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MANG6030W1

SEMESTER 1 EXAMINATIONS 2019-20

FINANCIAL ACCOUNTING 1

DURATION: 180 MINUTES (3 HOURS)

This paper contains FOUR questions. Answer THREE questions in total. If you attempt more questions than required, only the required number of answers will be marked. Please strike through any answers that you do not wish to be marked. If you do not do this the marker will mark the answers in the order that they appear in your exam booklets. You must answer QUESTION A1 from Section A and ANY TWO QUESTIONS from Section B. You should spend one hour on each question. An outline marking scheme is shown in brackets to the right of each question. Only University approved calculators may be used.

A foreign language direct ‘Word to Word’ translation dictionary (paper version) is ONLY permitted provided it contains no notes, additions or annotations.

SECTION A

You must answer this ONE question from this section.

A1.

KEDISON PLC

The following trial balance relates to Kedison plc at 30th August 2019.

	£’000	£’000
Sales		324,000
Inventory at 1st September 2018	16,850
Purchases	112,430
Distribution expenses	15,420
Administration expenses	20,870
Factory wages	42,690
Interest paid	1,300
Interim dividend paid	5,000
Land and buildings at cost at 1st September 2018 (note iii)	135,860
Buildings accumulated depreciation at 1st September 2018		9,400
Plant and machinery at cost	46,800
Plant accumulated depreciation at 1st September 2018		8,020
Construction contract (note ii)	1,480
Trade receivables	20,080
Bank	11,450
Trade payables		15,920
Ordinary shares of 50p each		50,000
Share premium		7,300
Retained earnings		15,590
	430,230	430,230

The following additional information is relevant:

i. Inventory was counted on 30^th August 2019 and valued at £22,500,000.

ii. Kedison commenced work on a construction contract on 1^st October 2018. The amount in the trial balance represents costs incurred to date. No payments on account have been invoiced or received. The contract price is £4,700,000 and a total profit of £1,500,000 is expected. The contract is currently 30% complete.

iii. The directors decided to revalue land and buildings as at 1^st September 2018. A Chartered Surveyor provided the following valuations:

Land 120,000,000

Buildings 80,000,000

200,000,000

As at 1^st September 2018 the building had a remaining life of 40 years with a nil residual value. Depreciation on the building is to be charged to administrative expenses. Ignore any transfers from the revaluation reserve to realised profits.

iv. Depreciation on plant and machinery is to be charged at 15% using the reducing balance method. It should be charged two thirds to cost of sales and one third to distribution expenses.

v. Corporation tax for the year ended 30^th August 2019 is estimated to be £38,870,000.

vi. The directors wish to propose a final dividend of 7p per share.

Required

Prepare the income statement for the year ended 30^th August 2019 and a statement of financial position as at that date for Kedison plc. The financial statements should comply as far as possible with the Companies Act and International Accounting Standards. Formal notes to the accounts are not required, but you should show your workings clearly.

[100 marks]

TURN OVER

SECTION B

You must answer ANY TWO questions from this section.

B1.

(a) Define ‘Revenue’ and explain how revenue should be measured as per International Accounting Standards.

[20 marks]

(b) Critically discuss whether the recognition of revenue in accordance with International Accounting Standards is objective and prudent.

[40marks]

(c) Dream Ltd is an online retailer of kitchen equipment, such as kettles and toasters etc. They earn a uniform gross profit margin on these goods of 30%.

Dream offers customers a full refund facility for any goods returned within 28 days of their purchase provided they are unused and in their original packaging so they can be resold to another customer. Past experience indicates that approximately 8% goods are returned under this policy.

On 1st May 2019, Dream received an order from Paramount Hotels Ltd. for 60 kettles, with a total sales value of £600. The kettles were for the guest bedrooms following a refurbishment of the hotel. Although Paramount has paid for these kettles, they have requested that Dream hold the kettles until the refurbishment is complete. Dream has agreed, and the kettles remain on the shelves of the warehouse.

In addition to selling their own branded goods Dream also sell microwaves manufactured by Flexi Ltd. Dream does not hold any microwaves in stock, but passes any orders received directly to Flexi. Flexi dispatch the goods directly to the customer. Under their agreement with Flexi, Dream must sell the microwaves at the manufacturers recommended price. If customers are dissatisfied with the goods they must request a refund directly from Flexi.

Dream earns a gross profit margin of 15% on any microwaves sold.

During the year ended 31st May 2019 Dream’s sales totalled £2,650,000. This included £760,000 in relation to microwaves.

Required:

Discuss how the matters described above should be treated in financial statements of Dream Ltd for the year ended 31st May 2019 and calculate the amounts to be recognised in revenue.

[40 marks]

B2.

Walter plc is in the process of developing a new drug to alleviate the effects of hay fever. Initial research was conducted in 2015, and the development project began on 1 January 2019. The drug is expected to go on sale immediately the development phase ends, on 1 July 2018. It is expected to be on sale for six years. The following information has been extracted from the costing records and project specification in relation to the drug:

	2015	2016	2017	2018
	£	£	£	£
Initial research	65,000	-	-	-
Development costs	-	30,100	68,240	5,000
Patent	-	-	-	1,300
Market research	-	-	-	2,500

In addition to the above costs, specialized equipment costing £13,000 was purchased for use on the project on 1^st January 2016. It is expected that at the end of the project it will be sold for £1,800.

The company’s year-end is 31^st December.

TURN OVER

Required

(a) Briefly explain the accounting treatment of research and development as required by IAS 38 Intangible Assets, referring to relevant accounting concepts to support that treatment.

[35 marks]

(b) Calculate the amounts to be included within the financial statements of Walter plc in relation to the hay fever drug for the years ended 31^st December 2015 – 31^st December 2019.

[40 marks]

(c) Discuss how useful the information contained within a company’s annual report on research and development is to the shareholder.

[25 marks]