Financial Reporting

1393 www. ebooks2000. blogspot. com FUNDAMENTALS LEVEL PAPER F7 FINANCIAL REPORTING (INTERNATIONAL) P R A C T I C E & R E V I S I O N K I T In this January 2010 new edition • • • • • • We discuss the best strategies for revising and taking your ACCA exams We show you how to be well prepared for your exam We give you lots of great guidance on tackling questions We show you how you can build your own exams We provide you with three mock exams including the December 2009 exam We provide the ACCA examiner’s answers as well as our own to the June and December 2009 exams as an additional revision aid

Our i-Pass product also supports this paper. FOR EXAMS IN 2010 2393 www. ebooks2000. blogspot. com First edition 2007 Fourth edition January 2010 ISBN 9780 7517 8054 3 (previous ISBN 9780 7517 6661 5) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www. bpp. com/learningmedia Printed in the United Kingdom All our rights reserved.

No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd. We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions. The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated. Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests. BPP Learning Media Ltd 2010 ii 3393 www. ebooks2000. blogspot. com Contents Page Finding questions Question index …………………………………………………………………………………………………………………………………………….. iv Using your BPP Learning Media Practice and Revision Kit …………………………………………………. ix Revising F7 General exam support from BPP Learning Media……………………………………………………………………………………………….. Topics to revise…………………………………………………………………………………………………………………………………………….. x Question practice ………………………………………………………………………………………………………………………………………….. x Passing the F7 exam ………………………………………………………………….. ………………………………………………………………… i Exam information ………………………………………………………………………………………………………………………………………… xii Analysis of past papers ……………………………………………………………………………………………………………………………….. xv Planning your question practice BPP Learning Media’s question plan…………………………………………………………………………………………………………….. vii Build your own exams………………………………………………………………………………………………………………………………….. xx Questions and answers Questions…………………………………………………………………………………………………………………………………………………….. 3 Answers …………………………………………………………………………………………………………………………………………………….. 7 Exam practice Mock exam 1 • Questions ………………………………………………………………………………………………………………………………………… 261 • Plan of attack ……………………………………………………………………………………………………………………………………. 269 • Answers…………………………………………………………………………………………………………………………………………… 70 Mock exam 2 • Questions ………………………………………………………………………………………………………………………………………… 285 • Plan of attack ……………………………………………………………………………………………………………………………………. 293 • Answers…………………………………………………………………………………………………………………………………………… 95 Mock exam 3 (December 2009) • Questions ………………………………………………………………………………………………………………………………………… 309 • Plan of attack ……………………………………………………………………………………………………………………………………. 317 • Answers…………………………………………………………………………………………………………………………………………… 18 ACCA examiner’s answers • June 2009………………………………………………………………………………………………………………………………………… 331 • December 2009 ………………………………………………………………………………………………………………………………… 337 Review form & free prize draw 4393 www. ebooks2000. blogspot. com iii Question index The headings in this checklist/index indicate the main topics of questions, but questions are expected to cover several different topics. Questions marked 2. were examination questions under the previous syllabus. Examiner’s answers. For the June and December 2009 exams the examiner’s answers can be found at the end of this kit. Time Marks allocation Mins Page number Question Answer Part 1: The conceptual framework 1 2 3 Peterlee (2. 5 6/06) Derringdo (2. 5 6/03 part) Porto (Pilot paper amended) 13 11 13 23 20 23 3 3 4 97 97 98 Part 2: The regulatory framework 4 Regulatory framework (2. 5 12/04) 25 45 4 100 Part 3: Presentation of published financial statements 5 6 7 8 9 Winger (2. 5 Pilot paper amended) Harrington (2. 5 6/05 amended) Llama (12/07) Tadeon (2. 12/06) Kala (Pilot paper amended) 25 25 25 25 25 25 25 25 25

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45 45 45 45 45 45 45 45 45 5 6 8 9 10 11 13 15 16 102 104 108 111 114 117 120 123 126 10 Wellmay (2. 5 6/07 amended) 11 Dexon (6/08) 12 Candel (12/08) 13 Pricewell (6/09) Part 4: Non-current assets 14 Derringdo II (2. 5 6/03 part) 15 Broadoak (2. 5 12/01) 16 Elite Leisure (2. 5 12/05 part) 17 Dearing (ME3) (12/08)) 18 Flightline (6/09) 9 25 12 10 10 16 45 22 18 18 17 18 19 19 20 130 131 134 135 136 Part 5: Intangible assets 19 Emerald (12/07) 20 Dexterity (2. 5 6/04) 10 25 18 45 20 21 138 140 Part 6: Impairment of assets 21 Advent (2. 5 12/04 amended) 22 Wilderness (2. 12/05) 13 25 23 45 22 22 142 144 iv 5393 Finding questions www. ebooks2000. blogspot. com Time Marks allocation Mins Page number Question Answer Part 7: Reporting financial Performance 23 Derringdo III (2. 5 6/03 amended part) 24 Telenorth (2. 5 12/01) 25 Tourmalet (2. 5 12/03) 26 Partway (2. 5 12/06) 5 25 25 25 9 45 45 45 24 25 26 28 147 147 151 153 Part 8: Introduction to groups 27 Preparation question with helping hands: Simple consolidation 28 Hideaway (2. 5 12/05 amended) – 10 – 18 29 30 156 157 Part 9: The consolidated statement of financial position 29 Highveldt (2. 5 6/05) 30 Parentis (2. 6/07) 31 Pedantic (12/08) 25 25 25 45 45 45 30 32 33 158 162 165 Part 10: The consolidated income statement 32 Preparation question: Acquisition during the year 33 Hillusion (2. 5 6/03) 34 Hydan (2. 5 6/06) 35 Hydrate (2. 5 12/02 amended) – 25 25 20 – 45 45 36 34 35 37 38 168 171 174 178 Part 11: Accounting for associates 36 Preparation question: Laurel 37 Preparation question: Tyson 38 Plateau (12/07) 39 Holdrite (2. 5 12/04) 40 Patronic (6/08) 41 Hedra (2. 5 12/05) 42 Hosterling (2. 5 12/06) 43 Pacemaker (6/09) – – 25 25 25 25 25 25 – – 45 45 45 45 45 45 39 41 43 44 45 46 48 49 180 183 184 188 190 192 196 198

Part 12: Inventories and construction contracts 44 Preparation question: Contract 45 Concepts (6/08) 46 Linnet (2. 5 6/04) 47 Torrent (2. 5 6/06) 48 Beetie (Pilot paper) – 15 13 12 10 – 27 23 22 18 50 51 52 53 53 201 202 203 204 206 Finding questions 6393 www. ebooks2000. blogspot. com v Time Marks allocation Mins Page number Question Answer Part 13: Provisions, contingent liabilities and contingent assets 49 Bodyline (2. 5 12/03) 50 Tentacle (2. 5 6/07) 51 Promoil (ME3) (12/08) 25 15 15 45 27 27 54 55 55 207 210 211 Part 14: Financial assets and financial liabilities 52 Peterlee II (2. 6/06 part) 53 Jedders 54 Pingway (6/08) 12 15 10 22 27 18 56 56 58 212 213 214 Part 15: The legal versus the commercial view of accounting 55 Triangle (2. 5 6/05) 56 Atkins (2. 5 12/02) 57 Angelino (2. 5 12/06) 25 15 25 45 27 45 58 59 60 215 218 220 Part 16: Leasing 58 Preparation question: Branch 59 Evans 60 Bowtock (2. 5 12/03 amended) 61 Fino (12/07) – 12 5 15 – 22 9 27 61 61 61 62 222 222 223 224 Part 17: Accounting for taxation 62 Preparation question: Julian 63 Deferred taxation 64 Bowtock II (2. 5 12/03 amended) – 15 10 – 27 20 62 63 63 226 227 228 Part 18: Earnings per share 65 Preparation question: Fenton 66 Savoir (2. 6/06 part) 67 Niagara (2. 5 6/03 part) – 13 13 – 23 23 64 64 65 230 231 232 Part 19: Analysing and interpreting financial statements 68 Rytetrend (2. 5 6/03) 69 Reactive (Pilot paper part) 70 Greenwood (2. 5 6/07) 71 Victula (ME3)(12/08) 25 20 25 25 45 36 45 45 66 67 69 70 234 238 239 241 vi 7393 Finding questions www. ebooks2000. blogspot. com Time Marks allocation Mins Page number Question Answer Part 20: Limitations of financial statements and interpretation techniques 72 Harbin (12/07) 73 Breadline (2. 5 6/02) 74 Toogood (2. 5 6/07) 75 Waxwork (6/09) 25 25 25 15 45 45 45 27 72 74 76 76 243 245 248 249

Part 21: Cash flow statements 76 Preparation question: Dickson 77 Bigwood (2. 5 12/04) 78 Casino (2. 5 6/05) 79 Tabba (2. 5 12/05) 80 Minster (2. 5 12/06) 81 Pinto (6/08) 82 Coaltown (6/09) – 25 25 25 25 25 25 – 45 45 45 45 45 45 77 81 84 85 87 88 90 250 253 256 259 262 264 266 Part 22: Alternative models and practices 83 Preparation question: Changing prices 84 Update (2. 5 6/03 part) – 12 – 22 91 92 269 270 Part 23: Specialised not-for-profit and public sector entities 85 Appraisal (Pilot paper part) 5 9 93 271 Mock exam 1 86 87 88 89 90 Pumice(Pilot paper) Tintagel (6/04) Nedburg (12/02) Shiplake (6/02) Creative accounting (12/02)

Mock exam 2 91 92 93 94 95 Hample (2. 5 6/99 part) Chamberlain (12/02) Boston (6/06) Atomic power (12/00) Errsea (2. 5 6/07 part) Mock exam 3 (December 2008 paper) Finding questions 8393 www. ebooks2000. blogspot. com vii Planning your question practice Our guidance from page (xvii) shows you how to organise your question practice, either by attempting questions from each syllabus area or by building your own exams – tackling questions as a series of practice exams. ACCA examiner’s answers The ACCA examiner’s answers to questions marked Pilot papers to 12/08 can be found on the BPP website at the following link: www. pp. com/acca/examiner-solutions Additional question guidance Additional guidance to certain questions can be found on the BPP website at the following link: www. bpp. com/acca/extra-question-guidance Using your BPP Learning Media products This Kit gives you the question practice and guidance you need in the exam. Our other products can also help you pass: • • • • Learning to Learn Accountancy gives further valuable advice on revision Passcards provide you with clear topic summaries and exam tips Success CDs help you revise on the move i-Pass CDs offer tests of knowledge against the clock

You can purchase these products by visiting www. bpp. com/mybpp. viii 9393 Finding questions www. ebooks2000. blogspot. com Using your BPP Learning Media Practice and Revision Kit Tackling revision and the exam You can significantly improve your chances of passing by tackling revision and the exam in the right ways. Our advice is based on feedback from ACCA examiners. • • We look at the dos and don’ts of revising for, and taking, ACCA exams We focus on Paper F7; we discuss revising the syllabus, what to do (and what not to do) in the exam, how to approach different types of question and ways of obtaining easy marks

Selecting questions We provide signposts to help you plan your revision. • • • A full question index BPP’s question plan highlighting the most important questions and explaining why you should attempt them Build your own exams, showing how you can practise questions in a series of exams Making the most of question practice At BPP Learning Media we realise that you need more than just questions and model answers to get the most from your question practice. • • • • • Our Top tips included for certain questions provide essential advice on tackling questions, presenting answers and the key points that answers need to include We show you how you can pick up Easy marks on some questions, as we know that picking up all readily available marks often can make the difference between passing and failing We include marking guides to show you what the examiner rewards We include examiners’ comments to show you where students struggled or performed well in the actual exam We refer to the 2009 BPP Study Text (for exams in December 2009 and June 2010) for detailed coverage of the topics covered in questions In a bank at the end of this Kit we include the examiner’s answers to the June and December 2009 papers.

Used in conjunction with our answers they provide an indication of all possible points that could be made, issues that could be covered and approaches to adopt. Attempting mock exams There are three mock exams that provide practice at coping with the pressures of the exam day. We strongly recommend that you attempt them under exam conditions. Mock exams 1 and 2 reflect the question styles and syllabus coverage of the exam; Mock exam 3 is the December 2009 paper. Using your BPP Learning Media Practice and Revision Kit 10393 www. ebooks2000. blogspot. com ix Revising F7 General exam support from BPP Learning Media BPP Learning Media is committed to giving you the best possible support in your quest for exam success.

With this in mind, we have produced guidance on how to revise and techniques you can apply to improve your chances of passing the exam. This guidance can be found on the BPP Learning Media web site at the following link: www. bpp. com/acca/examtips/revising-for-ACCA-exams. doc A paper copy of this guidance is available by emailing [email protected] com Topics to revise What we do know about F7 is that Question 1 will be a consolidation question. This can be a statement of financial position or income statement or both, and it will probably include an associate, so be prepared for all of this. Therefore you must revise all the consolidation workings, and you must know how to account for an associate. All questions are compulsory.

Question 2 will be a single company accounts preparation question. This allows the examiner to bring in more complex issues that he would not test in the consolidation question. Make sure you can deal with finance leases, deferred tax, calculating finance costs using the effective interest rate, prior period adjustments, discontinued operations and construction contracts. Question 3 will be on statements of cash flow or interpretation of accounts. You have studied both of these at 1. 1, so make sure you can do them well. Other recent questions have involved non-current assets and impairment, intangible assets, EPS, provisions and regulatory issues. These are all likely topics for questions 4 and 5.

There will be a certain amount of discussion in some of the questions, so be prepared to write about financial reporting topics, such as the Framework or specific accounting standards. Question practice This is the most important thing to do if you want to get through. All of the most up-to-date exam questions from the previous syllabus and all the F7 questions to date are in this kit. Practice doing them under timed conditions, then go through the answers and go back to the study text for any topic you are really having trouble with. Come back to a question week later and try it again – you will be surprised at how much better you are getting.

Be very ruthless with yourself at this stage – you have to do the question in the time, without looking at the answer. This will really sharpen your wits and make the exam experience less worrying. Just keep doing this and you will get better at doing questions and you will really find out what you know and what you don’t know. x Revising F7 11393 www. ebooks2000. blogspot. com Passing the F7 exam If you have honestly done your revision then you can pass this exam. What you must do is remain calm and tackle it in a professional manner. The examiner stresses a number of points which you should bear in mind. • You must read the question properly.

Students often fail to read the question properly and miss some of the information. Time spent reading the question a second time would be time well spent. Make yourself do this, don’t just rush into it in a panic. Workings must be clear and cross-referenced. If the marker can read and understand your workings they can give you credit for using the right method, even if your answer is wrong. If your answer is wrong and there are no workings, or they are illegible and incomprehensible, you will get no marks for that part of the question. Stick to the timings and answer all questions. Do not spend too long on one question at the expense of others.

The number of extra marks you will gain on that question will be minimal, and you could have at least obtained the easy marks on the next question. Do not neglect the short parts of the question. If you get a 20-mark consolidation with a 5-mark discussion topic at the end, leave time for that last part. You can’t afford to throw away 5 marks. Make sure you get the easy marks. If an accounts preparation question contains something that you are unable to do, just ignore it and do the rest. You will probably only lose a few marks and if you start trying to puzzle it out you might waste a lot of minutes. Answer the question. In a discussion-type question you may be tempted to just write down everything you know about the topic. This will do you no good.

The marking parameters for these questions are quite precise. You will only get marks for making points that answer the question exactly as it has been set. So don’t waste your time waffling – you could be scoring marks somewhere else. • • • • • Note that you have 15 minutes reading time at the start of this exam, during which you are allowed to make notes on the question paper. Use this to read the questions carefully and underline important points. Make note of any points that occur to you which you may otherwise forget. Get really familiar with the paper and focus on what you can do, not the bits you think you can’t do. Gaining the easy marks

The first point to make is that you do not get any marks for just writing down the formats for a financial statement. But, once you have put the formats down, you are then in a position to start filling in the numbers and getting the easy marks. Also, correct formats will give you a guide so that you don’t miss things. For instance, it’s easy to forget about the minority interest in a group income statement. So that’s a good place to start. Having put down the formats, then go through the workings and slot in the figures. Make sure you get in all the ones you can do easily. Complicated parts are well worth doing if you are able to do them – there will be marks for those. Complicated parts which you don’t know how to do are best left alone.

If you have an interpretation question, you will not get many marks for just producing lots of ratios or restating information you have already been given in the question. You have to be able to evaluate the information and see what judgements can be made. So go through the information critically and see which ratios are actually relevant. Then calculate them and say something sensible about them. Revising F7 12393 www. ebooks2000. blogspot. com xi Exam information Format of the exam All questions are compulsory. Questions 1-3; 25 marks each Question 4 Question 5 Time allowed: 3 hours plus 15 minutes reading time Number of marks 75 15 10 100 Additional information The Study Guide provides more detailed guidance on the syllabus. December 2009 2 3 4 5 Consolidated income statement including associate Single company statement of comprehensive income and statement of financial position Mixed question on non-current assets, cash flows and ROCE Scenario question on assets Scenario question on EPS Marks 25 25 25 15 10 100 June 2009 1 2 3 4 5 Consolidated statement of financial position including associate Prepare income statement and statement of financial position from trial balance Statement of cash flows and comment on ratios IAS 10 scenario question Financial statement extracts for complex asset Marks 25 25 25 15 10 100 Examiner’s comment. The overall performance of candidates in this paper was poor. A significant number of candidates did not attempt either or both of Questions 4 and 5. Answers to sections of the paper requiring written comment, interpretation or analysis were weak or non-existent. December 2008 2 3 4 5 Consolidated income statement and statement of financial position Single company statement of comprehensive income, statement of changes in equity and statement of financial position Ratio analysis and comparison of performance for two companies Discussion and scenario on provisions Non current asset and depreciation – financial statement extracts Marks 25 25 25 15 10 100 xii Revising F7 13393 www. ebooks2000. blogspot. com Examiner’s comment. There was a generally improved performance at this diet but some areas still need improvement. The best answered sections of the paper were the computational elements, the analysis and discursive areas were much weaker. Some candidates wasted time producing ever-elaborate workings and unnecessary journals which were confusingly presented. This made their scripts very difficult to mark. June 2008 2 3 4 5 Consolidated income statement plus calculate goodwill on acquisition and discuss treatment of associate Redraft financial statements Statement of cash flows and comment on cash flow management Explain qualitative characteristics and apply to inventory Accounting for convertible loan note Marks 25 25 25 15 10 100 Examiner’s comment. I am disappointed in the overall performance of candidates. Answers were weak in sections requiring written comment and analysis, which accounted for 33 marks. The first two questions were done quite well. In question 3 candidates often scored well on the cash flow statement but the interpretation was generally weak. Question 4 was mixed, question 5 on the financial instrument was very badly answered by most candidates.

December 2007 1 2 3 4 5 Consolidated statement of financial position including associate Single company accounts preparation question Performance appraisal including calculation of ratios Discussion of ‘faithful representation’ and leasing scenario Discussion and scenario on development expenditure Marks 25 25 25 15 10 100 Examiner’s comments. The overall pass rate for this paper was disappointing. Performance was poor on questions requiring written comment and analysis. Many candidates did not answer the question that was asked. The first two questions were generally done well. Candidates did well on the ratios in Question 3, but their analysis was poor.

Questions 4 and 5 were not well done. Revising F7 14393 www. ebooks2000. blogspot. com xiii Pilot paper 1 2 3 4 5 Consolidated statement of financial position including associate Single company accounts preparation question Performance appraisal including calculation of ratios Discursive question on qualitative characteristics of financial information including short scenario Construction contract Marks 25 25 25 15 10 100 xiv Revising F7 15393 www. ebooks2000. blogspot. com Analysis of past papers Below provides an overview of the syllabus and details of when each element has have been examined. Further details are included in the relevant chapter of the knowledge bank.

Covered in text chapter A CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 1 1 The need for a conceptual framework Understandability, relevance, reliability and comparability – Framework qualitative characteristics – Accounting policies, changes in accounting estimates and errors Recognition and measurement The legal versus the commercial view of accounting Alternative models and practices (accounting for inflation) The concept of ‘faithful representation’ (‘true and fair view’) A REGULATORY FRAMEWORK FOR FINANCIAL REPORTING 2 2 23 Reasons for the existence of a regulatory framework The standard setting process Specialised, not-for-profit and public sector entities FINANCIAL STATEMENTS 21 4 Statements of cash flows Tangible non-current assets – Property, plant and equipment – Investment properties – Government grants – Borrowing costs Intangible assets Inventories and construction contracts Financial assets and financial liabilities – Fair value through profit or loss – Amortised cost – Convertible debt Leases Provisions, contingent liabilities and contingent assets Impairment of assets – Group accounting – Other Q1(b) Q1(a) Q2, Q5 Q1(a) Q2 Q4(b) Q2, Q4 Q2 Q2 Q2 Q3 Q2 Q2, Q5 Q3 Q2, Q5 Q3 Q2, Q4 Q4(b) Q4(a)(b) Q4(a)(b) Q4(a)(b) Q4(b) Q5(b) Q2 Q4(a) Pilot paper Dec 2007 June 2008 Dec 2008 June 2009 Dec 2009 1 15 22 1 Q4(a) Q4 Q2 Q2 Q4(a) 5 12 14 Q5(a)(b) Q4(b) Q2 Q2 Q2, Q4(b) Q4 Q2 Q2, Q4(b) Q2 Q5 Q2 Q2 Q2 16 13 6 Q2

Revising F7 16393 www. ebooks2000. blogspot. com xv Pilot paper C C9 FINANCIAL STATEMENTS (CONT’D) Taxation – Current tax – Deferred tax Q2 Q2 Dec 2007 June 2008 Dec 2008 June 2009 Dec 2009 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2, Q4(b) Q2 C10 Regulatory requirements relating to the preparation of financial statements – Income statement – Statement of comprehensive income – Statement of financial position – Statement of changes in equity C11 Reporting financial performance – Discontinued operations – Non-current assets held for sale – Earnings per share D D1 D2 D3 BUSINESS COMBINATIONS The concept and principles of a group The concept of consolidated financial tatements Preparation of consolidated financial statements: – Consolidated income statement – Consolidated statement of comprehensive income – Consolidated statement of financial position – Associates ANALYSING AND INTERPRETING FINANCIAL STATEMENTS Limitations of financial statements Calculation and interpretation of accounting ratios and trends to address users’ and stakeholders’ needs Limitations of interpretation techniques Specialised, not-for-profit and public sector entities Q2 Q2 Q2 Q2(a) Q2(b) Q2(a) Q2(c) Q2(b) Q2(a) Q2(c) Q2(b) Q2(a) Q2(b) Q2 Q2 Q2(c) Q5 Q1(a) Q1(b) Q1(c) Q1(b) Q1(b) Q1(b) Q1(a) Q1(b) Q1(a) Q1(b) Q1 Q1 Q1 Q1 Q1 E E1 E2 E3 E4 Q3(a)(b) Q3(a)(b) Q3(b) Q3(a)(b) Q3(c) Q3(b) Q4 Q3 Q3(c) xvi Revising F7 17393 www. ebooks2000. logspot. com Planning your question practice We have already stressed that question practice should be right at the centre of your revision. Whilst you will spend some time looking at your notes and Paper F7 Passcards, you should spend the majority of your revision time practising questions. We recommend two ways in which you can practise questions. • • Use BPP Learning Media’s question plan to work systematically through the syllabus and attempt key and other questions on a section-by-section basis Build your own exams – attempt questions as a series of practice exams These ways are suggestions and simply following them is no guarantee of success.

You or your college may prefer an alternative but equally valid approach. BPP Learning Media’s question plan The BPP Learning Media plan below requires you to devote a minimum of 30 hours to revision of Paper F7. Any time you can spend over and above this should only increase your chances of success. Step 1 Step 2 Review your notes and the chapter summaries in the Paper F7 Passcards for each section of the syllabus. Answer the key questions for that section. These questions have boxes round the question number in the table below and you should answer them in full. Even if you are short of time you must attempt these questions if you want to pass the exam.

You should complete your answers without referring to our solutions. Step 3 Step 4 Attempt the other questions in that section. Attempt Mock exams 1, 2 and 3 under strict exam conditions. Planning your question practice 18393 www. ebooks2000. blogspot. com xvii Syllabus section The conceptual framework 2010 Passcards chapters 1 Questions in this Kit 1, 2, 3 Done Comments Peterlee is a straightforward question on the Framework and Derringdo gets you to apply the Framework to the issue of revenue recognition. Make sure you do Porto from the pilot paper. This question covers a lot of material and is good revision. All of these questions are good. Candel and Pricewell are the most recent.

Broadoak is a full question on IAS 16, so make sure you do it. The other questions reflect what you may see for a 10 or 15-mark question. Dexterity is a 25-mark on goodwill and intangible assets, so it covers a lot of ground. Emerald is a recent question. Wilderness is an excellent question on impairment. See if you can do it in the time. Partway is a recent question on discontinued operations. Question 27 is a good preparation question on the basics. Question 28 looks at the effect of related parties on group accounts. This is the context within which the examiner will examine related parties. Highveldt does not require the whole position statement, but gets you to produce the key workings.

Pedantic is from the December 2008 paper. , Start with the preparation question, and then do Hydan, which is a recent question. Do the two preparation questions first and then Patronic and Pacemaker, which are the latest exam questions. Start with the preparation question and make sure you also do Torrent and Beetie. Make sure you do Bodyline, which is a full question on provisions. Promoil is a good example of a 15-mark question from the December 2008 paper. Both of these questions cover calculation of interest costs. Make sure you can do them. These are good questions on the application of substance over form. Do both of them. These are all short questions. Do them all.

The regulatory framework Presentation of published financial statements Non-current assets 2 3 4 12 13 4 15 16 Intangible assets 5 19 , 20 Impairment of assets Reporting financial performance Introduction to groups 6 7 8 22 26 27, 28 The consolidated statement of financial position The consolidated income statement Accounting for associates Inventories and construction contracts Provisions, contingent liabilities and contingent assets Financial assets and financial liabilities The legal versus the commercial view of accounting Leasing 9 29, 30, 31 10 11 32, 33 , 34 35 36, 37 40 43 12 44, 47, 48 13 49 51 14 15 53 54 55 57 16 59, 60, 61 xviii Planning your question practice 19393 www. ebooks2000. blogspot. com

Syllabus section Accounting for taxation Earnings per share Analysing and interpreting financial statements Limitations of financial statements and interpretation techniques Statements of cash flows Alternative models and practices Specialised, not-forprofit and public sector entities 2010 Passcards chapters 17 18 19 Questions in this Kit 62 64 Done Comments Do the preparation question. Question 63 is good practice for a question on deferred tax. Question 67 is part of a recent exam question, so good practice. You must do Greenwood and Victular, which are recent questions. Waxwork and Harbin are the most recent questions. 65, 67 70 71 20 72 75 21 22 23 6, 81 82 84 Do the preparation question and Pinto and Coaltown, which are the most recent questions. Update is a typical question on this area. You will not get a full question on this. The examiner has stated that this part-question in the pilot paper is typical of how it will be examined. 85 Planning your question practice 20393 www. ebooks2000. blogspot. com xix Build your own exams Having revised your notes and the BPP Passcards, you can attempt the questions in the Kit as a series of practice exams. This is our suggestion: Practice exams 1 1 2 3 4 5 43 7 69 3 19 2 38 8 70 1 45 3 39 9 73 48 16 4 40 10 78 50 17 5 41 11 79 61 47 6 42 6 80 66 54

We have selected these questions on the following basis: • • • • Question 1 will be a consolidation Question 2 will be an accounts preparation question Question 3 will be a statement of cash flows or an interpretation of accounts question Questions 4 and 5 will test other areas of the syllabus December 2008 Paper: 12, 17, 31, 51, 71 June 2009 Paper: 13, 18, 43, 75, 81 xx Planning your question practice 21393 www. ebooks2000. blogspot. com Questions 1 22393 www. ebooks2000. blogspot. com ACCA examiner’s answers Remember that you can access the ACCA examiner’s solutions to questions marked ‘Pilot paper’ or ‘12/07’on the BPP website using the following link: www. pp. com/acca/examiner-solutions Additional question guidance Remember that you can find additional guidance to certain questions on the BPP website using the following link: www. bpp. com/acca/extra-question-guidance 2 23393 www. ebooks2000. blogspot. com 1 Peterlee (2. 5 6/06) (a) 23 mins The IASB’s Framework for the preparation and presentation of financial statements (Framework) sets out the concepts that underlie the preparation and presentation of financial statements that external users are likely to rely on when making economic decisions about an entity. Required Explain the purpose and authoritative status of the Framework. (5 marks) (b)

Of particular importance within the Framework are the definitions and recognition criteria for assets and liabilities. Required Define assets and liabilities and explain the important aspects of their definitions. Explain why these definitions are of particular importance to the preparation of an entity’s statement of financial position and income statement. (8 marks) (Total = 13 marks) 2 Derringdo (2. 5 6/03 part) 20 mins Revenue recognition is the process by which companies decide when and how much income should be included in the income statement. It is a topical area of great debate in the accounting profession. The IASB looks at revenue recognition from conceptual and substance points of view.

There are occasions where a more traditional approach to revenue recognition does not entirely conform to the IASB guidance; indeed neither do some International Accounting Standards. Required (a) Explain the implications that the IASB’s Framework for the Preparation and Presentation of Financial Statements (Framework) and the application of substance over form have on the recognition of income. Give examples of how this may conflict with traditional practice and some accounting standards. (6 marks) Derringdo sells goods supplied by Gungho. The goods are classed as A grade (perfect quality) or B grade, having slight faults. Derringdo sells the A grade goods acting as an agent for Gungho at a fixed price calculated to yield a gross profit margin of 50%.

Derringdo receives a commission of 12·5% of the sales it achieves for these goods. The arrangement for B grade goods is that they are sold by Gungho to Derringdo and Derringdo sells them at a gross profit margin of 25%. The following information has been obtained from Derringdo’s financial records: $’000 Inventory held on premises 1 April 20X2 – A grade 2,400 – B grade 1,000 – A grade 18,000 Goods from Gungho year to 31 March 20X3 – B grade 8,800 Inventory held on premises 31 March 20X3 – A grade 2,000 – B grade 1,250 Required Prepare the income statement extracts for Derringdo for the year to 31 March 20X3 reflecting the above information. (5 marks) (Total = 11 marks) (b) Questions 24393 www. ebooks2000. blogspot. com 3 Porto (pilot paper amended) (a) 23 mins The qualitative characteristics of relevance, reliability and comparability identified in the IASB’s Framework or the preparation and presentation of financial statements (Framework) are some of the attributes that make financial information useful to the various users of financial statements. Required Explain what is meant by relevance, reliability and comparability and how they make financial information useful. (9 marks) (b) During the year ended 31 March 20X6, Porto experienced the following transactions or events: (i) (ii) Entered into a finance lease to rent an asset for substantially the whole of its useful economic life.

The company’s income statement prepared using historical costs showed a loss from operating its hotels, but the company is aware that the increase in the value of its properties during the period far outweighed the operating loss. Required Explain how you would treat the items above in Porto’s financial statements and indicate on which of the Framework’s qualitative characteristics your treatment is based. (4 marks) (Total = 13 marks) 4 Regulatory framework (2. 5 12/04) 45 mins Historically financial reporting throughout the world has differed widely. The International Accounting Standards Committee Foundation (IASCF) is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements.

The various pronouncements of the IASCF are sometimes collectively referred to as International Financial Reporting Standards (IFRS) GAAP. Required (a) (b) (c) Describe the functions of the various internal bodies of the IASCF, and how the IASCF interrelates with other national standard setters. (10 marks) Describe the IASCF’s standard setting process including how standards are produced, enforced and occasionally supplemented. (10 marks) Comment on whether you feel the move to date towards global accounting standards has been successful. (5 marks) (Total = 25 marks) 4 Questions 25393 www. ebooks2000. blogspot. com 5 Winger (2. 5 pilot paper amended) The following list of account balances relates to Winger at 31 March 20X1. ‘000 Sales revenue (note a) Cost of sales Distribution costs Administration expenses Lease rentals (note b) Loan interest paid Dividend paid Property at cost (note c) Plant and equipment cost Depreciation 1 April 20X0 – plant and equipment Development expenditure (note d) Profit on disposal of non-current assets Trade accounts receivable Inventories: 31 March 20X1 Cash and bank Trade accounts payable Taxation: over provision in year to 31 March 20X0 Equity shares of 25c each 8% loan notes (issued in 20W8) Retained earnings 1 April 20X0 The following notes are relevant. (a) 185,050 28,700 15,000 20,000 2,000 12,000 200,000 154,800 45 mins $’000 358,450 34,800 30,000 45,000 55,000 28,240 10,660 29,400 2,200 150,000 50,000 71,600 741,450 741,450

Included in sales revenue is $27 million, which relates to sales made to customers under sale or return agreements. The expiry date for the return of these goods is 30 April 20X1. Winger has charged a mark-up of 20% on cost for these sales. A lease rental of $20 million was paid on 1 April 20X0. It is the first of five annual payments in advance for the rental of an item of equipment that has a cash purchase price of $80 million. The auditors have advised that this is a finance lease and have calculated the implicit interest rate in the lease as 12% per annum. Leased assets should be depreciated on a straight-line basis over the life of the lease. On 1 April 20X0 Winger acquired a new property at a cost of $200 million.

For the purpose of calculating depreciation only, the asset has been separated into the following elements. Separate asset Land Heating system Lifts Building Cost $’000 50,000 20,000 30,000 100,000 Life freehold 10 years 15 years 50 years (b) (c) The depreciation of the elements of the property should be calculated on a straight-line basis. The new property replaced an existing one that was sold on the same date for $95 million. It had cost $50 million and had a carrying value of $80 million at the date of sale. The profit on this property has been calculated on the original cost. It had not been depreciated on the basis that the depreciation charge would not be material.

Plant and machinery is depreciated at 20% on the reducing balance basis. (d) The figure for development expenditure in the list of account balances represents the amounts deferred in previous years in respect of the development of a new product. Unfortunately, during the current year, the government has introduced legislation which effectively bans this type of product. As a consequence of this the project has been abandoned. The directors of Winger are of the opinion that writing off the development expenditure, as opposed to its previous deferment, represents a change of accounting policy and therefore wish to treat the write off as a prior period adjustment. 5

Questions 26393 www. ebooks2000. blogspot. com (e) A provision for income tax for the year to 31 March 20X1 of $15 million is required. Required (a) (b) (c) Prepare Winger’s income statement for the year to 31 March 20X1, along with the changes in retained earnings from the statement of changes in equity. (9 marks) Prepare a statement of financial position as at 31 March 20X1 in accordance with International Financial Reporting Standards as far as the information permits. (11 marks) Discuss the acceptability of the company’s previous policy in respect of non-depreciation of property. (5 marks) (Total = 25 marks) 6 Harrington (2. 5 6/05 amended)

INCOME STATEMENT – YEAR TO 31 MARCH 20X5 Sales revenue (note (i)) Cost of sales (note (ii)) Gross profit Operating expenses Loan note interest paid (refer to statement of financial position) Profit before tax Income tax expense (note (vi)) Profit for the year STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X5 Property, plant and equipment (note (iii)) Investments (note (iv)) Current assets Inventory Trade receivables Bank Total assets Equity and liabilities: Ordinary shares of 25c each (note (v)) Reserves: Share premium Retained earnings – 1 April 20X4 – Year to 31 March 20X5 – dividends paid $’000 45 mins Reproduced below are the draft financial statements of Harrington, a public company, for the year to 31 March 20X5: $’000 13,700 (9,200) 4,500 (2,400) (25) 2,075 (55) 2,020 $’000 6,270 1,200 7,470 1,750 2,450 350 4,550 12,020 2,000 600 2,990 2,020 (500) 4,510 7,110 Non-current liabilities 10% loan note (issued 20X2) Deferred tax (note (vi)) Current liabilities Trade payables 500 280 780 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. 6 Questions 27393 www. ebooks2000. blogspot. com 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 January 20X5. The plant had originally cost $900,000 and had been depreciated by $630,000 at 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. On 31 December 20X4 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 31 March 20X5 are: $’000 Land at cost Buildings at cost Less accumulated depreciation at 31 March 20X4 Plant at cost Less accumulated depreciation at 31 March 20X4 4,000 (800) 5,200 (3,130) $$’000 1,000 3,200 (ii) ,070 6,270 At the beginning of the current year (1 April 20X4), Harrington 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). Harrington makes a transfer to realised profits in respect of the excess depreciation on revalued assets. Note: depreciation for the year to 31 March 20X5 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 31 March 20X4 and during the year to 31 March 20X5 the investments have risen in value by an average of 10%. Harrington has not reflected this increase in its financial statements. On 1 October 20X4 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. Income tax on the profits for the year to 31 March 20X5 is estimated at $260,000. The figure in the income statement is the underprovision for income tax for the year to 31 March 20X4. The carrying value of Harrington’s net assets is $1·4 million more than their tax base at 31 March 20X5.

The income tax rate is 25%. (v) (vi) Required (a) (b) (c) Prepare a restated statement of comprehensive income for the year to 31 March 20X5 reflecting the information in notes (i) to (vi) above. (9 marks) Prepare a statement of changes in equity for the year to 31 March 20X5. (6 marks) Prepare a restated statement of financial position at 31 March 20X5 reflecting the information in notes (i) to (vi) above. (10 marks) (Total = 25 marks) Questions 28393 www. ebooks2000. blogspot. com 7 7 Llama (12/07) The following trial balance relates to Llama, a listed company, at 30 September 2007: Land and buildings – at valuation 1 October 2006 (note (i))

Plant – at cost (note (i)) Accumulated depreciation of plant at 1 October 2006 Investments – at fair value through profit or loss (note (i)) Investment income Cost of sales (note (i)) Distribution costs Administrative expenses Loan interest paid Inventory at 30 September 2007 Income tax (note (ii)) Trade receivables Revenue Equity shares of 50 cents each fully paid Retained earnings at 1 October 2006 2% loan note 2009 (note (iii)) Trade payables Revaluation reserve (arising from land and buildings) Deferred tax Suspense account (note (iv)) Bank The following notes are relevant: (i) $’000 130,000 128,000 26,500 2,200 89,200 11,000 12,500 800 37,900 400 35,100 180,400 60,000 25,500 80,000 34,700 14,000 11,200 24,000 6,600 471,000 $’000 45 mins 32,000 471,000 Llama has a policy of revaluing its land and buildings at each year end. The valuation in the trial balance includes a land element of $30 million. The estimated remaining life of the buildings at that date (1 October 2006) was 20 years. On 30 September 2007, a professional valuer valued the buildings at $92 million with no change in the value of the land. Depreciation of buildings is charged 60% to cost of sales and 20% each to distribution costs and administrative expenses. During the year Llama manufactured an item of plant that it is using as part of its own operating capacity.

The details of its cost, which is included in cost of sales in the trial balance, are: Materials cost Direct labour cost Machine time cost Directly attributable overheads $’000 6,000 4,000 8,000 6,000 The manufacture of the plant was completed on 31 March 2007 and the plant was brought into immediate use, but its cost has not yet been capitalised. All plant is depreciated at 12? % per annum (time apportioned where relevant) using the reducing balance method and charged to cost of sales. No non-current assets were sold during the year. The fair value of the investments held at fair value through profit or loss at 30 September 2007 was $27·1 million. ii) The balance of income tax in the trial balance represents the under/over provision of the previous year’s estimate. The estimated income tax liability for the year ended 30 September 2007 is $18·7 million. At 30 September 2007 there were $40 million of taxable temporary differences. The income tax rate is 25%. Note: you may assume that the movement in deferred tax should be taken to profit or loss (income statement). 8 Questions 29393 www. ebooks2000. blogspot. com (iii) The 2% loan note was issued on 1 April 2007 under terms that provide for a large premium on redemption in 2009. The finance department has calculated that the effect of this is that the loan note has an effective interest rate of 6% per annum.

The suspense account contains the corresponding credit entry for the proceeds of a rights issue of shares made on 1 July 2007. The terms of the issue were one share for every four held at 80 cents per share. Llama’s share price immediately before the issue was $1. The issue was fully subscribed. (iv) Required Prepare for Llama: (a) (b) (c) A statement of comprehensive income for the year ended 30 September 2007. A statement of financial position as at 30 September 2007. A calculation of the earnings per share for the year ended 30 September 2007. (9 marks) (13 marks) (3 marks) Note. a statement of changes in equity is not required. (Total = 25 marks) 8 Tadeon (2. 5 12/06)

The following trial balance relates to Tadeon, a publicly listed company, at 30 September 20X6: $’000 Revenue Cost of sales Operating expenses Loan interest paid (note (i)) Rental of vehicles (note (ii)) Investment income 25 year leasehold property at cost (note (iii)) Plant and equipment at cost Investments at amortised cost Accumulated depreciation at 1 October 20X5 – leasehold property – plant and equipment Equity shares of 20 cents each fully paid Retained earnings at 1 October 20X5 2% Loan note (note (i)) Deferred tax balance 1 October 20X5 (note (iv)) Trade receivables Inventories at 30 September 20X6 Bank Trade payables Suspense account (note (v)) The following notes are relevant: (i) 118,000 40,000 1,000 6,200 45 mins $’000 277,800 ,000 225,000 181,000 42,000 36,000 85,000 150,000 18,600 50,000 12,000 53,500 33,300 1,900 18,700 48,000 700,000 700,000 The loan note was issued on 1 October 20X5. It is redeemable on 30 September 20Y0 at a large premium (in order to compensate for the low nominal interest rate). The finance department has calculated that the effective interest rate on the loan is 5. 5% per annum. The rental of the vehicles relates to two separate contracts. These have been scrutinised by the finance department and they have come to the conclusion that $5 million of the rentals relate to a finance lease. The finance lease was entered into on 1 October 20X5 (the date the $5 million was paid) for a four year period.

The vehicles had a fair value of $20 million (straight-line depreciation should be used) at 1 October 20X5 and the lease agreement requires three further annual payments of $6 million each on the anniversary of the lease. The interest rate implicit in the lease is to be taken as 10% per annum. (Note: you are not required to calculate the present value of the minimum lease payments. ) The other contract is an operating lease and should be charged to operating expenses. (ii) Questions 30393 www. ebooks2000. blogspot. com 9 Other plant and equipment is depreciated at 121/2% per annum on the reducing balance basis. All depreciation of property, plant and equipment is charged to cost of sales. iii) (iv) On 30 September 20X6 the leasehold property was revalued to $200 million. The directors wish to incorporate this valuation into the financial statements. The directors have estimated the provision for income tax for the year ended 30 September 20X6 at $38 million. At 30 September 20X6 there were $74 million of taxable temporary differences, of which $20 million related to the revaluation of the leasehold property (see (iii) above). The income tax rate is 20%. The suspense account balance can be reconciled from the following transactions: The payment of a dividend in October 20X5. This was calculated to give a 5% yield on the company’s share price of 80 cents as at 30 September 20X5.

The net receipt in March 20X6 of a fully subscribed rights issue of one new share for every three held at a price of 32 cents each. The expenses of the share issue were $2 million and should be charged to share premium. Note. The cash entries for these transactions have been correctly accounted for. Required Prepare for Tadeon: (a) (b) A statement of comprehensive income for the year ended 30 September 20X6; and A statement of financial position as at 30 September 20X6. (8 marks) (17 marks) (Total = 25 marks) (v) Note. A statement of changes in equity is not required. Disclosure notes are not required. 9 Kala (pilot paper amended) The following trial balance relates to Kala, a publicly listed company, at 31

March 20X6: Land and buildings at cost (note (i)) Plant – at cost (note (i)) Investment properties – valuation at 1 April 20X5 (note (i)) Purchases Operating expenses Loan interest paid Rental of leased plant (note (ii)) Dividends paid Inventory at 1 April 20X5 Trade receivables Revenue Income from investment property Equity shares of $1 each fully paid Retained earnings at 1 April 20X5 8% (actual and effective) loan note (note (iii)) Accumulated depreciation at 1 April 20X5 – buildings – plant Trade payables Deferred tax Bank The following notes are relevant: (i) $’000 270,000 156,000 90,000 78,200 15,500 2,000 22,000 15,000 37,800 53,200 45 mins $’000 739,700 278,400 4,500 150,000 119,500 50,000 60,000 26,000 33,400 12,500 5,400 739,700 The land and buildings were purchased on 1 April 20W0. The cost of the land was $70 million. No land and buildings have been purchased by Kala since that date. On 1 April 20X5 Kala had its land and buildings professionally valued at $80 million and $175 million respectively. The directors wish to incorporate these 10 Questions 31393 www. ebooks2000. blogspot. com values into the financial statements.

The estimated life of the buildings was originally 50 years and the remaining life has not changed as a result of the valuation. Later, the valuers informed Kala that investment properties of the type Kala owned had increased in value by 7% in the year to 31 March 20X6. Plant, other than leased plant (see below), is depreciated at 15% per annum using the reducing balance method. Depreciation of buildings and plant is charged to cost of sales. (ii) On 1 April 20X5 Kala entered into a lease for an item of plant which had an estimated life of five years. The lease period is also five years with annual rentals of $22 million payable in advance from 1 April 20X5.

The plant is expected to have a nil residual value at the end of its life. If purchased this plant would have a cost of $92 million and be depreciated on a straight-line basis. The lessor includes a finance cost of 10% per annum when calculating annual rentals. (Note: you are not required to calculate the present value of the minimum lease payments. ) The loan note was issued on 1 July 20X5 with interest payable six monthly in arrears. The provision for income tax for the year to 31 March 20X6 has been estimated at $28. 3 million. The deferred tax provision at 31 March 20X6 is to be adjusted to a credit balance of $14. 1 million. The inventory at 31 March 20X6 was valued at $43. 2 million. (iii) (iv) (v)

Required, Prepare for Kala: (a) (b) (c) A statement of comprehensive income for the year ended 31 March 20X6. A statement of changes in equity for the year ended 31 March 20X6. A statement of financial position as at 31 March 20X6. (10 marks) (4 marks) (11 marks) (Total = 25 marks) 10 Wellmay (2. 5 6/07 amended) The summarised draft financial statements of Wellmay are shown below. INCOME STATEMENT YEAR ENDED 31 MARCH 20X7 Revenue (note (i)) Cost of sales (note (ii)) Gross profit Operating expenses Investment property rental income Finance costs Profit before tax Income tax Profit for the year 45 mins $’000 4,200 (2,700) 1,500 (470 20 (55) 995 (360) 635 Questions 32393 www. ebooks2000. blogspot. com 11

STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X7 $’000 Assets Non-current assets Property, plant and equipment (note (iii)) Investment property (note (iii)) Current assets Total assets Equity and liabilities Equity Equity shares of 50 cents each (note (vii)) Reserves: Retained earnings (note (iv)) Revaluation reserve Non-current liabilities 8% convertible loan note (20Y0) (note (v)) Deferred tax (note (vi)) Current liabilities Total equity and liabilities The following information is relevant to the draft financial statements: (i) Revenue includes $500,000 for the sale on 1 April 20X6 of maturing goods to Westwood. The goods had a cost of $200,000 at the date of sale. Wellmay can repurchase the goods on 31 March 20X8 for $605,000 (based on achieving a lender’s return of 10% per annum) at which time the goods are estimated to have a value of $750,000. Past experience shows that after the end of the reporting period the company often receives unrecorded invoices for materials relating to the previous year.

As a result of this an accrued charge of $75,000 for contingent costs has been included in cost of sales and as a current liability. Non-current assets: Wellmay owns two properties. One is a factory (with office accommodation) used by Wellmay as a production facility and the other is an investment property that is leased to a third party under an operating lease. Wellmay revalues all its properties to current value at the end of each year and uses the fair value model in IAS 40 Investment property. Relevant details of the fair values of the properties are: Factory $’000 1,200 1,350 Investment property $’000 400 375 $’000 4,200 400 4,600 1,400 6,000 1,200 2,850 350 3,200 4,400 600 180 80 820 6,000 (ii) (iii) Valuation 31 March 20X6 Valuation 31 March 20X7 The valuations at 31 March 20X7 have not yet been incorporated into the financial statements. Factory depreciation for the year ended 31 March 20X7 of $40,000 was charged to cost of sales. As the factory includes some office accommodation, 20% of this depreciation should have been charged to operating expenses. (iv) The balance of retained earnings is made up of: Balance b/f 1 April 20X6 Profit for the year Dividends paid during year ended 31 March 20X7 (v) 8% convertible loan note (20Y0) On 1 April 20X6 an 8% convertible loan note with a nominal value of $600,000 was issued at par.

It is redeemable on 31 March 20Y0 at par or it may be converted into equity shares of Wellmay on the basis of 100 new shares for each $200 of loan note. An equivalent loan note without the conversion option would 12 Questions 33393 $’000 2,615 635 (400) 2,850 www. ebooks2000. blogspot. com have carried an interest rate of 10%. Interest of $48,000 has been paid on the loan and charged as a finance cost. The present value of $1 receivable at the end of each year, based on discount rates of 8% and 10% are: End of year 1 2 3 4 (vi) 8% 0·93 0·86 0·79 0·73 10% 0·91 0·83 0·75 0·68 The carrying amounts of Wellmay’s net assets at 31 March 20X7 are $600,000 higher than their tax base. The rate of taxation is 35%.

The income tax charge of $360,000 does not include the adjustment required to the deferred tax provision which should be charged in full to the income statement. Bonus/scrip issue: On 15 March 20X7, Wellmay made a bonus issue from retained earnings of one share for every four held. The issue has not been recorded in the draft financial statements. Required Redraft the financial statements of Wellmay, including a statement of comprehensive income and a statement of changes in equity, for the year ended 31 March 20X7 reflecting the adjustments required by notes (i) to (vii) above. Note: Calculations should be made to the nearest $’000. (25 marks) (vii) 11 Dexon (6/08) ‘000 Assets Non-current assets Property at valuation (land $20,000; buildings $165,000 (note (ii)) Plant (note (ii)) Investments at fair value through profit and loss at 1 April 2007 (note (iii)) Current assets Inventory Trade receivables (note (iv)) Bank Total assets Equity and liabilities Equity Ordinary shares of $1 each Share premium Revaluation reserve Retained earnings – at 1 April 2007 – for the year ended 31 March 2008 Non-current liabilities Deferred tax – at 1 April 2007 (note (v)) Current liabilities Total equity and liabilities $’000 45 mins Below is the summarised draft statement of financial position of Dexon, a publicly listed company, as at 31 March 2008. $’000 185,000 180,500 12,500 378,000 84,000 52,200 3,800 140,000 518,000 250,000 40,000 18,000 12,300 96,700 109,000 167,000 417,000 19,200 81,800 518,000 Questions 34393 www. ebooks2000. blogspot. com 13 The following information is relevant: (i) Dexon’s income statement includes $8 million of revenue for credit sales made on a ‘sale or return’ basis.

At 31 March 2008, customers who had not paid for the goods, had the right to return $2·6 million of them. Dexon applied a mark up on cost of 30% on all these sales. In the past, Dexon’s customers have sometimes returned goods under this type of agreement. The non-current assets have not been depreciated for the year ended 31 March 2008. Dexon has a policy of revaluing its land and buildings at the end of each accounting year. The values in the above statement of financial position are as at 1 April 2007 when the buildings had a remaining life of fifteen years. A qualified surveyor has valued the land and buildings at 31 March 2008 at $180 million.

Plant is depreciated at 20% on the reducing balance basis. (iii) The investments at fair value through profit and loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 2007 the relevant index was 1,200 and at 31 March 2008 it was 1,296. In late March 2008 the directors of Dexon discovered a material fraud perpetrated by the company’s credit controller that had been continuing for some time. Investigations revealed that a total of $4 million of the trade receivables as shown in the statement of financial position at 31 March 2008 had in fact been paid and the money had been stolen by the credit controller.

An analysis revealed that $1·5 million had been stolen in the year to 31 March 2007 with the rest being stolen in the current year. Dexon is not insured for this loss and it cannot be recovered from the credit controller, nor is it deductible for tax purposes. During the year the company’s taxable temporary differences increased by $10 million of which $6 million related to the revaluation of the property. The deferred tax relating to the remainder of the increase in the temporary differences should be taken to the income statement. The applicable income tax rate is 20%. The above figures do not include the estimated provision for income tax on the profit for the year ended 31 March 2008.

After allowing for any adjustments required in items (i) to (iv), the directors have estimated the provision at $11·4 million (this is in addition to the deferred tax effects of item (v)). On 1 September 2007 there was a fully subscribed rights issue of one new share for every four held at a price of $1·20 each. The proceeds of the issue have been received and the issue of the shares has been correctly

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