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UNIVERSITY OF LONDON
PRELIMINARY EXAM 2015
TOTAL NUMBER : 8
OF PAGES
(INCLUDING
THIS PAGE)
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INSTRUCTIONS TO CANDIDATES: -
Candidates should answer a total of FOUR questions, with at least ONE from each section.
Section A has FOUR questions and Section B has TWO 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 of this paper. 8-column
accounting paper is provided at the end of this question paper. If used, it must be detached 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.
DO NOT TURN OVER THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.
1. The statements of financial position for Euan Ltd, Mark Ltd and Nathan Ltd as at December 2014
are as follows:
Euan Ltd acquired 70% of Mark Ltd for 290,000 on 1 January 2010 when Mark Ltds share capital
and reserves stood at 190,000. At this date the fair value of Mark Ltd's non-current assets was
280,000 but they were recorded at their historical cost of 260,000. Mark Ltd has not incorporated
this revaluation in its books.
Euan Ltd acquired 25% of Nathan Ltd for 70,000 on 1 January 2011. At this date the fair value of
Nathan Ltd's non-current assets was 300,000 and Nathan Ltd incorporated this revaluation into its
accounts. The share capital and reserves on 1 January 2011 of Nathan Ltd, including the
revaluation reserve, stood at 250,000.
No changes to the share capital of Mark Ltd and Nathan Ltd have occurred since their acquisition by
Euan Ltd.
At the year-end, all group companies declare a dividend of 10p per share. These dividends have
been accounted for correctly.
Euan Ltd's inventory figure includes 10,000 of inventory which had been bought from Mark Ltd.
Mark Ltd had paid 2,000 for these goods. Euan Ltds inventory figure also includes 15,000 of
inventory which has been bought from Nathan Ltd. Nathan Ltd had paid 5,000 for these goods.
Goodwill is to be capitalised. Impairment of 50,000 is seen against the value of the goodwill of
Mark Ltd in 2014.
(continued)
(a) Define a subsidiary and an associate company. Outline the differences in how such companies
are accounted for.
(5 marks)
(b) Prepare the groups consolidated statement of financial position as at 31 December 2014.
(20 marks)
2. On 1 January 2014, Richard Ltds long-term budget showed anticipated net receipts of 20,000
for the current year and thereafter 34,000 each year for the foreseeable future. The companys cost
of capital is 10% per annum and this is not expected to change.
i. General economic conditions suggest that the forward budget for existing activities after
2014 should be revised from 34,000 per annum to 28,500 per annum.
ii. A new three-year contract is undertaken which requires an initial outlay of 6,500 on 31
December 2014 and is expected to produce receipts of 3,400 on 31 December of each of
the following three years.
iii. The company is awarded a prize for its support of the local community and received 3,000
in 2014.
iv. The cost of capital was 10% for 2014 but is now expected to be 15% from 1 January 2015
for the foreseeable future.
Otherwise everything proceeds to plan and other expectations are unchanged. You may assume
that all cash flows arise on 31 December each year. Ignore taxation and inflation. The company
always pays a dividend equal to its income.
Required
(a) Compare and contrast the accountant versus economists approach to income and capital.
(9 marks)
(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)
Expenses 450,000
Depreciation 126,000
Net profit 819,000
The price change indices for the year are identified as follows (RPI = retail price index):
Required
(a) Define fully stabilised current value accounts and discuss their advantages and limitations.
(7 marks)
(b) Prepare a statement of financial performance for Boris Ltd for the year ended 31 December
2014 and a statement of financial position as at 31 December 2014 using current value
(replacement cost) accounting and using the financial capital maintenance concept. Base
depreciation on the year-end value of non-current assets.
(9 marks)
(continued)
4. Answer all four parts to this question. You can assume they are not connected.
The tax rate for the company is 33%. There is no deferred tax balance brought forward as at 1
January 2015.
Show the statement of financial performance and statement of financial position entries for deferred
tax for the years 2015 to 2018, under the flow-through and the full provision methods.
Also briefly state reasons in favour and against the provision of deferred taxation.
(10 marks)
b) Rohan Ltd entered into a long-term contract with the following information:
Show how the long-term contract will be treated in the final accounts of Rohan Ltd for the year
ended 31 December 2014 in accordance with standard accounting practice. Justify your treatment in
each case with reference to accounting standards where applicable.
(5 marks)
c) Sian Ltd issued 1 million ordinary shares with nominal value of 10p for 2.50. A further issue of
bonus shares, in respect of all its shares, followed on a 1 for 5 basis. Before the share issue, Sians
share capital and reserves were as follows:
(continued)
d) Two lawsuits have been filed against Polly Ltd during 2014. Polly Ltd is fighting both the lawsuits
and the outcomes of both lawsuits are uncertain. The directors of Polly Ltd consider that there is a
5% chance that they will lose lawsuit 1. If they do lose this lawsuit, the expected settlement will be
approximately 300,000. The directors consider that there is a 30% chance of losing lawsuit 2 and
the expected settlement if the lawsuit is lost is expected to be 900,000. Both lawsuits are
considered to be material by Polly Ltd.
Discuss the accounting treatment for these lawsuits in the 2014 financial statements.
(5 marks)
SECTION B
5.
Critically appraise both the traditional and economic arguments for and against accounting
regulation.
OR
Define deprival value and discuss the strengths and limitations of deprival value as the basis of
asset valuation in corporate financial reports.
(25 marks)
6.
Compare and contrast the different methods for translating the financial statements of foreign
subsidiaries. Discuss how the foreign exchange reserves arise under each method, how they should
be accounted for and the situations in which each of the methods should be used.
OR
Discuss the issues in accounting for goodwill and critically assess an accounting standard in this
area.
(25 marks)
- END -
% 11 12 13 14 15 16 17 18 19 20
n
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
21 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022
22 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018
23 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015
24 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013
25 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010
% 11 12 13 14 15 16 17 18 19 20
n
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
21 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891
22 8.176 7.645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909
23 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925
24 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937
25 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948