Question 1

Patronus bought 400,000 shares in Secondus on 1 April 2018. At the same time   Patronus bought 300,000 shares in Additionus.  Patronus prepares its financial      statements to 31 March each year and at 31 March 2019 the balance sheets of the three companies are as shown.

ASSETS

Non-current assets

Property plant and equipment Investment in Secondus         Investment in Additionus

Current assets

Inventory

Receivables

Cash and cash equivalents

Total Assets

EQUITY AND LIABILITIES

Equity

Ordinary shares, £1 each Share premium                Revaluation surplus         Retained earnings

Non-current liabilities

Borrowings

Current liabilities

Bank overdraft

Payables

Total Liabilities

Total Equity and Liabilities

Patronus

£’000

12,690  2,412  1,713  16,815

783

3,113  19,459  23,355  40,170

1,657

8,876  2,937  15,168  28,638

6,772

-

4,760 4,760 11,532  40,170

The following notes are relevant:

i.      On 1 April 2018 the retained earnings of Secondus were £650,000. At that     date the fair value of the net assets of Secondus was £1 million higher than their     book value.  The difference related to the land on which the firm’s factory and office are built, which was purchased many years ago.

ii.      On 1 April 2018 the retained earnings of Additionus were £1,500,000.

iii.     On 1 January 2019 Secondus sold goods to Patronus for £400,000.  Secondus normally has a profit margin of 10%. At the end of the year Patronus owed               Secondus £100,000 in respect of this transaction and half the inventory was still       unsold.

iv.     Patronus carried an impairment review for goodwill.  Goodwill in Secondus had been impaired by £250,000.

v.     Patronus policy is to value non-controlling interest at percentage share of net assets.

Required:

a.      Prepare the consolidated balance sheet of the Patronus Group as at 31 March

2019.                                                                                                             (20 marks)

b.     The fair value adjustment for Secondus related to land.  Discuss what the         impact would be on the consolidated financial statements for the year if the fair value adjustment had related to an asset with a useful life of 10 years as at the date of       acquisition.

(5 marks) (Total 25 marks)

Question 2

Taverham plc is preparing its accounts to the year ended 31 March 2019.  There are a number of issues which require explanation and you have been asked to prepare  some guidance as one of the accountants working in the finance department.

Issue 1

In late March the directors of Taverham uncovered a material error that had been     made by the company’s recently retired finance director and had affected the           financial statements for some time.  Their investigations revealed that £2.5 million of revenues included in the profit or loss for the year ended 31 March 2019 related to   the year ended 31 March 2020.  More detailed analysis revealed that a further £1.5 million of revenue included in the year ended 31 March 2018 should have been        recognised in the year ended 31 March 2019.   They do not think that the errors in   recording extend back to any earlier periods.

Issue 2

Taverham has provided a 6 month warranty on some of the products that it sells.   They expect that the cost of meeting the promises made under the warranties is    about 10% of relevant sales, the volume of relevant sales in the current year being £8 million for the whole year.  You can assume that revenue accrues evenly          throughout the year.  The warranty provision at 31 March 2018 was £150,000.

Issue 3

On 15th  March 2019

Taverham delivered goods to Hellesdon Ltd, an unrelated company, for £300,000.   The transaction was on a sale or return basis. Hellesdon Ltd has not contacted        Taverham to discuss this transaction. Taverham has treated it as a credit sale in the year end accounts.

Required:

For each of the transactions outlined above identify the accounting issue, state the relevant accounting principles and rules and finally apply those principles to the     issues raised to provide advice about an appropriate accounting treatment.