ACCT2031 CORPORATE FINANCIAL REPORTING 2021
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ACCT2031-WE01
CORPORATE FINANCIAL REPORTING
2021
SECTION A
For each question, choose ONE of the proposed answers. (2 marks each)
1. Iroko holds three separate inventory lines at the year-end. These are valued as follows:
Product |
FIFO £ |
LIFO £ |
NRV £ |
X |
9,120 |
5,040 |
7,080 |
Y |
13,560 |
16,080 |
15,360 |
Z |
18,240 |
20,400 |
22,080 |
40,920 41,520 44,520
According to IAS 2 Inventories, what amount of inventories should be recognised in the statement of financial position as at the end of the reporting period?
a. £38,880
b. £40,800
c. £40,920
d. £41,520
2. MN obtained a government licence to operate a mine from 1 April 2019. The licence requires that, at the end of the mine’s useful life, all buildings must be removed from the site and the site landscaped. MN estimates that the cost of this decommissioning work will be £1,000,000 in ten years’ time (present value at 1 April 2019 £463,000) using a discount factor of 8%.
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets how much should MN include in provisions in its statement of financial position as at 31 March 2020?
a. £463,000
b. £1,000,000
c. £500,040
d. £1,080,000
3. In December 2016 Heinz Ltd revalued a piece of land from a cost of £700,000 to its market value of £1.5 million. In December 2020, due to a downturn in the local economy, the market value fell to £650,000.
How much of the impairment loss should be recognised in profit or loss as an expense in Heinz Ltd’s statement of profit or loss for the year ended 31 December 2020?
a. £NIL
b. £50,000
c. £800,000
d. £850,000.
4. On 1 October 2010 Bamford purchased an office building for £1.4 million. At that date it had an estimated useful life of 30 years. On 1 October 2018 Bamford began to let the building to a third party, reclassifying it as an investment property and adopting the fair value model in accordance with IAS 40 Investment Property. On 1 July 2020, Bamford began to use the office block for its own operations again. An independent valuer estimated that useful life of the building was 25 years from 1 July 2020 and provided the following additional information:
Fair value of the property
£000
At 1 October 2019 2,100
At 1 July 2020 1,900
At 30 September 2020 1,950
Bamford has adopted the cost model for tangible assets that fall within the scope of IAS 16 Property, plant and equipment.
What is the total charge to profit or loss in respect of the office building for the year ended 30 September 2020?
a. £19,000
b. £76,000
c. £214,000
d. £219,000
5. Crete acquired 80% of the equity share capital of Rhodes on 1 July 2019. For the year ended
30 June 2020, the cost of sales of Crete was £270,000 and the cost of sales of Rhodes was £150,000. During the year ended 30 June 2020, Crete sold goods Rhodes for £80,000 at a mark up of 25%. At the year-end, one quarter of these goods were still in inventory.
What is the consolidated cost of sales for the year ended 30 June 2020?
a. £340,000
b. £344,000
c. £356,000
d. £420,000
6. Gordon Ltd purchased an item of plant at a cost of £12 million on 1 January 2019. Gordon charged depreciation at 20% per annum (straight line) and received capital allowances of 25% (reducing balance) in respect of the purchase. This was the only temporary difference in respect of the years to 31 December 2019 and 2020. The tax rate is 20%.
What is the amount of Deferred Tax in Profit or Loss for Gordon for the year ended 31 December 2020?
a. £30,000 debit
b. £90,000 debit
c. £30,000 credit
d. £90,000 credit
7. Kale has correctly calculated its basic earnings per share (EPS) for the current year.
Which of the following items need to be additionally considered when calculating Kale’s diluted EPS for the year?
I. A 1 for 5 rights issue of equity shares during the year at £1 ·20 when the market price of the equity shares was £2 ·00
II. The issue during the year of a convertible (to equity shares) loan note
III. The granting during the year of directors’ share options exercisable in three years’ time
IV. Equity shares issued during the year as the purchase consideration for the acquisition of a new subsidiary company
a. All four
b. I and II only
c. II and III only
d. III and IV only
8. On 1 April 2020, Sharp Limited acquired a financial debt instrument (a financial asset) at its nominal value of £12 million. The instrument carries a fixed coupon interest of 7% which is receivable annually in arrears. Transaction costs associated with the acquisition were £104,000.
What is the carrying value of the financial asset as at 1 April 2020?
a. £11,896,000
b. £12,000,000
c. £12,104,000
d. £12,840,000.
9. TrainEuro sells European train tickets to customers through an online service. TrainEuro buys tickets at discounted prices and then sells them to the public at cost plus 15%. During the year ended 30 June 2019, TrainEuro’s train ticket sales amounted to £23m.
What is the amount of revenue that TrainEuro should recognise in its financial statements for the year ended 30 June 2019?
a. £3 million
b. £3.45 million
c. £20 million
d. £23 million
10. Comparability is identified as an enhancing qualitative characteristic in the IASB’s Conceptual Framework for Financial Reporting.
Which of the following does NOT improve comparability?
a. Restating the financial statements of previous years when there has been a change of accounting policy
b. Prohibiting changes of accounting policy unless required by an IFRS or to give more relevant and reliable information
c. Disclosing discontinued operations in financial statements
d. Applying an entity’s current accounting policy to a transaction which an entity has not engaged in before
SECTION B
QUESTION 11
(i) On 1 October 2019, Margate acquired 75% of Deal’s equity shares by a share exchange of two new shares in Margate for every five acquired shares in Deal. In addition, Margate will pay the shareholders of Deal £2.42 per share on 30 September 2020. The market value of Margate’s shares at 1 October 2019 was £2 each. Margate has not recorded any of the purchase consideration in Deal.
On 1 January 2020, Margate acquired 25% of the equity shares in Dover paying £3 per share in cash and Dover was correctly identified as an associate company of Margate. This transaction has been correctly recorded in the books of Margate.
The summarised statements of financial position of the three companies as at 31 March 2020 are:
Margate Deal Dover
ASSETS £000 £000 £000
Property, plant & Equipment 56,625 62,000 50,000
Investment in Dover 48,375 - -
Current assets 68,000 36,500 61,000
Total assets 173,000 98,500 111,000
EQUITY
Share capital (£1 shares) 44,000 32,000 64,500
Retained earnings 57,000 10,500 23,500
101,000 42,500 88,000
Non-current liabilities
8% debentures 60,000 40,000 20,000
Current liabilities
Total liabilities
12,000 16,000 3,000
72,000 56,000 23,000
173,000 98,500 111,000
The following information is relevant:
O During the year to 31 March 2020, Deal made a profit of £4 million, Dover made a profit of £6 million.
O At the date of acquisition of Deal, Margate conducted a fair value exercise on Deal’s net assets which were equal to their carrying amounts with the exception of an item of plant which had a fair
value of £6 million below its carrying amount. The plant had a remaining economic life of three years at 1 October 2019.
O Margate’s policy is to value the non-controlling interest at fair value at the date of acquisition. A share price for Deal of £2.70 each is representative of the fair value of the shares held by the non-controlling interest.
O Since acquisition, Margate has made sales of goods to Deal. Deal had £4.6 million of these goods in inventory at 31 March 2020. Margate’s mark-up on sales is 15%.
O There are impairment losses of 20% on goodwill in the period to year-ended 31 March 2020.
O Margate’s cost of capital is 10% per annum. Assume a present value factor of 0.83 for a 2-year discounting calculation.
O Assume profits for all companies arose evenly.
Required:
Prepare the Consolidated Statement of Financial Position for the Margate Group for the year ended
31 March 2020.
(25 marks)
(ii) Margate acquired some ordinary shares in Ashford in May 2020. Margate was one of three
shareholders, the majority shareholder held 60% of voting shares, a second shareholder held 22% of voting shares and Margate held 18% of the voting shares.
The board of directors consisted of ten members. The majority shareholder was represented by six of the board members, while Margate and the other shareholder were represented by two members each.
A shareholders’ agreement stated that certain board and shareholder resolutions required either unanimous or majority decision.
It was envisaged that during the coming month Margate would supply technical services to Ashford. Margate do not intend to account for its investment in Ashford as an associate, because of a lack of significant influence over the entity. Margate felt that the 60% majority owner used its influence as the parent to control and govern its subsidiary.
Required:
Discuss whether you agree with Margate’s assertion that they do not have significant influence over
Ashford.
(5 marks)
(Total: 30 Marks)
SECTION C – ANSWER ANY TWO QUESTIONS
QUESTION 12
The draft financial statements of Auckland plc for the year to 31 March 2020 are as follows:
Statement of Profit or Loss and Other Comprehensive Income
Note £000
Revenue
Cost of sales
Gross profit
Operating expenses
Interest payable
Interest receivable
Profit before tax
Income tax
Profit for the period
Other Comprehensive Income
Loss on revaluation of land
Total comprehensive income for the year Statements of Financial Position as at:
Non- current assets
Property, plant and equipment
Current assets
Inventory
Trade receivable
Bank
Total assets
Capital and reserves:
Ordinary shares of £1 each
Share premium
Revaluation Reserve
Retained earnings
Non-Current liabilities
Deferred tax
Government grants
Lease obligations
8% Convertible loan
Current liabilities
12,400
(6,800)
5,600
(2,604)
(180)
70
2,886
(460)
2,426
(400)
2,026
31 March 2020
£000 £000
7,344
2,850
1,810
402
3,930
10,733
2,000 800 700 4,010 7,510
550 200 300 400 1,450
Trade payable 700 960
Lease obligations 150 187
Income tax 520 295
Government grants 4 160 125
Bank Overdraft NIL 206
1,530 1,773
Total equity and liabilities 12,406 10,733
The following information is relevant:
(1) Non- current assets
O Land was revalued downwards by £400,000 on 1 April 2019.
O During the year an item of plant that had cost £800,000 and had accumulated depreciation of £120,000 was sold at a loss (included in cost of sales) of £60,000 on its carrying value.
O The depreciation charge for the year was £1,400,000.
(2) Share capital and loan stocks The increase in the share capital during the year was due to the following events:
O On 1 June 2019 there was a bonus issue (out of share premium) of two bonus shares for every 10 shares held:
O On 1 February 2020 the 8% convertible loan stock holders exercised their right to convert to ordinary shares. The terms of conversion were 50 ordinary shares of £1 for each £100 of 8% convertible loan stock.
O The remaining increase in the ordinary shares had been due to issue of shares for cash on
1 September 2019.
(3) Government grant
O A credit of £180,000 for the current year’s amortisation of government grants for capital expenditure has been included in cost of sales.
(4) Plant with a fair value of £560,000 was acquired on a lease basis. The interest payable on the lease is included in the amount charged to the Statement of Profit or Loss and Other Comprehensive Income for the year ending 31 March 2020.
Required
Prepare a Statement of Cash Flows for Auckland plc for the year ended 31 March 2020 using the indirect method.
(20 marks)
Comment on what the statement you have prepared tells users about the cash flows of Auckland plc for the year-ended 31 March 2020.
(5 marks)
(Total: 25 marks)
QUESTION 13
The following issues relate to company clients of the firm of accountants you work for. Each company has a year-end of 31 March 2020.
You are required to prepare a brief report for your manager explaining the appropriate accounting treatments at the 31 March 2020 year-end in each case along with supporting calculations as necessary.
You should cite relevant accounting regulations in your answer.
(i) Richmond owned a 100% subsidiary, Bedale that is treated as a cash generating unit. On 31 March 2020 there was an industrial accident (a gas explosion) that caused damage to some of Bedale’s plant. The assets of Bedale immediately before the accident were:
Goodwill
Patent
Factory building
Plant
Receivables and cash
£000
1,800
1,200
4,000
3,500
1,500
12,000
As a result of the accident, the recoverable amount of Bedale is £6.7 million and the impairment loss needs to be ascertained and recorded.
The explosion destroyed (to the point of no further use) an item of plant that had a carrying amount of £500,000.
Bedale has an open offer from a competitor of £1 million for its patent.
The receivables and cash are already stated at their fair values less costs of disposal (net realisable values).
(13 marks)
(ii) On 1 April 2019, Nicholas plc issued £12 million x £1 convertible loan notes at par which carry
a nominal interest (coupon) rate of 6% per annum.
The loan notes are redeemable on 31 March 2023 at par for cash or can be exchanged for equity shares. A similar loan note, without the conversion option, would have required Nicholas to pay an interest rate of 9%.
The present value of £1 receivable at the end of each year, based on discount rates of 6% and 9%, can be taken as:
End of
year
1
2
3
4
6%
0.94
0.89
0.84
0.79
9%
0.92
0.84
0.77
0.71
(12 marks)
(Total: 25 marks)
QUESTION 14
(i) The Ibitha shipping company has seen a downturn in business. The board has agreed two restructuring projects during the year to 30 April 2020.
Plan A involves selling 50% of its off-shore fleet in one year’s time. Additionally, the plan is to make 40% of its seamen redundant. Ibitha will carry out further analysis before deciding which of its fleets and related employees will be affected. In previous announcements to the public, Ibitha has suggested that it may restructure the off-shore fleet in the future.
Plan B involves the reorganisation of the headquarters in 18 months’ time, and includes the redundancy of 20% of the headquarters’ workforce. The company has made announcements before the year-end but there was a three month consultation period which ended just after the year end, whereby Ibitha was negotiating with employee representatives. Thus individual employees had not been notified by the year end.
Required
Explain with reasons how should Ibitha deal with these two restructuring plans in terms of their 30 April 2020 year-end financial statements.?
(13 marks)
(ii) The Cowshed Dairy Ltd are a retailer and distributor of speciality cheeses. They have
traditionally delivered the cheeses using their own transport, but this arrangement has changed from 1 November 2020. The Cowshed Dairy have made arrangements with a local logistics company MTD Ltd, to take over the distribution function from that date.
The contract agreed between the two parties sets out that MTD will supply two refrigerated trucks with drivers for use in the delivery service. They will be painted in the colours and logo of the Cowshed Dairy, and will normally be kept at the premises of MTD, although they may be kept at the Cowshed Diary occasionally if that is more convenient for delivery schedules.
Required:
Prepare notes for a discussion with the financial director of The Cowshed Dairy Ltd in which you explain with reasons, how the contract with MTD should be classified in the financial statements of the cheese retailer, and the financial reporting implications of that treatment .
(12 marks) (Total: 25 marks)
2022-08-09