acca f7 (int) final assessment - questions (d08)

Final Assessment

KAPLAN PUBLISHING of 10

ACCA FINAL ASSESSMENT

Financial

Reporting

DECEMBER 2008

QUESTION PAPER

Time allowed Reading time: 15 minutes Writing time: 3 hours

All FIVE questions are compulsory and MUST be attempted

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

Kaplan Publishing/Kaplan Financial

ACCA F7 (INT) Financial Reporting

© Kaplan Financial Limited, 2008 All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

of 10 KAPLAN PUBLISHING

Final Assessment

All FIVE questions are compulsory and MUST be attempted QUESTION 1 On 1 April 2007 Pauline acquired the following non-current investments: • 6 million equity shares in Sonia by an exchange of two shares in Pauline for every

four shares in Sonia plus $1.25 per acquired Sonia share in cash. The market price of each Pauline share at the date of acquisition was $6 and the market price of each Sonia share at the date of acquisition was $3.25.

• 30% of the equity shares of Arthur at a cost of $7.50 per share in cash. Only the cash consideration of the above investments has been recorded by Pauline. In addition $1,000,000 of professional costs relating to the acquisition of Sonia is also included in the cost of the investment. The summarised draft statements of financial position of the three companies at 31 March 2008 are:

Pauline Sonia Arthur $000 $000 $000 Assets Non-current assets Property, plant and equipment 36,800 20,800 36,000 Investments in Sonia and Arthur 26,500 Nil Nil Available-for-sale investments 13,000 Nil Nil ______ ______ ______ 76,300 20,800 36,000 Current assets Inventory 13,800 12,400 7,200 Trade receivables 6,400 3,000 4,800 ______ ______ ______ Total assets 96,500 36,200 48,000 ______ ______ ______ Equity and liabilities Equity shares of $1 each 20,000 8,000 8,000 Retained earnings − at 31 March 2007 32,000 12,000 22,000 − for 5,800 10,000 ______ ______ ______

year ended 31 March 2008 18,500

70,500 25,800 40,000 Non-current liabilities 7% Loan notes 10,000 2,000 2,000 Current liabilities 16,000 8,400 6,000 ______ ______ ______ Total equity and liabilities 96,500 36,200 48,000 ______ ______ ______



The following information is relevant: (i) At the date of acquisition Sonia had an internally generated brand name. The

directors of Pauline estimate that the value of this brand name has a fair value of $2 million, an indefinite life and has not suffered any impairment.

(ii) On 1 April 2007, Pauline sold an item of plant to Sonia at its agreed fair value of $5

million. Its carrying amount prior to the sale was $4 million. The estimated remaining life of the plant at the date of sale was five years (straight-line depreciation).

(iii) During the year ended 31 March 2008 Sonia sold goods to Pauline for $5.4 million.

Sonia had marked up these goods by 50% on cost. Pauline had a third of the goods still in its inventory at 31 March 2008. There were no intra-group payables/receivables at 31 March 2008.

(iv) Pauline has a policy of valuing non-controlling interests at fair value at the date of

acquisition. For this purpose the share price of Sonia at this date should be used. Impairment tests on 31 March 2008 concluded that neither consolidated goodwill or the value of the investment in Arthur have been impaired.

(v) The available-for-sale investments are included in Pauline’s statement of financial

position (above) at their fair value on 1 April 2007, but they have a fair value of $18 million at 31 March 2008.

(vi) No dividends were paid during the year by any of the companies. Required: Prepare the consolidated statement of financial position for Pauline as at 31 March 2008. (25 marks)


Final Assessment

QUESTION 2 The following trial balance relates to Wooster at 30 September 20X8:

$000 $000

Ordinary shares of $1 each 100,000 10% debenture (issued in 20X6) 30,000 Retained earnings 1 October 20X7 23,440 Land and buildings – cost (Note 1) 92,000 Plant and equipment – cost (Note 1) 124,740 Depreciation 1 October 20X7: – Building 16,000 – Plant 34,740 Trade receivables (Note 2) 25,500 Trade payables 7,740 Lease rentals (Note 3) 800 Revenue 247,450 Cost of sales 165,050 Distribution costs 13,400 Administration expenses (Note 2) 12,300 Interim dividends (Note 5) 3,200 Debenture interest paid (Note 5) 1,500 Inventory – 30 September 20X8 16,240 Cash and bank 4,640 _______ _______ 459,370 _______ 459,370 _______

The following notes are relevant: (1) Non-current assets

The land had an original cost of $12 million and the buildings $80 million. The land and buildings were revalued on 1 October 20X7 on the basis of open market values at $120 million in total. This was made up of $20 million attributed to the land and $100 million to the buildings. The building's original estimated life of 50 years (with a nil residual value) has not changed. From the date of the revaluation there were 40 years of life remaining. The directors wish to include the revalued amounts (including the depreciation effects) in the financial statements for the year to 30 September 20X8. Plant and equipment is depreciated at 15% per annum on the reducing balance.

(2) Factoring of trade receivables

The trade receivables figure in the trial balance of $25.5 million is a net figure after $10 million of trade receivables were sold for $9.5 million to Dahlia Financing on 30 September 20X8. The $9.5 million was paid into the bank on the same date. The difference of $500,000 has been charged to administration as a financing cost. Wooster will have to refund Dahlia Financing any amounts relating to trade receivables that remain uncollected by Dahlia Financing after a period of six months.



(3) Lease rentals

A lease rental of $800,000 was paid on 30 September 20X8. It is the first of five annual payments in arrears for the rental of an item of equipment that has a cash purchase price of $3m. The auditors have advised that this is a finance lease and have calculated that the implicit interest rate in the lease is 10% per annum.

(4) Tax

A provision for profits tax for the year to 30 September 20X8 of $9 million is required.

(5) Dividends and debenture interest

The company has paid an interim ordinary dividend and half of the annual debenture interest. The average annual dividend yield (interim plus final) for companies in Wooster's market sector is 6%. The yield is calculated as the net dividend expressed as a percentage of the market price of the share. The current market price of Wooster's equity shares is $2.25. The company is to declare a final dividend that will give Wooster’s equity shareholders a dividend yield equal to the average for the sector. The dividend will be declared prior to the year-end, and should be included in the financial statements.

Required:

(a) The income statement of Wooster for the year to 30 September 20X8 reflecting the

adjustments required by Notes (1) to (5) above. (9 marks) (b) A statement of financial position as at 30 September 20X8. (16 marks) Note: Ignore deferred tax and the notes to the financial statements. (Total: 25 marks)


Final Assessment

QUESTION 3 The following accounts have been prepared for Ashmansworth for the year ended 30 June 20X8. Income statement for the year ended 30 June 20X8

$000

Revenue 2,553 Cost of sales (1,814)_____

Gross profit 739 Distribution costs (125) Administration costs (284)_____

Profit from operations 330 Finance cost (50)_____

Profit before tax 280 Tax (120)_____

Net profit/loss for the year 160 _____ Statement of financial position as at 30 June 20X8

30 June 20X8

30 June 20X7

$000 $000

ASSETS Non-current assets Property, plant and equipment 380 305 Intangible assets 250 _____ 225 ___ 630 _____ 530 ___ Current assets Inventories 150 102 Trade and other receivables 390 315 Cash and cash equivalents 52 _____ 1 ___ 592 _____ 418 ___ Total assets 1,222 _____ 948 ___ EQUITY AND LIABILITIES Capital and reserves Ordinary share capital 200 150 Share premium 160 150 Revaluation reserve 100 91 Retained earnings 160 _____ 100 ___ 620 _____ 491 ___



30 June 20X8

30 June 20X7

$000 $000

Non-current liabilities Interest-bearing borrowings 100 _____ − ___ 100 _____ − ___ Current liabilities Trade and other payables 197 169 Bank overdraft 185 178 Tax creditor 120 _____ 110 ___ 502 _____ 457 ___ 1,222 _____ 948 ___

The following information is available. (1) Fixtures and fittings, with an original cost of $85,000 and a net book value of $45,000,

were sold for $32,000 during the year. (2) The following information relates to property, plant and equipment.

30 June 20X8

30 June 20X7

$000 $000

Cost/valuation 720 595 Accumulated depreciation ( 340)___ ( 290)___ Net book value 380 ___ 305 ___

Required: (a) Prepare a statement of cash flows for Ashmansworth for the year ended 30 June

20X8. (15 marks) (b) Calculate, explain the meaning of and suggest reasons for the change in the following

ratios for Ashmansworth:

(i) Current ratio. (ii) Debt/equity. (10 marks)

(Total: 25 marks)


Final Assessment

QUESTION 4 Swanky Barnett is a national chain of hair and beauty salons. Material items that have arisen in finalising the accounts for the year ended 31 March 20X5 are as follows: (1) During March a customer had started legal proceedings against the company. An

experimental dye technique had changed the customer’s hair from blonde to green and he is suing for mental distress and loss of earnings, as he had to take time off work whilst his natural hair colour grew back. The legal team have advised that there is a case to answer and that there is a 60% chance that the full claim of $1million will be payable. There is no provision currently within the accounts.

(2) Swanky Barnett has developed a new facial care product that has been in successful

production for the past three years. The costs of developing this product have been capitalised on the balance sheet and amortised since commercial production started. The current carrying value for these development costs is $4.3 million with an expected remaining life of five years. Since the year-end there has been a flurry of copycat products such that the demand for 'Swanky Face' has dropped to loss- making levels, so a provision of $3 million has been recorded in the accounts to cover the future losses.

(3) Due to problems with hygiene and staffing, management have decided to close the

ear piercing division of the company with effect from June 20X5. This was announced in February to the workforce and a plan is in place to retrain staff where possible and sell off specific assets. A restructuring provision has been put in place to cover all the restructuring costs for $1.5 million. No further disclosures regarding the closure have been made in the accounts.

Required: Draft a memorandum explaining the accounting treatment of these issues, providing calculations where appropriate and indicating the disclosure and presentation requirements for the above items. (15 marks)



QUESTION 5 (a) IAS 12 Income Taxes associates deferred taxation with ‘timing differences’. Required: Explain the meaning of the term ‘timing differences’ and give two examples of timing

differences. (4 marks) (b) In the year ended 31 December 20X7, Chantelle, a publicly listed company,

estimates the current tax liability as $802,000, payable nine months after the year-end. Accelerated capital allowances are $800,000, and there are no other timing differences.

In the year ended 31 December 20X8, the previous year’s liability is settled at

$821,000. The current tax liability is estimated at $1.2 million. Accelerated capital allowances are now $900,000. Again, there are no other timing differences.

Chantelle pays tax at a rate of 30%. Required: Prepare extracts in respect of taxation from the income statement for the year ended

31 December 20X8 and the statement of financial position at 31 December 20X8. (6 marks) (Total: 10 marks)


acca f7 (int) final assessment - questions (d08)

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