�21

Illustration 1

In Lalaland the rate of VAT is 15%. The following purchases and sales of a computer happen before it is eventually sold to the consumer.

Abel manufactures the computer and sells it to a distributor for $200.

The distributor sells it to a retailer for $300.

The retailer sells it to the consumer for $500.

The figures above are exclusive of VAT.

Calculate the VAT payable by each of the parties above.

SolutionVAT payable on each transaction:

Abel manufactures the computer and sells it to a distributor for $200 = VAT of (200 x 15%) $30

The distributor sells it to a retailer for $300 = VAT of (300 x 15%) $45

The retailer sells it to the consumer for $500 = VAT of (500 x 15%) $75

Party Input Tax Paid when Purchased

Output Tax Paid when Sold

Net Amount Payable

Manufacturer 0 30 30

Distributor 30 45 15

Retailer 45 75 30

Consumer 75 0 75

�22

Illustration 2

Arttie Co. is registered for VAT and the VAT rate applicable is 12%.

In the most recent VAT period they made sales of $120,000 and purchases of $50,000. Both of these figures are exclusive of VAT.

Calculate the VAT payable in the period.

Solution

$

VAT Due on Sales (120,000 x 12%) 14400

VAT Paid on Purchases (50,000 x 12%) 6000

Net Amount Payable to Authorities 8400

�23

Illustration 3

Jenny’s business is registered for sales tax purposes. During the quarter ending 31 December 2011, she made the following sales and purchases, all of which were subject to VAT at 20%:

What is the amount of VAT payable or receivable on 31 December 2011?

Solution

Sales $ Purchases $

Sales of Goods (Excludes Tax) 550 Purchase of Goods (Excludes Tax) 1,055

Sales of Goods (Includes Tax) 900 Purchase of Goods (Includes Tax) 720

Sales of Goods (Excludes Tax) 945 Purchase of Goods (Includes Tax) 420

Sales of Goods (Includes Tax) 660 Purchase of Goods (Includes Tax) 1,140

$

Sale of Goods (Excludes Tax) 550 x 20% 110

Sale of Goods (Includes Tax) 900 x (20 / 120) 150

Sale of Goods (Excludes Tax) 945 x 20% 189

Sale of Goods (Includes Tax) 660 x (20 / 120) 110

Total Sales Tax on Sales 559

Purchases of Goods (Excludes Tax) 1,055 x 20% 211

Purchases of Goods (Includes Tax) 720 x (20 / 120) 120

Purchases of Goods (Includes Tax) 420 x (20 / 120) 70

Purchases of Goods (Includes Tax) 1,140 x (20 / 120) 190

Total Sales Tax on Purchases 591

Total Receivable (591 - 559) 32

�24


1. Which of the following is not an indirect tax?A Wealth TaxB Excise DutyC Property TaxD Income Tax

AnswerD Income Tax

2. Zoe is in the process of completing her VAT return for the quarter ended 31 March2013. The following information is available:

• Sales invoices totalling £128,000 were issued in respect of standard rated sales.

• Standard rated expenses amounted to £24,800.

• On 15 February 2013 Gwen purchased machinery at a cost of £24,150. This figure is inclusive of VAT.

Unless stated otherwise all of the above figures are exclusive of VAT. The standard rate of tax is 20%.

What is the Vat payable?

Answer

VAT return – quarter ended 31 March 2013

Output VATSales (128,000 x 20%) 25,600

Input VATExpenses (24,800 x 20%) 4,960Machinery (24,150 x 20/120) 4,025

______(8,985)______

VAT payable 16,615______

�25

3. Correctly identify the difference between exempt and zero rated supplies. The options cannot be used more than once.

Type of SupplyZero RatedExempt

OptionsEntity must be registered for VAT purposesEntity does not register for VAT purposesVat can be claimed back on purchasesVat cannot be claimed back on purchases

�26

Mind Map 4 - Tax IV

�27


1. Which of the following is a characteristic of transfer pricing?A This does not have an effect on individual entity purposesB The results in transactions not taking place at “arms length” and profits being effected by the group members. C A legal way of reducing your tax billD An illegal way of reducing your tax bill

Answer B

2. Identify which of the following is a Benefit in KindA Company CarB Time in LieuC Gym MembershipD Overtime

Answer A & C

3. Which of the following describes Avoidance of Tax?A Illegal means to avoid taxB Legal means to avoid tax

Answer B

�28

Mind Map 5 - International Tax

�29


1. What determines a company’s country of residence?

A. Where the company’s income is earnedB. Where the company’s place of control is C. Where they receive dividendsD. Where the majority of their subsidiaries are located

Answer B

2. Which of the following statements is correct about the deduction method of double taxation relief?

A. Tax relief is obtained by deducting foreign tax as an expense in the statement of profit and loss

B. Tax relief is obtained by treating foreign tax as a lossC. Tax relief is obtained by deducting the foreign tax from the foreign income so that only

the net amount is subject to tax in the country of residencyD. Tax relief is obtained by deducting foreign tax from revenue in the statement of profit

or loss.

Answer C

3. Which of the following is a concept of a Branch of a company?

A. Loss relief is availableB. Loss relief is not availableC. Separate companyD. Asset transfers can result in a gain or loss

Answer A

4. Which of the following is an advantage for the tax authority of deduction of tax at source?

A. Administration costs are borne by the entity deducting taxB. Tax is deducted after income is paid to the taxpayerC. Tax is collected laterD. The total amount of tax due for the period is difficult to calculate

Answer A

�30

5. Which of the following cannot be classed as a permanent establishment under the OECD Model?

A. FactoryB. Office/BranchC. Construction projectD. Pop up Restaurant

Answer D

�31

Mind Map 6 - Intro to Groups

�32


1. What does NCI stand for in terms of Group Accounting?

A. Nuclear Control Institute

B. Non Coded Information

C. Non Controlling Interest

D. Non Conforming Image

Answer C

2. Which of the following can constitute “control” of a company after an undertaking?

A. Has the right to exercise a dominant influence over an undertaking

B. Owns 35% of the shares

C. Has not got the right to appoint or remove a majority of its board of directors

D. Has no right to returns from the company

Answer A

�33

Mind Map 7 - Introduction to Group SFP

�34

Illustration 1

Additional Information

Almeria today acquired all the shares in Murcia for $300m.

The Fair Value of the NCI at acquisition was 0.

Required

Prepare the consolidated statement of financial position for the Almeria group

Almeria Murcia

Non Current Assets

Tangible 100 100

Investment in Murcia 300

Current Assets

Inventory 40 200

Receivables 60 100

Cash 200 200

700 600

Ordinary Shares 160 100

Accumulated Profits 240 200

Equity 400 300

Non Current Liabilities 100 200

Current Liabilities 200 100

700 600

�35

Pro-Forma

Working 1 - Group Structure

Working 2 - Equity Table

Working 3 - Goodwill

Almeria

Murcia

Date Acquired

Parent Share

NCI

At Acquisition At Year End

Share Capital

Accumulated Profits

Cost of Parent Investment

Fair Value of NCI at acquisition

Less net assets at acquisition (W2)

Goodwill

�36

Working 4 - NCI

Working 5 - Accumulated Profits

$


NCI% of Sub Post-Acq Profits

Value of NCI at Year End

$

Parent’s Accumulated Profits

Add: Parent % of the subsidiary’s post acquisition profits

�37

SFP for Almeria Group

Almeria Murcia Group

Non Current Assets

Goodwill

Tangible 100 100

Investment in Murcia 300

Current Assets

Inventory 40 200

Receivables 60 100

Cash 200 200

700 600



Non Controlling Interest

Equity 400 300



700 600

�38

Solution

Working 1 - Group Structure



Almeria

↓100%

Murcia

Date Acquired TODAY

Parent Share 100%

NCI 0%


Share Capital 100 100


300 300

Cost of Parent Investment 300

Fair Value of NCI 0

Less net assets at acquisition (W2) -300

Goodwill 0

�39

Working 4 - NCI


$

Fair Value of NCI at acquisition 0

NCI% of Sub Post-Acq Profits 0

Value of NCI at Year End 0

$

Parent’s Accumulated Profits 240

Add: Parent % of the subsidiary’s post acquisition profits Nil

240

�40

SFP for Almeria Group

Almeria Murcia Group

Non Current Assets

Goodwill None (W3) Nil

Tangible 100 100 100 + 100 200

Investment in Murcia 300 Cancel out Nil

Current Assets

Inventory 40 200 40 + 200 240

Receivables 60 100 60 +100 160

Cash 200 200 200 + 200 400

700 600 1000

Ordinary Shares 160 100 Parent 160

Accumulated Profits 240 200 W5 240

Non Controlling Interest W4 Nil

Equity 400 300 400

Non Current Liabilities 100 200 100 + 200 300

Current Liabilities 200 100 200 + 100 300

700 600 1000

�41

Information for Illustration 2 - OTQs for Lecture 7


Ant today acquired 160m of the 200m shares in Dec.

The Fair Value of the NCI was 50.

OTQ 1

What is the percentage ownership and the date of acquisition for Ant Group?

A. 70% & TodayB. 80% & 1 year agoC. 80% & TodayD. 100% & Today

Answer C

Ant Dec

Assets 500 500

Investment in Dec 350

850 500



Equity 350 300

Liabilities 500 200

850 500

�42

OTQ 2

What is the value of the net assets acquired by Ant in Dec on the date of acquisition

A. 200B. 300C. 100D. 600

Answer B

Working 2- Equity Table

OTQ 3

What is the value of the Goodwill in Dec on the date of acquisition?

A. 100B. 350C. 50D. 400

Answer A


OTQ 4




300 300




Goodwill 100

�43

What is the value of the non controlling interest in Dec at the year end?

A. 100B. 300C. 100D. 50

Answer D

Working 4 - NCI

OTQ 5

What is the value of the retained earnings for the group at the year end?

A. 200B. 300C. 250D. 50

Answer C


OTQ 6

$


NCI% of Sub Post-Acq Profits 0


$


Add: Parent % of the subsidiary’s post acquisition profits Nil

250

�44

What is the value of the total assets and the share capital that will appear in the statement of financial position for Ant Group? A. 1000 & 100B. 100 & 100C. 1,100 & 300D. 1,100 & 100

Answer B

Statement of Financial Position for Ant Group

Ant Dec Group

Goodwill W3 100

Assets 500 500 500 + 500 1000

Investment in Dec 350 Cancelled in

Goodwill W3 Nil

Total Assets 850 500 1100

Ordinary Shares 100 200 Parent Only 100

Accumulated Profits 250 100 W5 250

NCI W4 50

Liabilities 500 200 500 +200 700

Total Equity & Liabilities 850 500 1100

�45

Mind Map 8 - Group SFP continued

�46

Illustration 1


Evan acquired 150m shares in Dando one year ago when the reserves of Dando were $40m. The Fair Value of the NCI on the date of acquisition was $100m.

Required

Prepare the consolidated statement of financial position for the Evan group.

Evan Dando

Assets 200 350

Investment in Dando 500

Current Assets 200 300

900 650

Ordinary Shares ($1) 200 200


Equity 450 300


Liabilities 170 150

900 650

�47

Solution

Working 1- Group Structure



↓

Date Acquired

Parent Share

NCI


Share Capital

Accumulated Profits

Cost of Parent Investment


Less net assets at acquisition (W2)

Goodwill

�48

Working 4 - NCI


$


NCI% of Sub Post-Acq Profits

Value of NCI at Year End

$

Parent’s Accumulated Profits

Add: Parent % of the subsidiary’s post acquisition profits

�49

Statement of Financial Position for Evan Group

Evan Dando Group

Goodwill

Assets 200 350

Investment in Dando

500


900 650

Ordinary Shares ($1)

200 200

Accumulated Profits

250 100

NCI

Equity 450 300

Non Current Liabilities

280 200

Liabilities 170 150

900 650

�50

Solution




Evan

↓75%

Dando

Date Acquired 1 Year Ago

Parent Share 75%

NCI 25%

100%




240 300




Goodwill 360

�51

Working 4 - NCI


$


NCI% of Sub Post-Acq Profits (25% x 60m) 15


$


Add: Parent % of the subsidiary’s post acquisition profits (75% x 60m) 45

295

�52

Statement of Financial Position for Evan Group

Evan Dando Group

Goodwill W3 360

Assets 200 350 200 + 350 550

Investment in Dando

500 Cancelled out in W3.

Nil

Current Assets 200 300 200 + 300 500

1410


Parent Only 200

Accumulated Profits

W5 295

NCI W4 115

570


280 200 280 + 200 480

Liabilities 170 150 170 + 150 320

1410

�53

Illustration 2


Virtual acquired 60m shares in Insanity one year ago when the reserves of Insanity were $60m. The Fair Value of the NCI at that date was $120m.

Required

Prepare the consolidated statement of financial position for the Virtual group

Virtual Insanity

Assets 1000 800

Investment in Insanity 600


2000 1000



Equity 1550 500


Liabilities 200 200

2000 1000

�54

SolutionWorking 1- Group Structure



Virtual

↓60%

Insanity

Date Acquired 1 Year Ago

Parent Share 60%

NCI 40%

100%




160 500




Goodwill 560

�55

Working 4 - NCI


$


NCI% of Sub Post-Acq Profits (40% x (500 - 160))

136


$


Add: Parent % of the subsidiary’s post acquisition profits (60% x (500 - 160)

204

954

�56

Statement of Financial Position for Virtual Group

Virtual Insanity Group

Goodwill W3 560

Assets 1000 800 1000 + 800 1800

Investment in Insanity

600 Cancelled in W3

Nil

Current Assets 400 200 400 + 200 600

2000 1000 2960


800 100 Parent Only 800

Accumulated Profits

750 400 W5 954

NCI W4 256

Equity 1550 500 1954


250 300 250 + 300 550

Liabilities 200 200 200 + 200 400

2000 1000 2960

�57

Illustration 3

Brad acquires 80% of Angelina’s share capital for $800. Angelina has 100 shares in issue with a nominal value of $1 and Angelina’s share price is $8. At the date of acquisition the net assets of Angelina are $600.

Calculate the gross goodwill arising on the acquisition.

Solution

Goodwill

Cost of Parent’s investment 800

Fair value of NCI at acquisition (100 x 20% x $8) 160

960

Less net assets at acquisition in W2 -600

Gross Goodwill 360

�58

Illustration 4

Brad acquires 80% of Angelina’s share capital for $800. Angelina has 100 shares in issue with a nominal value of $1 and Angelina’s share price is $8. At the date of acquisition the net assets of Angelina are $600.

Calculate the goodwill arising using the proportionate method.

Solution

Goodwill


Value of NCI (600 x 20%) 120

Net assets at acquisition (W2) -600

Goodwill 320

�59

Illustration 5

Archie acquires 60% of Mitchell’s share capital with consideration of $900. Mitchell has 200 shares in issue with a share price is $5. At the date of acquisition the net assets of Mitchell were $800 and are $950 at the year end. At the year end the retained earnings of Archie were $1,000.

An impairment review has been carried out on the goodwill at the year end which has found it to be impaired by $40.

Calculate the gross goodwill, the retained earnings and the NCI at the year end.

Solution

Goodwill


Fair value of NCI at acquisition (200 x 40% x $5) 400

1300

Less 100% net assets at acquisition in W2 -800

Gross Goodwill 500

Impairment -40

Post Impairment Goodwill 460

Dr W4 16

Dr W5 24

�60

NCI

Retained Earnings

Fair Value of NCI at Acquisition 400

NCI% Post Acquisition Profit (950 - 800) x 40% 60

NCI Share of Impairment -16

444

Parent 1000

NCI% Post Acquisition Profit (950 - 800) x 60% 90

Parent Share of Impairment -24

1066

�61

Illustration 6

French acquired 75% of Shambles several years ago.

If French has $1500 of retained earnings at the year end, calculate the gross goodwill, retained earnings for the group and the NCI at the year end.

Cost of Investment

Fair Value of NCI at

acquisition

Net assets at acquisition

Net assets at year end

Goodwill Impairment at

Y/E

$ $ $ $ $

1,000 300 800 3,000 200

�62

Solution

Goodwill

NCI

Cost of Parent’s investment 1,000

Fair value of NCI at acquisition (Market Value) 300


Gross Goodwill 500

Impairment -200


DR W4 50

DR W5 150


Plus NCI share of post acquisition profits 2200 x 25% 550

Impairment -50

800

�63

Retained Earnings

Parent 1500

NCI% Post Acquisition Profit 2200 x 75% 1650

Parent Share of Impairment -150

3000

�64

Illustration 7

Pinky acquired 80% of Brain 4 years ago. The following information is relevant:

Goodwill is calculated gross and is subject to an annual impairment review. In the current year goodwill has been impaired by $20.

Net Assets at year end

Net Assets at acquisition

Cost of investment

Fair Value of NCI at

acquisition

$ $ $ $

150 100 175 25

Pinky Brain

Investment in Pinky 175

Assets 100 100

Inventory 140 200

Receivables 160 100

Bank 125 200

700 600



Equity 400 150

Non current liabilities 100 250

Liabilities 300 100

700 600

�65

Solution


Working 2 - Net Assets Subsidiary

Pinky

↓80%

Brain

Date Acquired 4 Years Ago

Parent Share 80%

NCI 20%

100%


Share Capital 50 50


100 150

�66


Working 4 - NCI




Gross Goodwill 100

Impairment -20


Dr W4 (20%) 4

Dr W5 (80%) 16


Plus NCI share of post acquisition profits 50 x 20% 10

Less Goodwill Impairment 20 x 20% -4

31

�67

Working 5 - Group Accumulated Profit

Statement of Financial Position for Pinky Group

$


Less Goodwill Impairment 20 x 80% -16

Add: Parent % of the subsidiary’s post acquisition profits 80% x (100 - 150) (W2)

40

264

Pinky Brain Group

Goodwill W3 80

Assets 100 100 100 + 100 200

Inventory 140 200 140 + 200 340

Receivables 160 100 160 + 100 260

Bank 125 200 125 + 200 325

700 600 1205


160 50 Parent Only 160

Accumulated Profits

240 100 W5 264

NCI W4 31

Equity 400 150 455

Non current liabilities

100 250 100 + 250 350

Liabilities 300 100 300 + 100 400

700 600 1205

�68

Illustration 8

George owns 80% of the subsidiary Bungle. Goodwill has been calculated on a proportionate basis and at acquisition was $400m.

During the impairment review in the current year it was found that the carrying value of the goodwill has been impaired by $50m

What is the required treatment to deal with the impairment of goodwill?

Solution

Goodwill on Balance Sheet

Proportionate goodwill 400

Impairment -50

Goodwill after impairment 350

Treatment

DR Retained Earnings (W5) 50

CR Goodwill 50

�69

Objective Test Questions1. PRT acquired 90% of SUB’s ordinary shares on 1 January 2012 for $1,250,000 when SUB’s retained earnings were $300,000. At 1 January 2011 the fair value of the Non-Controlling Interest was $200,000.

The equity of SUB as at 31 December 2013:

Ordinary share capital 430,000 Share premium 86,000 Retained earnings 324 ,000

The retained earnings of PRT were $2,100,000 at 31 December 2013.

What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for the Non-Controlling Interest?

A. $250,000B. $204,600C. $205,000D. $206,400

Answer D

SolutionNet Assets Subsidiary

NCI



Share Premium 86 86


776 840

Post Acq Profit 64


Plus NCI share of post acquisition profits 10% x 64 6.4

206.4

�70

2. HX acquired 70% of SA’s equity shares on 1 July 2010 for $452,000.The fair value of the NCI on the 1 July 2010 was $60,000 SA has $200,000 $1 equity shares in issue and at 1 July 2010 its reserves comprised share premium of $40,000 and retained earnings of $62,000.

What is the value of the gross goodwill arising on the acquisition of SA?

A. $235,000B. $210,000C. $245,000D. $135,000

Answer B

SolutionWorking 2 - Net Assets Subsidiary



Share Capital 200,000 N/A

Share Premium 40,000

Accumulated Profits 62,000

302000


Fair value of NCI at acquisition (Market Value) 60,000

Less 100% net assets at acquisition in W2 -302,000

Gross Goodwill 210,000

�71

3. HP acquired 70% of SA’s equity shares on 1 July 2010 for $652,000. Sauce has $400,000 $1 equity shares in issue and at 1 July 2010 its reserves comprised share premium of $220,000 and retained earnings of $122,000.

What is the value of the proportionate goodwill arising on the acquisition of SA?

A. $235,000B. $210,000C. $132,600D. $135,000

Answer C




Share Capital 400,000 N/A

Share Premium 220,000

Accumulated Profits 122,000

742,000


Fair value of NCI at acquisition (742000 x 30%) 222,600

Less 100% net assets at acquisition in W2 -742,000

Gross Goodwill 132,600

�72

4. PRT acquired 80% of SUB’s ordinary shares on 1 January 2011 for $1,136,000 when SUB’s retained earnings were $260,000. At 1 January 2011 the fair value of the Non-Controlling Interest was $300,000.

SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only subsidiary. PRT calculated that goodwill in its subsidiary was impaired by 20% at 31 December 2013. The equity of SUB as at 31 December 2013:

$000 Ordinary share capital 430 Share premium 86 Retained earnings 324


What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for Goodwill?

A. $250,000B. $200,000C. $440,000D. $528,000

Answer D

�73

Solution

Working 2 - Net Assets Subsidiary




Share Premium 86 86


776 840

Post Acq Profit 64




Gross Goodwill 660

Impairment -132

528

�74

5. PRT acquired 80% of SUB’s ordinary shares on 1 January 2011 for $2,346,000 when SUB’s retained earnings were $341,000.

SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only subsidiary. PRT calculated that proportionate goodwill in its subsidiary was impaired by 10% at 31 December 2013. The equity of SUB as at 31 December 2013:



What is the amount that PRT should include in its consolidated statement of financial position as at 31 December 2013 for Goodwill?

A. $195,000B. $1,395,000C. $1,234,000D. $155,000

Answer B

�75





Share Premium 24 24


995 1230

Post Acq Profit 235


Fair value of NCI at acquisition (994 x 20%) 199


Gross Goodwill 1550

Impairment -155

1395

�76

Mind Map 9 - Inter Company Transactions

�77

Illustration 1A Parent company has recorded an asset of $500 goods receivable with a subsidiary.

The subsidiary had recorded this as a payable of $500.

How should this be adjusted for on consolidation?

SolutionWhen cross casting assets & liabilities:

Less Payables $500 (DR)

Less Receivables $500 (CR)

Illustration 2A Parent company has recorded an asset of $300 goods receivable with a subsidiary.

The subsidiary had recorded this as an initial liability payable of $300 but has just recorded and sent a cheque payment to the parent of $50 leaving the payable balance of $250.




Plus Cash at bank $50 (DR)


�78

Illustration 3Parent has been selling goods to subsidiary. The parent has recorded an asset of $500 receivable from the subsidiary.

The $500 includes goods worth $100 sent prior to the year end to the subsidiary who has not received them. As a result the subsidiary has a balance of $400 recorded as a liability in payables.

How should this be treated on consolidation?



Plus Inventory $100 (DR)


�79

Illustration 4Arctic is the parent of a subsidiary Monkeys. Extracts of their SFPs are below

The trade payables of Monkeys includes $35m due to Arctic. This was after the deduction of $10m in respect of cash sent by Monkeys but not yet received by Arctic.

The receivables of Arctic at the year end include $70m due from Monkeys. $25m of these goods had been dispatched by Arctic, but were not yet received by Monkeys.

Show the treatment on consolidation.

Arctic Monkeys

Current Assets

Inventory 300 100

Receivables 200 250

Bank 100 50

600 400


�80

SolutionRemember!

Add the goods/cash in transit

Subtract the inter company current accounts

+/- Item Where? $m

+ Cash in transit Cash at Bank 10

+ Goods in transit Inventory 25

- Inter Company Current Account Payables 35

- inter Company Current Account Receivables 70

Arctic Monkeys Group

Current Assets

Inventory 300 100 300 + 100 + Goods in transit of 25

425

Receivables 200 250 200 + 250 - 70 inter company current account

380

Bank 100 50 100 + 50 + cash in transit 10

160

600 400 965

Current Liabilities 420 220 420 + 220 - inter company current account 35

605

�81

Illustration 5Sea is the parent of a subsidiary Lion. Extracts of their SFPs are below

The trade payables of Lion includes $20m due to Arctic. This was after the deduction of $15m in respect of cash sent by Lion but not yet received by Sea.

The receivables of Sea at the year end include $50m due from Lion. $15m of these goods had been dispatched by Sea, but were not yet received by Lion.

Show the treatment on consolidation.

Sea Lion

Current Assets

Inventory 400 250

Receivables 100 100

Bank 150 100

650 450


�82

SolutionRemember!

Add the goods/cash in transit

Subtract the inter company current accounts

+/- Item Where? $m

+ Cash in transit Cash at Bank 15

+ Goods in transit Inventory 15

- Inter Company Current Account Payables 20

- inter Company Current Account Receivables 50

Sea Lion Group

Current Assets

Inventory 400 250 400 + 250 + Goods in transit of 15

665

Receivables 100 100 100 + 100 - 50 inter company current account

150

Bank 150 100 150 + 100 + cash in transit 15

265

650 450 965

Current Liabilities 90 140 90 + 140 - inter company current account 20

210

�83

Illustration 6Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun.

I. Calculate the PURP.

II. Show the accounting treatment if the parent company is the seller.

III. Show the accounting treatment if the subsidiary company is the seller.

IV. Do parts I - III if the goods had been sold at a margin of 30%.

�84

Solution (Mark-up)

Parent is seller

Subsidiary is seller

Unsold Inventory Mark-up PURP

(400 x 3/4) = 300 25/125 60

DR/CR Account $ $

DR Accumulated Profits (W5) to decrease 60

CR Inventory to decrease 60

DR/CR Account $ $

DR Accumulated Profits (W5) with parent share to decrease (60 x 80%)

48

DR NCI (W4) with subsidiary share to decrease 12


�85

Solution (Margin)

Parent is seller


Unsold Inventory Margin PURP

(400 x 3/4) = 300 30% 90

DR/CR Account $ $



DR/CR Account $ $

DR Accumulated Profits (W5) with parent share to decrease (90 x 80%)

72

DR NCI (W4) with subsidiary share to decrease 18


�86

Illustration 7Avco Co. owns 60% of Strappo Co. and on the first day of this accounting period a Non Current Asset with a carrying value of $100,000 and a useful economic life of 5 years was sold between the two for $120,000.

I. Show the accounting treatment if the parent company is the seller

II.Show the accounting treatment if the subsidiary company is the seller

SolutionParent is seller


DR/CR Account $ $

Adjust the Value of the Asset

DR Accumulated Profits (W5) 20,000

CR Non Current Asset to decrease 20,000

Reduce depreciation as too much provided

DR Non Current Asset to Increase (20,000 / 5) 4,000

CR Accumulated Profits (W5) 4,000

Account $ $


DR Accumulated Profits (W5) with P% of PURP (20,000 x 60%) 12,000

DR NCI (W4) with NCI% of PURP (20,000 x 40%) 8,000

CR Non Current to decrease 20,000


DR Non Current to Increase (20,000 / 5) 4,000

CR NCI (W4) with NCI% of Dep’n (4,000 x 40%) 1,600

CR Accumulated Profits (W5) with P% of Dep’n (4,000 x 60%) 2,400

�87


1. A Parent company has recorded an asset of $800 goods receivable with a subsidiary.

The subsidiary had recorded this as a payable of $800.

The treatment on consolidation has been recorded as:

Less Payables $800 (CR)

Less Receivables $800 (DR)

Is this treatment:

A CorrectB Incorrect

Answer B (The DR and CR are the wrong way around)

2. A Parent company has recorded an asset of $2,000 goods receivable with a subsidiary.

The subsidiary had recorded this as an initial liability payable of $2000 but has just recorded and sent a cheque payment to the parent of $230 leaving the payable balance of $1,770.


Less Payables $1,770 (DR)

Plus Cash at bank $230 (DR)

Less Receivables $2,000 (CR)

Is this treatment:

A CorrectB Incorrect

Answer A

�88

3. Dafo has sold goods to their subsidiary Aldo during the year and at the year end has recorded a receivable of $4,690 due from Aldo.

Aldo has sent a cheque which has not yet been received by Dafo which means that the payable due to Dafo is recorded as $3,240 in the financial statements of Aldo.

Before adjustment for any of the above the group cash balance stood at $134,880.

What will the balance on cash be after making an adjustment for the above?

A. $139,570B. $138,120C. $136,330D. $133,430

Answer C

SolutionCash in transit (4690 - 3240) $1450

Group Cash (134,880 + 1450) $136,330

�89

4. DW sold goods to PR. DW is PR’s 80% owned subsidiary on 1 February 2011. The goods were sold to PR for $90,000. HW made a profit of 25% on the original cost of the goods.

At the year end, 30 June 2011, 30% of the goods had been sold by PR, the balance were still in PR’s inventory and PR had not paid for any of the goods.

Which ONE of the following states the correct adjustments required in the HW group’s consolidated statement of financial position at 30 June 2011?

A. Reduce inventory and retained earnings by $12,600 and Reduce payables and receivables by $12,600.

B. Reduce inventory by $12,600, the NCI by $2,520, retained earnings by $10,080 and Reduce payables and receivables by $90,000.

C. Reduce inventory and retained earnings by $15,750 and Reduce payables and receivables by $15,750.

D. Reduce inventory by $15,750, the NCI by $3,150, retained earnings by $12,600 and Reduce payables and receivables by $90,000.

Answer C

Solution

Unsold Mark up PURP

90,000 x 70% = 63,000 25/125 12,600

CR Inventory 12,600

DR NCI (20%) 2,520

DR Ret. Earnings (80%) 10,080

DR Payables 90,000

CR Payables 90,000

�90

5. Dando Co. owns 80% of Pobo Co. and on the first day of this accounting period Pobo Co. sold a Non Current Asset to Dando Co. The asset had a carrying value of $250,000 and a useful economic life of 4 years was sold between the two for $300,000.

What amount will go to NCI to account for the above transaction?

A. $7,500 CRB. $7,500 DRC. $10,000 DRD. $2,500 CR

Answer B

Solution

Account $ $


DR Accumulated Profits (W5) with P% of PURP (50,000 x 80%) 40,000

DR NCI (W4) with NCI% of PURP (50,000 x 20%) 10,000

CR Non Current to decrease 50,000


DR Non Current to Increase (50,000 / 4) 12,500

CR NCI (W4) with NCI% of Dep’n (12,500 x 20%) 2,500

CR Accumulated Profits (W5) with P% of Dep’n (12,500 x 80%) 10,000

Amount to NCI (10,000 (DR) - 2,500 (CR)) 7,500 (DR)

�91

Mind Map 10 - Associates(IAS 28)

�92

Illustration 1 3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of $400,000. Since that time Wars Ltd.has had the following results:

Due to poor trading results and customer service issues, Star Ltd feel that in the current year the investment in Wars Ltd. has been impaired by $20,000.

Show the treatment of War Ltd. in the statement of financial position of Star Group and in the Income statement for the 3 years of the investment.

Solution

Year Profit Dividend Paid By Associate

1 $200,000 0

2 $160,000 $150,000

3 $30,000 0

Year 1 Investment In Associate (SFP)

Initial Investment 400,000

Parent Share of Post Acquisition Profit (200,000) x 25% 50,000

Investment in Associate 450,000

Year 1 Income From Associate (Income Statement)

Parent share of Current Year Income (200,000 x 25%) 50,000

�93



Parent Share of Post Acquisition Profit (200,000 + 160,000) x 25% 90,000

Share of Dividend (150,000 x 25%) -37,500



Parent share of Current Year Income (160,000 x 25%) 40,000



Parent Share of Post Acquisition Profit (200,000 + 160,000 + 30,000) x 25% 97,500

Share of Dividend (150,000 x 25%) -37,500

Impairment -20,000



Parent share of Current Year Income (30,000 x 25%) 7500

Impairment -20,000

Loss From Associate -12500

�94

Illustration 2 Inter company sales of $1,300 have occurred in Attila group at a mark up on cost of 30%. At the year end 1/2 of these goods had been sold on. Attila has an 30% interest in Hun.

I. Calculate the PURP.

II. Show the accounting treatment if the parent company is the seller.

III. Show the accounting treatment if the Associate company is the seller.

�95

Solution

Parent is seller

Associate is seller

Unsold Inventory Mark-up PURP Group %

(1300 x 1/2) = 650 30/130 150 45

DR/CR Account $ $


CR Investment in Associate 45

DR/CR Account $ $


CR Group Inventory 45

�96


1. An associate is an entity in which an investor has significant influence over the investee.

Which of the following indicate(s) the presence of significant influence?

I. The investor owns 330,000 of the 1,500,000 equity voting shares of the investee II. The investor has representation on the board of directors of the investee III. The investor is able to insist that all of the sales of the investee are made to a

subsidiary of the investor IV. The investor controls the votes of a majority of the board members

A (i) and (ii) only B (i), (ii) and (iii) C (ii) and (iii) only D All four

Answer A

2. The Caddy group acquired 240,000 of August’s 800,000 equity shares for $6 per share on 1 April 2014. August’s profit after tax for the year ended 30 September 2014 was $400,000 and it paid an equity dividend on 20 September 2014 of $150,000.

On the assumption that August is an associate of Caddy, what would be the carrying amount of the investment in August in the consolidated statement of financial position of Caddy as at 30 September 2014?

A $1,455,000 B $1,500,000 C $1,515,000 D $1,395,000

Answer A

Solution

Parent Investment (240 x 6) 1,440

Share Profit (400 x 30% x 6/12) 60

Dividend Received (150 x 30%) -45

1,455

�97

3. HB sold goods to AT, its 30% owned associate, on 1 November 20X0. The goods were sold to S2 for $33,000. HB made a profit of 25% on the original cost of the goods.At the year end, 31 March 20X1, 50% of the goods had been sold by S2. The remaining goods were included in inventory.

What is the amount of the adjustment required to retained earnings in the consolidated statement of financial position at 31 March 20X1.

A. $660B. $1,238C. $3,300D. $990

Answer D

Solution

4. The HC group acquired 30% of the equity share capital of AF on 1 April 2010 paying $25,000.

At 1 April 2010 the equity of AF comprised:

$1 equity shares 50,000Share premium 12,500Retained earnings 10,000

AF made a profit for the year to 31 March 2011 (prior to dividend distribution) of $6,500 and paid a dividend of $3,500 to its equity shareholders.

What is the value of HC’s investment in AF for inclusion in HC’s statement of financial position at 31 March 2011.

A $26,950 B $31,500 C $28,000D $25,900

Answer D

Unsold Mark up Associate % PURP

16,500 25/125 30% 990

�98

Solution

5. Which of the following statements relating to the method of consolidation are true?

A. All subsidiaries of the parent are consolidated using equity accounting.B. All associates of the parent are consolidated using equity accounting.C. The only way to gain control of a subsidiary is to purchase 50% or more of the share

capital.D. If a company buys some shares but owns less than 50% of another entity it is

accounted for as a subsidiary.

Answer B

Parent Investment 25,000

Share Profit (6,500 x 30%) 1,950

Dividend Received (3,500 x 30%) -1,050

25,900

�99

Mind Map 11 - Group Statement of Comprehensive

Income

�100

Illustration 1 Nero Co. purchased 80% of Jax Co. on 01/06/X2. The figures for Profit and Loss items for the year ended 01/12/X2 were as follows:

Show the figures to be shown in the Group Statement of Profit or Loss and calculate the Group Profit or Loss for the year ended 01/12/12.

Solution

Nero Jax

Revenue 8000 3000

Cost of Sales -4000 -1000

Gross Profit 4000 2000

Operating Costs -1500 -1500

Finance Costs -1000 -200

Profit Before Tax 1500 300

Tax -700 -100

Profit for the year 800 200

Nero Jax 6 MonthsJax Group

Revenue 8000 3000 1500 9500

Cost of Sales -4000 -1000 -500 -4500

Gross Profit 5000

Operating Costs -1500 -1500 -750 -2250

Finance Costs -1000 -200 -100 -1100

Profit Before Tax 1650

Tax -700 -100 -50 -750

Profit for the year 900

�101

Illustration 2 Simo Co. purchased 80% of Loco Co. on 01/03/X2. The figures for Profit and Loss items for the year ended 01/12/X2 were as follows:

During the period since acquisition Simo sold goods to Loco during the year at a margin of 40% and worth $1000. Half of these goods have been sold on by Loco by the year end.

Loco paid interest of $200 to Simo after acquisition.

Simo paid dividend of $125 on 31/11/X2.

Show the figures to be shown in the Group Statement of Profit or Loss and calculate the Group Profit or Loss for the year ended 01/12/12.

Solution

Simo Loco

Revenue 9000 2000




Finance Income 300 0


Profit Before Tax 3000 -200

Tax -800 -60

Profit for the year 2200 -260

�102

PURP

As the Parent is seller

Remember to remove the total amount of the sales also from sales and cost of sales


(1000 x 1/2) = 500 40% 200

DR/CR Account $ $

DR Cost of sales to increase 200


DR/CR Account $ $

DR Revenue to decrease 1000

CR Cost of sales to decrease 1000

Simo Loco 9 MthsLoco Adjustments Group

Revenue 9000 2000 1500 -1000 9500

Cost of Sales -4000 -1000 -750 1000

PURP (W1) -200 -3950

Gross Profit 9500

Operating Costs -1000 -700 -525 -1525

Finance Income 300 0

Sub. Dividend (125 x 80%) -100

Sub. Interest -200 0

Finance Costs -1000 -500 -375

Sub Interest 200 -1175

Profit Before Tax 7975

Tax -800 -60 -45 -845

Group Profit for the year 7130

�103

Illustration 3Argentina owns an 80% share of Messi which it purchased one year ago.

The information below relates to Messi at the date of acquisition.

The income statements for both are:

Other information

I. Messi sold goods to Argentina during the year at a margin of 40% and worth $100m. Half of these goods have been sold on by Messi by the year end.

II. Calculate goodwill using the fair value of the NCI at the date of acquisition. At the year end an impairment review has found that the goodwill has been impaired by 10%.

Produce a consolidated Income Statement for the Argentina group.

Ordinary Share Capital

Reserves Fair Value of the net assets

Fair value of the NCI

Cost of the investment

$m $m $m $m $m

200 400 800 200 1900

Argentina Messi

Revenue 8000 3000





Profit Before Tax 1500 300

Tax -700 -100

Profit for the year 800 200

�104

SolutionWorking 1- Group Structure

Working 2 - Inter Company

PURP

As the Sub is seller we will need to adjust the NCI share Profit

Remember to remove the total amount of the sales also from sales and cost of sales

Argentina

↓80%

Messi

Date Acquired 1 Year Ago (No time apportionment)

Parent Share 80%

NCI 20%

100%


(100 x 1/2) = 50 40% 20

DR/CR Account $ $



DR/CR Account $ $

DR Revenue to decrease 100

CR Cost of sales to decrease 100

�105


The treatment for this is:

Working 4 - Cost of Sales



Net Assets at Acquisition -800

Gross Goodwill 1300

Goodwill impairment

Gross Goodwill 1300

Impairment Loss (1300 x 10%) 130

DR/CR Account $ $


CR Goodwill Intangible Asset to decrease 130

$m

Parent 4000

Subsidiary 1000

Less Inter Company Sales -100

Plus the PURP 20

Plus impairment loss 130

5050

�106

Working 5 - NCI

Statement of Profit or Loss for Argentina Group

$

NCI % of the subsidiary’s profits in question 200 x 20% 40

Less NCI share of PURP 20 x 20% -4

Less NCI share of Impairment of goodwill 130 x 20% -26

10

Argentina Messi Group

Revenue 8000 3000 8000 + 3000 - 100 inter company sales

10900

Cost of Sales -4000 -1000 W4 -5,050

Gross Profit 4000 2000 5850

Operating Costs -1500 -1500 1500 + 1500 -3000

Finance Costs -1000 -200 1000 + 200 -1200

Profit Before Tax 1500 300 1650

Tax -700 -100 700 + 100 -800

Profit for the year 800 200 850

Attributable to Parent (Balancing Figure) 840

Attributable to NCI (W5) 10

850

�107


1. On 1 July 2014, Walter acquired 70% of the equity share capital of White. Extracts of their statements of profit or loss for the year ended 30 September 2014 are:

What would be the cost of sales in Walter’s consolidated statement of profit or loss for the year ended 30 September 2014?

A $37.00 million B $28.50 million C $35.50 million D $47.50 million

Answer B

Solution

Walter‘000

White‘000

Revenue 35,000 26,000

COS -23,000 -14,000

Parent 23,000

Sub (14,000 x 3/12) 5,500

28,500

�108

2. On 1 July 2014, Walter acquired 70% of the equity share capital of White. Extracts of their statements of profit or loss for the year ended 30 September 2014 are:

Sales from Walter to White throughout the year ended 30 September 2014 had consistently been $500,000 per month. Walter made a mark-up on cost of 30% on these sales. White had $260,000 of these goods in inventory as at 30 September 2014.

What would be the cost of sales in Walter’s consolidated statement of profit or loss for the year ended 30 September 2014?

A $27.00 million B $28.56 million C $35.56 million D $27.06 million

Answer D

Solution

Walter‘000

White‘000

Revenue 35,000 26,000

COS -23,000 -14,000

Parent 23,000

Sub (14,000 x 3/12) 5,500

Inter-Co Sales (500 x 3) -1,500

PURP (260 x 30/130) 60

27,060

�109

3. PT acquired 60% of SB’s ordinary shares on 1 January 2011 for $2,346,000 when SUB’s retained earnings were $341,000.

SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only subsidiary. PRT calculated that proportionate goodwill in its subsidiary was impaired by 10% at 31 December 2013. The equity of SUB as at 31 December 2013:



What adjustment should be made to the NCI share of profit for the goodwill impairment?

A. $0B. $995 DRC. $155,000 CRD. $155,000 DR

Answer A

Proportionate goodwill does not affect the NCI.

�110

Mind Map 12 - Regulatory Environment

�111


1. There are different approaches to corporate governance: rules-based and principles- based.

For each of the characteristics below, select whether it is a rules-based or a principle-based approach.

A. Comply with the code or explain why

B. Applied in the US

C. Instils the code into law

D. Applied in the UK

Answer

Rules-based = B&C

Principles-based = A&D

2. Which three of the following are topics included in the International Accounting Standards Board’s (IASB) The Conceptual Framework for Financial Reporting?

A. The objective of financial statements

B. Concepts of capital maintenance

C. Regulatory bodies governing financial statements

D. Measurement of the elements of financial statements

E. The standard setting process.

Answer

A, B & D

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3. What is the purpose of the International Organization of Securities Commission (IOSCO)

A. Regulates the world’s securities and futures markets.

B. Promotes rigorous application of the international financial reporting standards

C. Reviews issues not covered by IFRS

D. Issues accounting standards

Answer

A

4. List the following in the correct order for the International Financial Reporting Standard setting process.

A. Consultation with advisory committee in order to set agenda and planning process

B. Issue exposure draft for public consultation

C. Issue Discussion paper for public consultation

D. Issue IFRS

Answer B

A. A, B, C, D

B. A, C, B, D

C. A, D, B, C

D. B, D, A, C

5. Which of the following are NOT responsibilities of the IFRS Advisory Council?

A. Give advice to IASB on agenda decisions and priorities in its work

B. Annually review the strategy of the IASB

C. Inform the IASB of the views of the members of the council on proposed new standards

D. Appoint the member of the IASB

Answer

C & D

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https://en.wikipedia.org/wiki/Securities

https://en.wikipedia.org/wiki/Futures_contract

Mind Map 13 - Conceptual Framework

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1. Which of the following is NOT a purpose of the IASB’s Conceptual Framework? A. To assist the IASB in the preparation and review of IFRS B. To assist auditors in forming an opinion on whether financial statements comply with

IFRS C. To assist in determining the treatment of items not covered by an existing IFRS D. To be authoritative where a specific IFRS conflicts with the Conceptual Framework

Answer D

2. The IASB’s Framework for the preparation and presentation of financial statements lists four qualitative characteristics of financial statements, one of which is reliability.

Which ONE of the following lists three characteristics of reliability?

A. Neutrality, prudence and comparability. B. Prudence, faithful representation and relevance. C. Comparability, relevance and completeness. D. Neutrality, faithful representation and prudence.

Answer D

3. Which ONE of the following is NOT listed as an element of financial statements by the IASB Framework?

A AssetB EquityC ProfitD Expenses

Answer C

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4. The following are possible methods of measuring assets and liabilities other than historical cost:

(i) Current cost (ii) Realisable value (iii) Present value(iv) Replacement cost

According to the IASB’s Conceptual Framework for Financial Reporting (2010) (Framework) which of the measurement bases above can be used by an entity for measuring assets and liabilities shown in its statement of financial position?

A (i) and (ii) B (i), (ii) and (iii) C (ii) and (iii) D (i), (ii) (iii) and (iv)

Answer D

5. Which of the following criticisms does NOT apply to historical cost accounts during a period of rising prices?

A. They contain mixed values; some items are at current values, some at out of date values

B. They are difficult to verify as transactions could have happened many years ago C. They understate assets and overstate profit D. They overstate gearing in the statement of financial position

Answer B

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Mind Map 14 - External Audit

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Illustration 1 Statal Co. has just been audited and the auditor has found that management have incorrectly calculated depreciation for the current year. The error is material to the financial statements and the directors have refused to correct the error.

What action should the auditor take in issuing the audit opinion?

Solution The auditor should issue a modified audit report with an ‘except for’ paragraph.

Illustration 2 Newrit Co. is currently being audited and the auditor has discovered that the payroll function is outsourced to Payroller Co. The auditor has contacted Payroller Co. but they are unable to provide them with the payroll records of Newrit Co. due to a recent computer failure. Payroll is material to the financial statements.

What action should the auditor take in issuing the audit opinion?

Solution The auditor should issue a modified audit report with an ‘except for’ paragraph.

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1. What is the responsibility of the external auditor?

A. To report on whether the financial statements are prepared in a true and fair manner

B. To prepare the financial statements

C. Implement internal controls

D. Appoint the internal auditor

Answer

A

2. Select which of the following are the rights of an auditor.

A. Access to all records

B. Speak at the AGM

C. Call an EGM

D. Restate the financial statements

Answer

A, B & C

3. Put the following steps in order in relation to the Audit Process.

A. Audit planning

B. Detailed testing

C. Report at AGM

D. Review and Opinion

E. Risk Assessment

F. Appointment and Agree Terms

Answer A

A. F, E, A, B, D & C

B. F, E, B, A, D & C

C. F, E, A, D, B & C

D. F, E, A, B, C & D�119

4. Which of the following is NOT an element of the Auditors Report.

A. Fee

B. Title & Addressee

C. Opinion

D. Signature

Answer

A

5. The Auditor should only use an ‘Emphasis of Matter’ paragraph to highlight potential important issues or uncertainties rather than for general communications to share holders.

Is this statement:

A. True

B. False

Answer A

6. The auditors have discovered that the inventory has been materially understated in the financial statements.

What type of audit report should be issued in this situation?

A. A modified report, based on insufficient appropriate evidence, with a qualified opinion

B. A modified report, based on material misstatements, with a qualified opinion

C. A modified report, based on material misstatements, with an adverse opinion

D. An unmodified report, with an unmodified opinion

Answer

B

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Mind Map 15 - Ethics

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1. Accountants must ensure that they act responsibly when carrying out the services they provide to the public. Which of the following may influence an accountant not to act in the public interest and must therefore be guarded against?

A. Becoming too familiar with a client and developing a close friendship.B. Being offered a larger fee than the work really warrants.C. Wanting to keep the client happy.D. All of the above.

Answer D

2. Archie is an accountant who works in a small local manufacturing business. During the recent recession the company has had cash flow problems and the CEO has asked Archie to overstate profit by bringing in sales from next year. He assures Archie that it is a ‘one-off to ensure our survival and the jobs of him and his colleagues’.

For Archie to do this would be a breach of which of the following principles?

A. ObjectivityB. ConfidentialityC. IntegrityD. Advocacy

Answer C

3. You have discovered an ethical threat. Which of the following should you do first?

A. Discuss with the director of the company

B. Discuss with your line manager

C. Discuss with the auditor

D. Discuss with your professional body

Answer D

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4. In what situation is it appropriate to break confidentiality?

A. To obtain promotion

B. Under duress

C. Legal requirement

Answer C

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Mind Map 16 - Corporate Governance

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Objective Test Questions1. Corporate Governance is best described as:

A. A system of policies by which the organisation is directed and controlled.B. Guidance for the treatment of stakeholders by an organisation.C. A system of penalties for unethical behaviour.D. Guidance on how the organisation should interact with government.

Answer A

2. Which of the following statements relating to the US Sarbanes-Oxley Act 2002 is correct?

A. It is a principles based code requiring compliance or an explanation of reasons for non-compliance.

B. It came about as a response to the Second World War.C. It requires the Auditor to be represented on the board of directors.D. It requires an annual statement on Internal Controls.

Answer D

3. Which of the following is not required under the UK Corporate Governance Code?

A. Regular re-election of directors.B. Separate people holding the post of CEO and Chairman.C. All members of the board should be non-executives.D. Directors should have regular performance evaluations.

Answer C

4. Evan has been asked to join the board of AST Ltd. as a Non-Executive director. Which of the following would mean that he could not accept the role as he is not sufficiently independent.

A. He was employed as a senior manager in AST Ltd from which he retired 8 years ago.B. He is a director in HRT Ltd. who supply a major component to AST Ltd.C. He went to school with the Chairman although they did not keep in contact.D. He owns a very small number of AST Ltd’s shares.

Answer B

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5. Which of the following is not a function of the Audit Committee?

A. Monitoring and review of the financial statements of the organisation.B. Monitoring the work of Internal Audit.C. Monitoring the performance of the board of directors.D. Liaison with the external auditor.

Answer C

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Mind Map 17 - Presentation of Financial Statements

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Statement of Financial Position Pro-FormaYZ Group Statement of Financial Position as at 31 December 20X5

Assets

Non-Current Assets

Property Plant & Equipment X

Investments X

Intangibles X

X

Current Assets

Inventories X

Trade Receivables X

Cash & Cash Equivalents X

Total Assets X

X

Equity & Liabilities

Share Capital & Reserves

Ordinary Shares X

Share Premium Account X

Retained Earnings X

Other Components of Equity X

Total Equity X

Non-Current Liabilities X

Long Term borrowings X

Deferred Tax X

Current Liabilities X

Trade Payables X

Short Term Borrowings X

Current Tax Payable X

Short Term Provisions X X

Total Equity & Liabilities X

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Statement of Changes in Equity Pro-Forma

Share Capital

SharePremium

RevaluationReserve

RetainedEarnings

TotalEquity

$ $ $ $ $

Balance B/F X X X X X

Change in Accounting Policy/prior year error

(X) (X)

Restated Balance X X X X X

Dividends (X) (X)

Shares Issued X X X

Profit for the Period X X

Revaluation gain/loss X X

Transfer to Retained Earnings

(X) X -

Balance C/F X X X X X

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Statement of Comprehensive Income Pro-Forma$

Revenue X

Cost of Sales (X)

Gross Profit X

Distribution Costs (X)

Admin Expenses (X)

Profit from Operations X

Finance Cost (X)

Investment Income X

Profit Before Tax X

Income Tax Expense (X)

Profit For the Year X

Other Comprehensive Income

Gain/Loss on Revaluation X

Gain/Loss on Financial Instruments Through Comprehensive Income X

Total Comprehensive Income for the Year X

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Mind Map 18 - Non Current Assets

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Illustration 1

Mahesh Bhupathi started a painting business on 1 April 2010. In the year to 31 March 2011, he incurred costs which are summarised below.

What amounts should be capitalised as Land and buildings, and Paint Brushes?

Solution

Item $

Office 200,000

Legal fees relating to purchase of office

8,000

Cost of materials and labour to paint office

250

Paint brushes for business use

10,000

Delivery costs of brushes 50

Staff wages 45,000

Land & Buildings $

Office 200,000

Legal Fees 8,000

Painting not included -

Total 208,000

Paint Brushes $

Paint brushes for business use 10,000

Delivery cost of brushes 50

Wages (Paid each year) -

Total 10,050

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Illustration 2

Charlotte has been running a creche since 1 July 2010. She has purchased the following items relating to this business:

1. A new microwave for the creche kitchen at a cost of $200 (purchased 5 May 2011)2. New tables for the creche at a cost of $600 (purchased 1 July 2011)

She depreciates the oven at 8% straight line and the tables at 20% reducing balance. a full year’s depreciation is charged in the year of purchase and none in the year of disposal.

What is the total depreciation charge for the year ended 30 September 2013?

Solution

Tables

Year O’Bal Dep’n Cl’Bal

2011 600 120 480

2012 480 96 384

2013 384 77 307

Microwave $

Cost at 5 May 2011 200

Dep’n 30 Sep 2012 (200 x 8%) 16

Dep’n 30 Sep 2013 (200 x 8%) 16

Total Depreciation for Year $

Tables 77

Microwave 16

Total Depreciation 93

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Illustration 3

The following relates to the purchase of plant by Windsor Automotive:

What is the total depreciation charge for the years ended 30 November 2010 and 2011?

Solution

$

Cost $20,000

Purchase Date 1 September 2010

Depreciation method Straight line pro rata

Residual value 2,000

Useful economic life 5

Review, 1 Sep 2011

New residual value 0

New Useful economic life 8

$

Cost at 01 Sep 2010 20,000

Depreciation to date (20,000 - 2,000) / 5) x 3/12 -900

Carrying Value 30 Nov 10 19100

New Depreciation (19,100 - 0) / 8 -2,388

Carrying Value 30 Nov 10 16712

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Illustration 4

Grigor Dimitrov purchased a new tennis racquet for $1,000 on 1 January 2010. At that time, he believed that its useful economic life would be 10 years, with no residual value.

On 1 January 2012, Grigor changes his estimations. He believes that the racquet will be used for a further 10 years after which time it will have a second-hand value of $100.

What is the depreciation charge for the year ended 31 December 2012?

Solution

Illustration 5

Mr Gall runs a construction company. On 1 January 2010, he purchased a fork-lift vehicle for $8,000. He depreciates it at 5% per anum straight line on a monthly basis. A few years later, he decides to replace it with one which is of superior quality. He sells the forklift truck on 30 June 2012 for $7,500.

How much is charged to Mr Gall’s income statement for the year ended 31 December 2012?

$

Cost at 01 Jan 2010 1,000

Depreciation to date (1,000 / 10) x 3 -300

Carrying Value 700

New Depreciation (700 - 100) / 10 60

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Solution

$

Cost at 01 Jan 2010 8,000

Depreciation 31 Dec 2010 (8,000 x 5%) -400

Depreciation 31 Dec 2011 (8,000 x 5%) -400

Depreciation 30 June 2012 (8,000 x 5%) x 6/12 -200

Carrying Value 7000

Sale Proceeds 7,500

Profit On Disposal 500

Depreciation in Year -200

Disposal Account

DR CR

Asset at Cost 8,000 Accumulated Dep’n 1,000

Proceeds 7,500

Profit on Sale 500

8500 8,500

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1. Identify from the list below, revenue expenditure and capital expenditure.

A. Desktop Computer

B. Printer Paper

C. Ink

D. Laptop

E. Computer Desk

F. Server with Monitors

Answer

Revenue Expenditure = B & C

Capital Expenditure = A, D, E & F

2. Both Land and Land Improvements will generally be depreciated.

True or False

Answer

False

3. A company purchases equipment for £30,000 on July 1, 2014. It estimates that the equipment will have a residual value of £2,000 and its useful life will be 7 years. Assuming that the company's accounting year ends on December 31 of each year, what will be the Depreciation Expense for the years 2014 and 2015 assuming straight-line depreciation?

2014 ______

2015 ______

Answer

2014 = £4,000

2015 = £4,000

Working (30,000-2,000)/7 = 4,000

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4. On January 1, 2010 an asset was acquired for £30,000. Its useful life was expected to be 10 years and the residual value is expected to be NIL. After 4 years, the company reviewed the asset and found that it would be useful for only 3 more years. The company uses the straight-line method of depreciation. What will the Depreciation Expense in each of the years 2012 and 2014?

Answer2012 = £3,0002014 = £6,000

Working; 2010 = (30,000 – 0)/10 = 3,000 ; 2014 = NBV = 30,000 – (3,000 x 4) = 18,000, Dep’n 18,000/3 = 6,000

5. Calculate the profit or loss on disposal and indicate the journal entries required.

Sales Proceeds 35,500Asset Cost 100,000Depreciation to date 60,000

A. Profit on disposal 4,500 ; Dr Income Statement 4,500 Cr Disposal Account 4,500B. Loss on disposal 4,500 ; Dr Income Statement 4,500 Cr Disposal Account 4,500C. Profit on disposal 64,500 ; Dr Income Statement 4,500 Cr Disposal Account 4,500D. Loss on disposal 64,500 ; Dr Income Statement 4,500 Cr Disposal Account 4,500

Answer B

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Mind Map 19 - Non Current Assets II

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Illustration 1

John Boy has had a non current asset for several years which he bought for $300,000. The depreciation on the asset to date has been $50,000. He decides to revalue the asset and finds that it is now worth $350,000.

Show the journal entries to record the transaction.

Solution

Asset at cost 300,000Depreciation to date -50,000

Carrying Value 250,000New Value 350,000Revaluation Reserve 100,000

Journal Entries

DR Acc Dep’n 50,000DR Asset at Cost 50,000

CR Rev. Reserve 100,000

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Illustration 2Jamie owns a shoe factory. The premises were bought on 1 May 20X3 for $600,000 and depreciated at 3% per annum straight line.

Jamie now wishes to revalue the factory premises to $900,000 on 1 May 20X8 to reflect market value.

What is the balance on the revaluation reserve after this transaction?

Solution

$

Cost at 1 May 20X3 600,000

Depreciation to 1 May 20X8 (600,000 x 3%) x 5 -90,000

Carrying Value 510,000

New Value 900,000

Revaluation Reserve (900,000 - 510,000) 390,000

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Illustration 3Antro Co. buys an asset on 01 Jan 20X4 for $500,000 with a useful economic life of 20 years. On 01 Jan 20X6 the asset is revalued to $600,000.

On 01 Jan 20X7 the asset is revalued again to $400,000.

Show the accounting treatment for the two revaluations and the depreciation charge for the year ended 31 Dec 20X8.

Solution

$

Cost 500,000

Dep’n to 01 Jan 20X6 (500,000 / 20) x 2 -50,000


New Value 01 Jan 20X6 600,000

Revaluation Reserve 150,000


Dep’n to 01 Jan 20X7 (600,000 / 18) -33,333

Carrying Value 01 Jan 2007 566,667


Impairment -166,667

Remove Revaluation Reserve 150,000

Rest to P/L (166,667 - 150,000) 16,667

New Depreciation 400,000 / 17 23,529

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Illustration 4Charlie owns a shop in Smallville. He bought it 30 years ago for $150,000, depreciating it over 50 years. At the start of 20X8 he decides to revalue the unit to $900,000. The shop has a remaining useful life of 20 years.

What will the depreciation charge be in 20X8?

Solution

$

Cost 30 yrs ago 150,000

Accumulated Dep’n (150,000 / 50) x 30 -90,000


New Value 900,000

Revaluation Reserve 840,000

New Depreciation 900,000 / 20 45,000

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Objective Test Questions1. The following information relates to OTQ1, OTQ2 and OTQ3.

ABC Company purchased a building on 1/1/07 at a cost of 1,250,000. The building is depreciated at 2% per annum. At 31/12/10, the building was revalued at 1,500,000 reflecting its value on the market at that time. The company revalued the building 31/12/14 and found that the market value was 1,000,000.

What are the journal entries required in 2010 after the first revaluation?

A. Dr Asset 350,000 Cr Revaluation Reserve 350,000 Cr P&L 0B. Cr Asset 350,000 Dr Revaluation Reserve 350,000 Cr P&L 0C. Dr Asset 350,000 Cr Revaluation Reserve 0 Cr P&L 350,000D. Cr Asset 350,000 Dr Revaluation Reserve 0 Dr P&L 350,000

Answer A

WorkingNBV 2010 (1250000 – (1250000*0.02)*4) = 1,150,000Revaluation = 1,500,000Revaluation Gain = 350,000

2. What are the journal entries required in 2014 after the second revaluation?

A. Cr Asset 410,000 Dr Revaluation Reserve 350,000 Dr P&L 60,000B. Dr Asset 410,000 Cr Revaluation Reserve 410,000 Cr P&L 0C. Dr Asset 350,000 Cr Revaluation Reserve 350,000 Cr P&L 60,000D. Dr Asset 410,000 Cr Revaluation Reserve 350,000 Cr P&L 60,000

Answer A

NBV 2014 (1500000 – (1500000*0.02)*3) = 1,410,000Revaluation = 1,000,000Revaluation Loss = 410,000

3. What is the depreciation charge for 2015?

2015 ______

Answer 20,000

Working1,000,000 * 0.02 = 20,000

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4. In the notes to the financial statements, what is missing from the disclosure items below in terms of revaluation of a non current asset.

• Date • Assumption• Qualified Revaluer• Revaluation Gain/Loss

Answer Cost of Asset

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Mind Map 20 - Investment Property (IAS 40)

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Illustration 1Which of the following are Investment Property?

• Building used as accommodation for staff.• Land purchased as an investment. No planning consent yet.• New office building purchased for capital appreciation.

Solution

Building used as accommodation for staff. NO

Land purchased as an investment. No planning consent yet. YES

New office building purchased for capital appreciation. YES

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Illustration 2A company has purchased a building for investment purposes on 1st Jan 20X0. The building cost a total of $1.5m with the land element being estimated at $500,000.

The building has a useful life of 30 years. At the 31st December 20X0 the fair value of the building (including the land) was $2m.

Show the treatment of the property for the two methods possible under IAS 40.

Solution

Cost Model

Cost of the Property $1,500,000

Depreciation in Period (1,500,000 - 500,000) / 30 $33,333

Carrying Value at 31 December 20X0 $1,466,667

Fair Value Model

Cost of the Property $1,500,000

Depreciation in Period Not Depreciated $0

Fair Value Adjustment to Income ($2m - $1.5m) $500,000

Carrying Value at 31 December 20X0 $2,000,000

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Aston Co. owns a property which cost $400,000 7 years ago at which time it had a useful economic life of 20 years. The property is rented out to Villa Co. under an operating lease and has been treated using the cost model. Aston Co. has now decided to revalue the property to it’s current fair value of $500,000.

Which of the following is correct?

A. A revaluation reserve of $240,000 will be created.B. A charge of $240,000 will be taken to Profit or Loss.C. A gain of $240,000 will be taken to Profit or Loss.D. The carrying value of the property will be increased by $100,000.

Answer C

Cost $400,000Depreciation (400/20 x 7) $140,000Carrying Value $260,000Revalue to $500,000Revaluation Amount $240,000 to P/L as Investment Property

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Mind Map 21 - Intangible Assets (IAS 38)

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Illustration 1Which of the following should be classified as development?

1. Lion Ltd has spent $200,000 investigating whether a particular substance, drefite, found in the Arctic Circle is resistant to heat.

2. Hoey Ltd has incurred $250,000 expenses in the course of making new material for ski-equipment which will be more durable.

3. Ryan Ltd has found that a chemical compound, mallerite, is harmful to the human body.4. Lion Ltd has incurred a further $300,000 using drefite in creating prototypes of a new

heat-resistant body-suit for humans.

Solution

2 & 4 are development

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Illustration 2

Coddy Ltd is developing a new product, the fold-up bicycle. Forecasts are as follows:

Show how the development costs should be treated if:

1. the costs do not qualify for capitalisation2. the costs do qualify for capitalisation.

Solution

Expense Costs

20X5 20X6 20X7 20X8

$ $ $ $

Revenue from other activities 500 700 800 800

Revenue from Fold-up Bicycle 500 700 900

Development costs -600

1. Expense Costs

20X5 20X6 20X7 20X8 Total

Revenue from other activities

500 700 800 800 2800

Revenue from other widgets 500 700 900 2100

Development costs -600 -600

Net Profit/Loss -100 1200 1500 1700 4300

2. Amortise Development Costs

20X5 20X6 20X7 20X8 Total

Revenue from other activities

500 700 800 800 2800

Revenue from other widgets 500 700 900 2100

Development costs 0 -143 -200 -257 -600

Net Profit/Loss 500 1057 1300 1443 4300

Working for Costs 600 x 500/2100

600 x 700/2100

600 x 900/2100

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Illustration 3A company has 3 projects in development:Project A is in development and testing of the product has proved successful. Production has begun and some sales have been made to date. The costs have been measured accurately and the project looks likely to be profitable. All costs incurred so far meet the criteria to be capitalised under IAS 38.

Project B is also in development and testing of the product has proved successful. The costs have been measured accurately and the company expects to begin production and sales next year. All costs incurred so far meet the criteria to be capitalised under IAS 38.

Project C was begun in the current period and to date there has been a feasibility study carried out which was inconclusive.

Other Information:

Show how the above will be treated in the current period accounts discussing each project individually.

A B C

Total Costs to the start of the year 600 500

Costs incurred in the period 200 100 150

Total Anticipated Revenues 20,000 30,000 Unknown

Revenue in Period 5,000 0 0

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Solution

Project A

Project A is in production and meets the criteria for capitalisation. All costs to date will be capitalised and amortisation based on sales during the period will be charged

Costs Capitalised to Date 600

Costs in the period 200

Total costs to be capitalised 800

Ammortisation in Period (800 x 5,000/20,000) 200

Intangible Asset Carried Forward 600

Project B

Project B meets the criteria for capitalisation. All costs to date will be capitalised but production has not begun meaning that no amortisation will occur.

Costs Capitalised to Date 500


Total costs to be capitalised 600

Intangible Asset Carried Forward 600

Project C

Project C does not meet the criteria for capitalisation as it is purely research into the feasibility of the project and the outcome was uncertain. All costs to date will be written off to the income statement in the period incurred.


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1. Which one of the following could be classified as deferred development expenditure in M’s statement of financial position as at 31 March 2010 according to IAS 38 Intangible assets?

A. $120,000 spent on developing a prototype and testing a new type of propulsion system for trains. The project needs further work on it as the propulsion system is currently not viable.

B. A payment of $50,000 to a local university’s engineering faculty to research new environmentally friendly building techniques.

C. $35,000 spent on consumer testing a new type of electric bicycle. The project is near completion and the product will probably be launched in the next twelve months. As this project is the first of its kind for M it is expected to make a loss.

D. $65,000 spent on developing a special type of new packaging for a new energy efficient light bulb. The packaging is expected to be used by M for many years and is expected to reduce M’s distribution costs by $35,000 a year.

Answer D

2. Which ONE of the following events would result in an asset being recognised in KJH’s statement of financial position at 31 January 2012?

A. KJH spent $50,000 on an advertising campaign in January 2012. KJH expects the advertising to generate additional sales of $100,000 over the period February to April 2012.

B. KJH is taking legal action against a contractor for faulty work. Advice from its legal team is that it is likely that KJH will receive $250,000 in settlement of its claim within the next 12 months.

C. KJH purchased the copyright and film rights to the next book to be written by a famous author for $75,000 on 1 March 2011.

D. KJH has developed a new brand name internally. The directors value the brand name at $150,000.

Answer C

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3. Dempsey’s year end is 30 September 2014. Dempsey commenced the development stage of a project to produce a new pharmaceutical drug on 1 January 2014. Expenditure of $40,000 per month was incurred until the project was completed on 30 June 2014 when the drug went into immediate production. The directors became confident of the project’s success on 1 March 2014. The drug has an estimated life span of five years; time apportionment is used by Dempsey where applicable.

What amount will Dempsey charge to profit or loss for development costs, including any amortisation, for the year ended 30 September 2014?

A $12,000 B $98,667 C $48,000 D $88,000

Answer D

The directors were only confident of success on 31 March so until then we write off the monthly amount. So 2 months at $40,000 goes to P/L

From then until it ended on 30 June it is capitalised. So 4 months at $40,000 to SFP $160,000.

Production began on 30 June so we can start amortisation of the $160,000 then over 60 months.

It’s 3 months until the year end so amortise for that length of time.

Write off to 1 January 2014 to 28 February 2014 (2 x $40,000) $80,000Amortisation 160,000 (i.e. 4 x 40,000)/60 months x 3 (July to September) $8,000

$88,000

4. Which ONE of the following CANNOT be recognised as an intangible non-current asset in GHK’s statement of financial position at 30 September 2011?

A. GHK spent $12,000 on a consultation to determine demand for a new type of product.B. GHK purchased another entity, BN on 1 October 2010. Goodwill arising on the

acquisition was $15,000. C. GHK purchased a brand name from a competitor on 1 November 2010, for $65,000. D. GHK spent $21,000 during the year on the development of a new product. The product

is being launched on the market on 1 December 2011 and is expected to be profitable.

Answer A

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Mind Map 22 - Government Grants (IAS 20)

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Illustration 1A company purchases an item of plant on which it receives a government grant of 30% of the purchase price. The plant cost $2m and has no residual value.

The plant is to be depreciated on a straight line basis over it’s 10 year life.

Show the possible accounting treatments for the government grant in the first year.

Solution

DR CR

Plant at Cost 2,000,000

Cash 2,000,000

Income Statement Depreciation 200,000

Accumulated Depreciation 200,000

Cash for Government Grant 600,000

Deferred Income 600,000

Deferred Income Recognition in Year (600,000 / 10) 60,000

Income Statement 60,000

Total charge to Income Statement (200,000 - 60,000) = $140,000

DR CR

Plant at Cost 2,000,000

Cash 2,000,000

Cash 600,000

Plant at Cost 600,000

Income Statement Depreciation ((2m - 600k) /10) 140,000

Accumulated Depreciation 140,000

Total Charge to Income Statement = $140,000

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1. Which of the following statements about IAS 20 Accounting for Government Grants and Disclosure of Government Assistance are true?

I. A government grant related to the purchase of an asset must be deducted from the carrying amount of the asset in the statement of financial position

II. A government grant related to the purchase of an asset should be recognised in profit or loss over the life of the asset

III. Free marketing advice provided by a government department is excluded from the definition of government grants

IV. Any required repayment of a government grant received in an earlier reporting period is treated as prior period adjustment

A (i) and (ii)B (ii) and (iii)C (ii) and (iv)D (iii) and (iv)

Answer B

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Mind Map 23 - Borrowing Costs (IAS 23)

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Illustration 1

A company is building a qualifying asset worth $2.5m and has issued a bond of the same value to do so with an effective interest rate of 6%.

The asset will take 9 months to build and for the first 3 months the company invests the proceeds of the bond and earns interest at 3%.

What borrowing costs should be capitalised?

Solution

$

Total Interest for the Year (2.5m x 6%) 150,000

For 9 months x 9/12 112,500

Temporary Investment Income (2.5m x 3%) x 3/12 -18,750

93,750

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Illustration 2A company has a £1m 6% loan and a £2m 8% loan. It builds a building costing £600,000 and it takes 8 months.

What borrowing costs should be capitalised?

Solution

Illustration 3Company buys land on 1/12, a planning application is prepared during December and January. Permission is obtained at the end of January. Payment for the land is made on 1/2. On this date a loan is taken out to pay for the land and building constructionAdverse weather conditions meant a delay in the commencement of work until 15/3.When should interest be capitalised from?

Solution

Total Borrowing Cost Total Cost

$1m 6% 6

$2m 8% 16

$3m At total cost 22

Average Rate therefore is (22/3) = 7.33%

We can capitalise 600,000 x 7.33% x 8/12 = $29,320

Expenses start being incurred 1 December

Borrowing costs incurred 1 February

Activities started 15 March

Start Capitalising on 15 March

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Illustration 4

Davos is building an office block and issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 April 20X9. The loan is redeemable at a premium which means the loan has an effective finance cost of 7·5% per annum.

The loan was specifically issued to finance the building of the new block which meets the definition of a qualifying asset in IAS 23. Construction of the block commenced on 1 May 20X9 and it was completed and ready for use on 28 February 2010, but did not open for trading until 1 April 20X0.

During the year trading at Davos’ was below expectations so they suspended the construction of the new block for a two-month period during July and August 20X9. The proceeds of the loan were temporarily invested for the month of May 20X9 and earned interest of $40,000.

Calculate the borrowing costs that can be capitalised under IAS 23

SolutionThe effective interest rate is 7.5% which should be used to capitalise the interest as this is a qualifying asset.

The interest cost for the year to 31/03/20X0 would therefore be ($10m x 7.5%) = $750,000.

However the building only began on 1/05/20X9 and was completed on 28/02/20X0 so one month at the start and one month at the end can’t be capitalised.

In addition there were 2 months during which construction was suspended.

8 months interest ($750,000 x 8/12) = $500,000 less the temporary investment income of $40,000 should be caplitalised.

Total = $460,000

The rest of the cost should be written off to the Income statement.

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Objective Test Questions1. Indicate which of the following is NOT a qualifying asset.

A. You are distilling whisky, and it must be allowed 10 years to mature.B. You are a wholesaler. All goods purchased leave your firm as sales, unchanged

from their state of arrival.C. You are building a town’s power-generation facility, which will take 4 years to

completeD. You are building a manufacturing plant, which will take 2 years to complete

Answer B

2. You have a qualifying asset, a chemical plant. 80% of your company’s borrowings are in relation to this qualifying asset. The remainder of the borrowings are not used for qualifying assets. Total borrowings are $30,000 and the effective rate is 6%. The plant was finished 2 months before the year end.

How much can be capitalised?

A. 1,500B. 400C. 2,000D. 3,600

Answer A

30,000 x 6% x 10/12 = $1,500

3. Capitalisation is suspended if active development of an asset is suspended for an extended period of time.

TrueFalse

Answer True

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Mind Map 24 - Operating Segments (IFRS 8)

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Illustration 1Norman, a public limited company, has three business segments which are currently reported in its financial statements. Norman is an international hotel group which reports to management on the basis of region. It does not currently report segmental information under IFRS8 ‘Operating Segments’. The results of the regional segments for the year ended 31 May 2008 are as follows:

There were no significant inter company balances in the segment assets and liabilities. The hotels are located in capital cities in the various regions, and the company sets individual performance indicators for each hotel based on its city location.

Required:

Discuss how the principles in IFRS 8 ‘Operating Segments’ for the determination of a company’s reportable operating segments would be applied to Norman plc using the information given above.

RegionRevenue Segmental

Profit/LossSegmental

AssetsSegmentalLiabilitiesExternal Internal

$m $m $m $m $m

European 200 3 -10 300 200

South East Asia 300 2 60 800 300

Other 500 5 105 2,000 1,400

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Solution

The KPIs used by the management of Norman are based on city so it may well be that the operating segments of Norman could be split further on a city basis.

Norman should investigate their reporting structure to evaluate whether decisions about allocation and performance are made within the entity on a city basis and consider splitting the segments further.

Regarding the current segments, only the South East Asia segment passes all 3 tests for a reportable segment. The European segment meets only the criteria for 10% + of reported revenue and fails on the others.

However both segments will be reportable as they meet at least one of the criteria.

The current reported segments report only 50% of the entity’s total external revenue so they will have to identify further operating segments regardless of whether they meet the criteria until the reach 75%.

By examining the internal reports of Norman the entity can determine whether the operating segments should be further split based on the information used by management.

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Illustration 2JK is an entity that operates in the wholesale and retail clothing market sectors across several countries. It prepares its financial statements in accordance with IFRSs. The directors are considering listing JK on a local stock exchange within the next 12 months. One of the directors has raised concerns about the costs associated with being a listed entity, in particular the additional expense of producing operating segment information.

(a) Explain how the requirements of IFRS 8 Operating segments assist entities in minimising the costs of producing the operating segment disclosures required by the standard as well as the benefits that could be gained by investors from reviewing the operating segment disclosures of JK when making decisions on investment.

(b) Discuss the potential limitations faced by investors of using operating segment information when making investment decisions.

Solution(a)IFRS 8 requires that operating segment disclosures be based on the information that the entity already produces for internal purposes.

If the information is already being internally produced by JK it should not involve significant costs to comply with the IFRS 8 disclosures. Investors are normally looking for information that can help them estimate the future performance of an entity.

While the financial statements of JK will provide information on the performance of the entity as a whole, the business operates in both retail and wholesale and in different geographic locations.

The risks associated with these sectors will be different and so to accurately assess the future risks facing an entity, users will need more than the combined figures in the financial statements. The operating segment disclosures on the performance and resources of the parts of the business will then provide the investors with an insight into this information.

(b) Under IFRS 8, the management of JK would determine the reportable segments that exist in the entity. Segments may be selected differently by each entity which reduces the comparability of segmental disclosures across entities.

Also, not all of the financial information can easily be allocated to segments – eg head office expenses and finance costs. This again makes it difficult for users to get a complete picture of the performance of segments and reduces comparability.

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Objective Test Questions1. Decking is a multidivisional company that has both internal sales and external sales to customers. Decking should report segment financial information for each segment meeting which of the following criteria?

A. Segment profit or loss is 10% or more of consolidated profit or loss. B. Segment profit or loss is 10% or more of combined profit or loss of all company

segments. C. Segment revenue is 10% or more of combined revenue of all company segments. D. Segment revenue is 10% or more of consolidated profit or loss.

Answer B & C

2. The following information pertains to Willow Company for the year ended 31 December 20X4.

Sales to customers 2,000,000Intersegment sales 600,000

All of Willows segments are engaged solely in manufacturing operations. Willow has a reportable segment if that segment’s revenue exceeds:

A. 264,000B. 260,000C. 204,000D. 200,000

Answer B

3. Reported segments should report _____% or more of the entity’s total external revenue.

What is the missing percentage?

A. 25%B. 50%C. 75%D. 15%

Answer C

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Mind Map 25 - Assets Held For Sale and Discontinued

Operations (IFRS 5)

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Illustration 1 Archie Co. committed itself at the beginning of the financial year to selling a property that is being under-utilised following the economic downturn. As a result of the economic downturn, the property was not sold by the end of the year. The asset was actively marketed but there were no reasonable offers to purchase the asset. Archie is hoping that the economic downturn will change in the future and therefore has not reduced the price of the asset.

Can Archie Co. classify the property as available for sale under IFRS 5?

SolutionAlthough Archie has a plan to sell, it is available immediately and they are trying to locate a buyer it would appear that they are not marketing the property at a reasonable price.

They have not reduced the price even though there has been a downturn that has presumably reduced prices in general so cannot classify the property under IFRS 5.

Illustration 2 A company has a machine that cost $300,000 to buy two years ago. At the time of purchase the machine had a useful economic life of 30 years and they apply the cost model under IAS 16 (Cost less depreciation).

The company has decided to sell the machine and it’s fair value at this time is $220,000 with additional costs to sell being estimated at $5,000.

Although the machine has not been sold at the year end as the decision was taken that day the company is confident that it will be sold quickly and is committed to selling it having begun to market the machine to potential purchasers.

How should the machine be treated at the year end in the financial statements and at what value will it be included?

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Solution

(a)Cost $300,000

Depreciation Year 1 (300,000 / 30) $10,000

Depreciation Year 2 (300,000 / 30) $10,000

Carrying Value of Machine $280,000

Fair Value $220,000

Cost to Sell $5,000

Fair Value less Cost to Sell $215,000

Impairment (280,000 - 215,000) $65,000

The impairment will reduce the carrying value of the machine to $215,000 and the charge will be written off to the income statement.The machine will no longer be depreciated.

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Illustration 3A company has two divisions each of which form a major line of business, Division A and Division B.

Mid way through the current period Division A was shut down with losses of $50,000 on the sale of the fixed assets of the business and redundancy costs of $100,000.

Division B was restructured incurring losses of $85,000.

Results in the period included the following information:

Prepare a note to the accounts showing the analysis of the discontinued operation and draft the income statement for the company for the period.

Div A Div B

$‘000 $‘000

Revenue 1,000 2,000

Cost of Sales 750 1,250

Distribution 250 300

Administration 100 50

Finance costs for the business were $40,000 in the period and the tax charge was $32,000.

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SolutionDiscontinued Operations Analysis

$‘000

Revenue 1,000

Cost of Sales 750

Gross Profit 250

Admin Expenses 100

Distribution Costs 250

Operating Loss -100

Loss on Disposal of Fixed Assets -50

Redundancy Costs -100

Total Loss -250

Income Statement for Company

$‘000

Revenue 2,000

Cost of Sales 1,250

Gross Profit 750

Admin Expenses 50

Distribution Costs 300

Operating Profit 400

Re-organisation Costs -85

PBIT 315

Finance Costs -40

PBT 275

Tax -32

Profit for Period from Continuing Operations 243

Loss for Period from Discontinued Operations -250

Loss for Period from Total Operations -7

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1. BN has an asset that was classified as held for sale at 31 March 2012. The asset had a carrying value of $900 and a fair value of $800. The cost of disposal was estimated to be $50. The useful economic life of the asset was 10 years.

According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which ONE of the following values should be used for the asset in BN’s statement of financial position as at 31 March 2012?

A. $750A. $750B. $810C. $720

Answer A

2. PQ has ceased operations overseas in the current accounting period. This resulted in the closure of a number of small retail outlets.

Which one of the following costs would be excluded from the loss on discontinued operations?

A Loss on the disposal of the retail outlets B Redundancy costs for overseas staff C Cost of restructuring head office as a result of closing the overseas operations D Trading losses of the overseas retail outlets up to the date of closure

Answer C

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Mind Map 26 - Impairment of Assets (IAS 36)

�176

Illustration 1The carrying value of an item of plant in the financial statements is $400,000. The recoverable amount of the plant has been determined as $275,000.

Is the plant impaired and if so by how much?

Solution

$m


Recoverable amount 275,000

Impairment 125,000

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Illustration 2A company has an asset for which the following information is relevant:

Carry out the impairment review for the asset.

Solution

$‘000

Carrying amount 400

Fair Value 350

Cost to sell 25

Cash flows expected in each of the next 5 years 90

Discount rate 10%

Annuity rate for 10% over 5 years 3.791

$‘000

Value in Use (90 x 3.791) 341.19

Fair Value less cost to sell (350,000 - 25,000) 325

Recoverable amount is the higher of these two which is the Value in Use of $341,190.

Carrying Value 400

Recoverable Amount 341.19

Impairment 58.81

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Illustration 3Marko owned a piece of property, plant and equipment (PPE) which cost $12 million and was purchased on 1 May 20X8. It is being depreciated over 10 years on the straight-line basis with zero residual value. On 30 April 20X9, it was revalued to $13 million and on 30 April 20X0, the PPE was revalued to $8 million.

The whole of the revaluation loss had been posted to the statement of comprehensive income and depreciation has been charged for the year.

Show the correct treatment.

Solution

Revalued Am’t Revaluation Reserve

BF 12 0.0

Dep’n (12/10) -1.2 0.0

Revaluation 2.2 2.2

CF 13 2.2

Dep’n -1.44 0

NBV 11.56 2.20

New Valuation 8

Total Impairment 3.56

Remove revaluation 2.20

Income Statement 1.36

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Illustration 4A cash generating unit has the assets outlined below. It’s recoverable amount has been assessed as $1,000. Show the treatment for any impairment.

Solution

Assets Carrying Value

Goodwill 100

PPE 800

Intangible 400

1300

Impairment Test

Carrying Value of Assets 1,300

Recoverable Amount 1,000

Impairment 300

Assets Carrying Value Impairment Post Impairment

Goodwill 100 -100 Nil

PPE 800 (200 x 800/1,200) = -133 667

Intangible 400 (200 x 400/1,200) = -67 333

1300 1000

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Illustration 5A cash generating unit has the assets outlined below. It’s recoverable amount has been assessed as $1,650.

The PPE has been damaged and now has a fair value of 700. The recoverable amount of the receivables has been assessed at their current carrying amount.

Show the treatment for any impairment.

Assets Carrying Value

Goodwill 100

PPE 800

Intangibles 700

Receivables 200

Inventory 400

2200

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Solution

Impairment Test

Carrying Value of Assets 2200

Recoverable Amount 1650

Impairment 550

Assets Carrying Value Note Impairment Post

Impairment

PPE 800 Down to Fair Value -100 700

Goodwill 100 Write off all -100 0

Receivables 200 At Fair Value 0 200

Intangibles 700 Pro- Rata(350 x 700/1100) -223 477

Inventory 400 Pro- Rata(350 x 400/1100) -127 273

2200 -550 1650

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1. Which of the following is NOT an indicator of impairment?

A. Advances in the technological environment in which an asset is employed have an adverse impact on its future use

B. An increase in interest rates which increases the discount rate an entity usesC. The carrying amount of an entity’s net assets is higher than the entity’s number of

shares in issue multiplied by its share priceD. The estimated net realisable value of inventory has been reduced due to fire damage

although this value is greater than its carrying amount

Answer D

Although the estimated NRV is lower than it was (due to fire damage), the entity will still make a profit on the inventory and thus it is not an indicator of impairment.

2. Riley acquired a non-current asset on 1 October 2009 at a cost of $100,000 which had a useful economic life of ten years and a nil residual value. The asset had been correctly depreciated up to 30 September 2014. At that date the asset was damaged and an impairment review was performed. On 30 September 2014, the fair value of the asset less costs to sell was $30,000 and the expected future cash flows were $8,500 per annum for the next five years. The current cost of capital is 10% and a five year annuity of $1 per annum at 10% would have a present value of $3·79 What amount would be charged to profit or loss for the impairment of this asset for the year ended 30 September 2014?

A $17,785 B $20,000 C $30,000 D $32,215

Answer A

Cost $100,000Depreciation (100,000/10 x 5) $50,000Carrying Value $50,000

Value in Use (8,500 x 3.79) $32,215Fair Value Less Costs $30,000

Use Higher $32,215Carrying Value $50,000Impairment $17,785

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3. The net assets of Fyngle, a cash generating unit (CGU), are:

Property, plant and equipment $200,000Allocated goodwill $50,000Product patent $20,000Net current assets (at net realisable value) $30,000

As a result of adverse publicity, Fyngle has a recoverable amount of only $200,000.What would be the value of Fyngle’s property, plant and equipment after the allocation of the impairment loss?

A $154,545 B $170,000 C $160,000 D $133,333

Answer A

Solution

Impairment Test

Carrying Value of Assets 300,000

Recoverable Amount 200,000

Impairment 100,000

Assets Carrying Value Impairment Post Impairment

PPE 200,000 200/220 x -50,000 = -45,455 154,545

Goodwill 50,000 -50,000 Nil

Product Plant 20,000 20/220 x -50,000 = -4,545 15,455

Current Assets 30,000 - 30,000

300,000 Total Impairment = 300 45,455

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Mind Map 27 - Inventories (IAS 2)

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Illustration 1

ABC Co. has the following items in inventory:

i) Goods purchased for resale at a cost of $40,000. The recent downturn in the economy has meant that these goods will now sell for $42,000 with costs to sell of $2,500.

ii)Materials purchased at a cost of $30,000 per tonne which will be sold at a profit. The manufacturer of the materials has just announced that from now on they will sell these materials to you at a lower price of $28,000 per tonne.

iii)Plant constructed for a specific customer at a cost of $50,000 and an agreed price to the customer of $60,000. New health and safety requirements mean that the plant will need to be modified at a cost to ABC Co. of $4,000 before it can be delivered to the customer.

At what value should each of the above be included in the inventory of ABC Co.

Solution

Goods at $40,000

Cost 40,000

Net Realisable Value ($42,000 - 2,500) 39,500

Use Lower so value at... 39,500

The value of inventory will be reduced by $500 and this will be written off to the income statement.

Materials at $30,000 per tonne

The fact that the manufacturer has changed the cost price is irrelevant.

The goods will be sold at a profit and thus will be valued at $30,000 per tonne cost.

Plant at $50,000

Cost 50,000

Net Realisable Value ($60,000 - 4,000) 56,000

Use Lower so value at... 50,000

The value of the inventory will remain at $50,000.

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Objective Test QuestionsOn 30 September 2014, Razor’s closing inventory was counted and valued at its cost of $1 million. Some items of inventory which had cost $210,000 had been damaged in a flood (on 15 September 2014) and are not expected to achieve their normal selling price which is calculated to achieve a gross profit margin of 30%. The sale of these goods will be handled by an agent who sells them at 80% of the normal selling price and charges Razor a commission of 25%.

At what value will the closing inventory of Razor be reported in its statement of financial position as at 30 September 2014?

A $1 millionB $790,000C $180,000D $970,000

Answer D

The normal selling price of damaged inventory is $300,000 (210/70%).This will now sell for $240,000 (300,000 x 80%), and have a NRV of $180,000 (240 – (240 x 25%)). The expected loss on the inventory is $30,000 (210 cost – 180 NRV) and therefore the inventory should be valued at $970,000 (1,000 – 30).

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Mind Map 28 - Current Tax (IAS 12)

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Illustration 1

Sebastian Philpott commenced trade on 1 January 2011 and estimates that the tax payable for the year ended 31 December 2011 is $200,000.

In August 2012, the accountant of Sebastian Philpott receives and pays tax of $210,000 for the year ended 31 December 2011. At 31 December 2012 he estimates that the company owes $220,000 for corporation tax in relation to the Y/E 31 December 2012.

Calculate the tax charge and income tax payable accounts for the years ended 31 December 2011 and 2012, and detail the amounts shown in the statement of financial position and income statement in both years.

Solution

DR CR

20X4 $ $

Income Statement Charge (Est. 2011) 200,000

Corp Tax Provision (SFP) 200,000

20X5

Income Statement Charge (Est. 2012) 220,000

Under Provision 20X4 to IS 10,000


20X4 20X5

Corp Tax Provision 200,000 220,000

Tax Expense I/S 200,000 230,000

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Illustration 2

Kettle Ltd estimated last year’s tax charge to be $250,000. However, their tax advisor settled with the tax authorities at $220,000.

This year, Kettle Ltd estimate their tax bill to be $270,000, but they are confused as to how this should be reflected in the financial statements.

Calculate tax liability and tax charge to be shown in the statement of financial position and income statement for the current year.

Solution

$

Income Statement Charge (Est.) 270,000

Over Provision to IS -30,000

Income Statement Charge 240,000


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1. Which of the following statement about the income tax expense reported for accounting purposes is NOT correct.

A. It is shown as an expense in the income statementB. It is the amount that must be paid to the government in respect of the current

income tax year. C. It is not necessarily the same as the income tax payable. D. None of the above

Answer B

2. On 31 December 20X4, PS had a debit balance b/f on its corporate income tax account of 42,000, representing an under provision of the tax charge for the year ended 31 December 20X3.

PS’s taxable profit for the year ended 31 December 20X4 was 325,000 and the applicable income tax rate for the year to 31 December 20X4 was 19%.

Calculate the income tax expense that PS will charge in its statement of profit or loss for the year ended 31 December 20X4. (To the nearest whole number)

31 December 20X4 _______

Answer103,560

Charge for the year (324000 X 19% ) = 61560Under provision for the previous year = 42000Income Tax expense = 103560

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3. On 31 December 20X4, SP had a credit balance b/f on its corporate income tax account of 35,000, representing an over provision of the tax charge for the year ended 31 December 20X3.

SP’s taxable profit for the year ended 31 December 20X4 was 832,000 and the applicable income tax rate for the year to 31 December 20X4 was 24%.

Calculate the income tax expense that SP will charge in its statement of profit or loss for the year ended 31 December 20X4. (To the nearest whole number)

31 December 20X4 _______

Answer164,680

Charge for the year ( 832000 X 24% ) = 199680Over provision for the previous year = (35,000)Income Tax expense = 164680

�192

Mind Map 29 - IAS 8 Accounting Policies, Estimates & Errors

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Illustration 1I. A change in the IFRS relating to leases means that an entity that used to recognise a

lease on an item of plant as an operating lease must now recognise it as a finance lease.

II. Depreciation has previously been charged by the entity at 25% straight line but has decided to change this to 30% reducing balance.

III. The entity had previously charged certain overheads within administration expenses but now has decided to show them within cost of sales.

IV. The method used by the entity to measure the value of it’s inventory has been changed.

For each of the above is it a change in accounting policy or a change in accounting estimate?

Solution

The recognition and presentation of the lease has changed meaning this is a change in accounting policy.

There is no change in recognition, measurement or the basis of measurement so this is a change in an accounting estimate.

The presentation of the overheads has changed so this is a change in policy.

The measurement basis of inventory has changed so this is a change in accounting policy.

�194

Illustration 2A company discovers that items of inventory with a value of £1m were included in the Statement of Financial Position as at 31 December 20X0 even though they were in fact sold prior to the year end.

The figures reported in the year to December 20X0 and the figures for the current year were:

Show the retained earnings for each year and the revised 20X1 Income Statement with comparatives (ignore any tax effects).

20X1 20X0

$‘000 $‘000

Sales 10,000 9,000

Cost of Sales 5,000 3,000

Gross Profit 5,000 6,000

Tax 300 250

Net Profit 4700 5750

Retained Earnings B/F 1st Jan 20X0 $12m

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Solution

Income Statement

20X1 20X0

$‘000 $‘000

Sales 10,000 9,000

Cost of Sales

20X1 (5,000 - 1,000) 4,000

20X0 (3,000 + 1,000) 4,000


Tax 300 250

Net Profit 5700 4750

Retained Earnings

20X1 20X0

$‘000 $‘000

Retained Earnings B/F 17,750 12,000

Prior Period Adjustment -1,000

As Restated 16,750 12,000

Net Profit for Period 5,700 4,750

Retained Earnings C/F 22,450 16,750

�196


Which of the following would be a change in accounting policy in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors? A. Adjusting the financial statements of a subsidiary prior to consolidation as its accounting

policies differ from those of its parentB. A change in reporting depreciation charges as cost of sales rather than as

administrative expenses C. Depreciation charged on reducing balance method rather than straight line D. Reducing the value of inventory from cost to net realisable value due to a valid adjusting

event after the reporting

Answer B

Which of the following is a change of accounting policy under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?

A. Classifying commission earned as revenue in the statement of profit or loss, having previously classified it as other operating income

B. Switching to purchasing plant using finance leases from a previous policy of purchasing plant for cash

C. Changing the value of a subsidiary’s inventory in line with the group policy for inventory valuation when preparing the consolidated financial statements

D. Revising the remaining useful life of a depreciable asset

Answer A

According to IAS 8 Accounting policies, changes in accounting estimates and errors, which ONE of the following is a change in accounting policy requiring a retrospective adjustment in financial statements for the year ended 31 December 2010?

A. The depreciation of the production facility has been reclassified from administration expenses to cost of sales in the current and future years.

B. The depreciation method of vehicles was changed from straight line depreciation to reducing balance.

C. The provision for warranty claims was changed from 10% of sales revenue to 5%.D. Based on information that became available in the current period a provision was made

for an injury compensation claim relating to an incident in a previous year.

Answer A

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Mind Map 31 - Pensions (IAS 19)

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Illustration 1A company maintains a defined benefit pension scheme for it’s employees. The following information is relevant:

The pension assets brought forward in 20X0 $1,000 with a closing balance of $2,000.

The Discount Rate is 11%.

Calculate the expected return on Pension Assets.

Solution

Pension Assets Brought Forward 1,000

Expected Return % 11%

Expected Return on Plan Assets 110

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Illustration 2

A company maintains a defined benefit pension scheme for it’s employees. The following information is relevant:

The liabilities of the scheme were $1,400 at the start of the period and $2,600 at the end.

The discount rate is 12%.

Calculate the Interest Cost for the period.

Solution

Pension Liabilities Brought Forward 1,400

Discount Rate 12%

Interest Cost 168

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Illustration 3 - Try this yourself!The following details refer to Company A’s pension scheme.

Calculate the return on assets and the interest cost.

Solution

B/F C/F

Pension Assets 1,000 2,000

Pension Liabilities 1,400 2,600

The discount rate is 11%

Pension Assets Brought Forward 1,000

Expected Return % 11%

Expected Return on Plan Assets 110

Pension Liabilities Brought Forward 1,400

Discount Rate 11%

Interest Cost 154

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Illustration 4A company maintains a defined benefit pension scheme for it’s employees. The following information is relevant:

The pension assets brought forward in 20X0 $1,800 with a closing balance of $2,700.

The company contributes $90 per year into the scheme.

Benefits paid out in the period were $100.

The liabilities of the scheme were $1,600 at the start of the period and $2,100 at the end.

The discount rate is 12%.

The terms of the scheme have changed meaning that past service costs have arisen of $35 and the current service costs for the period are $70.

Required:

Show the treatment for the pension scheme in the financial statements of the company.

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1. Which of the following represent a defined benefit scheme?

A. The employer undertakes to finance a pension income of a certain amountB. The cost of providing pensions is not certain and varies from year to yearC. The employer has no further obligation after this amount is paid

Answer A & B

2. Which of the following represent a defined contribution scheme?

A. The employer has an ongoing obligation to make sufficient contributions to the plan to fund the pensions

B. The annual cost to the employer is reasonably predictableC. The employer’s contribution is usually a fixed percentage of the employee’s salary.

Answer A & C

3.Trampo Co makes contributions to a defined contribution pension fund for employees at a rate of 5% of gross salary. The contributions made are $10,000 per month for convenience with the balance being contributed in the first month of the following accounting year. The wages and salaries for 20X4 are $4.7m.

Calculate the pension expense to be charged to the statement of profit or loss for 20X4.

Answer B

A. $100,000B. $235,000C. $4.7mD. $200,000

Working4.7m X 5% = $235,000

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4. Trampo Co makes contributions to a defined contribution pension fund for employees at a rate of 5% of gross salary. The contributions made are 10,000 per month for convenience with the balance being contributed in the first month of the following accounting year. The wages and salaries for 20X4 are 4.7m.

Calculate the pension accrual/prepayment at the end of the year.

Answer C

A. $100,000B. $235,000C. $115,000D. $200,000

WorkingPayments during the year = 10,000 X 12 = 120,000

Accrual = 235000-120000 = 115000

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Mind Map 32 - Foreign Exchange (IAS 21)

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Illustration 1Zian is located in a foreign country and imports its raw materials at a price which is normally denominated in dollars. The product is sold locally at selling prices denominated in dinars, and determined by local competition. All selling and operating expenses are incurred locally and paid in dinars. Distribution of profits is determined by the parent company, Ribby. Zian has financed part of its operations through a $4 million loan from Hall which was raised on 1 June 2007. This is included in the financial assets of Hall and the non-current liabilities of Zian. Zian’s management have a considerable degree of authority and autonomy in carrying out the operations of Zian and other than the loan from Hall, are not dependent upon group companies for finance.

Required

Discuss and apply the principles set out in IAS 21 ‘The effects of changes in foreign exchange rates’ in order to determine the functional currency of Zian.

(8 marks)

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Solution to Illustration 1The functional currency is the currency of the primary economic environment in which the entity operates (IAS21). The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash.

An entity’s management considers the following factors in determining its functional currency (IAS21):(i)the currency that dominates the determination of the sales prices; and (ii) the currency that most influences operating costs

The currency that dominates the determination of sales prices will normally be the currency in which the sales prices for goods and services are denominated and settled. It will also normally be the currency of the country whose competitive forces and regulations have the greatest impact on sales prices. In this case it would appear that currency is the dinar as Zian sells its products locally and the prices are determined by local competition. However, the currency that most influences operating costs is in fact the dollar, as Zian imports goods which are paid for in dollars although all selling and operating expenses are paid in dinars. The emphasis is, however, on the currency of the economy that determines the pricing of transactions, as opposed to the currency in which transactions are denominated.

Factors other than the dominant currency for sales prices and operating costs are also considered when identifying the functional currency. The currency in which an entity’s finances are denominated is also considered. Zian has partly financed its operations by raising a $4 million loan from Hall but it is not dependent upon group companies for finance. The focus is on the currency in which funds from financing activities are generated and the currency in which receipts from operating activities are retained.

Additional factors include consideration of the autonomy of a foreign operation from the reporting entity and the level of transactions between the two. Zian operates with a considerable degree of autonomy both financially and in terms of its management. Consideration is given to whether the foreign operation generates sufficient functional cash flows to meet its cash needs which in this case Zian does as it does not depend on the group for finance.

It would be said that the above indicators give a mixed view but the functional currency that most faithfully represents the economic effects of the underlying transactions, events, and conditions is the dinar, as it most affects sales prices and is most relevant to the financing of an entity. The degree of autonomy and independence provides additional supporting evidence in determining the entity’s functional currency.

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Illustration 2Bulldog Ltd has a year end of 31 January.

On 13th October Bulldog Ltd buys goods from Eagle Inc. a US supplier for $250,000.

On 24th November Bulldog settles the transaction in full.

Exchange rates

13th October £1 : $1.45

24th November £1 : $1.55

Show the accounting entries for these transactions.

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Illustration 2 Solution

Agreeing Transaction Working £

On date of agreeing the transaction use the spot rate to record it

250,000 / 1.45 172,414

DR Purchases 172,414

CR Payables 172,414

On Settlement Working £

On date of agreeing the transaction use the spot rate to record it

250,000 / 1.55 161,290

DR Payables 172,414

CR Cash with amount actually paid 161,414

CR FX Gain with the difference 11,000

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Illustration 3Jeff Ltd. purchases an item of plant from a foreign supplier for cash of €100,000. Jeff is a US company and the exchange rate at the time was $ = €1.50.

What value in $ will the asset be recorded at?

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Solution to Illustration 3

Working $

The rate at the time of purchase is $ : €1.50 €100,000 / 1.50 66,666

DR Asset 66,666

CR Cash 66,666

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Illustration 4Jeff Ltd. purchases an item of plant on 1st June from a foreign supplier on one month’s credit for €100,000. Jeff is a US company.

Exchange rates

1st June $ = €1.50

21st June $ = €1.40

How will this transaction be dealt with in the accounts for the year to 21st June?

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Solution to Illustration 4

At Purchase Date Working $

The rate at the time of purchase is $ : €1.50 €100,000 / 1.50 66,666

DR Asset 66,666

CR Payables 66,666

At 21st June Working $

The rate at this time is $ : €1.40 €100,000 / 1.40 71,429

The payable must be retranslated at the year end as it is a monetary balance. So........

DR FX Loss (71,429 - 66,666) 4,763

CR Payables (71,429 - 66,666) 4,763

The $4,763 is unrealised so is included in Other Comprehensive Income.

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Objective Test Questions1. Which of the following statements describes Functional Currency?

A. It is the main currency used by a business or unit of a business.B. It is the currency that the financial statements are presented in.

Answer A

The following information relates to OTQ2 and OTQ3:

Chill Company based in Japan sells goods to the UK for £500,000 on 12 March 20x4 when the exchange rate was Yen/£0.65. The customer pays in April 20X4 when the rate was Yen/£0.60.

2. How does the entity account for the sale at 12 March 20X4?

A. Dr Receivables 769,231 Credit Sales 769,231

B. Dr Receivables 325,000 Credit Sales 325,000

C. Dr Receivables 833,000 Credit Sales 833,333

D. Dr Receivables 300,000 Credit Sales 300,000

Answer A

Working500,000/0.65

3. What is the gain or loss on exchange when the payment is made in April 20X4?

A. Gain = 64,102B. Loss = 64,102C. Gain = 25,000D. Loss = 25,000

Answer A

WorkingPayment 500000/0.6 = 833,333Receivables = 769231Gain = 833,333-769231 = 64,102

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Mind Map 33 - Subsequent Events (IAS 10)

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Illustration 1

Which of the following are adjusting events for Fishcakes Ltd? The year end is 30 June 20X1 and the accounts are approved on 20 August 20X1.

1. Sales of year-end inventory on 4 July 2011 at less than cost2. Issue of new ordinary shares on 10 July 2011.3. A fire in the warehouse occurred on 16 July 2011. All stock was destroyed.4. A major credit customer was declared bankrupt on 20 July 2011.5. All of the share capital of a rival, Haggis Ltd was acquired on 22 July 2011.6. On 4 August, $700,000 was received in respect of an insurance claim dated 13

February 2011.

Which of the following are adjusting events for Fishcakes Ltd?

Solution

1, 4 and 6.

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Objective Test Questions1. Which Which TWO of the following events which occur after the reporting date of a company but before the financial statements are authorised for issue are classified as ADJUSTING events in accordance with IAS 10 Events after the Reporting Period?

(i) A change in tax rate announced after the reporting date, but affecting the current tax liability(ii) The discovery of a fraud which had occurred during the year(iii) The determination of the sale proceeds of an item of plant sold before the year end(iv) The destruction of a factory by fire

A (i) and (ii)B (i) and (iii)C (ii) and (iii)D (iii) and (iv)

Answer C

2. IAS 10 Events after the reporting period distinguishes between adjusting and non-adjusting events.

Which ONE of the following is an adjusting event in XS’s financial statements?

A. A dispute with workers caused all production to cease six weeks after the year end. B. A month after the year end XS’s directors decided to cease production of one of its

three product lines and to close the production facility. C. One month after the year end a court determined a case against XS and awarded

damages of $50,000 to one of XS’s customers. XS had expected to lose the case and had set up a provision of $30,000 at the year end.

D. Three weeks after the year end a fire destroyed XS’s main warehouse facility and most of its inventory.

Answer C

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3. Which ONE of the following would be classified by WDC as a non-adjusting event according to IAS 10 Events After The Reporting Period? WDC’s year end is 30 September 2011.

A. WDC was notified on 5 November 2011 that one of its customers was insolvent and was unlikely to repay any of its debts. The balance outstanding at 30 September 2011 was $42,000.

B. On 30 September WDC had an outstanding court action against it. WDC had made a provision in its financial statements for the year ended 30 September 2011 for damages awarded against it of $22,000. On 29 October 2011 the court awarded damages of $18,000.

C. On 5 October 2011 a serious fire occurred in WDC’s main production centre and severely damaged the production facility.

D. The year end inventory balance included $50,000 of goods from a discontinued product line. On 1 November 2011 these goods were sold for a net total of $20,000.

Answer C

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Mind Map 34 - Short Term Finance I

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1. Which of the following is NOT a source of short term finance?

A. Trade payablesB. FactoringC. OverdraftD. Share Issue

Answer D

2. Which of the following is an advantage of a bank overdraft?

A. Flexible source of financeB. Repayable on demandC. May require securityD. Variable finance costs

Answer A

3. What is factoring?

A. Outsourcing of the credit control department to a third party.B. Invoices are used as security to borrow funds

Answer A

4. Which of the following is a method of dealing with credit risk on exports.

A. Negotiable instrumentsB. Short dated government bondsC. Documentary creditsD. Bills of exchange

Answer C & D

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Mind Map 35 - Short Term Finance II

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Illustration 1A US Treasury Bill with a face value of $10,000 is issued at a 6% discount yield for 60 days.

Calculate the discount value on the Bill assuming 360* days in the year.

*This is the number used on the US calculations.

SolutionD = R x F x T/Y

R = 6% as a decimal so 0.06F = 10,000T = 60Y = 360

D = 0.06 x 10,000 x 60/360

D = $100

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Illustration 2A US Treasury Bill with a face value of $10,000 is issued at a 4% discount yield for 45 days.

Calculate the issue price of the Bill assuming 360* days in the year.

*This is the number used on the US calculations.

SolutionCalculate D first then P

D = R x F x T/Y

R = 4% as a decimal so 0.04F = 10,000T = 45Y = 360

D = 0.04 x 10,000 x 45/360

D = $50then...

P = F - D

P = (10,000 - 50) $9,950

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Illustration 3

A Government has issued debt which is redeemable in 5 years time.

Interest is payable at 8%.

The current market value of the debt is $102.

Calculate the Yield to Maturity on the bond.

Solution

Period Item $ DR 5% PV DR 15% PV

1 -5 Interest 8 4.329 34.63 3.352 26.82

5 Capital 100 0.784 78.40 0.497 49.70

Market Value -102 -102

11.03 -25.48

IRR Calculation: 5 + (11.03 / (11.03 - (25.48)) (15 - 5) = 8.02%

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Illustration 4

A Government has issued debt which is redeemable in 5 years time.

Interest is payable at 10%.

The current market value of the debt is $104.

Calculate the Yield to Maturity on the bond.

Solution

Period

Item $ DR 5% PV DR 15% PV

1 -5 Interest 10 4.329 43.29 3.352 33.52

5 Capital 100 0.784 78.40 0.497 49.70


17.69 -20.78

IRR Calculation: 5 + (17.69 / (17.69 - (20.78)) (15 - 5) = 9.6%

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1. A Treasury Bill with a face value of 20,000 is issued at a 9% discount yield for 90 days.

Calculate the discount value on the Bill assuming 360 days in the year.

Answer444

Working0.09 x 20,000 x 90/360 = 450

2. A Treasury Bill with a face value of 20,000 is issued at a 9% discount yield for 90 days.

Calculate the issue price of the Bill.

Answer19,550

Working20,000 – 450 = 19,550

3. Hazel Co is considering investing in government bonds. The current price of a $100 bond with 5 years maturity is 98. The bonds have a coupon rate of 6% and repay face value of $100 at the end of the 15 years. Calculate the yield to maturity using discount rates of 5% and 15%.

A. 5.1%B. 6.84%C. 4.5%D. 4.9%

Answer B

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4. Which of the following describes a commercial paper (CP)

A. An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities

B. Is issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations or to expand business

Answer A

Period

Item $ DR 5% PV DR 15% PV

1 -5 Interest 6 4.329 25.97 3.352 20.11

5 Capital 100 0.784 78.40 0.497 49.70


6.37 -28.19

IRR Calculation: 5 + (6.37 / (6.37 - (28.19)) (15 - 5) = 6.84%

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https://en.wikipedia.org/wiki/Corporation

Mind Map 36 - Working Capital

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Illustration 1Balance Sheet

Income Statement

Other Information:

All sales are made on credit.

Required:

Calculate the Cash Operating Cycle for Inter Ltd.

$‘000

ASSETS

Non Current Assets 1000

Inventory 300

Receivables 200

Cash 300

1800

LIABILITIES

Ordinary Shares 800

Reserves 200

Long term Liabilities 700

Payables 100

Overdraft -

1800

$‘000

Revenue 1000

COS 800

Gross Profit 200

Other Costs 100

Net Profit 100

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Solution

Part II

Show the journal entries and calculate the Revised Balance sheet if the operating cycle changes to:

Item Working Days

Inventory Period 300/800 x 365 137

Collection Period 200/1000 x 365 73

Less:

Payables Period 100/800 x 365 46

164

Item Days

Inventory Period 200

Collection Period 100

Less:

Payables Period 30

270

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Solution

Item New Days Old Days Old Balance

Working New Balance

Movem’t

Inventory 200 137 300 300 x 200/137

438 138

Receivables

100 73 200 200 x 100/73

274 74

Less:

Payables 30 46 100 100 x 30/46

65 -35

270 164

Entries Dr Cr

Dr Inventory 138

Cr Cash 138

Dr Receivables 74

Cr Cash 74

Dr Payables 35

Cr Cash 35

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Revised Balance Sheet

$‘000 Movement $‘000

ASSETS

Non Current Assets 1000 1000

Inventory 300 138 438

Receivables 200 74 274

Cash 300 -247 53

1800 1765

LIABILITIES


Reserves 200 200

Long term Liabilities 700 700

Payables 100 -35 65

Overdraft 0 0

1800 1765

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Part III

Show the journal entries and calculate the Revised Balance sheet if the operating cycle changes to:

Solution

Item Days

Inventory Period 90

Collection Period 30

Less:

Payables Period 60

60

Item New Days Old Days Old Balance

Working New Balance

Movem’t

Inventory 90 200 438 438 x 90/200

197 -241

Receivables

30 100 274 274 x 30/100

82 -192

Less:

Payables 60 30 65 65 x 60/30 130 65

60 270

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Revised Balance Sheet

Entries Dr Cr

Dr Cash 241

Cr Inventory 241

Dr Cash 192

Cr Receivables 192

Dr Cash 65

Cr Payables 65

498 498

$‘000 Movement $‘000

ASSETS


Inventory 438 -241 197

Receivables 274 -192 82

Cash 53 498 551

1765 1830

LIABILITIES


Reserves 200 200


Payables 65 65 130

Overdraft 0 0

1765 1830

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1. Which of the following are components of working capital within the financial statements:

1. Non Current Assets. 2. Inventory. 3. Payables. 4. Intangible Assets.

A. 1 and 2 B. 2 and 3 C. 3 and 4 D. 2 and 4

Answer B

2. Which of the following are indicators of overtrading.

i) Reliance on long term finance. ii) Offering lax credit terms. iii) Build up of inventory. iv) Rapidly decreasing sales. v) Deteriorating Current ratio.

A. i) iii) and iv) only B. ii) iii) and v) only C. All of the above D. i) ii) and iii) only

Answer B

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3. The following information has been calculated for A Co:

Trade receivables collection period 52 daysRaw material inventory turnover period 42 days Work in progress inventory turnover period 30 days Trade payables payment period 66 daysFinished goods inventory turnover period 45 days

What is the length of the working capital cycle?

A 103 days B 131 days C 235 days D 31 days

Answer A

4. If inventory days go up from 100 to 150 the company will need to invest more cash in the business.

Is this statement:

A. TRUE B. FALSE

Answer A

5. Which of the following statements concerning working capital management are correct?

1 The twin objectives of working capital management are profitability and liquidity 2 A conservative approach to working capital investment will increase profitability 3 Working capital management is a key factor in a company’s long-term success

A 1 and 2 only B 1 and 3 only C 2 and 3 only D 1, 2 and 3

Answer B

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1 The twin objectives of working capital management are profitability and liquidity 2 A aggressive approach to working capital investment will increase profitability 3 Working capital management is not a key factor in a company’s long-term success


Answer A


1 The twin objectives of working capital management are profitability and liquidity 2 A moderate approach to working capital investment will increase profitability 3 An aggressive approach to working capital investment uses more long term finance than short term.


Answer B


1 A conservative approach to working capital investment employs uses long term finance to finance some fluctuating current assets. 2 An aggressive approach to working capital investment will increase profitability 3 Working capital management has no effect on profitability of the company.


Answer A

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Mind Map 37 - Managing Receivables & Payables

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Illustration 1

Credit sales in the year are currently 1200 and the company offers 3 month credit terms. The overdraft rate for the company is 10%.

New Policy

2% discount if paid in less than 10 days

2 month terms for everyone else.

20% will take the discount

Should the new policy be implemented?

Solution

Method = Compare the savings through reducing receivables by offering the discount to the profit lost by doing so.

Working

Receivables Before 1200 x 3/12 300

Receivables After 20% who take discount

(1200 x 10/365) x 20%

7

Everyone else (1200 x 2/12) x 80% 160

167

Saving = (Reduction in receivables x Overdraft rate)

(300 - 167) x 10% 13

Lost Profit = Amount of Discount (1200 x 20%) x 2% 4.8

The saving made is greater than the profit lost so the discount should be offered

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Illustration 2Receivables are currently $4,600,000. Sales are $37,400,000

A factor has offered to take over the administration of trade receivables on a non-recourse basis for an annual fee of 3% of credit sales.

The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will save $100,000 per year in administration costs and $350,000 per year in bad debts.

A condition of the factoring agreement is that the factor would advance 80% of the face value of receivables at an annual interest rate of 7%. The current overdraft rate is 5%

Solution

Difference on Receivables

Current Receivables 4,600,000

Receivables Under Factor 37,400,000 x (30 / 365) 3,073,973

Difference 1,526,027

Benefits & Costs of Factor

Benefits of Using Factor

Reduced Overdraft Interest 1,526,027 x 0.05 76,301

Admin Cost Savings 100,000

Bad Debt Savings 350,000

Total Benefits 526,301

Costs Of Using Factor

Annual Fee 37,400,000 x 0.03 1122000

Extra Interest Cost 3,073,973 x 80% x (7% - 5%) 49,184

Total Costs 1171184

Total Benefits Less Total Costs -644,883

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1. How can a company assess the credit worthiness of their customers?

1. Get trade references from other suppliers or from banks. 2. Use a credit rating agency. 3. Offer initial high levels of credit. 4. Ask for a written promise to pay.


Answer B

2. Which of the following are benefits of a company offering a discount to customers for early payment of invoices?

1. Better liquidity for the firm. 2. Less interest as less or no overdraft will be required. 3. Risk of more bad debt as customers take longer to pay. 4. Loss of customers who don’t take advantage of the discount.

A. 2 and 3 only B. 1 and 3 only C. 1 and 2 only D. 1, 2 and 3

Answer C

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3. The management of XYZ Co has annual credit sales of $20 million and accounts receivable of $4 million. Working capital is financed by an overdraft at 12% interest per year. Assume 365 days in a year.

What is the annual finance cost saving if the management reduces the collection period to 60 days?

A. $85,479 B $394,521 C $78,904 D $68,384

Answer A

Current Receivables = 4,000,000 New (20/365 x 60) = 3,287,671

Reduction = 712,329 Multiply by O’draft rate = (712,329 x 12%) = $85,479

4. Which of the following are disadvantages of debt factoring for a company?

1. It can be expensive. 2. It creates a bad impression with customers because the debt is collected by the factor. 3. It can increase the liquidity of the company. 4. It can lose the goodwill of customers.


Answer D

5. Which of the following statements relate to invoice discounting through a factor?

1. The company retains the risk of bad debt. 2. The factor collects the debt. 3. The factor advances a percentage of the invoice value to the company. 4. Invoice discounting can be used by any company.


Answer B �242

Mind Map 38 - Inventory Management

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Illustration 1Demand of 1200 units per month.

Cost of making an order of $12.

Cost of one unit $10.

Holding cost per year of 10% of the purchase price of the goods.

Calculate the EOQ & check that it is correct.

Solution

Working

Annual Demand 1200 x 12 14400

Holding Cost $10 x 10% 1

Ordering Cost 12

EOQ √(2 x 12 x 14,400) / 1 588

Test

Ordering Costs (Cost Per order x (Demand / EOQ))

12 x (14,400 / 588) 294

Holding Costs (Cost Per Unit x (EOQ / 2)) 1 x (588 / 2) 294

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Illustration 2Company orders when the level of stock reaches 50,000

It takes 4 weeks to receive new stock from the time of ordering.

The company uses 7,500 units on average per week.

Calculate the buffer stock.

Solution

Buffer Stock = Re-order level less usage in lead time

Re-order level 50,000

Lead Time 4 weeks

Usage per week 7,500

50,000 - (4 x 7,500) 20,000

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Illustration 3The current policy is to order 100,000 units when the inventory level falls to 35,000 units. Forecast demand to meet production requirements during the next year is 625,000 units. The cost of placing and processing an order is €250, while the cost of holding a unit in stores is €0·50 per unit per year. Both costs are expected to be constant during the next year. Orders are received two weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year.

Calculate EOQ with buffer stock

Solution

Working

Buffer Stock (Re-order level - (Lead time x amount used per week))

35,000 - (2 weeks x 625,000/50)

10,000

EOQ ignoring buffer stock √ (2 x 250 x 625,000 / 0.5)

25,000

Total cost Calculations

Order Costs (Cost per order x No. Orders) 250 x (625,000/25,000)

6,250

Holding Costs (Holding cost p/unit x Average Stock)

0.5 x (25,000 / 2) 6,250

Holding Cost for Buffer (Holding cost p/unit x Buffer Stock)

0.5 x 10,000 5,000

Total Costs 17,500

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Illustration 4Demand is 1000 units per month.

Purchase cost per unit £11.

Order cost £30

Holding cost 10% p.a. of stock value.

Required

Calculate the minimum total cost with a discount of 1% given on orders of 1500 and over

Solution

EOQ with Discounts

1) Calculate EOQ in normal way (and the costs)

2) Calculate costs at the lower level of each discount above the EOQ

Working

EOQ √ (2 x 30 x 12,000 / 1.1) 809


Order Costs (Cost per order x No. Orders)

30 x (12,000 / 809) 445


1.1 x (809/2) 445

Cost of Purchases 12,000 x 11 132000

Total Costs 132890

If 1500 are ordered to take the discount:


Order Costs (Cost per order x No. Orders)

30 x (12,000 / 1500) 240


(1.1 x 99%) x (1500/2) 817

Cost of Purchases 12,000 x (11 x 99%) 130,608

Total Costs 131665

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1. Which of the following types of cost we are seeking to minimise by using the Economic Order Quantity?

A. Holding costs and inventory movement costs B. Ordering costs and holding costs C. Ordering costs and insurance costs D. Holding costs and security costs

Answer B

2. If a company uses the Economic Order Quantity as the level at which to order, how will they calculate total ordering costs for the year?

A. Cost per order x (Annual Demand / EOQ) B. Annual Demand x (Cost per order /EOQ) C. (EOQ / Cost per order) x Holding costs D. Annual demand x EOQ

Answer A

3. ABC Co. sells widgets and expects annual demand of 3.4m units. The cost of making an order is $49.71 and the cost of holding one unit for one year is $0.50.

What is the total ordering costs per year:

A. $5,687.34 B. $6,413.81 C. $6,500.54 D. $6,430.32

Answer C

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4. ABC Co. sells widgets and expects annual demand of 1.2m units. The cost of making an order is $25.21 and the cost of holding one unit for one year is $0.50.

What is the total holding costs per year:

A. $2,850 B. $3,750 C. $2,450 D. $2,750

Answer D

5. Layla Co. sells 200m wigs in a year with each order taking 15 days to be delivered once made. They make an order every time their stock levels reach 10m wigs.

What is the buffer stock level for Layla Co.

A. 1,780,822 B. 6,666,666 C. 9,333,333 D. 2,345,632

Answer A

6. Which of the following are drawbacks of a company using the Economic Order Quantity method of stock management?

1. Assumes constant ordering costs. 2. Assumes constant demand. 3. Assumes known annual demand. 4. Assumes no buffer stock or lead time.

A 1, 2 and 4 only B 1 and 3 only C All of the above D 1, 2 and 3

Answer C

�249

7. Stavros Co’s current inventory policy is to order 60,000 units when the inventory level falls to 55,000 units. Forecast demand to meet production requirements during the next year is 800,000 units. The cost of placing and processing an order is $90, while the cost of holding a unit in stores is $1 per unit per year. Both costs are expected to be constant during the next year. Orders are received three weeks after being placed with the supplier. You should assume a 50-week year and that demand is constant throughout the year.

What is the total cost of ordering at the EOQ level?

A. $12,000 B. $6,000 C. $7,000 D. $19,000

Answer D

Solution

Working

Buffer Stock (Re-order level - (Lead time x amount used per week))

15,000 - (3 weeks x 800,000/50)

7,000

EOQ ignoring buffer stock √ (2 x 90 x 800,000 / 1)

12,000


Order Costs (Cost per order x No. Orders) 90 x (800,000/12,000) 6,000


1 x (12,000 / 2) 6,000

Holding Cost for Buffer (Holding cost p/unit x Buffer Stock)

1 x 7,000 7,000

Total Costs 19,000

�250

Mind Map 39 - Cash Management I

�251

Illustration 1A business expects to move 500,000 from it’s interest bearing account into cash over the course of one year.

The interest rate is 7% and the cost of making a transfer is $250.

How much should the business transfer into cash each time it makes a transfer?

Solution

Working

Annual Disbursements $500,000

Interest Rate 7%

Cost of making a transfer $250

Amount to transfer √(2 x 250 x 500,000) / 0.07

$59,761

�252

Illustration 2Using the information in illustration 1 calculate the total cost to the business each year of their cash management policy.

Solution

Working

Holding Cost (Ave Cash Balance x Interest Rate)

($59761 / 2) x 0.07 2091

Trading Cost (Cost of Transfer x No. Transfers)

$250 x (500,000 / 59,761)

2091

Total Cost 4182

�253

Illustration 3Subsonic Speaker Systems (SSS) has annual transactions of $9 million.

The fixed cost of converting securities into cash is $264.50 per conversion.

The annual opportunity cost of funds is 9%.

What is the optimal deposit size?

Solution

Working

Annual Disbursements $9,000,000

Interest Rate 9%

Cost of making a transfer $264.50

Amount to transfer √(2 x 264.5 x 9,000,000) / 0.09)

230,000

Working


(230,000 / 2) x 0.09 10,350


$264.50 x (9,000,000 / 230,000)

10,350

Total Cost 20,700

�254

Illustration 4If a company must maintain a minimum cash balance of £8,000, and the variance of its daily cash flows is £4m (ie std deviation £2,000). The cost of buying/ selling securities is £50 & the daily interest rate is 0.025 %.

Calculate the spread, the upper limit & the return point.

Solution

Working

Lower Limit Given in Question 8,000

Spread (3 x ((3/4 x 50 x 4,000,000) / 0.00025))1/3

25,303

Upper Limit (Lower Limit + Spread)

8,000 + 25,303 33,303

Return Point (Lower Limit + (1/3 x Spread)

8,000 + (1/3 x 25,303) 16,434

�255


1. Which of the following are the reasons for a company to hold cash?

1. Speculation 2. Persuasion 3. Transaction 4. Reaction


Answer B

2. Revaile Co. has annual transactions of $30 million. The fixed cost of converting securities into cash is $500 per conversion. The annual opportunity cost of funds is 6%. What is the optimal deposit size?

A. $21,213 B. $42,426 C. $707,107 D. $42.43

Answer C

Working

Annual Disbursements $30,000,000

Interest Rate 6%

Cost of making a transfer $500

Amount to transfer √(2 x 264.5 x 9,000,000) / 0.09)

707,107

Working


(707,107 / 2) x 0.06 21,213


$500 x (30,000,000 / 707,107)

21,213

Total Cost 42,426

�256

3. Which of the following are problems with the Baumol Model?

1. Assumes constant cash disbursements 2. Assumes that there are no cash receipts, just movements 3. Assumes a risk free interest rate 4. Assumes no safety buffer for cash


Answer D

4. If a company must maintain a minimum cash balance of £20,000, and the variance of its daily cash flows is £6.25m (ie std deviation £2,500). The cost of buying/ selling securities is £80 & the daily interest rate is 0.035 %.

What is the upper-limit using the Miller-Orr model of cash management?

Working

Lower Limit Given in Question 20,000

Spread (3 x ((3/4 x 80 x 6,250,000) / 0.00035))1/3

25,303

Upper Limit (Lower Limit + Spread)

8,000 + 25,303 33,303

Return Point (Lower Limit + (1/3 x Spread)

8,000 + (1/3 x 25,303) 16,434

�257

Mind Map 40 - Cash Management II

�258

Illustration 1 Jenkins Co. is preparing a cash flow forecast for the next four months. They have an overdraft facility of $10,000 available and the following information is relevant:

1. Sales will be $40,000 in month one and are expected to rise by 5% per month. 2. Wages will be $15,000 in month one and are expected to rise by $500 per month. 3. Other costs will be $10,000 in month one and are expected to rise by $1000 per month. 4. Capital investment of $80,000 for new Plant is scheduled to occur in month 2. 5. An interim payment of 50% of the dividends declared for the year $240,000 will be paid

in month 3. 6. The opening balance on cash is $132,000.

Prepare the cash flow forecast and advise Jenkins on the implications as well as possible action to take in response.

�259

Solution

Implications - By month 3 the cash balance has fallen to $34,000. - This is below the level that can be covered through the overdraft of $10,000. - The operating cash flows are positive so this is not a trading problem. - The cause is the capital investment and the dividend payment. - This is a severe liquidity risk to the company. - Action will need to be taken to prevent it.

Actions - Postpone the Capital investment. - Finance the capital investment in another way e.g. lease rather than buy. - Postpone the dividend payment for one month meaning that the balance is -$16,000 at

it’s worst point. Ask to increase the overdraft to $16,000 and within the next month the positive trading income should wipe out the negative balance.

- Reduce the dividend.

Month 1$

Month 2$

Month 3$

Month 4$

Sales Receipts 40,000 42,000 44,100 46,305

Payments:

Wages -15,000 -15,500 -16,000 -16,500

Other Costs -10,000 -11,000 -12,000 -13,000

Capital Investment -80,000

Dividend Payment -120,000

Net Cash Flow 15,000 -64,500 -103,900 16,805

Opening Balance 132,000 147,000 82,500 -21,400

Closing Balance 147,000 82,500 -21,400 -4,595

�260


1. Drill has produced the following sales forecast:

£ ‘000July 850August 860September 870October 880November 890December 900

Currently 15% of customers pay in cash, of the credit customers (excl irrecoverable debts), 55% pay in one month, 35% pay in two months and 10% in three months. Irrecoverable debts are 3%. This payment pattern is expected to continue.

Calculate the forecast sales receipts for October to the nearest 1,000

Answer1,476,000

Working

October Sales 880 * 15% 132September Sales 870 * 85% * 55% *(100-3%) 395August Sales 860 * 85% * 35% * (100-3%) 248July Sales 850 * 85% * 10% * (100-3%) 701

1,476

2. The following items have been extracted from an entity's budget for the next month:

Sales on credit 140,000Expected increase in inventory in the next month 30,000Expected decrease in receivables in the next month 15,000

Calculate the budgeted receipt from trade receivables next month?

Answer155,000

Working(140,000+15,000)

�261

3. Which of the following is a technique to create a cash budget?

A. A receipts and payments forecastB. A statement of financial position forecastC. A statement of profit and loss D. A statement of changes in equity

AnswerA & B

�262

Mind Map 41 - Cash Flow Statements

�263

Illustration 1An entity has the following results in their financial statements:

2011 2010

ASSETS $‘000 $‘000


Inventory 300 400

Receivables 200 300

Cash 300 200

1800 1900

LIABILITIES


Reserves 200 199


Payables 100 100

1800 1900

$‘000 $‘000

Revenue 1000 1200

COS 800 1100


Profit on Sale of Non Current Asset 30 0

Other Costs 70 90

PBIT 100 10

Interest Cost 10 7

PBT 90 3

Tax 30 2

PAT 60 1

�264

Other Information:

I. Within cost of sales is depreciation of $40,000 and amortisation of an intangible asset of $30,000.

II. Within other costs is an increase in accrued admin expenses of $5,000.

Perform the reconciliation of Profit Before Tax to Cash Generated From Operations for 2011.

Solution


Finance Costs (Often accrued - not cash so add back)

10,000

Depreciation (Not Cash - add back) 40,000

Ammortisation (Not Cash - add back) 30,000

Profit On Sale of NCA (Not Cash - exclude) -30,000

Increase in Accruals (Not Cash Expenses - add back)

5,000 55,000

Operating cash flow before working capital changes 145,000

Decrease in Inventory (Sold more so cash in)(400 - 300)

100,000

Decrease in Receivables (Collecting cash more quickly = cash in)(300 - 200)

100,000

No Change in Payables - - 200000

Cash Generated from Operations 345000

�265

Illustration 2An entity has the following information in their financial statements:

Other information:

I. The entity disposed of a piece of plant during the year with a carrying value of $300 for a profit of $50.

II. Intangible assets are made up of qualifying development expenditure on a product currently being sold, with amortisation in 2011 of $100.

What cash flows will appear in the statement of cash flows for the entity in the year 2011?

Solution

2011 2010

PPE 2,000 1,100

Intangible Assets 500 400

Property Plant & Equipment

Opening Balance 1,100

Closing Balance -2,000

Disposal (Remove Carrying Amount) -300

Balance -1200

This difference needs to increase the amount of PPE from 800 to 2000 to balance the account so must be additions - A CASH FLOW

We have also sold some PPE & so received cash.The amount received will be the carrying value plus the profit made.

(300 + 50) 350

�266

Intangible Assets

Opening Balance 400

Closing Balance -500

Amortisation (Reduces the balance) -100

Balance -200

This difference needs to increase the amount of Intangible Asset by 200 to balance the account so must be development expenditure - A CASH FLOW

�267

Illustration 3

Statement of Financial Position 2011 2010

Non Current Assets

PPE (note (i)) 32,600 24,100

Financial Assets (note (ii)) 4,500 7,000

37,100 31,100

Current Assets

Inventory 10,200 7,200

Receivables 3,500 3,700

Bank 1,400

13,700 12,300

Total Assets 50,800 43,400

Equity & Liabilities

Ordinary Shares of $1 (note (iii)) 14,000 8,000

Share Premium (note (iii)) 2,000

Revaluation Reserve (note (iii)) 2,000 3,600

Retained Earnings 13,000 10,100


Finance Lease Obligations 7,000 6,900

Deferred Tax 1,300 900

Current Liabilities

Tax 1,000 1,200

Bank Overdraft 2,900

Prov’n for warranties (note (iv)) 1,600 4,000

Finance Lease Obligations 4,800 2,100

Trade Payables 3,200 4,600

Total Equity & Liabilities 50,800 43,400

�268

Note (i) - Property Plant & Equipment

The property disposed of was sold for $8.1 million.

Note (ii) - Investments/Investment Income

During the year an investment that had a carrying amount of $3 million was sold for $3.4 million. No investments were purchased during the year.

Investment income consists of:

Income Statement 2011 2010

$‘000 $‘000

Revenue 58,500 41,000

Cost of Sales -46,500 -30,000


Operating Activities -8,700 -4,500

Investment Income (note (ii)) 1,100 700


Profit Before Tax 3,900 6,800

Income Tax -1,000 -1,800

Profit For the year 2,900 5,000

Cost

$‘000

Accumulated Depreciation

$‘000

Carrying Amount

$‘000

At 30 September 2010 33,600 -9,500 24,100

New finance lease additions 6,700 6,700

Purchase of new plant 8,300 8,300

Disposal of property -5,000 1,000 -4,000

Depreciation for the year -2,500 -2,500

At 30 September 2011 43,600 -11,000 32,600

�269

Note (iii)

On 1 April 2011 there was a bonus issue of shares that was funded from the share premium and some of the revaluation reserve. This was followed on 30 April 2011 by an issue of shares for cash at par.

Note (iv)

The movement in the product warranty provision has been included in cost of sales.

Required:

Prepare a statement of cash flows for Mocha for the year ended 30 September 2011, in accordance with IAS 7 Statement of cash flows, using the indirect method.

(19 marks)

Year to 30 September 2011 2010

$‘000 $‘000

Dividends received 200 250

Profit on sale of investment 400 0

Increases in fair value 500 450

1100 700

�270

Solution

$‘000 $’000


Finance Costs 500

Finance Income -1,100

Depreciation Note (i) 2,500

Profit On Sale of NCA (8,100 - 4,000) -4,100

Increase in Warranty Provision

(4,000 - 1,600) -2,400 -4600

Operating cash flow before working capital changes -700

Increase in Inventory (10,200 - 7,200) -3,000

Decrease in Receivables (3,700 - 3,500) 200

Decrease in Payables (4,600 - 3,200) -1,400 -4200

Cash Generated from Operations -4900

�271

$‘000 $’000


Finance Costs 500

Finance Income -1,100

Depreciation Note (i) 2,500

Profit On Sale of NCA (8,100 - 4,000) -4,100

Increase in Warranty Provision

(4,000 - 1,600) -2,400 -4600

Operating cash flow before working capital changes -700

Increase in Inventory (10,200 - 7,200) -3,000

Decrease in Receivables (3,700 - 3,500) 200

Decrease in Payables (4,600 - 1,600) -1,400 -4200

Cash Generated from Operations -4900

Interest Paid -500

Income Tax Paid (W4) -800

Net Cash Deficit from operating activities -6200

Cash flows from investing activities

Purchase of Property Plant & Equipment -8,300

Disposal of Property Plant & Equipment 8,100

Disposal of Investment 3,400

Dividends Received 200

Net cash from investing activities 3400

Cash flows from financing activities

Shares Issued (W2) 2,400

Payment of Finance Lease obligations (W3) -3,900

Net cash from financing activities -1,500

Net decrease in cash and cash equivalents -4300

Cash and cash equivalents brought forward 1,400

Cash and cash equivalents carried forward -2900

�272

W1 - Financial Assets

W2 - Shares Issued

W3 - Finance Leases

Financial Assets

Opening Balance 7,000

Closing Balance -4,500

Sale of Asset -3,000

Increase in Fair Value 500

Total 0

No Cash flows to deal with in Financial Assets

Ordinary Shares of $1 (note (iii)) 8,000

Share Premium (note (iii)) 2,000

Revaluation Reserve (note (iii)) 3,600

Ordinary Shares of $1 (note (iii)) -14,000

Share Premium (note (iii)) 0

Revaluation Reserve (note (iii)) -2,000

Balance -2400

The difference is the shares issued for cash in the year which is a cash flow

Opening Balance (Current Leases) 2,100

Opening Balance (Non Current Leases) 6,900

Closing Balance (Current Leases) -4,800

Closing Balance (Non Current Leases) -7,000

New Leases in Year 6,700

Balance 3,900

The difference is the leases REPAID in the year which is a cash flow

�273

W4 - Income Tax

Opening Balance (Income Tax) 1,200

Opening Balance (Deferred Tax) 900

Closing Balance (Income Tax) -1,000

Closing Balance (Deferred Tax) -1,300

Income Statement Charge (Increase tax due) 1000

Balance 800

The difference is the tax PAID in the year which is a cash flow

�274


1. Which of the following do not appear with cash flows from investing activities within a statement of cash flows?

A. Interest ReceivedB. Cash purchase of a new carC. Profit from disposal of an old carD. Dividends receivedE. Repayment of a loan taken out to purchase some machinery

AnswerC & E

2. An item of plant costing 1.8m was purchases on 01/01/X4 and is being depreciated over its UEL of 10 years. Residual value is NIL. On 31/12/X5 the asset was revalued to 1.92m, there was no change to its UEL. On 31/12/X6 the asset was sold for 2.1m.

The entity prepares financial statements at 31 December each year.

Which two amounts will appear on the statement of profit and loss and the statement of cash flows regarding the disposal of the plant.

A. 2.1m inflowB. 2.1m outflowC. 0.42M Gain on Disposal D. 0.18M Gain on Disposal E. 0.372M Gain on Disposal

AnswerA&B

Working31/12/X5 Revaluation 1.92 8 years UEL remaining Depreciation 0.24

NBV 31/12X6 = 1.92-0.24 = 1.68mSales Proceeds = 2.1mGain on disposal = 2.1-1.68 = 0.42m

�275

3. The following is an extract of the Statement of Financial Position for Bubbly Company for the years 20X4 and 20X3

Current Assets 20X4 20X3Cash and Cash Equivalents 2,350,000 -

Current LiabilitiesCash and Cash Equivalents - 1,112,000

Which of the following is correct?

A. Net increase in cash of 1,238,000B. Net increase in cash of 3,462,000C. Net decrease in cash of 1,238,000D. Net decrease in cash of 3,462,000

Answer B

4. Which of the following is a disadvantage of Cash Flow Statements?

A. Used to value the businessB. Users can access the quality of profitC. Harder to manipulateD. Prepared on a Historic Basis

AnswerD

�276

Documents

F1 CIMA Workbook Q & A - Mapit Accountancy