PROFESSIONAL STAGE APPLICATION EXAMINATION

TUESDAY 22 MARCH 2011

(2 hours)

FINANCIAL ACCOUNTING
This paper consists of FIFTEEN objective test (OT) questions (20 marks) and FOUR written test
questions (80 marks).

1.

Ensure your candidate details are on the front of your answer booklet.

2.

Answer each question in black pen only.

Objective Test Questions (1 15)

3.

Record your OT responses on the separate answer sheet provided: this must not be folded or
creased. Your candidate details are printed on the sheet.

4.

For each of the 15 OT questions there are four options: A, B, C, D. Choose the response that
appears to be the best and indicate your choice in the correct box, as shown on the answer
sheet.

5.

Attempt all questions; you will score equally for each correct response. There will be no
deductions for incorrect responses or omissions.

Written Test Questions (1 4)

6.

Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.

7.

The examiner will take account of the way in which answers are presented.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.

Place your label here. If you do not have a label you

MUST enter your candidate number in this box

DO NOT TURN OVER UNTIL YOU ARE

INSTRUCTED TO BEGIN WORK

The Institute of Chartered Accountants in England and Wales 2011

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1.

Applegarth Ltd is an independent travel company. Its nominal ledger at 31 December 2010 showed
the following balances.

Revenue
Purchases
Administrative expenses
Other operating expenses
Inventories at 1 January 2010
Retained earnings at 1 January 2010
Ordinary share capital (1 shares)
Share premium account
Land and buildings cost (including land at 300,000)
accumulated depreciation at 1 January 2010
Fixtures and fittings cost
accumulated depreciation at 1 January 2010
Cash at bank
6% Debentures (redeemable at par on 1 September 2011)
Trade and other receivables
Trade and other payables

2,070,000
1,260,000
289,000
276,000
12,000
72,700
495,000
24,000
650,000
75,000
386,000
76,600
29,000
40,000
37,500
86,200

The following additional information is available:

(1)

Revenue consists of Applegarth Ltds holidays sold direct to the public and holidays sold on
behalf of third party travel agents for which it earns a 10% commission. Where holidays are sold
on behalf of third party travel agents Applegarth Ltd receives the full gross amount from the
customer and then remits the fee, less the 10% commission, to the third party travel agent. All
cash received from customers under this arrangement to 30 November 2010 had been correctly
remitted to third party travel agents and correctly recognised in the nominal ledger. However,
Applegarth Ltd made sales in December under such arrangements with a total gross value of
85,000. This cash was still held by Applegarth Ltd at the year end and has been recognised in
full as part of revenue.

(2)

On 1 September 2010 one of Applegarth Ltds premises had a refit costing 120,000 and this
was recognised in administrative expenses. However, on further investigation, it was discovered
that half of this amount should have been recognised as part of the cost of fixtures and fittings in
accordance with IAS 16, Property, Plant and Equipment.

(3)

Depreciation on property, plant and equipment has yet to be charged and should be recognised
in administrative expenses. Applegarth Ltd charges depreciation as follows:

Buildings on a straight-line basis with the current year charge based on a revised
remaining useful life of 50 years at 1 January 2010.
Fixtures and fittings at a rate of 15% pa on reducing balance.

Applegarth Ltd has previously measured property, plant and equipment using the historical cost
model. However, on 1 January 2010 the board of directors made the decision to revalue the
companys land and buildings. On that date, the land was valued at 700,000 and buildings at
450,000. Applegarth Ltd wishes to make annual transfers between the revaluation surplus and
retained earnings, in accordance with best practice.
(4)

Inventories at 31 December 2010 were valued correctly at 15,000.

(5)

On 1 June 2010 Applegarth Ltd issued 300,000 1 ordinary shares at a cash price of 1.25 per
share. The full amount has been recognised as part of ordinary share capital.

The Institute of Chartered Accountants in England and Wales 2011

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(6)

A dividend of 20p per ordinary share was paid on 19 December 2010 on the correct number of
shares in issue at that date. This dividend payment has been included in other operating
expenses. The 6% Debentures were issued in 2008 and interest for the year ended
31 December 2010 remained unpaid at the year end.

(7)

The income tax charge for the year has been estimated at 74,900.

Requirement
Prepare an income statement and a statement of changes in equity for Applegarth Ltd for the year
ended 31 December 2010 and a statement of financial position as at that date in a form suitable for
publication.
(22 marks)
NOTES: Notes to the financial statements are not required.
Expenses should be analysed by function.

PLEASE TURN OVER

The Institute of Chartered Accountants in England and Wales 2011

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2.

Lessimore plc has investments in a number of subsidiaries and is preparing its financial statements
for the year ended 31 December 2010.
(i)

Lessimore plc acquired 122,500 ordinary shares in Hoare Ltd a number of years ago. The
consideration consisted of 80,000 cash and 150,000 1 ordinary shares in Lessimore plc.
Lessimore plc paid 4,000 of professional fees in relation to the acquisition of Hoare Ltd.
Lessimore plc sold its investment in Hoare Ltd on 30 September 2010 for 600,000.
Shares in Lessimore plc had a fair value of 1.60 each at the date Hoare Ltd was acquired and
2.25 each at the date of its disposal.
Extracts from Hoare Ltds statements of financial position are shown below:
At acquisition

Ordinary share capital (1 nominal value)

Share premium account
Retained earnings

175,000
35,000
127,000

At 31 December
2009

175,000
35,000
419,000

Hoare Ltd made a profit for the year ended 31 December 2010 of 132,000. Profits accrued
evenly throughout the period.

(ii)

Lessimore plc holds 90% of the ordinary share capital of Brebner Ltd. Brebner Ltd is in the
process of completing its statement of cash flows for the year ended 31 December 2010. There
are a number of calculations outstanding that need to be completed before the statement of
cash flows can be finalised.
The following information is relevant:
Property, plant and equipment
Carrying amount at 1 January 2010
Carrying amount at 31 December 2010

272,000
180,500

Depreciation for year

126,500

Disposal (carrying amount)

25,000

A profit of 3,000 was made on the above disposal.

On 1 January 2008 Brebner Ltd acquired its first intangible non-current asset, a brand, for
50,000, which was assessed as having a useful life of eight years. On 31 December 2010
Brebner Ltd acquired a second brand for cash. No other intangible non-current assets were
acquired or disposed of during the year. The carrying amount of intangible non-current assets at
31 December 2010 was 66,250.
Brebner Ltd showed investment income of 17,200 in its income statement for the year ended
31 December 2010. Accrued investment income of 2,350 and 3,070 was recognised in
Brebner Ltds statements of financial position as at 31 December 2009 and 2010 respectively.

The Institute of Chartered Accountants in England and Wales 2011

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(iii)

Lessimore plc raised substantial amounts of cash during the year via a number of different
financial instruments, which have not yet been recognised in the draft financial statements.
On 1 January 2010 Lessimore plc issued 2 million 1 ordinary shares for 1.30 each.
On 1 April 2010 Lessimore plc issued 5 million 5% 1 redeemable preference shares at par.
The preference shares are redeemable on 1 April 2015. No dividend had been paid by the year
end.
On 1 July 2010 Lessimore plc issued 3 million 6% 1 irredeemable preference shares at par.
The dividend for the year in respect of these shares was paid on 31 December 2010 along with
an ordinary dividend of 25p per share.
Lessimore plcs equity at 31 December 2009 was as follows:

1 ordinary shares
Share premium account
Retained earnings

1,500,000
450,000
879,800

Equity

2,829,800

Lessimore plc had a draft profit for the year ended 31 December 2010 of 287,600 before
accounting for the above transactions.
Requirements
(a)

Using the information in (i) above, calculate the profit or loss from discontinued operations in
respect of Hoare Ltd as it would be presented in the consolidated income statement of
Lessimore plc for the year ended 31 December 2010, in accordance with IFRS 5, Non-current
Assets Held for Sale and Discontinued Operations.
(6 marks)

(b)

Using the information in (ii) above, prepare the investing activities section from Brebner Ltds
statement of cash flows for the year ended 31 December 2010.
(6 marks)

(c)

Using the information in (iii) above, prepare extracts from Lessimore plcs individual (ie single
entity) income statement for the year ended 31 December 2010 and its individual statement of
financial position as at that date.
(6 marks)
(18 marks)

PLEASE TURN OVER

The Institute of Chartered Accountants in England and Wales 2011

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3.

Bugbee plc has investments in two companies, Garton Ltd and Horsfall Ltd.
Bugbee plc acquired 320,000 of Garton Ltds 1 ordinary shares several years ago. On 1 April 2010
Bugbee plc acquired 119,000 of Horsfall Ltds 1 ordinary shares.
The draft, summarised statements of financial position of the three companies at 31 December 2010
are shown below:
Bugbee plc

ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Investments Garton Ltd
Horsfall Ltd
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares)
Share premium account
Revaluation surplus
Retained earnings

Current liabilities
Trade and other payables
Taxation

Total equity and liabilities

Garton Ltd

Horsfall Ltd

900,000

450,000
150,000
1,500,000

665,000
35,000

700,000

530,000

530,000

92,800
56,950
9,600
159,350

35,000
26,500
4,000
65,500

29,600
32,000
1,500
63,100

1,659,350

765,500

593,100

800,000

350,000
390,450
1,540,450

400,000

150,000
146,810
696,810

340,000
100,000

103,760
543,760

49,600
69,300
118,900

31,690
37,000
68,690

28,340
21,000
49,340

1,659,350

765,500

593,100

Additional information:
(1)

At the date of acquisition Garton Ltd had a balance of 91,600 on its retained earnings and
50,000 on its revaluation surplus.
Garton Ltds statement of financial position at acquisition included goodwill of 65,000, which
had arisen on the acquisition of the business of a sole trader. At 31 December 2010 this amount
had been impaired by 30,000. The fair values of the other assets and liabilities held by Garton
Ltd at the date of acquisition were equal to their carrying amounts. Garton Ltds financial
statements also disclosed a contingent liability which had a fair value of 75,000 at the date of
acquisition and its fair value had not changed at 31 December 2010.

The Institute of Chartered Accountants in England and Wales 2011

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(2)

At the date of its acquisition by Bugbee plc the fair value of Horsfall Ltds net assets was the
same as the carrying amount, apart from an item of equipment, which had a fair value of
40,000 in excess of its carrying amount. At the date of acquisition the piece of equipment was
thought to have a remaining useful life of four years. No fair value adjustment has been made in
the books of Horsfall Ltd and there was no change in the fair value of this equipment at the year
end. At the date of acquisition Horsfall Ltd had a balance on its retained earnings of 86,800.

(3)

During December 2010 Bugbee plc sold goods to Garton Ltd and Horsfall Ltd for 20,000 and
30,000 respectively on which its gross margin was 30%. Both Garton Ltd and Horsfall Ltd held
half of these goods in inventories at the year end and had paid cash on delivery.

(4)

Bugbee plc has undertaken annual impairment reviews. Impairment losses of 12,000 and
5,000 have been identified in respect of Garton Ltd and Horsfall Ltd respectively for the year
ended 31 December 2010. These need to be recognised in the consolidated financial
statements of Bugbee plc.

Requirement
Prepare the consolidated statement of financial position of Bugbee plc as at 31 December 2010.
(22 marks)

PLEASE TURN OVER

The Institute of Chartered Accountants in England and Wales 2011

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4.

Kempster plc operates in the oil extraction and refining business and is preparing its draft financial
statements for the year ended 31 December 2010. The following information has been collected for
the preparation of the provisions and contingencies notes.
(1)

A new site was acquired on 1 January 2009 and is being used as the site for a new oil refinery.
Initial preparation work was undertaken at the site at the start of 2009 and the oil refinery was
completed and ready for use on 31 December 2009. The new refinery was expected to have a
useful life of 25 years. Kempster plc has a well-publicised policy that it will reinstate any
environmental damage caused by its activities. The estimated cost of reinstating the
environment is 1,300,000 for damage caused during the initial preparation work. (Ignore the
effect of discounting.)

(2)

An explosion at one of Kempster plcs oil extraction plants on 1 July 2010 has led to a number
of personal injury claims being made by employees who were injured during the explosion. To
date five claims have been made. If these claims are successful, it is likely that a further three
employees who were also injured will make a claim. Kempster plcs lawyers estimate that it is
probable that the claims will succeed and that the estimated average cost of each pay-out will
be 50,000. The lawyers have recommended that Kempster plc settles the claims out of court
as quickly as possible at their estimated amount for all eight employees injured to avoid any
adverse publicity.
An additional two claims have been made by employees for the stress, rather than injury, that
the explosion has caused them. If these claims were to succeed the lawyers have estimated
that the likely pay-out would be around 10,000 per employee. However, the lawyers have
stated that they believe it to be unlikely that these employees will win such a case.
Kempster plc made an insurance claim to try to recover the personal injury costs that it is
probable that it will incur. The claim is now in its advanced stages and the insurance company
has agreed to meet the cost of the claims in full. The insurance company will refund Kempster
plc once the claims have been settled.

(3)

The future of Kempster plcs business operations is in doubt following the explosion at the oil
extraction plant. The national press criticised Kempster plc for the way that it handled the
problem. To address this, on 1 October 2010 Kempster plc paid 12,000 to a risk assessment
specialist who has recommended introducing a new disaster recovery plan at an estimated cost
of 500,000.

(4)

Kempster plc entered into an operating lease in the previous period for some office space.
However, the companys plans changed and the office space was no longer required. At
1 January 2010 a correctly calculated provision had been made for the future outstanding
rentals of 80,000 for the remaining five years. The rent paid during the period was 15,000. In
addition, Kempster plc has signed a sub-lease to rent out the space for the first six months of
next year for total rental income of 6,000. No other tenants are expected to be found for the
office space. (Ignore the effect of discounting.)

Requirements
(a)

(b)

Using the information above, prepare:

(i)

the provisions and contingencies notes showing the numerical movements table and
relevant narrative disclosures, for inclusion in the financial statements of Kempster plc for
the year ended 31 December 2010; and

(ii)

a summary of the amounts that should be recognised in the income statement for the year
ended 31 December 2010.
(11 marks)

Explain the two bases of accounting referred to by the IASB Framework as underlying
assumptions, illustrating their application with reference to Kempster plc.
(7 marks)
(18 marks)

The Institute of Chartered Accountants in England and Wales 2011

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