Fundamentals Level – Skills Module

Financial Reporting

Paper F7
Time allowed: 3 hours 15 minutes

This question paper is divided into three sections:

Section A – ALL 15 questions are compulsory and MUST be attempted

Section B – ALL 15 questions are compulsory and MUST be attempted

Section C – BOTH questions are compulsory and MUST be attempted

Do NOT open this question paper until instructed by the supervisor.

Do NOT record any of your answers on the question paper.

This question paper must not be removed from the examination hall.
Section A: All Questions are compulsory and must be attempted-2 marks Each
1 Which of the following statement is correct?
1. The money measurement concept requires all the assets and liabilities to be accounted
for at original (historical) cost.
2. Faithful representation means that the economic substance of a transaction should be
reflected in financial statements, not necessarily its legal form.
3. The realization concept means that profits or gains cannot normally be recognized in the
statement of profit or loss until cash has been received.

A. 1 and 2 only
B. 2 and 3 only
C. 1 and 3 only
D. All three statements

2. On 1st January 2015 Xem received a government grant of $300,000 to assist in the purchase of
new plant costing $3,000,000 with a useful life of five years. The grant is repayable on a sliding
scale if the machine is sold within five years; that is full amount if sold in the first year, 80% if
sold in the second year and so on. The management of Xem intends to use the machine for five
years.
Assuming the accounting policy is to offset the grant against the cost of the asset,
what will be the depreciation for the year ended 31 st December 2016 and what
provision will be required for the repayment of the grant as at 31st December 2016?

Depreciation Charge (‘000) Provision (‘000)

A. 280 100
B. 540 Nil
C. 300 60
D. 380 Nil

3. On 1st January 2016 Lila Plc. entered into lease agreement to lease an item of plant for 4 years
with rentals of $210,000 payable annually in arrears. The asset has a useful life of 5 years and the
end of the lease term legal ownership will pass to Lila plc. The fair value of the asset at the
inception of the lease was $635,000 and the interest rate implicit in the lease is 12.2% for the
year ended 31st December 2016 Lila plc. has accounted for the lease as an operating lease and
 operating lease and recorded the payment of $210,000 as an operating expense. This treatment
was discovered during 2017.

In accordance with IAS 17 Leases, what will be the adjustment to the opening balance
of retained earnings?

A. $5,530 Credit
B. $132,500 credit
C. $210,000 Debit
D. Nil

4. Under IAS 40 Investment property, which of the following transfer would result in a
change from the cost measurement basis before transfer to the fair value
measurement basis after transfer?

A. A transfer from investment property owner-occupied property

B. A transfer from inventories to investment property at the commencement of an operating
lease to another party
C. A transfer from investment property to inventories, when the property is intend for sale
D. None of above

5. AD’s figures for research and development are as follows:

Research $250,000
Development expense in the year $200,000
Brought forward deferred development expense $300,000
Written off deferred expenditure in the year ??
At 31st December 2016 the balance carried forward for development expenditure was $400,000
assume that the criteria of development cost is already met.
What amount will AD charge to profit or loss research and development for 2016?

A. $267,000
B. $350,000
C. $482,000
D. $787,000
6. Rinsa Ltd has ceased operations overseas in the current accounting period. This resulted in the
closure of a number of small retail outlets.
Which one of the following costs would be excluded from the loss on discontinued
operations?
A. Loss on the disposal of the retail outlets.
B. Redundancy costs for overseas staff.
C. Cost of restructuring head office as a result of closing the overseas operations
D. Trading losses of the overseas retail outlets up to the date of closure

7. On 1st January 2016, Shark co entered into a sale and leaseback of its property when it was sold,
the asset had a carrying value of $6million and a remaining life of 10years. Shark co sold the asset
for the $7 million and leased it back on a 10 year lease, paying $1 million on 31 st December each
year. The lease carried an implicit interest rate of 7%.

What is the total expense (including amortization of profit) that should be recorded
in the statement of profit or loss for the year ended 31st December 2016?

A. $1,000,000
B. $1,090,000
C. $2,000,000
D. $1,060,000

8. At 1st October 2015 Zenith Ltd had the following balances in respect of property, plant and
equipment:

Cost $220,000
Tax written down value $82,500
Statement of Financial position:
Carrying amount $132,000

Zenith ltd depreciates all property, plant and equipment over five years using the straight line
method and no residual value. All assets were less than five years old at 1 st October 2015. No
assets were purchased or sold during the year ended 30 th September 2012.
The local tax regime allows tax depreciation of 50% on additions to property, plant and
equipment in the accounting period in which they are purchased. In subsequent accounting
 periods’ tax depreciation of 25% per year of the tax written down value is allowed. Income tax
on profit is at a rate of 25%.

What should be the amount for deferred tax in Zenith Ltd.’s statement of financial
position as at 30th September 2016 in accordance with IAS 12 Income taxes?
A. $5,843
B. $6,531
C. $12,375
D. $23,375

9. On 1st January 2015 Oppo ltd issued $1,000,000 8% convertible loan notes at par. The debt is
repayable, or convertible at a premium of 10% four years after issue. The effective interest rate
for the debt is 14%. The present value $1 receivable at the end year, based on discount rate of
8%, 10% and 14% are:

8% 10% 14%

End of year 1 0.926 0.909 0.877

2 0.857 0.826 0.769
3 0.794 0.751 0.675
4 0.735 0.683 0.592
What is the finance charge to Oppo ltd in profit or loss for the year ended 31 st
December 2016 (to the nearest ‘000)?
A. $160,000
B. $200,000
C. $120,000
D. $270,000

10. Nayer acquired 80,000 ordinary shares in Almas some year ago.
Extract from the statement of financial position of the two companies as at 30th September 2015
are as follows:
Nayer Almas
Ordinary shares $1 each $500,000 $100,000
Retained earnings $100,000 $50,000
On acquisition the retained earnings of Almas showed a deficit of $10,000.
Goodwill has been impaired by $15,000 since acquisition. Non-controlling interest is measured at
fair value at acquisitions.
 What were the consolidated retained earnings of Nayer ltd on 30 th September 2016?

A. $126,000
B. $116,000
C. $136,000
D. $146,000

11. Parestine Ltd sold goods to its wholly owned subsidiary for $1,800 representing cost plus 20%. At
the yearend two-third of goods were still in inventory.
What is the amount of unrealized profit at the year end?

A. $360
B. $300
C. $240
D. $200

12. Catalyst acquired the whole of the issued share capital of Caddaffi for $15 million in cash. In
arriving at the purchase price Catalyst had taken into account in respect of Caddaffi future re-
organization costs $1 million and anticipated future losses of $2 million. The fair value of the net
assets of Caddaffi before taking into account these matters was $10 million.

In accordance with IFRS 03, Business combination, what is the amount of goodwill on
the acquisition?

A. $8 million
B. $7 million
C. $6 million
D. $5 million

13. Which of the following factors could cause a company’s gross profit percentage on
sales to fall below the expected level?

A. Overstatement of closing inventories

B. The incorrect inclusion in purchase of invoices relating to goods supplied in the following
period
C. The inclusion in sales of the proceeds of sale of non-current assets
D. Trade discount offered to customers were lower than expected
14. Lyca mobiles makes a 2-for-3 rights issue price of $2. The cum-rights price is $4.
What is the theoretical ex right price?

A. $4.50
B. $5.80
C. $6.00
D. $3.20

15. When a single entity makes purchases or sales in a foreign currency, it will be necessary to
translate the transactions into its functional currency before the transactions can be included in its
financial records.
In accordance with IAS 21 The Effect of Changes in Foreign Currency Exchange Rates,
which of the following foreign currency exchange rates may be used to translate the
foreign currency purchases and sales?
(1) The rate which existed on the day that the purchase or sale took place
(2) The rate which existed at the beginning of the accounting period
(3) An average rate for the year, provided there have been no significant fluctuations throughout
the year
(4) The rate which existed at the end of the accounting period

A. 1 and 4 only
B. 1 and 2 only
C. 3 and 4 only
D. 1 and 3 only
Section B: All Questions are compulsory and must be attempted-2 Marks Each

The following information relates to questions 16-20

Ballu constructs buildings for customers which can take many years to be complete. Ballu has three
contracts in progress at 30 th September, which are detailed bellow. All of the contracts below began in
the current year.

Contract 1 Contract 2 Contract 3

($’000) ($’000) ($’000)

Price 30,000 80,000 4,000

Cost incurred to date (60,000) (40,000) (500)

Cost to complete (10,000) (20,000) (2,000)

Progress (In %) 80 60 25

Amount billed to date 7,000 3,000 1,000

16. What turnover should be recorded (To the nearest ‘000) in relation to contract 1?
A. $24,000,000
B. $24,751,000
C. $25,000,000
D. $23,400,000

17. What cost of sales should be recorded (To the nearest ‘000) in relation to contract 2?

A. $4,200,000
B. $6,400,000
C. $3,600,000
D. $5,800,000

18. Ballu’s assistant accountant is unsure about how to deal with a brand new contract where the
progress and overall profit cannot yet be ascertained.
 Identify which of the following statement, if any, is/are true?
Statement 1: Where the progress and overall profits are unknown, no contract assets or liability
can be recognized.
Statement 2: Where the progress and overall profits are unknown, revenue should be
recognized to the level of recoverable costs.

A. Statement 1
B. Statement 2
C. Both statements
D. Neither 1 & 2.

19. What should be recorded in the statement of financial position (To the nearest ‘000) in
relation to contract 3?

A. Nil
B. $500,000 contract liability
C. $125,000 contract liability
D. $3,000,000 contract assets

20. Ballu’s assistant has also enquired about moving to change the way of measuring the progress of
contracts.
Which of the following describes how the change should be applied?

A. As a change in accounting estimate, applied retrospectively

B. As a change in accounting estimate, applied prospectively
C. As a change in accounting policy, applied retrospectively
D. As a change in accounting policy, applied prospectively
The following information relates to questions 21-25:

On 1st January 2016, Patana acquired 80% of Sareena’s $2 million share capital. At this date, Sareena
had retained earnings of $4 million and a revaluation surplus of $2 million. Patana had retained earnings
of$10 million and a revaluation surplus of $5 million.

The fair value of Sareena’s net assets at acquisition were equal to their carrying amounts with the
exception of Sareena’s property which had a fair value of $800,000 in excess of its carrying value and a
remaining life of 20 years.

At 31st December 2016, Patana and Sareena both revalued their assets. Patana’s assets increased by a
further $2 million while Sareena’s increased by $500,000. At this date, Patana’s retained earnings were
$18 million and Sareena’s were $3.5 million.

21. What will consolidated retained earnings be at 31 st December 2016?

A. $15,432,000
B. $17,850,000
C. $18,368,000
D. $17,568,000

22. What will be the other comprehensive income attributable to the parent for the year
ended 31st December 2016?

A. $2,400,000
B. $3,400,000
C. $6,000,000
D. $1,070,000

23. Identify whether or not the following items should be recognized as assets in the
consolidated financial statement of Patana?

1) Patana brand name, which was internally generated so not shown in Patana’s
financial statements but has a fair value $3 million.
2) An intangible asset related to an encryption process which has now been deemed
illegal. This is included within intangibles at $1.5 million.
 A. 1 and 2 should not be recognized and
B. 2 should be recognized and 1 should not
C. 1 should be recognized and 2 should not
D. All of above should be recognized

24. Patana has also owned 20% of Dickson for many years, using equity accounting. During the year
Patana sold $6 million of goods to Dickson at a mark-up of 20%. Dickson has a quarter of the
goods left in inventory at the year end.
What is unrealized profit as at 31st December 2016?

A. $60,000
B. $50,000
C. $25,000
D. $15,000

25. On 31st December 2016, Patana sold its entire holding of Sareena for $9 million. At this date, the
remaining goodwill was $1 million. The fair value of the non-controlling interest was 2.5 million
and the fair value of the net assets (Including the fair value adjustment) was $10.6 million.

What is the profit/loss in the disposal of Sareena to be shown in the consolidated

financial statements of Patana?

A. $100,000 loss on disposal

B. $1,900,000 gain on disposal
C. $5,100,000 loss on disposal
D. $2,020,000 gain on disposal
The following information relates to questions 26-30:

Hakka plc. is looking to expand overseas by acquiring a new subsidiary. For this reason, TWO
geographical areas have been targeted, England and Finland. In England, there is an entity named,
LalaLand and In Finland there is an entity named, Esaland. Both company are listed entities on their
local exchange.

Following figures are provided for the least trading period:

Lalaland Esaland Hakka Plc.

Revenue $160m $300m $500m

Gross profit margin 26% 17% 28%

Profit from operations margins 9% 11% 16%

Gearing 65% 30% 38%

Average rate of interest expensed in P/L 4% 9% 8%

P/E ratio 11.6 15.9 16.3

26. Which one of the following statements in a realistic conclusion that could be drawn
from above information?

A. Lalaland appears to be benefiting from economic of scale

B. Lalaland has attracted a lower rate of interest on its borrowings than Esaland because it’s gearing
level would suggest that a lower risk to lenders than Esaland.
C. Acquisition of either entity would lead to an improvement in Hakka Plc.’s gross margin due to the
increased revenue that would be achieved.
D. Esaland has lower operating expenses than Lalaland

27. Which TWO of the following statements are true, based on information provided?

1) Lalaland would be riskier investment than Esaland because it has higher gearing
2) Lalaland would give Hakka plc. greater benefit in terms of additional borrowing capacity
 3) The market is more confident about the future performance of Esaland than Hakka plc.
4) The market is more confident about the future performance of Hakka plc. than Lalaland and
Esaland

A. 1 and 3 only
B. 2 and 4 only
C. 1 and 4 only
D. 3 and 4 only

28. Which one of the following statements concerning the use of ratio analysis to make a
decision about investing in Lalaland or Esaland is FALSE?

A. Lalaland and Esaland may use different accounting standards when preparing their financial
statements and this would reduce the comparability of their profit margins.
B. Lalaland and Esaland may target different types of customers, meaning that comparison between
the two is difficult.
C. Lalaland and Esaland may apply different accounting policies, such as cost model versus
revaluation model for property, plant and equipment. This would reduce compatibility of their
gearing ratios.
D. LalaLand and Esaland are listed on different stock exchanges which reduces comparability of
their P/E ratios.

29. If Hakka plc. Acquired Esaland, it has assessed that combining the two companies would lead to
an overall saving in cost of sales of $5 million.
If this was taken into account, what would be the gross margin of Hakka plc.
combined with Esaland to one decimal place?

A. 21.5%
B. 24.5%
C. 26.5%
D. 25.5%
30. Your assistant has raised concerns about Esaland, having heard that they may treated finance
lease incorrectly as operating lease.

Which, if any, of the statements is/are true in relation to this?

Statement 1: If Esaland has incorrectly treated the leases as operating leases, gearing will be
overstated
Statement 2: If Esaland has incorrectly treated the leases as operating leases, the average rate of
interest incurred could be inaccurate.

A. Statement 1 is correct
B. Statement 2 is correct
C. Both are correct
D. Neither statement is correct
Section C: All Questions are compulsory and must be attempted

Question 31
On 1 April 2007 Palavi purchased 56 million shares in Sean for an immediate cash payment of $90
million. The retained earnings of Sean at 1 April 2007 were $30 million. The terms of the business
combination provide for the payment of an additional $12 million on 31 March 2009 if the performance of
Sean reaches a specified level in the two year period ended 31 March 2009. The directors of Palavi
estimated that the fair value of the contingent consideration at 1 April 2007 was $10 million. This
estimate was unchanged at 30 September 2008 (ignore discounting). The statement of financial position
of Palavi includes this investment at its original cash price of $90 million.
On 1 October 2006 Palavi paid $15 million (included in Palavi’s cost of investment) for 25% of the equity
shares of Alavin, a company that was incorporated on that date. The statements of financial position of
the three entities at 30 September 2008 were as follows:
Palavi Sean Alavin
Non-current assets: $000 $000 $000
Property, plant and equipment 144,000 100,000 112,000
Investments 113,000 Nil Nil
257,000 100,000 112,000

Current assets:
Inventories 40,000 32,000 28,000
Trade receivables 48,800 30,000 32,000
Bank 9,000 8,000 10,000
97,800 70,000 70,000

Total assets 354,800 170,000 182,000

Equity
Ordinary $1 Share capital 100,000 70,000 60,000
Retained earnings 158,800 39,000 56,000
Total equity 258,800 109,000 116,000

Non-current liabilities:
Loan notes 60,000 36,000 42,000
Current liabilities:
Trade payables 30,000 18,000 20,000
Taxation 6,000 7,000 4,000
Total current liabilities 36,000 25,000 24,000

Total equity and liabilities 354,800 170,000 182,000

The following information is relevant:

(i) The directors of Palavi carried out a fair value exercise to measure the identifiable assets and
liabilities of Sean at 1 April 2007. The following matters emerged:
Land having a carrying value of $10 million had an estimated market value of $15 million. Plant
and equipment having a carrying value of $40 million had an estimated market value of $44
million. The estimated future economic life of the plant at 1 April 2007 was four years. The fair
value adjustments have not been reflected in the individual financial statements of Sean.

(ii) The inventories of Sean and Alavin at 30 September 2008 included components purchased from
Palavi during the year at a cost of $20 million to Sean and $16million to Alavin. Palavi supplied
these components at cost plus a markup of one third.

(iii) The trade receivables of Palavi included $5 million receivable from Sean and $4 million receivable
from Alavin in respect of the purchase of components. The trade payables of Sean and Alavin
include an equivalent amount payable to Palavi.

(iv) The directors of Palavi estimated that the fair value of the non-controlling interest in Sean on 1
April 2007 was $23 million. It is Palavi’s policy to measure the non-controlling interest at the date
of acquisition at its fair value in the consolidated financial statements.

(v) The goodwill arising on acquisition of Sean has not suffered any impairment and there is no
impairment on the investment in associate.

Required:
a) Prepare the consolidated statement of financial position of Palavi at 30
September 2008 (20 marks)
Question 32
The following trial balance relates to Scuba Ltd as at 30 September 2014.
$'000 $'000
Revenue 213,500
Cost of sales 136,800
Distribution costs 17,500
Administrative expenses 19,000
Loan note interest paid 1,500
Investment income 400
Equity shares of 25 cents each 60,000
6% loan note 25,000
Retained earnings at 1 October 2013 4,300
Land and buildings at cost (land element $10 million) 50,000
Plant and equipment at cost 83,700
Accumulated depreciation at 1 October 2013: buildings 8,000
plant and equipment 33,700
Equity financial asset investments 17,000
Inventory at 30 September 2014 24,800
Trade receivables 28,500
Bank 2,900
Current tax 1,100
Deferred tax 1,200
Trade payables 36,700
382,800 382,800
Notes:

1. Scuba’s revenue includes cash sale of $6 million that it made on return basis, cost of these sold
goods are $4.8 million. Entity expects on the basis of past experience that one-third of these goods
will be returned to the entity by the customer after the year ended 30 September 2014. Entity will
provide the refund amount to the customer in early days of next accounting period. Entity uses IFRS
15 Revenue from Contract with customer and there is no objective evidence in respect of decrease in
value of inventory.
2. Scuba’s policy is to use revaluation model for land and building as per IAS 16 Property, Plant and
Equipment and the market values of land and building at year end 30 September 2014 are $12million
 and $43million respectively. The remaining life of building at 1 October 2013 was 25years. It is an
entity policy not to transfer revaluation reserves to retained earnings in respect of excess
depreciation. For plant and machinery depreciation method was set out as 20% on reducing balance
method. All of depreciation is to be charged in Cost of sales. In the tax jurisdiction, in which Scuba
Ltd operates will give arise a deferred tax of 30% on revaluation. No depreciation is yet charged on
any property plant and equipment.
3. Equity financial assets in trial balance above qualify for the irrevocable election as it is not for trading
purpose and entity has already made election to recognize gains and losses in other comprehensive
income. This investment consists of 5000 equity shares in Luca Ltd. Every share has a market price
of $3 in the stock exchanges at 30 September 2014. Assume transaction cost is immaterial.
4. The balance on current tax represents the under/over provision of the tax liability for the year ended
30 September 2013. A provision for the income tax for the year ended 30 September 2014 of $6.4
million is required. At 30th September 2014, Scuba ltd had taxable temporary differences of $5 million
(excluding the impact of revaluation gain above in adjustment 2), requiring a provision for the
deferred tax. The income tax rate of Scuba Ltd is 30%.

Required:

a) Prepare the statement of profit or loss and other comprehensive income for Scuba for
the year ended 30th September 2014 (10 marks)
b) Prepare the statement of financial position for Scuba Ltd as at 30 th September 2014.
(10 marks)
(20 marks)