Professional Documents
Culture Documents
UNIVERSITY OF LONDON
279 0091 ZA
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme
Financial Reporting
Wednesday, 14th May 2008 : 2.30pm to 5.45pm
Candidates should answer FOUR of the following SEVEN questions. All questions carry
equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
1.
The balance sheets for Breakfast Plc, Jam Ltd and Honey Ltd as at 31 December 2007
are given as follows:
Breakfast Plc
400,000
650,000
25,000
55,000
30,000
Jam Ltd
300,000
Honey Ltd
140,000
165,000
164,000
9,000
2,000
950,000
112,000
(6,000)
(25,000)
710,000
500
(1,500)
(4,000)
146,000
500,000
200,000
50,000
450,000
150,000
360,000
96,000
950,000
710,000
146,000
4,000
11,000
(225,000)
Breakfast Plc acquired 75 % of Jam Ltd for 500,000 on 1 January 2001. At the time of
acquisition, the fair value of Jam Ltds fixed assets was 300,000 (historic cost
150,000) and Jam Ltd included the revaluation in its accounts. No other assets were
revalued at the date of acquisition. Jam Ltd's share capital and reserves on the date of
acquisition were 420,000, after the revaluation had correctly been incorporated into the
companys accounts.
Breakfast Plc acquired 20% of Honey Ltd on 1 January 2003 for 120,000 when Honey
Ltds net assets at fair value were 70,000.
Goodwill is capitalised and amortised over 10 years.
The stock in Breakfast Plc includes 10,000 of stock purchased from Jam Ltd. These
goods had cost Jam Ltd 2,000. The stock in Breakfast Plc also includes 5,000 of stock
purchased from Honey Ltd. These goods had cost Honey Ltd, 3,000.
Any differences in inter-company balances are due to cash in transit.
At the year end Breakfast Plc declares a dividend of 5p per share, Jam Ltd declares a
dividend of 20p per share and Honey Ltd declares a dividend of 10p per share. These
dividends have not been accounted for by any of the companies.
Required
(a)
Prepare a consolidated balance sheet for Breakfast Plc for the year ended 31 December
2007.
(20 marks)
(b)
What are joint ventures and how should they be accounted for?
UL08/122
D04
Page 2 of 9
(5 marks)
2.
On 1 January 2008, Shoe Ltds long term budget showed anticipated net receipts of
24,000 and thereafter 40,800 each year for the foreseeable future. The companys
cost of capital is 10% per annum and this is not expected to change.
During 2008, the following occur:
I
General economic conditions suggest that the budget for existing activities after
2008 should be revised from net receipts of 40,800 per annum to net receipts of
34,200 per annum.
II
A new three year contract is undertaken which requires an initial outlay of 7,800
on 31 December 2008 and is expected to produce receipts of 4,080 on 31
December of each of the following years. This contract has not been included in
the budget in part I.
III
The company receives a grant of 3,600 for its environmental policies in 2008.
This has not been included in the budget in part I.
IV
The cost of capital was 10% but is now expected to be 15% for the foreseeable
future.
Otherwise everything proceeds to plan and other expectations are unchanged. You may
assume that all cashflows arise on 31 December each year. Ignore taxation and inflation.
Required
(a)
(b)
Calculate Hicks income number 1 ex post version A and Hicks income number
1 ex post version B.
(8 marks)
(c)
Calculate Hicks income number 2 ex post version A and Hicks income number
2 ex post version B.
(8 marks)
UL08/122
D04
Page 3 of 9
3.
On 1 January 2008, Air Ltd entered into the following lease agreements with Leasing
and Hiring Ltd:
I
The rental of machine K. The lease was for four years, with a quarterly rental of
11,592 payable in advance, the first payment being due on 1 January 2008. The
fair value of the machine is 150,000. Air Ltd is responsible for all repairs and
maintenance of the machine which has a useful economic life of four years with
no residual value.
II
The rental of machine L, paying 10 annual instalments of 90,000 each, the first
payable on 1 January 2008. On 1 January 2008, the fair value of the machine was
800,000. The machine has an estimated useful life of 10 years at the end of
which the machine has no residual value. Leasing and Hiring Ltd retains
responsibility for maintaining the machine and Air Ltd will return machine L to
Leasing and Hiring Ltd at the end of the contract. The cost of capital for Air Ltd is
10%.
Required
(a)
Define finance leases and operating leases and discuss how both these types of
leases would be accounted for in the accounts of the lessee.
(9 marks)
(b)
Show how the above transactions will be reflected in the financial statements of
Air Ltd for 2008, including its notes, in accordance with standard accounting
practice, giving reasons for your choice of accounting treatment.
(16 marks)
UL08/122
D04
Page 4 of 9
4.
Hope Ltd started trading on 1 January 2007. The profit and loss account and the balance
sheet for the first year of trading are given as follows:
Profit and loss account
Sales
Cost of sales
Opening stock
Purchases
Closing stock
150,000
15,000
75,000
(20,000)
(70,000)
80,000
(20,000)
(10,000)
50,000
Gross profit
Expenses
Depreciation
Balance sheet
Fixed assets
Plant and machinery
Cost
Accumulated depreciation
Net book value
Current assets
Stock
Other current assets
Net current assets
Long term liabilities
Debentures
Net assets
200,000
(10,000)
190,000
20,000
60,000
80,000
(120,000)
150,000
100,000
50,000
150,000
The price change indices for the year were identified as follows:
Indices
Stock
Plant and
machinery
RPI
1 January
2007
Average for
the year
30 November
2007
31December
2007
115
125
130
145
140
150
150
155
135
155
160
170
Closing stock was acquired on 30 November 2007. All fixed assets and opening stock
were acquired on the first day of trading. Sales and purchases accrue evenly throughout
the year.
(question continues on next page)
UL08/122
D04
Page 5 of 9
Required
5.
(a)
Prepare the current purchasing power profit and loss account and balance sheet as
at 31 December 2007 and explain how the gain or loss on monetary items arises.
(8 marks)
(b)
Prepare the current value (replacement cost) profit and loss account and balance
sheet as at 31 December 2007 and explain how the fixed asset adjustment arises.
Ignore gains and losses on net monetary items and gearing adjustments and use
the maintenance of physical / operating capacity principle. Depreciation is to be
calculated on year end replacement cost.
(9 marks)
(c)
Discuss the advantages and disadvantages of CPP and current value financial
statements.
(8 marks)
The following information on its activities is provided by Unknown Plc. Answer all
parts of the following questions, dealing separately with each part. Justify your
treatment in each case with reference to accounting standards where applicable. All
parts of the question carry equal marks.
(25 marks)
(a)
Unknown Plc entered into a long term contract with the following information:
Date commenced
Expected completion date
Final contract price
Costs to 31 December 2007
Value of work certified to 31 December 2007
Progress payments invoiced to 31 December 2007
Estimated costs to completion
1 January 2007
31 December 2009
8,000,000
6,200,000
5,100,000
5,500,000
900,000
How would this contract be accounted for by Unknown Plc for the year ended 31
December 2007?
(b)
A lawsuit has been filed against Unknown Plc. Unknown Plc is fighting the
lawsuit but its outcome is uncertain. The directors of Unknown Plc consider that
there is a 40% chance of the lawsuit being successful. If they lose the lawsuit, the
expected settlement will be approximately 100,000. Discuss the accounting
treatment for this lawsuit.
(c)
Unknown Plc bought a new machine on 1 June 2007 from International Org for
150,000 bans, the currency in which International Org trades, on credit. No
payment had taken place in relation to this purchase at the year end. The exchange
rate at date of purchase of the fixed asset was 15 bans to and the exchange rate
at year end is 10 bans to . How would this acquisition be accounted for by
Unknown Plc for the year ended 31 December 2007?
UL08/122
D04
Page 6 of 9
(d) The forecast profit before interest and tax for the year ended 31 December 2007
for Unknown Plc is estimated at 100,000. Currently Unknown Plc has issued
share capital of 400,000 comprising of 50p shares. Unknown Plc is considering
issuing 250,000 10% debentures. Define earnings per share and discuss the
information provided by this ratio. Calculate earnings per share for Unknown Plc
before and after the debenture issue.
(e)
Unknown Plc provides you with the following projected data in order to provide
for deferred taxation on the full basis.
Year ended 31/12 Taxable profit Capital allowances
000
000
2007
2008
2,500
2,400
800
160
Depreciation
000
160
320
The tax rate for Unknown Plc is 33%. Calculate the deferred tax provision for
Unknown Plc for the years ended 31 December 2007 and 31 December 2008.
6.
Either
Discuss the strengths and limitations of the concept of deprival value. Should this
concept be used in reporting financial results?
Or
Compare the accounting treatment of non-current tangible assets to that of investment
properties and discuss how the different accounting treatments affect the financial
statements.
7.
Either
Discuss the accounting treatment of research and development and critically assess an
accounting standard in this area.
Or
Discuss the advantages and limitations of standardising corporate financial reporting.
UL08/122
D04
Page 7 of 9
Present Value interest factor per 1.00 due at the end of n years for interest rate of:
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
10
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
0.811
0.803
0.795
0.788
0.780
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
0.660
0.647
0.634
0.622
0.610
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
0.538
0.522
0.507
0.492
0.478
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
0.439
0.422
0.406
0.390
0.375
0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.458
0.436
0.416
0.396
0.377
0.359
0.342
0.326
0.310
0.295
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312
0.294
0.278
0.262
0.247
0.233
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
0.242
0.226
0.211
0.197
0.184
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
0.199
0.184
0.170
0.158
0.146
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
0.164
0.150
0.138
0.126
0.116
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
0.135
0.123
0.112
0.102
0.092
11
12
13
14
15
16
17
18
19
20
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
0.112
0.101
0.091
0.082
0.074
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
0.093
0.083
0.074
0.066
0.059
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
0.077
0.068
0.060
0.053
0.047
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
0.064
0.056
0.049
0.043
0.038
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123
0.107
0.093
0.081
0.070
0.061
0.053
0.046
0.040
0.035
0.030
0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108
0.093
0.080
0.069
0.060
0.051
0.044
0.038
0.033
0.028
0.024
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
0.037
0.032
0.027
0.023
0.020
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
0.031
0.026
0.022
0.019
0.016
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.074
0.062
0.052
0.044
0.037
0.031
0.026
0.022
0.018
0.015
0.013
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
0.022
0.018
0.015
0.013
0.010
UL08/122
D04
Page 8 of 9
Present Value interest factor for an annuity of 1.00 for a series of n years for interest rate of :
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
10
0.990
1.970
2.941
3.902
4.853
5.795
6.728
7.652
8.566
9.471
10.368
11.255
12.134
13.004
13.865
14.718
15.562
16.398
17.226
18.046
18.857
19.660
20.456
21.243
22.023
0.980
1.942
2.884
3.808
4.713
5.601
6.472
7.325
8.162
8.983
9.787
10.575
11.348
12.106
12.849
13.578
14.292
14.992
15.678
16.351
17.011
17.658
18.292
18.914
19.523
0.971
1.913
2.829
3.717
4.580
5.417
6.230
7.020
7.786
8.530
9.253
9.954
10.635
11.296
11.938
12.561
13.166
13.754
14.324
14.877
15.415
15.937
16.444
16.936
17.413
0.962
1.886
2.775
3.630
4.452
5.242
6.002
6.733
7.435
8.111
8.760
9.385
9.986
10.563
11.118
11.652
12.166
12.659
13.134
13.590
14.029
14.451
14.857
15.247
15.622
0.952
1.859
2.723
3.546
4.329
5.076
5.786
6.463
7.108
7.722
8.306
8.863
9.394
9.899
10.380
10.838
11.274
11.690
12.085
12.462
12.821
13.163
13.489
13.799
14.094
0.943
1.833
2.673
3.465
4.212
4.917
5.582
6.210
6.802
7.360
7.887
8.384
8.853
9.295
9.712
10.106
10.477
10.828
11.158
11.470
11.764
12.042
12.303
12.550
12.783
0.935
1.808
2.624
3.387
4.100
4.767
5.389
5.971
6.515
7.024
7.499
7.943
8.358
8.745
9.108
9.447
9.763
10.059
10.336
10.594
10.836
11.061
11.272
11.469
11.654
0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536
7.904
8.244
8.559
8.851
9.122
9.372
9.604
9.818
10.017
10.201
10.371
10.529
10.675
0.917
1.759
2.531
3.240
3.890
4.486
5.033
5.535
5.995
6.418
6.805
7.161
7.487
7.786
8.061
8.313
8.544
8.756
8.950
9.129
9.292
9.442
9.580
9.707
9.823
0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
5.759
6.145
6.495
6.814
7.103
7.367
7.606
7.824
8.022
8.201
8.365
8.514
8.649
8.772
8.883
8.985
9.077
11
12
13
14
15
16
17
18
19
20
0.901
1.713
2.444
3.102
3.696
4.231
4.712
5.146
5.537
5.889
6.207
6.492
6.750
6.982
7.191
7.379
7.549
7.702
7.839
7.963
8.075
8.176
8.266
8.348
8.422
0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
5.938
6.194
6.424
6.628
6.811
6.974
7.120
7.250
7.366
7.469
7.562
7.645
7.718
7.784
7.843
0.885
1.668
2.361
2.974
3.517
3.998
4.423
4.799
5.132
5.426
5.687
5.918
6.122
6.302
6.462
6.604
6.729
6.840
6.938
7.025
7.102
7.170
7.230
7.283
7.330
0.877
1.647
2.322
2.914
3.433
3.889
4.288
4.639
4.946
5.216
5.453
5.660
5.842
6.002
6.142
6.265
6.373
6.467
6.550
6.623
6.687
6.743
6.792
6.835
6.873
0.870
1.626
2.283
2.855
3.352
3.784
4.160
4.487
4.772
5.019
5.234
5.421
5.583
5.724
5.847
5.954
6.047
6.128
6.198
6.259
6.312
6.359
6.399
6.434
6.464
0.862
1.605
2.246
2.798
3.274
3.685
4.039
4.344
4.607
4.833
5.029
5.197
5.342
5.468
5.575
5.668
5.749
5.818
5.877
5.929
5.973
6.011
6.044
6.073
6.097
0.855
1.585
2.210
2.743
3.199
3.589
3.922
4.207
4.451
4.659
4.836
4.988
5.118
5.229
5.324
5.405
5.475
5.534
5.584
5.628
5.665
5.696
5.723
5.746
5.766
0.847
1.566
2.174
2.690
3.127
3.498
3.812
4.078
4.303
4.494
4.656
4.793
4.910
5.008
5.092
5.162
5.222
5.273
5.316
5.353
5.384
5.410
5.432
5.451
5.467
0.840
1.547
2.140
2.639
3.058
3.410
3.706
3.954
4.163
4.339
4.486
4.611
4.715
4.802
4.876
4.938
4.990
5.033
5.070
5.101
5.127
5.149
5.167
5.182
5.195
0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
4.327
4.439
4.533
4.611
4.675
4.730
4.775
4.812
4.843
4.870
4.891
4.909
4.925
4.937
4.948
END OF PAPER
UL08/122
D04
Page 9 of 9
UNIVERSITY OF LONDON
279 0091 ZB
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diploma in Economics and Access Route for Students in the
External Programme
Financial Reporting
Wednesday, 14th May 2008 : 2.30pm to 5.45pm
Candidates should answer FOUR of the following SEVEN questions. All questions carry
equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.
1.
The profit and loss accounts for the year ended 31 December 2007 for Sand Plc, Sea Ltd
and Tree Ltd are given as follows:
Sales
Cost of sales
Gross profit
Admin costs
Distribution costs
Dividends receivable
Profit before tax
Tax
Profit after tax
Transfers to general reserves
Dividends payable
Net profit for the year
Retained profit brought forward
Retained profit for the year
Sand Plc
Sea Ltd
Tree Ltd
1,500,000
(1,120,000)
380,000
(60,900)
(20,000)
8,400
307,500
(100,000)
207,500
(10,000)
(110,000)
87,500
720,000
807,500
400,000
(100,000)
300,000
(34,000)
(26,000)
150,000
(15,000)
135,000
(7,000)
(5,000)
240,000
(60,000)
180,000
(30,000)
(10,000)
140,000
600,000
740,000
123,000
(20,000)
103,000
(10,000)
(1,000)
92,000
200,000
292,000
Sand Plc acquired 80% of Sea Ltd for 50,000 on 1 January 2003, when Sea Ltd's profit
and loss account reserve was 40,000. The share capital of Sea Ltd totals 10,000. During
the year Sea Ltd sold goods costing 5,000 to Sand Plc for 7,000. 10% of these goods are
still in Sand Plcs stock.
Sand Plc acquired 40% of Tree Ltd for 100,000 on 1 January 2005, when Tree Ltds
share capital and reserves were 75,000. The share capital of Tree Ltd is 20,000 50p
shares. During the year Tree Ltd sold goods costing 3,000 to Sand Plc for 4,000. 50% of
these goods are still in Sand Plcs stock.
Goodwill is capitalised and amortised over 10 years.
At the year end Sand Plc proposes charging Sea Ltd a management fee of 10,000 and
charging Tree Ltd a management fee of 5,000. Sand Plc has included this management
fee in its sales figure and Sea Ltd and Tree Ltd have included the management fee payable
to Sand Ltd in admin costs.
Required
(a)
Prepare the consolidated profit and loss account for Sand Plc for the year ended 31
December 2007.
(20 marks)
(b)
What are joint ventures and how are they accounted for?
UL08/122
D03
Page 2 of 9
(5 marks)
2.
On 1 January 2008, Boot Ltds long term budget showed anticipated net receipts of
32,000 and thereafter 54,400 each year for the foreseeable future. The companys
cost of capital is 10% per annum and this is not expected to change.
During 2008, the following occur:
I
General economic conditions suggest that the budget for existing activities
after 2008 should be revised from net receipts of 54,400 per annum to net
receipts of 45,600 per annum.
II
III
The company receives a grant for its environmental policy for 4,800 in 2008.
This has not been included in the budget in part I.
IV
The cost of capital was 10% but is now expected to be 15% for the foreseeable
future.
Otherwise everything proceeds to plan and other expectations are unchanged. You
may assume that all cashflows arise on 31 December each year. Ignore taxation and
inflation.
Required
(a)
(b)
(c)
UL08/122
D03
Page 3 of 9
3.
On 1 January 2008, Pair Ltd entered into the following lease agreements with Leasing
and Hiring Ltd:
I
The rental of machine K. The lease was for four years, with a quarterly rental of
15,456 payable in advance, the first payment being due on 1 January 2008. The
fair value of the machine is 200,000. Pair Ltd is responsible for all repairs and
maintenance of the machine which has a useful economic life of four years with
no residual value.
II
The rental of machine L, paying 10 annual instalments of 100,000 each, the first
payable on 1 January 2008. On 1 January 2008, the fair value of the machine was
900,000. The machine has an estimated useful life of 10 years at the end of
which the machine has no residual value. Leasing and Hiring Ltd retains
responsibility for maintaining the machine and Pair Ltd will return machine L to
Leasing and Hiring Ltd at the end of the contract. The cost of capital for Pair Ltd
is 10%.
Required
(a)
Define finance leases and operating leases and discuss how both these types of
leases would be accounted for in the accounts of the lessee.
(9 marks)
(b)
Show how the above transactions will be reflected in the financial statements of
Pair Ltd for 2008, including its notes, in accordance with standard accounting
practice, giving reasons for your choice of accounting treatment.
(16 marks)
UL08/122
D03
Page 4 of 9
4.
T Org, an 80% subsidiary of D Plc, prepares its accounts in the currency bots. The
financial statements of T Org as at 31 December 2007 are given as follows:
Balance sheet as at 31 December
2007
T Org
bots
Fixed assets
Less accumulated depreciation
Net book value
Current assets
Stock
Other net current assets
T Org
bots
3,600,000
(800,000)
2,800,000
8,000,000
2,200,000
10,200,000
(6,000,000)
7,000,000
Share capital
Profit for the year
5,000,000
2,000,000
7,000,000
T Org
bots
Turnover
Cost of sales
Opening stock
Purchases
Closing stock
T Org
bots
12,000,000
7,200,000
7,000,000
(8,000,000)
(6,200,000)
5,800,000
Gross profit
General expenses
Depreciation
(200,000)
(800,000)
(1,000,000)
4,800,000
(1,800,000)
3,000,000
(1,000,000)
2,000,000
bots to
10
15
18
25
20
(question continues on next page)
UL08/122
D03
Page 5 of 9
Required
5.
(a)
Translate the balance sheet for T Org using the closing rate method. Explain how
the foreign exchange difference arises under the closing rate method.
(7 marks)
(b)
Translate the balance sheet and the profit and loss account using the temporal
method. Explain how the foreign exchange difference arises under the temporal
method.
(11 marks)
(b)
Discuss the advantages and disadvantages of the closing rate and temporal
methods and outline the situations in which each method should be used.
(7 marks)
The following information on its activities is provided by Piece Ltd. Answer all parts of
the question, dealing separately with each part. Justify your treatment in each case with
reference to accounting standards where applicable. All parts of the question carry
equal marks.
(25 marks)
(a)
Piece Ltd started a new business selling widgets. 200 widgets were bought on 1
January 2007 for 1,000 each and sold for 1,500 each on 1 June 2007. On 1 June
2007, the replacement cost of widgets was 1,200 each. Piece Plc intends to use
current value accounting for this transaction. Calculate the cost of sales
adjustment for this transaction.
(b)
Piece Ltd entered into a long term contract with the following information:
Date commenced
1 January 2007
31 December 2009
16,000,000
12,400,000
10,200,000
11,500,000
1,500,000
How would this contract be accounted for by Piece Ltd for the year ended 31
December 2007?
(c)
A lawsuit has been filed against Piece Ltd. Piece Ltd is fighting the lawsuit but its
outcome is uncertain. The directors of Piece Ltd consider that there is a 40%
chance that the lawsuit will be successful. If they lose the lawsuit, the expected
settlement will be approximately 300,000. Discuss the accounting treatment for
this lawsuit.
UL08/122
D03
Page 6 of 9
(d) Piece Ltd undertakes research and development into new products and processes
for the first time in 2007. The total cost for research and development totals
400,000. Of this 5% is pure research, 20% is applied research and 75% are costs
to develop a new product. How would Piece Ltd account for this research and
development expenditure for the year ended 31 December 2007?
(e)
Piece Ltd provides you with the following projected data in order to provide for
deferred taxation on a full basis for 2007 and 2008:
Year ended 31/12
2007
2008
Taxable profit
000
8,000
4,000
Capital allowances
000
3,800
2,200
Depreciation
000
3,200
5,600
The tax rate for Piece Ltd is 33%. Calculate the deferred tax provision for the
years ended 31 December 2007 and 31 December 2008.
6.
Either
Discuss the major issues in accounting for goodwill and critically assess an accounting
standard in this area.
Or
Discuss the arguments for and against the regulation of financial reporting.
7.
Either
What are fully stabilised current value accounts? Discuss the benefits and limitations
of fully stabilised current value accounts.
Or
Compare the accounting treatment of non-current tangible assets to that of investment
properties and discuss how the different accounting treatments affect the financial
statements.
UL08/122
D03
Page 7 of 9
Present Value interest factor per 1.00 due at the end of n years for interest rate of:
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
10
0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861
0.853
0.844
0.836
0.828
0.820
0.811
0.803
0.795
0.788
0.780
0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743
0.728
0.714
0.700
0.686
0.673
0.660
0.647
0.634
0.622
0.610
0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642
0.623
0.605
0.587
0.570
0.554
0.538
0.522
0.507
0.492
0.478
0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555
0.534
0.513
0.494
0.475
0.456
0.439
0.422
0.406
0.390
0.375
0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481
0.458
0.436
0.416
0.396
0.377
0.359
0.342
0.326
0.310
0.295
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417
0.394
0.371
0.350
0.331
0.312
0.294
0.278
0.262
0.247
0.233
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362
0.339
0.317
0.296
0.277
0.258
0.242
0.226
0.211
0.197
0.184
0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315
0.292
0.270
0.250
0.232
0.215
0.199
0.184
0.170
0.158
0.146
0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275
0.252
0.231
0.212
0.194
0.178
0.164
0.150
0.138
0.126
0.116
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239
0.218
0.198
0.180
0.164
0.149
0.135
0.123
0.112
0.102
0.092
11
12
13
14
15
16
17
18
19
20
0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209
0.188
0.170
0.153
0.138
0.124
0.112
0.101
0.091
0.082
0.074
0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183
0.163
0.146
0.130
0.116
0.104
0.093
0.083
0.074
0.066
0.059
0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160
0.141
0.125
0.111
0.098
0.087
0.077
0.068
0.060
0.053
0.047
0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140
0.123
0.108
0.095
0.083
0.073
0.064
0.056
0.049
0.043
0.038
0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123
0.107
0.093
0.081
0.070
0.061
0.053
0.046
0.040
0.035
0.030
0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108
0.093
0.080
0.069
0.060
0.051
0.044
0.038
0.033
0.028
0.024
0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095
0.081
0.069
0.059
0.051
0.043
0.037
0.032
0.027
0.023
0.020
0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084
0.071
0.060
0.051
0.043
0.037
0.031
0.026
0.022
0.019
0.016
0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.074
0.062
0.052
0.044
0.037
0.031
0.026
0.022
0.018
0.015
0.013
0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065
0.054
0.045
0.038
0.031
0.026
0.022
0.018
0.015
0.013
0.010
UL08/122
D03
Page 8 of 9
Present Value interest factor for an annuity of 1.00 for a series of n years for interest rate of :
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
%
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
10
0.990
1.970
2.941
3.902
4.853
5.795
6.728
7.652
8.566
9.471
10.368
11.255
12.134
13.004
13.865
14.718
15.562
16.398
17.226
18.046
18.857
19.660
20.456
21.243
22.023
0.980
1.942
2.884
3.808
4.713
5.601
6.472
7.325
8.162
8.983
9.787
10.575
11.348
12.106
12.849
13.578
14.292
14.992
15.678
16.351
17.011
17.658
18.292
18.914
19.523
0.971
1.913
2.829
3.717
4.580
5.417
6.230
7.020
7.786
8.530
9.253
9.954
10.635
11.296
11.938
12.561
13.166
13.754
14.324
14.877
15.415
15.937
16.444
16.936
17.413
0.962
1.886
2.775
3.630
4.452
5.242
6.002
6.733
7.435
8.111
8.760
9.385
9.986
10.563
11.118
11.652
12.166
12.659
13.134
13.590
14.029
14.451
14.857
15.247
15.622
0.952
1.859
2.723
3.546
4.329
5.076
5.786
6.463
7.108
7.722
8.306
8.863
9.394
9.899
10.380
10.838
11.274
11.690
12.085
12.462
12.821
13.163
13.489
13.799
14.094
0.943
1.833
2.673
3.465
4.212
4.917
5.582
6.210
6.802
7.360
7.887
8.384
8.853
9.295
9.712
10.106
10.477
10.828
11.158
11.470
11.764
12.042
12.303
12.550
12.783
0.935
1.808
2.624
3.387
4.100
4.767
5.389
5.971
6.515
7.024
7.499
7.943
8.358
8.745
9.108
9.447
9.763
10.059
10.336
10.594
10.836
11.061
11.272
11.469
11.654
0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536
7.904
8.244
8.559
8.851
9.122
9.372
9.604
9.818
10.017
10.201
10.371
10.529
10.675
0.917
1.759
2.531
3.240
3.890
4.486
5.033
5.535
5.995
6.418
6.805
7.161
7.487
7.786
8.061
8.313
8.544
8.756
8.950
9.129
9.292
9.442
9.580
9.707
9.823
0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
5.759
6.145
6.495
6.814
7.103
7.367
7.606
7.824
8.022
8.201
8.365
8.514
8.649
8.772
8.883
8.985
9.077
11
12
13
14
15
16
17
18
19
20
0.901
1.713
2.444
3.102
3.696
4.231
4.712
5.146
5.537
5.889
6.207
6.492
6.750
6.982
7.191
7.379
7.549
7.702
7.839
7.963
8.075
8.176
8.266
8.348
8.422
0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
5.938
6.194
6.424
6.628
6.811
6.974
7.120
7.250
7.366
7.469
7.562
7.645
7.718
7.784
7.843
0.885
1.668
2.361
2.974
3.517
3.998
4.423
4.799
5.132
5.426
5.687
5.918
6.122
6.302
6.462
6.604
6.729
6.840
6.938
7.025
7.102
7.170
7.230
7.283
7.330
0.877
1.647
2.322
2.914
3.433
3.889
4.288
4.639
4.946
5.216
5.453
5.660
5.842
6.002
6.142
6.265
6.373
6.467
6.550
6.623
6.687
6.743
6.792
6.835
6.873
0.870
1.626
2.283
2.855
3.352
3.784
4.160
4.487
4.772
5.019
5.234
5.421
5.583
5.724
5.847
5.954
6.047
6.128
6.198
6.259
6.312
6.359
6.399
6.434
6.464
0.862
1.605
2.246
2.798
3.274
3.685
4.039
4.344
4.607
4.833
5.029
5.197
5.342
5.468
5.575
5.668
5.749
5.818
5.877
5.929
5.973
6.011
6.044
6.073
6.097
0.855
1.585
2.210
2.743
3.199
3.589
3.922
4.207
4.451
4.659
4.836
4.988
5.118
5.229
5.324
5.405
5.475
5.534
5.584
5.628
5.665
5.696
5.723
5.746
5.766
0.847
1.566
2.174
2.690
3.127
3.498
3.812
4.078
4.303
4.494
4.656
4.793
4.910
5.008
5.092
5.162
5.222
5.273
5.316
5.353
5.384
5.410
5.432
5.451
5.467
0.840
1.547
2.140
2.639
3.058
3.410
3.706
3.954
4.163
4.339
4.486
4.611
4.715
4.802
4.876
4.938
4.990
5.033
5.070
5.101
5.127
5.149
5.167
5.182
5.195
0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
4.327
4.439
4.533
4.611
4.675
4.730
4.775
4.812
4.843
4.870
4.891
4.909
4.925
4.937
4.948
END OF PAPER
UL08/122
D03
Page 9 of 9
91 Financial reporting
Workings
H+S
1
6
2
3
H+S
4
H+S
5
700,000
30,000
27,800
108,500
182,000
219,000
4,000
1,000
128,000
(231,000)
(35,000)
1,134,300
Share capital
Profit and loss account
Minority interest
H only
6
6
500,000
468,800
165,500
1,134,300
91 Financial reporting
Workings
1.
Investment
= investment in non group companies
= total investment investment in H investment in A
= 650,000 500,000 120,000 = 30,000
2.
Goodwill
= cost of investment Hs share of Ss net assets at acquisition
or
Cost of investment Hs share of As net assets at acquisition or
Jam 500,000 75%*420,000 = 185,000
Honey 120,000 20%*70,000 = 106,000
Total = 291,000
Amortisation
Balance sheet
Jam
185,000 129,500 = 55,500
Honey 106,000 53,000 = 53,000
Total 108,500
Against P+L reserve = 129,500 + 53,000 = 182,500
3.
Stock
4.
Cash
= H + S + cash in transit
5.
6.
Share in A and minority interest and profit and loss account reserve
H
450,000
(25,000)
30,000
1,000
456,000
500,000
956,000
S
360,000
(8,000)
(40,000)
A
96,000
(2,000)
(5,000)
312,000
150,000
200,000
662,000
89,000
50,000
139,000
Minority interest
= Minority share of Ss net assets at balance sheet date
= 25% * 662,000
= 165,500
Share in associate
= Hs share of As net assets at balance sheet date = 20% *
139,000 = 27,800
Profit and loss account reserve = H + Hs share of Ss post
acquisition reserves + Hs share of As post acquisition reserves
goodwill amortised
= 460,000 + 0.75*(312,000 70,000) + 0.2*(89,000
20,000) 182,500 = 468,800
b) What are joint ventures and how should they be accounted for? (5 marks)
Students are required to outline what a joint venture is and describe
the different ways in which they may be accounted for, outlining the
preferred accounting treatment. Details are given in the subject guide,
in IAS 31, FRS 9 and in any advanced financial reporting text
including International financial reporting.
Question 2
On 1 January 2008, Shoe Ltds [For full question please refer to the
examination paper.]
Required
a) Explain Hicks definition of well offness and Hicks measures of income
numbers 1 and 2.
(9 marks)
A good answer would clearly explain Hicks definition of well offness
and measures of income including explanations of ex ante and ex post
measures and versions A and B of the measures. A good answer would
clearly distinguish between the differences between the measures.
Details can be found in the subject guide, Chapter 3 and in
International financial reporting, Chapter 4. The Examiner is looking
for a clear explanation of the concepts and not just a reproduction of
the formulas for the measures.
b) Calculate Hicks income number 1 ex post version A and Hicks income
number 1 ex post version B.
(8 marks)
Calculations with workings are given as follows:
Income ex post 1A
Income ex post 1B
d1 t1 + v1 t1 v0 t0
d1 t1 + v1 t1 v0 t1
(135,626)
23,373
v0 t0
24000/1.1 + 408000/1.1
392,730
19,800
237,318
233,742
d1 t1
v1 t1
v0 t1
91 Financial reporting
c)
d1 t1 + v1 t1 ex ante income/r1
v0 t1 = y/1 + r0t1 + (y/r1 t1*1/1 + r0t1)
(4,718)
33,534
d1 t0
v 1 t0
Income (ex ante)
40800/0.1
0.1*392728
24,000
408,000
39,276
Question 3
On 1 January 2008, Air Ltd [For full question please refer to the
examination the paper.]
Required
a) Define finance leases and operating leases and discuss how both these types
of leases would be accounted for in the accounts of the lessee. (9 marks)
A good answer would clearly define the two different types of leases
together with a discussion of the factors that would be taken into
account in practice when deciding upon whether a lease was a finance
lease or an operating lease. The accounting treatment of both types of
leases in the profit and loss account and the balance sheet and the
main disclosures should be outlined clearly. Reading for this question
can be found in the subject guide, Chapter 9, International financial
reporting, Chapter 12, in most advanced financial reporting texts and
in relevant accounting standards, for example IAS 17 and SSAP 21.
b) Show how the above transactions will be reflected in the financial
statements of Air Ltd for 2008, including its notes, in accordance with
standard accounting practice, giving reasons for your choice of accounting
treatment.
(16 marks)
Transaction 1 should be identified as a finance lease with reasons given
for this decision. Once the lease has been correctly identified, the
interest rate implicit in the lease needs to be calculated, noting that
payments are made in advance and are made quarterly.
There are 15 periods since the first payment is in advance, therefore
the calculation to obtain the rate implicit in the lease is: 150,000 =
11,592 + 11,592*annuity factor 15. This gives the annuity factor
15 to be 11.94. From the discount factor tables provided, this equates
to a 3% rate implicit in the lease.
Once the rate implicit in the lease has been calculated, the calculation
or rental payment, finance charge and the obligation under the finance
lease can be calculated as follow:
Date
1.01.2008
1.01.2008
1.04.2008
1.07.2008
1.10.2008
1.01.2009
1.04.2009
1.07.2009
1.10.2009
1.01.2010
Rental payment
Finance
charge
Capital
repayment
11,592
11,592
11,592
11,592
11,592
11,592
11,592
11,592
11,592
4,152
3,929
3,699
3,462
3,218
2,967
2,709
2,442
11,592
7,440
7,663
7,893
8,130
8,374
8,625
8,883
9,150
Obligation
under
finance
lease
150,000
138,408
130,968
123,305
115,412
107,283
98,909
90,285
81,401
72,251
15,243
37,500
b/s
Non current assets
Leased assets
112,500
3,462
34,011
81,401
Payment
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
Discount
1
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
Present value
90,000
81,818
74,380
67,618
61,471
55,883
50,803
46,184
41,986
38,169
608,312
800,000
91 Financial reporting
Sales
Op stock
Purchases
Cl stock
Cost of sales
Gross profit
Expenses
Depreciation
Monetary
working capital
Adj note 1
Net profit
Current
150,000
15,000
75,000
(20,000)
(70,000)
80,000
(20,000)
(10,000)
Adjustment
170/155
170/135
170/155
170/160
CPP
CPP
164,516
18,889
82,258
(21,250)
(79,897)
84,619
(21,935)
(12,593)
170/155
170/135
24,491
74,5832
50,000
Purchasing
Fixed asset
Stock
Other current assets
Debentures
Power Balance
Sheet
190,000
Adjustment
170/135
CPP
239,259
20,000
60,000
(120,000)
170/160
170/170
170/170
21,250
60,000
(120,000)
150,000
Share capital
P+L reserve
Note 2
100,000
50,000
200,509
170/135
150,000
125,926
74,583
200,509
Note 2
This is calculated as a balancing figure.
b) Prepare the current value (replacement cost) profit and loss account and
balance sheet as at 31 December 2007 and explain how the fixed asset
adjustment arises. Ignore gains and losses on net monetary items and
gearing adjustments and use the maintenance of physical/operating capacity
principle. Depreciation is to be calculated on year end replacement cost.
(9 marks)
Solutions with workings are provided as follows:
Current value (replacement cost) profit and loss account and balance
sheet
P+L
Sales
Op stock
Purchases
Cl stock
Cos
Gp
Exp
Depn
150,000
15,000
75,000
(20,000)
(70,000)
80,000
(20,000)
(10,000)
Adjustment
130/130
130/115
130/130
130/140
130/130
155/125
CV
CV
150,000
16,957
75,000
(18,571)
(73,385)
76,615
(20,000)
(12,400)
Net profit
50,000
Balance
sheet
Fixed asset
190,000
Adjustment
155/125
CV
235,600
20,000
60,000
(120,000)
150/140
21,429
60,000
(120,000)
Stock
Other current assets
Debentures
44,215
150,000
Share capital
P+L
Cosa adj
Depn adj
Fa adj
Stock adj
100,000
50,000
Note 2
Note 3
Note 4
Note 5
150,000
197,029
From P+L
100,000
44,215
3,385
2,400
45,600
1,429
197,029
91 Financial reporting
c)
Discuss the advantages and disadvantages of CPP and current value financial
statements.
(8 marks)
A good answer would briefly outline the two types of statements and
discuss both the advantages and limitations of each. More details on
this area can be found in the subject guide, Chapters 5 and 6, in
International financial reporting Chapters 5, 6 and 7 and in any
advanced financial reporting text.
Question 5
The following information on its activities is provided by Unknown Plc.
Answer all parts of the following questions, dealing separately with each
part. Justify your treatment in each case with reference to accounting
standards where applicable. All parts of the question carry equal marks.
(25 marks)
a)
Unknown Plc entered into a long term contract with the following
information:
Date commenced
1 January 2007
31 December 2009
8,000,000
6,200,000
5,100,000
5,500,000
900,000
How would this contract be accounted for by Unknown Plc for the year
ended 31 December 2007?
This question relates to construction contracts. The accounting entries
for this contract with workings are as follows:
Contract price
Costs to date
Costs to completion
Expected profit
P+L
Turnover
Cos
Attributable profit
B/S
Long term contract balance
= costs + attributable profit progress payments
8,000,000
(6,200,000)
(900,000)
900,000
5,100,000
(4,526,250)
573,750
1,273,750
The % completed method should be used and brief details of either IAS
11 or SSAP 9 should be given. Details of this area can be found in the
subject guide Chapter 11 and International financial reporting, Chapter
15.
b) A lawsuit has been filed against Unknown Plc. Unknown Plc is fighting the
lawsuit but its outcome is uncertain. The directors of Unknown Plc consider
that there is a 40% chance of the lawsuit being successful. If they lose the
lawsuit, the expected settlement will be approximately 100,000. Discuss
the accounting treatment for this lawsuit.
This question relates to contingent liabilities. A contingent liability
should be identified and discussed with reference to IAS 37 or FRS 12.
The liability in the question should be identified as possible but not
probable and the appropriate accounting treatment, that of disclosure,
identified. Details of this area can be found in the subject guide Chapter
12 and in International financial reporting, Chapters 16 and 18.
c)
Unknown Plc bought a new machine on 1 June 2007 from International Org
for 150,000 bans, the currency in which International Org trades, on credit.
No payment had taken place in relation to this purchase at the year end. The
exchange rate at date of purchase of the fixed asset was 15 bans to and
the exchange rate at year end is 10 bans to . How would this acquisition be
accounted for by Unknown Plc for the year ended 31 December 2007?
Solutions are given as follows:
At acquisition
Cost of machine in bs
Creditor in b/s
150,000/15
At b/s date
Machine in b/s
Creditor in b/s
10,000
10,000
10,000
150,000/10
Loss in P+L
15,000
5,000
d) The forecast profit before interest and tax for the year ended 31 December
2007 for Unknown Plc is estimated at 100,000. Currently Unknown Plc has
issued share capital of 400,000 comprising of 50p shares. Unknown Plc is
considering issuing 250,000 10% debentures. Define earnings per share and
discuss the information provided by this ratio. Calculate earnings per share
for Unknown Plc before and after the debenture issue.
A good answer would define earnings per share, state its importance
and outline the information provided by the ratio. Earnings per share
would be calculated as follows:
Current e/s
100,000/200,000
Revised profit
New e/s
75,000/200,000
91 Financial reporting
Unknown Plc provides you with the following projected data in order to
provide for deferred taxation on the full basis.
Year ended 31/12
Taxable profit
Capital allowances
Depreciation
000
000
000
2007
2,500
800
160
2008
2,400
160
320
The tax rate for Unknown Plc is 33%. Calculate the deferred tax provision
for Unknown Plc for the years ended 31 December 2007 and 31 December
2008.
This question relates to deferred tax. Deferred tax should be defined
and its accounting treatment identified with reference to IAS 12 or FRS
19. Deferred tax accounting entries should be calculated as follows:
2008
2009
Capital allowances
Depreciation
800,000
160,000
160,000
320,000
640,000
211,200
(160,000)
(52,800)
211,200
(52,800)
B/S provision
211,200
158,400
Question 6
Either
Discuss the strengths and limitations of the concept of deprival value.
Should this concept be used in reporting financial results?
This question relates to the concept of deprival value. A good answer
would start by clearly defining and discussing the concept of deprival
value. The answer may cover briefly its use within current value
accounting. The answer would then go on to discuss both the
theoretical and practical strengths and limitations of the concept and
whether it should be used in financial reporting even though it is not
currently used.
A weak answer would perhaps just define the deprival value concept
with little discussion of its strengths, limitations and potential use in
financial reporting.
Reading for this area can be found in the subject guide Chapter 6, in
International financial reporting, Chapters 5 and 6 and in most
advanced financial reporting texts.
10
Or
Compare the accounting treatment of non-current tangible assets to that
of investment properties and discuss how the different accounting
treatments affect the financial statements.
This question related to a specific accounting issue, that of non-current
tangible assets and the difference between accounting for such assets
and investment properties.
A good answer would define both types of assets, giving examples of
both, referring to accounting standards for example IAS 16, IAS 36,
FRS 15 and SSAP 19. The accounting treatment of both would be
outlined and its affect on financial statements discussed, perhaps using
an example to highlight key differences and the implications of these;
for example on users of financial reporting, on financial performance
assessment; and on key accounting ratios.
A weak answer would just summarise the accounting standards in the
area and outline the accounting policies with little discussion of the
affect on financial statements and the implications of this.
Reading for this area is covered in the subject guide, Chapter 9, and
International financial reporting, Chapter 12 and in most advanced
financial reporting texts.
Question 7
Either
Discuss the accounting treatment of research and development and
critically assess an accounting standard in this area.
The question relates to a specific intangible asset, research and
development. A good answer would define intangible assets and
research and development, giving appropriate examples.
The accounting treatment for research and development would be
discussed, together with the criteria required for these, with perhaps a
consideration of the effect of the different treatments on the financial
statements.
A good answer would then outline either IAS 38 or SSAP 13 and then
critically assess the chosen standard. In the critical assessment, both
the benefits and problems of the standard should be discussed.
A weak answer would define research and development and
summarise the accounting standard on research and development with
little critical analysis of the standard.
Reading for this area can be found in the subject guide, Chapter 10, in
International financial reporting, Chapter 13, in the accounting
standards on this area and in most advanced financial reporting texts.
Or
Discuss the advantages and limitations of standardising corporate
financial reporting.
This question was a general question on standardising financial
reporting and not on any specific standard or rule. A good answer
would start by discussing what was meant by standardisation and the
regulatory mechanisms to achieve this; for example, regulation by
11
91 Financial reporting
12
Sales
1,883,000
Cost of sales
(1,213,200)
Gross profit
669,800
Administration costs
(84,900)
Distribution costs
Sand + Sea
(46,000)
Goodwill
(8,000)
Share in associate
49,000
579,900
6
(168,000)
411,900
(35,960)
375,940
Dividends
Sand
(110,000)
Transfer to reserves
(38,000)
227,940
9
1,204,000
1,431,940
Sales
= Sand + Sea inter-company sales + provision for unrealised
profit
= 1,500,000 + 400,000 10,000 7,000
91 Financial reporting
2.
Cost of sales
= Sand + Sea inter-company sales
= 1,120,000 + 100,000 7,000 + 200
3.
Administration costs
= Sand + Sea inter-company management fee
= 60,900 + 34,000 10,000
4.
Goodwill
Goodwill Sea
= Cost of investment share of net assets at acquisition
= 50,000 80% * 50,000 = 10,000
Goodwill Tree
= Cost of investment share of net assets at acquisition
= 100,000 40% * 75,000 = 70,000
Total goodwill amortisation per annum
= 1,000 for Sea and 7,000 for Tree, total = 8,000
Goodwill against retained profit brought forward
4 years for Sea = 4,000
2 years for Tree = 14,000
5.
6.
Tax
= Sand + Sea + Sands share of Tree
= 100,000 + 60,000 + 40% * 20,000
7.
Minority interest
= Minority share of Seas profit after tax after adjustment for
provision for unrealised profit
= 20% * (180,000 200)
8.
Transfer to reserves
= Sand + Sands share of Sea
= 10,000 + 80% * 30,000 + 40% * 10,000
9.
b) What are joint ventures and how are they accounted for? (5 marks)
Students are required to outline what a joint venture is and describe the
different ways in which they may be accounted for, outlining the
preferred accounting treatment. Details are given in the subject guide, in
IAS 31, FRS 9 and in any advanced financial reporting text including
International financial reporting.
Question 2
On 1 January 2008, Boot Ltds... [For full question please refer to the
examination paper.]
Required
a) Explain Hicks definition of well offness and Hicks measures of income
numbers 1 and 2.
(9 marks)
A good answer would clearly explain Hicks definition of well offness
and measures of income including explanations of ex ante and ex post
measures and versions A and B of the measures. A good answer would
clearly distinguish the differences between the measures. Details can be
found in the subject guide, Chapter 3 and in International financial
reporting, Chapter 4. The Examiner is looking for a clear explanation of
the concepts and not just a reproduction of the formulas for the
measures.
b) Calculate Hicks income number 1 ex post version A and Hicks income
number 1 version B.
(8 marks)
Calculations with workings are given as follows:
Cashflows
Ex ante
Time t
Net cashflows ()
1
32,000
2
54,400
3
54,400
4
54,400
5 onwards
54,400
Ex post
Time t
Revised cashflows ()
New contract ()
Grant ()
Net cashflow ()
5 onwards
32,000
45,600
45,600
45,600
45,600
(10,400)
5,440
5,440
5,440
51,040
51,040
51,040
4,800
26,400
Income ex post 1A
d1 t1 +v1 t1 v0 t0
(180,833)
Income ex post 1B
d1 t1 +v1 t1 v0 t1
31,164
v0 t0 =
32,000/1.1 + 544,000/1.1
d1 t1 =
523,636
26,400
v1 t1 =
316,403
v0 t1 =
26,400/1.1 + 316,403/1.1
311,639
Income ex post 1A
d1 t1 + v1 t1 v0 t0
(180,833)
Income ex post 1B
d1 t1 + v1 t1 v0 t1
31,164
45,600
91 Financial reporting
d1 t1 + v1 t1 ex ante income/r1
(6,290)
v0 t1 = y/1 + r0t1 +
Income ex post 2b
d1 t0 =
44,711
32,000
v 1 t0 =
544,00/0.1
544,000
0.1*523,636
52,364
Question 3
On 1 January 2008, Pair Ltd [For full question please refer to the
examination paper.]
Required
a) Define finance leases and operating leases and discuss how both these
types of leases would be accounted for in the accounts of the lessee.
(9 marks)
A good answer would clearly define the two different types of leases
together with a discussion of the factors that would be taken into
account in practice when deciding upon whether a lease was a finance
lease or an operating lease. The accounting treatment of both types of
leases in the profit and loss account and the balance sheet and the main
disclosures should be outlined clearly. Reading for this question can be
found in the subject guide, Chapter 9, International financial reporting,
Chapter 12, in most advanced financial reporting texts and in relevant
accounting standards, for example, IAS 17 and SSAP 21.
b) Show how the above transactions will be reflected in the financial
statements of Pair Ltd for 2008, including its notes, in accordance with
standard accounting practice, giving reasons for your choice of
accounting treatment.
(16 marks)
Transaction 1 should be identified as a finance lease with reasons given
for this decision. Once the lease has been correctly identified, the
interest rate implicit in the lease needs to be calculated, noting that
payments are made in advance and are made quarterly.
There are 15 periods since the first payment is in advance, therefore the
calculation to obtain the rate implicit in the lease is: 200,000=
15,456 + 15,456*annuity factor 15. This gives the annuity factor 15
to be 11.94. From the discount factor tables provided, this equates to a
3% rate implicit in the lease.
Once the rate implicit in the lease has been calculated, the calculation of
rental payment, finance charge and the obligation under the finance
lease can be calculated as follows:
Date
Rental payment
Finance charge
Capital repayment
1.01.2008
1.01.2008
15,456
15,456
184,544
1.04.2008
15,456
5,536
9,920
174,624
1.07.2008
15,456
5,239
10,217
164,407
1.10.2008
15,456
4,932
10,524
153,883
1.01.2009
15,456
4,616
10,840
143,044
1.04.2009
15,456
4,291
11,165
131,879
1.07.2009
15,456
3,956
11,500
120,379
1.10.2009
15,456
3,611
11,845
108,535
1.01.2010
15,456
3,256
12,200
96,335
20,324
50,000
Balance sheet
Non current assets
Leased assets
150,000
4,616
45,348
108,535
Payment
Discount factor
Present value
0
1
2
3
4
5
6
7
8
9
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
1
0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
100,000
90,909
82,645
75,131
68,301
62,092
56,447
51,316
46,651
42,410
91 Financial reporting
Question 4
T Org, an 80% subsidiary of D Plc [For full question please refer to the
examination paper.]
Required
a) Translate the balance sheet for T Org using the closing rate method.
Explain how the foreign exchange difference arises under the closing rate
method.
(7 marks)
In this question, the profit and loss account was not required.
The solution for the translated balance sheet is given as follows:
Balance sheet
Bots
Translation rate
Fixed assets
2,800,000
25
112,000
Stock
8,000,000
25
320,000
Other nca
2,200,000
25
88,000
Debentures
(6,000,000)
25
(240,000)
280,000
Share capital
5,000,000
Profit
2,000,000/20
Foreign exchange
Reserve
Balancing figure
or calculation
10
500,000
100,000
(320,000)
280,000
Temporal
Balance sheet
Fixed assets
Stock
Other net current assets
Debentures
Share capital
Profit
Bots
Translation rate
2,800,000
8,000,000
2,200,000
(6,000,000)
15
18
25
25
186,667
444,444
88,000
(240,000)
479,111
5,000,000
Balancing figure or
calculation
10
500,000
(20,889)
479,111
Temporal
Profit and loss
account
Sales
Op stock
Purchase
Cl stock
Cost of sales
Gross profit
Expenses
Depreciation
Foreign exchange
difference
Profit before tax
Tax
Profit after tax
Dividends
Net profit
Working 1
Cos
Bots
12,000,000
7,200,000
7,000,000
(8,000,000)
(6,200,000)
5,800,000
(200,000)
(800,000)
4,800,000
(1,800,000)
3,000,000
(1,000,000)
2,000,000
7,200,000
7,000,000
(8,000,000)
600,000
20
10
20
18
20
15
(625,556)
(25,556)
(10,000)
(53,333)
198,000
109,111
(90,000)
19,111
(40,000)
(20,889)
20
25
10
20
18
720,000
350,000
(444,444)
625,556
91 Financial reporting
which each method should be used and in describing the methods rather
than answering the full question.
Details of foreign exchange translation can be found in the subject
guide, Chapter 8 and International financial reporting, Chapter 25 as
well as in most advanced financial reporting texts.
Question 5
The following information on its activities is provided by Piece Ltd. Answer
all parts of the question, dealing separately with each part. Justify your
treatment in each case with reference to accounting standards where
applicable. All parts of the question carry equal marks.
(25 marks)
a) Piece Ltd started a new business selling widgets. 200 widgets were
bought on 1 January 2007 for 1,000 each and sold for 1,500 each on 1
June 2007. On 1 June 2007, the replacement cost of widgets was 1,200
each. Piece Plc intends to use current value accounting for this
transaction. Calculate the cost of sales adjustment for this transaction.
This question relates to current value accounting. The cost of sales
adjustment should be defined and calculated as follows:
Historical cost
Replacement cost
Sales
300,000
300,000
Cost of sales
(200,000)
(240,000)
Gross profit
100,000
60,000
40,000
Details of this area can be found in the subject guide Chapter 6 and
International financial reporting, Chapters 5 and 6.
b) Piece Ltd entered into a long term contract with the following
information:
Date commenced
1 January 2007
31 December 2009
16,000,000
12,400,000
10,200,000
11,500,000
1,500,000
How would this contract be accounted for by Piece Ltd for the year ended
31 December 2007?
This question relates to construction contracts. The accounting entries
for this contract with workings are as follows:
Contract price
16,000,000
Costs to date
(12,400,000)
Costs to completion
(1,500,000)
Expected profit
2,100,000
10,200,000
Cos
(8,861,250)
Attributable profit
1,338,750
Balance sheet
2,238,750
The % completed method should be used and brief details of either IAS
11 or SSAP 9 should be given. Readings on this area can be found in the
subject guide Chapter 11, in International financial reporting, Chapter 15
and in most advanced financial reporting texts.
c) A lawsuit has been filed against Piece Ltd. Piece Ltd is fighting the lawsuit
but its outcome is uncertain. The directors of Piece Ltd consider that there
is a 40% chance that the lawsuit will be successful. If they lose the
lawsuit, the expected settlement will be approximately 300,000. Discuss
the accounting treatment for this lawsuit.
This question relates to contingent liabilities. A contingent liability
should be identified and discussed with reference to IAS 37 or FRS 12.
The liability in the question should be identified as possible but not
probable and the appropriate accounting treatment, that of disclosure,
identified. Readings in this area can be found in the subject guide
Chapter 12, in International financial reporting, Chapters 16 and 18 and
in most advanced financial reporting texts.
d) Piece Ltd undertakes research and development into new products and
processes for the first time in 2007. The total cost for research and
development totals 400,000. Of this 5% is pure research, 20% is applied
research and 75% are costs to develop a new product. How would Piece
Ltd account for this research and development expenditure for the year
ended 31 December 2007?
This question relates to research and development. Good answers would
define research and development referring to IAS 38 or SSAP 13 and
outline the accounting treatment of all categories of research and
development including the conditions for capitalisation of applied
research. The total cost of 400,000 would be split into its components
of pure research, applied research and development and its accounting
treatment stated as follows:
Pure research
20,000
Development
may be capitalised
300,000
Readings in this area can be found in the subject guide Chapter 10, in
International financial reporting, Chapter 13 and in any advanced
financial reporting text.
91 Financial reporting
e) Piece Ltd provides you with the following projected data in order to
provide for deferred taxation on a full basis for 2007 and 2008:
Year ended 31/12
Taxable profit
Capital allowances
Depreciation
000
000
000
2007
8,000
3,800
3,200
2008
4,000
2,200
5,600
The tax rate for Piece Ltd is 33%. Calculate the deferred tax provision for
the years ended 31 December 2007 and 31 December 2008.
This question relates to deferred tax. Deferred tax should be defined and
its accounting treatment identified with reference to IAS 12 or FRS 19.
Deferred tax accounting entries should be calculated as follows:
2008
2009
Capital allowances
3,800,000
2,200,000
Depreciation
3,200,000
5,600,000
600,000
(3,400,000)
198,000
(1,122,000)
198,000
(1,122,000)
B/S provision
198,000
(924,000)
Deferred tax
Question 6
Either
Discuss the major issues in accounting for goodwill and critically assess an
accounting standard in this area.
The question related to a specific intangible asset, goodwill. A good
answer would define intangible assets and goodwill, giving examples of
how goodwill arises in practice, covering both internally generated and
externally generated goodwill and its importance in organisations. The
main issues relating to goodwill would then be identified and discussed.
These could include whether goodwill was an asset, measurement and
recognition issues in relation to goodwill, the different ways to account
for goodwill and the impact of these on financial statements,
impairment of goodwill and amortisation of goodwill. Both internally
generated and purchased goodwill should be covered.
A good answer would then outline an appropriate standard on the area;
for example IFRS 3 on business combinations or FRS 10 on goodwill
and intangible assets; and then critically assess the chosen standard. In
the critical assessment, both the benefits and problems of the standard
should be discussed. IAS 38 on intangible assets and FRS 11 on
impairment of non-current assets and goodwill may also be referred to.
A weak answer would define goodwill, briefly outline its accounting
treatment and summarise the main provisions of an appropriate
accounting standard without discussion of issues or critical assessment
of the standard.
10
11
91 Financial reporting
Or
Compare the accounting treatment of non-current tangible assets to that of
investment properties and discuss how the different accounting treatments
affect the financial statements.
This question relates to a specific accounting issue, that of non-current
tangible assets and the difference between accounting for such assets
and investment properties.
A good answer would define both types of assets, giving examples of
both, referring to accounting standards; for example IAS 16, IAS 36,
FRS 15 and SSAP 19. The accounting treatment of both would be
outlined and its affect on financial statements discussed, perhaps using
an example to highlight key differences and the implications of these for
assessing financial performance.
A weak answer would summarise the accounting standards in the area
and outline the accounting policies with little discussion on the effect on
financial statements and the implications of this.
Readings in area are covered in the subject guide, Chapter 9, in
International financial reporting, Chapter 12 and in most advanced
financial reporting texts.
12