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ACCA

Paper F7 (International)
Financial Reporting
Revision Mock Examination
December 2010
Question Paper

ALL FIVE questions are compulsory and MUST be attempted.

Time Allowed 15 minutes Reading and planning


3 hours Writing

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© The Accountancy College Ltd, November 2010
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
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Question 1

Pole

Pole plc acquired 60% of the ordinary share capital of Sole Ltd on 1 August 2010. The purchase cost
of the shares was satisfied by issuing 280,000 ordinary 50c shares of Pole plc at $1.25 per share.
Issue costs of $20,000 were incurred. The companies’ financial statements for the year ended 30
September 2010 were as follows.

Statement of financial position AT 30 September 2010


Pole plc Sole Ltd
$000 $000
Non current assets
Tangible assets 700 140
Investment in Sole Ltd 350 –
_____ _____
1,050 140
_____ _____
Current assets
Inventory 80 140
Trade Receivables 65 125
Cash 82 75
_____ _____
227 340
_____
1277 480
Capital and reserves
Ordinary shares of 50C (Pole)/$1 (Sole) 300 40
Share premium account 150 60
Retained earnings 247 210
_____ _____
697 310
_____ _____

Non current liabilities 420 70


_____ _____

Current liabilities 160 100

1277 480

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Income Statement FOR THE YEAR ENDED 30 September 2010
Pole plc Sole Ltd
$000 $000
Turnover 1,260 708
Cost of sales (644) (426)
_____ _____
Gross profit 616 282
Admin Expenses (378) (126)
_____ _____
Profit from operations 238 156
Interest payable (28) (12)
_____ _____
Profit before taxation 210 144
Tax on profit (113) (54)
_____ _____
Profit for the year 97 90

The following information is relevant to the preparation of the group financial statements.

(a) At the date of acquisition the value of the tangible assets of Sole Ltd at open market price
was $200,000. The assets have a remaining useful economic life of five years. Time
apportionment is to be used and depreciation is charged to admin expenses. All other
assets and liabilities of Sole Ltd were stated at their fair values at the time of acquisition.

(b) Just prior to its acquisition Sole was successful in applying for a six year licence to dispose of
hazardous waste. The licence was granted by the government at no cost, however Sole
estimated that the licence was worth $180,000 at the date of acquisition. Amortisation is to
be charged to cost of sales.

(c) The issue costs of $20,000 incurred on the issue of ordinary share capital had been charged
to the income statement of Pole plc under the heading of ‘ Admin expenses’.

(d) Goodwill arising on acquisition is to be impaired against the Income statement. Impairment
of goodwill for the year is $6,000.

(e) Following the acquisition Sole sold goods to Pole for $50,000 applying a mark up of 25%. Half
of these goods were in inventory at the year end. The goods had been sold on credit with
the balance outstanding in both books at the year end.

(f) Goodwill is to be valued using the fair value of non controlling interest. The NCI share of
goodwill has been valued at $7,000

Required

(a) Prepare a consolidated Statement of financial position and income statement for the Pole
group for the year ending 30th September 2010. (20 marks)

(b) Suggest reasons why a parent company may not wish to consolidate a subsidiary company,
and describe the circumstances in which non-consolidation of subsidiaries is permitted
(5marks)
(Total : 25 marks)

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Bleckley
Reproduced below are the draft financial statements of Bleckley, a public company, for the year to
30 September 2010:
INCOME STATEMENT - YEAR TO 30 September 2010
$’000
Sales revenue (note (i)) 13,700
Cost of sales (note (ii)) (9,200)
Gross profit 4,500
Operating expenses (2,400)
Loan note interest paid (refer to SFP) (25)
Profit before tax 2,075
Income tax expense (note (vi)) (55)
Profit for the year 2,020

STATEMENT OF FINANCIAL POSITION AS AT 30 September 2010 $’000 $’000


Property, plant and equipment (note (iii)) 6,270
Investments (note (iv)) 1,200
7,470
Current assets
Inventory 1,750
Trade receivables 2,450
Bank 350
4,550
Total assets 12,020
Equity and liabilities:
Ordinary shares of 25c each (note (v)) 2,000
Reserves:
Share premium 600
Retained earnings – 1 October 2009 2,990
– Year to 30 September 2010 2,020
– dividends paid (500)
4,510
7,110
Non-current liabilities
10% loan note (issued 2009) 500
Deferred tax (note (vi)) 280
780
Current liabilities
Trade payables 4,130
12,020
The company policy for ALL depreciation is that it is charged to cost of sales and a full year’s charge
is made in the year of acquisition or completion and none in the year of disposal.
The following matters are relevant:
(i) Included in sales revenue is $300,000 being the sale proceeds of an item of plant that was sold
in July 2010. The plant had originally cost $900,000 and had been depreciated by $630,000 at

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the date of its sale. Other than recording the proceeds in sales and cash, no other accounting
entries for the disposal of the plant have been made. All plant is depreciated at 25% per
annum on the reducing balance basis.
(ii) On 30 June 2010 the company completed the construction of a new warehouse. The
construction was achieved using the company’s own resources as follows:
$’000
Purchased materials 150
Direct labour 800
Supervision 65
Design and planning costs 20
Included in the above figures are $10,000 for materials and $25,000 for labour costs that were
effectively lost due to the foundations being too close to a neighbouring property. All the
above costs are included in cost of sales. The building was brought into immediate use on
completion and has an estimated life of 20 years (straightline depreciation).
(iii) Details of the other property, plant and equipment at 30 September 2010 are:
$’000 $$’000
Land at cost 1,000
Buildings at cost 4,000
Less accumulated depreciation at 30 September 2009 (800) 3,200
Plant at cost 5,200
Less accumulated depreciation at 30 September 2009 (3,130)
2,070
6,270
At the beginning of the current year (1 October 2009), Bleckley had an open market basis
valuation of its properties (excluding the warehouse in note (ii) above). Land was valued at
$1·2 million and the property at $4·8 million. The directors wish these values to be
incorporated into the financial statements. The properties had an estimated remaining life of
20 years at the date of the valuation (straight-line depreciation is used). Bleckley makes a
transfer to realised profits in respect of the excess depreciation on revalued assets. Note:
depreciation for the year to 30 September 2010 has not yet been accounted for in the draft
financial statements.
(iv) The investments are in quoted companies that are carried at their stock market values with
any gains and losses recorded in the income statement. The value shown in the statement of
financial position is that at 30 September 2009 and during the year to 30 September 2010 the
investments have risen in value by an average of 10%. Bleckley has not reflected this increase
in its financial statements.
(v) On 1 April 2010 there had been a fully subscribed rights issue of 1 for 4 at 60c. This has been
recorded in the above statement of financial position.
(vi) Income tax on the profits for the year to 30 September 2010 is estimated at $260,000. The
figure in the income statement is the underprovision for income tax for the year to 30
September 2009. The carrying value of Bleckley’s net assets is $1·4 million more than their tax
base at 30 September 2010. The income tax rate is 25%.
Required
(a) Prepare a restated income statement and a statement of other comprehensive income for the
year to 30 September 2010 reflecting the information in notes (i) to (vi) above. (9 marks)

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(b) Prepare a statement of changes in equity for the year to 30 September 2010. (6 marks)
(c) Prepare a restated statement of financial position at 30 September 2010 reflecting the
information in notes (i) to (vi) above. (10 marks)
(Total = 25 marks)

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Question 3 Hughes

Hughes is a publicly listed company. Details of its financial statements for the year ended 31
December 2009 are given below:

Statements of financial position as at:


31 December 2009 31 December 2008
$'000 $'000
Non-current assets
Property, plant and equipment 2,300 1,700
Goodwill 220 –
Investments at fair value through profit and loss 270 220
2,790 1,920

Current assets
Inventories 860 920
Trade receivables 480 680
Gross amounts due from construction contracts 140 100
Bank – 20
1,480 1,720
Total assets 4,270 3,640

Equity
Equity shares of $1 each 900 600
Share premium 270 150
Revaluation surplus 100 40
Retained earnings 1,710 1,520
2,980 2,310

Non-current liabilities
8% loan note 100 –
Finance lease liabilities 410 220
Deferred tax liability 30 40
540 260

Current liabilities
Trade payables 550 960
Bank overdraft 30
Current tax payable 100 80
Finance lease liabilities 70 30
750 1,070
Total equity and liabilities 4,270 3,640

Statement of comprehensive income for the year ended 31 December 2009


$'000
Revenue 2,510
Cost of sales (1,920)
Gross profit 590
Operating expenses (210)
Finance costs (90)

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Investment income (Interest received and gain on investments) 40
Profit before tax 330
Income tax expense (90)
PROFIT FOR THE YEAR 240
Other comprehensive income:
Gains on property revaluation 100
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 340

The following information is also available:


(i) During the year Hughes sold one of its office buildings for its fair value of $800,000 and agreed to
rent it back under an operating lease for a period of ten years at $30,000 per year. At the date of
sale the office building had a carrying value of $670,000 based upon a previous revaluation of
$700,000 less depreciation of $30,000. When the building had originally been revalued its carrying
value had been $660,000. No other disposals of non-current assets were made during the year.

(ii) Plant acquired under finance leases during the year was $400,000. Finance costs include $40,000
of finance charges relating to these finance leases.

(iii) Depreciation of property, plant and equipment during the year was $310,000.

(iv) The gain in market value of the investments during the year was $30,000. There were no sales of
investments during the year.

(v) The goodwill was part of the purchase of an unincorporated business. It was initially recorded at
$250,000, but subsequently suffered an impairment loss.

(vi) During the year a 1 for 2 rights issue was made.

(vii) A dividend of 10 cents per share was paid in October 2009.


Required
(a) Prepare a statement of cash flows for Hughes for the year to 31 December 2009 in accordance
with IAS 7 Statements of Cash Flows. (15 marks)
Note: ignore the effect of deferred tax on the property revaluation.

(b) Briefly explain what the statement of cash flows tells you about the position and performance of
the company during the year. (10 marks)

(Total: 25 marks)

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Question 4 Young

(a) The IASB Framework for the Preparation and Presentation of Financial Statements (the ‘IASB
Framework’) outlines the qualitative characteristics that useful financial information should possess.
One such characteristic is reliability.
Required
As outlined in the IASB Framework, identify and explain the factors that contribute towards the
reliability of financial information. (5 marks)

(b) Young purchased an item of heavy industrial machinery for $120,000 on 1 October 2007. It had
an estimated useful life of 10 years and a residual value of $10,000. Plant and machinery is
depreciated on a straight-line basis. The tax authorities do not allow depreciation as a deductible
expense. Instead, tax relief is granted based on an allowable deduction of 40% of the cost of the
asset in the year in which the asset is acquired followed thereafter by an annual allowable deduction
of 20% calculated on a reducing balance basis. The applicable rate of income tax throughout is 30%.
Required
(i) In respect of the above item of machinery, prepare extracts from the financial statements of
Young for the year ended 30 September 2010 showing the impact of deferred tax. (6 marks)

(ii) Explain the purpose of providing for deferred tax and consider whether this is consistent with
the two underlying assumptions of financial statements identified by the IASB Framework.
(4 marks)
(Total = 15 marks)

Question 5
On 1 October 2009, Neil issued $20m of 8% convertible loan notes at par. The loan notes are
convertible into equity shares in the company, at the option of the note holders, five years
after the date of issue (30 September 2013) on the basis of 25 shares for each $100 of loan
stock. Alternatively, the loan notes will be redeemed at par.

Neil has been advised by Great Times that, had the company issued similar loan notes without
the conversion rights, then it would have had to pay interest of 10%; the rate is thus lower
because the conversion rights are favourable.
Great Times also suggest that, as some of the loan note holders will choose to convert, the
loan notes are, in substance, equity and should be treated as such on Neil’s position
statement. Thus, as well as a reduced finance cost being achieved to boost profitability, Neil’s
gearing has been improved compared to a straight issue of debt.
Required
Explain the relevant accounting treatment for the convertible loan including references to
the conceptual framework
In relation to the 8% convertible loan notes, calculate the finance cost to be shown in the
income statement and the statement of financial position extracts for the year to 30
September 2010 for Neil and comment on the advice from Great Times.

(Total = 10 marks)

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