f7intfr study question bank sample d14 j15

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STUDY QUESTION BANK

December 2014–June 2015 Edition

ACCAPaper F7 | FINANCIAL REPORTING

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©2014 DeVry/Becker Educational Development Corp. All rights reserved. (i)

ACCA

PAPER F7

FINANCIAL REPORTING (INTERNATIONAL)

STUDY QUESTION BANK

For Examinations to June 2015

®

Sample

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STUDY QUESTION BANK – FINANCIAL REPORTING (F7)

©2014 DeVry/Becker Educational Development Corp. All rights reserved. (iii)

CONTENTS Question Page Answer Marks Date worked INTERNATIONAL FINANCIAL REPORTING STANDARDS

1 IASB (ACCA J98) 1 1001 12 CONCEPTUAL FRAMEWORK

2 Nette (ACCA J04) 1 1002 6 3 Limitations 1 1003 8 4 Framework 1 1004 8 5 Regulatory Framework 2 1004 5 6 Four Concepts (ACCA D98) 2 1005 16 7 Comparability (ACCA J04) 2 1006 8 ACCOUNTING FOR SUBSTANCE

8 Substance over form 2 1007 12 9 Hughes and Custom cars 3 1008 8 IAS 1 PRESENTATION OF FINANCIAL STATEMENTS

10 Objectives (ACCA Pilot Paper 97) 3 1009 20 11 Mercury 4 1010 22 12 Sulphur 5 1012 17 13 Cayman 6 1014 26 14 Oscar 8 1016 18 IAS 8 ACCOUNTING POLICIES

15 Perseus (ACCA J01) 9 1018 20 IAS 18 REVENUE

16 Jenson 10 1020 25 IAS 2 INVENTORY

17 Allrights Inc 11 1023 8 18 Sampi (ACCA J98) 12 1023 13 IAS 11 CONSTRUCTION CONTRACTS

19 William 13 1025 12 20 Merryview 13 1026 15 IAS 16 PROPERTY, PLANT AND EQUIPMENT

21 Adjustments 14 1028 15 22 Fam 14 1030 14 23 Stoat (ACCA D99) 15 1032 20 IAS 23 BORROWING COSTS

24 Dawes (ACCA D97) 16 1033 6

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FINANCIAL REPORTING (F7) – STUDY QUESTION BANK

(iv) ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Question Page Answer Marks Date worked IAS 20 GOVERNMENT GRANTS

25 Sponger 16 1033 12 IAS 40 INVESTMENT PROPERTY

26 Monet 17 1035 13 IAS 38 INTANGIBLE ASSETS

27 Intellectual Individuals 18 1037 15 28 Lamond (ACCA D00) 19 1039 20 IFRS 5 HELD FOR SALE ASSETS AND DISCONTINUED OPERATIONS

29 Davis 19 1040 6 IAS 36 IMPAIRMENT OF ASSETS

30 Justin (ACCA D99) 20 1041 8 IAS 17 LEASES

31 XYZ 21 1042 9 32 Snow 21 1044 15 IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

33 Rovers (ACCA J97) 22 1046 9 IAS 10 EVENTS AFTER THE REPORTING PERIOD

34 Earley 22 1047 13 35 Accounting treatment 23 1048 12 IAS 12 INCOME TAXES

36 Shep (I) 24 1049 37 Shep (II) 25 1050 38 Shep (III) 26 1051 39 Shep (IV) 26 1052 40 Broken dreams 27 1052 8 FINANCIAL INSTRUMENTS

41 Simpkins 27 1053 10 42 Iota 29 1055 10 REGULATORY FRAMEWORK

43 Danny 30 1056 5 44 Picant 30 1056 4 BASIC PRINCIPLES – CONSOLIDATED STATEMENT OF FINANCIAL POSITION

45 Consolidations 30 1057 19 46 Haggis 33 1061 12

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©2014 DeVry/Becker Educational Development Corp. All rights reserved. (v)

Question Page Answer Marks Date worked INTER-COMPANY ADJUSTMENTS

47 Hatton 34 1063 12 48 Hammer 36 1065 12 49 Hat 37 1067 15 FURTHER CONSOLIDATION ADJUSTMENTS

50 Hut 38 1070 13 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

51 Honey 39 1072 12 52 Humphrey 40 1073 10 53 High 41 1075 10 54 Happy 42 1077 13 IAS 28 INVESTMENTS IN ASSOCIATES

55 Haley 43 1079 10 56 Hamish 44 1081 10 57 Hydrogen 45 1082 16 ANALYSIS AND INTERPRETATION

58 Witton Way 46 1084 20 59 Rapido 47 1086 18 60 Not-for-profit 48 1089 10 IAS 7 STATEMENT OF CASH FLOWS

61 Standard 49 1090 20 62 Fallen 50 1093 20 IAS 33 EARNINGS PER SHARE

63 Earnings per share 51 1095 14 FURTHER PRACTICE QUESTIONS 64 Angelino (ACCA D06) – Substance over form 54 1098 25 65 Fresno (ACCA J94) – Accounts preparation 55 1101 10 66 Wellmay (ACCA J07) – Accounts preparation 56 1102 25 67 Candel (ACCA D08) – Accounts preparation 59 1105 25 68 Dune (ACCA J10 adapted) – Accounts preparation 61 1107 15 69 Torrent (ACCA J06) – IAS 11 63 1109 12 70 Shiplake (ACCA J02) – IAS 36 63 1110 15 71 Highveldt (ACCA J05) – Group accounts 65 1111 25 72 Hedra (ACCA D05) – Group accounts 66 1114 25 73 Picant (ACCA J10) – Group accounts 68 1117 21 74 Minster (ACCA D06) – IAS 7 70 1120 25 75 Mocha (ACCA D11) – IAS 7 72 1124 25

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(vi) ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

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©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1

Question 1 IASB

Required:

(a) State the objectives of the International Accounting Standards Board (IASB). (4 marks)

(b) Explain how the IASB approaches the task of producing a standard, with particular reference to the way in which comment or feedback from interested parties is obtained.

(8 marks)

(12 marks)

Question 2 NETTE

Nette, a public limited company, manufactures mining equipment and extracts natural gas. The directors are uncertain about the role of the IASB’s Conceptual Framework for Financial Reporting (the “Framework”) in corporate reporting. Their view is that accounting is based on the transactions carried out by the company and these transactions are allocated to the company’s accounting period by using the matching and prudence concepts. The argument put forward by the directors is that the Framework does not take into account the business and legal constraints within which companies operate.

Required:

Explain the importance of the “Framework” to the reporting of corporate performance and whether it takes into account the business and legal constraints placed upon companies.

(6 marks)

Question 3 LIMITATIONS

Financial statements identify position, performance and changes in position over a period of time. The main statements include Statement of Financial Position, Statement of Comprehensive Income and Statement of Cash Flows. These statements are intended to show how well a company has performed and give an indication of the value of the business. However, many accountants feel that the financial statements are limited in their value to the users of financial statements.

Required:

Identify and discuss the limitations of financial statements. (8 marks)

Question 4 THE FRAMEWORK

(a) State the main purpose of the Conceptual Framework for Financial Reporting (“The Framework”) adopted by the International Accounting Standards Board (IASB). (4 marks)

(b) Explain the status of “The Framework”. (2 marks)

(c) State the underlying assumption of financial statements identified by “The Framework”. (2 marks)

(8 marks)

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2 ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Question 5 REGULATORY FRAMEWORK

Required:

Briefly explain what a regulatory framework is and discuss the reasons why there is a need for a regulatory framework in financial reporting.

(5 marks)

Question 6 FOUR CONCEPTS

Required:

Define the following accounting concepts and explain for each their implications for the preparation of financial statements:

(a) The entity concept (4 marks) (b) Going concern (4 marks) (c) Materiality (4 marks) (d) Fair presentation (true and fair view) (4 marks)

(16 marks)

Question 7 COMPARABILITY

Comparability is an enhancing qualitative characteristic which adds to the usefulness of financial statements.

Required:

(a) Explain what is meant by the term “comparability” in financial statements, referring to TWO types of comparison that users of financial statements may make. (4 marks)

(b) Explain TWO ways in which the IASB’s Conceptual Framework for Financial Reporting and the requirements of accounting standards aid the comparability of financial information. (4 marks)

(8 marks)

Question 8 SUBSTANCE OVER FORM

“The accounting treatment and disclosure of the vast majority of transactions will remain the same whether they are accounted for on the basis of ‘substance’ or ‘form’. However, some transactions will have a commercial effect not fully indicated by their legal form, and where this is the case, it will not be sufficient to account for them merely by recording that form.”

Required:

Discuss the proposal that accounts should always reflect the commercial substance of transactions. (12 marks)

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Question 9 HUGHES AND CUSTOM CARS

(a) On 10 December 2012, Hughes sold inventory with a production cost of $30 million to the Wodwo Bank for $36 million cash. Hughes has a call option (an option to repurchase) on the goods exercisable on 10 January 2013 at a price of $37.8 million. The Wodwo Bank has a put option (an option to resell to the seller) exercisable on 10 February 2013 at a price of $39.7 million.

Required:

Discuss how the transaction should be accounted for in the accounts of Hughes at 31 December 2012. (4 marks)

(b) Custom Cars customises standard sports cars purchased from a major manufacturer, Sigma, by fitting extras (spoilers, skirts, tinted windows, etc) at its workshop premises. It sells them from its showroom on the same site, which it owns. During the year, the showroom was renovated and enlarged by means of an extension to the existing building. Sigma contributed many of the interior fitments, such as display stands for the cars, free of charge and also made a cash payment toward the total costs.

Required:

Discuss whether or not the extension and fittings should be shown in the statement of financial position of Custom Cars. (4 marks)

(8 marks)

Question 10 OBJECTIVES

The objective of financial statements is to provide information about financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

Required:

(a) State five potential users of company published financial statements, briefly explaining for each one their likely information needs from those statements. (10 marks)

(b) Briefly discuss whether you think that the company published financial statements, prepared in accordance with IFRS, achieve the objective stated above, giving your reasons.

Include in your answer two ways in which you think the quality of the information disclosed in financial statements could be improved. (10 marks)

(20 marks) Sample



Question 11 MERCURY

The trial balance of Mercury at 30 June 2013 was as follows: Dr Cr $000 $000 7% Preferred shares of $1 500 Ordinary shares of 50 cents 250 Share premium account 180 Retained earnings, at 1 July 2012 70 Inventory, 1 July 2012 450 Land at cost 300 Buildings at cost 900 Buildings, accumulated depreciation, 1 July 2012 135 Plant at cost 1,020 Plant, accumulated depreciation, 1 July 2012 370 Trade payables 900 Trade receivables 600 Allowance for doubtful debts, at 1 July 2012 25 Purchases 2,030 Administrative expenses 205 Revenue 3,000 Distribution costs 240 Other expenses 50 Bank balance 110 Ordinary dividend paid 25 10% Loan notes 500 _____ _____

5,930 5,930 –––––

–––––

You are provided with the following additional information:

(i) Depreciation on buildings is to be provided at 5% per year on cost and allocated to administrative expenses.

(ii) Plant is to be depreciated at 20% per year using the reducing balance method and included in distribution costs.

(iii) Closing inventory is valued at $500,000.

(iv) The allowance for doubtful debts is to be maintained at 5% of trade accounts receivable balances.

(v) An accrual for distribution wages of $30,000 is required.

(vi) Interest on the loan notes has not been paid during the year.

(vii) During June, a bonus (or scrip) issue of two for five was made to ordinary shareholders. This has not been entered into the books. The bonus shares do not rank for dividend for the current financial year.

(viii) Provisions are to be made for the following:

the preferred dividend for the year; an income tax charge of $55,000 for the year.

Sample



Required:

Prepare for Mercury for the year ended 30 June 2013, in accordance with IAS 1 Presentation of Financial Statements:

(a) a statement of profit or loss; and (8 marks) (b) a statement of changes in equity; and (5 marks) (c) a statement of financial position. (9 marks)

Notes to the accounts are NOT required. (22 marks)

Question 12 SULPHUR

The balances listed below were extracted from the records of Sulphur Co on 30 June 2013:

$ Revenue 530,650 Purchases 298,400 Returns (inwards) 1,880 Delivery vehicles (carrying amount) 19,230 Factory plant and equipment (carrying amount) 24,000 Land and buildings (carrying amount) 350,000 Factory overheads 66,420 Administrative expenses 18,710 Rent received 12,000 Investments (unlisted) 30,000 Investment income 1,500 Inventory at 1 July 2012 24,680 Trade receivables 15,690 Trade payables 34,700 Distribution costs 44,280 Cash in hand 410 Bank overdraft 4,820 Ordinary shares ($1 each) 150,000 Retained earnings at 1 July 2012 160,030

The following transactions and events occurred on 30 June 2013, after the above balances had been extracted:

(1) Sulphur received $460 from a customer.

(2) Inventory was valued at $29,170 at the close of business.

(3) Sulphur received an electricity bill for $1,240 relating to the factory for the three months to 30 June 2013. The bill was paid in July 2013.

(4) Sulphur paid $690 to a supplier in full settlement of an invoice for $700.

(5) The company’s land and buildings were valued by a chartered surveyor at $390,000 and the new value is to be included in the statement of financial position.

(6) Depreciation was provided on the reducing balance basis at the following annual rates:

Delivery vehicles 20% Factory plant and equipment 10%

(7) Bonus shares were issued on the basis of one for every two held on 29 June 2013.

(8) Income tax for the financial year ended 30 June 2013 was estimated at $38,100.

Sample



Required:

Prepare for Sulphur for the year ended 30 June 2013, in accordance with IAS 1 Presentation of Financial Statements:

(i) a statement of total comprehensive income using the “cost of sales” (i.e. function of expense) method; (7 marks)

(ii) a statement of changes in equity; and (3 marks)

(iii) a statement of financial position. (7 marks)

Notes to the financial statements are NOT required. (17 marks)

Question 13 CAYMAN

Cayman prepares annual financial statements to 30 September. At 30 September 2012, the company’s list of account balances was as follows:

$000 $000

Revenue 7,400 Production costs 4,140 Inventory at 1 October 2011 695 Distribution costs 540 Administrative expenses 730 Loan interest expense 120 Land at valuation 5,250 Buildings – cost 4,000 – accumulated depreciation at 1 October 2011 1,065 Plant and equipment – cost 6,400 – accumulated depreciation at 1 October 2011 1,240 Trade accounts receivable 2,060 Trade accounts payable 1,120 Bank overdraft 40 Issued shares (50 cent ordinary) at 30 September 2012 7,000 Share premium account at 30 September 2012 2,000 Revaluation surplus 1,500 Retained earnings 1,570 12% loan (payable 2019) 1,000 ______ ______

23,935 23,935 ––––––

––––––

Sample



The following matters are relevant to the preparation of the financial statements for the year ended 30 September 2012:

(1) Inventory at 30 September 2012 amounted to $780,000 at cost before adjusting for the following:

(i) Items which had cost $40,000 and which would normally sell for $60,000 were found to be faulty. $10,000 needs to be spent on these items in order to sell them for $45,000.

(ii) Goods sent to a customer on a sale or return basis have been omitted from inventory and included as sales in September 2012. The cost of these items was $8,000 and they were included in revenue at $12,000. The goods were returned by the customer in October 2012.

(2) Depreciation is to be provided on cost as follows:

Buildings: 2% per year Plant and equipment: 20% per year

80% of the depreciation is to be charged to cost of sales and 10% to each of distribution costs and administrative expenses.

(3) Land is to be revalued to $5,000,000.

(4) Accrued expenses and prepayments were: Accrued expenses Prepayments

$000 $000

Distribution costs 95 60 Administrative expenses 35 30

(5) During the year 4 million ordinary shares were issued at 75 cents each. The directors of Cayman declared an interim dividend of 2 cents per share in September 2012. No dividends were paid during the year.

(6) Loan interest is paid annually, in arrears, on 30 September each year.

Required:

Prepare for Cayman for the year ended 30 September 2012:

(i) a statement of total comprehensive income; (10 marks) (ii) a statement of financial position; and (10 marks) (iii) a statement of changes in equity, (6 marks)

in accordance with IAS 1 Presentation of Financial Statements.

Notes to the financial statements are NOT required. (26 marks) Sam

ple



Question 14 OSCAR

A trial balance has been extracted from the books of account of Oscar as at 31 March 2013 as follows:

$000 $000 Administrative expenses 210 Share capital (ordinary shares of $1 fully paid) 600 Receivables 470 Bank overdraft 80 Income tax (overprovision in 2012) 25 Provision for pollution costs 180 Distribution costs 420 Listed financial asset investments 560 Investment income 75 Plant and machinery: Cost 750 Accumulated depreciation (at 31 March 2013) 220 Retained earnings (at 1 April 2012) 180 Purchases 960 Inventory (at 1 April 2012) 140 Trade payables 260 Sales revenue 2,010 Interim dividend paid 120 ——— ——— 3,630 3,630 ——— ——— Additional information

(1) Inventory at 31 March 2013 was valued at $150,000.

(2) The following items are already included in the balances listed in the above trial balance:

Distribution Administrative costs expenses $000 $000 Depreciation (for the year to 31 March 2013) 27 5 Hire of plant and machinery 20 15 Auditors’ remuneration – 30 Directors’ emoluments – 45

(3) The income tax rate is 33%.

(4) The income tax charge based on the profits for the year is estimated to be $74,000.

(5) The provision for pollution costs is to be increased by $16,000.

(6) Authorised ordinary share capital consists of 1,000,000 ordinary shares of $1 each.

(7) There were no purchases or disposals of fixed assets during the year.

(8) The market value of the listed financial asset investments, which are classed as “fair value through profit or loss” as at 31 March 2013 was $580,000. There were no purchases or sales of such investments during the year.

Required:

Insofar as the information permits, prepare the company’s statement of profit or loss for the year to 31 March 2012 and a statement of financial position as at that date in accordance with IAS 1.

(18 marks)

Sample



Question 15 PERSEUS

The list of account balances of Perseus, a limited liability company, contains the following items at 31 December 2012:

Dr Cr $ $ Opening inventory 3,850,000 Accounts receivable ledger balances 2,980,000 1,970 Accounts payable ledger balances 14,300 1,210,400 Prepayments 770,000 Cash at bank A 940,000 Overdraft at bank B 360,000

The closing inventory amounted to $4,190,000, before allowing for the adjustments required by items (2) and (3) below.

In the course of preparing the financial statements at 31 December 2012, the need for a number of adjustments emerged, as detailed below:

(1) The opening inventory was found to have been overstated by $418,000 as a result of errors in calculations of values in the inventory sheets.

(2) Some items included in closing inventory at cost of $16,000 were found to be defective and were sold after the end of the reporting period for $10,400. Selling costs amounted to $600.

(3) Goods with a sales value of $88,000 were in the hands of customers at 31 December 2012 on a sale or return basis. The goods had been treated as sold in the records and the full sales value of $88,000 had been included in trade receivables. After the end of the reporting period, the goods were returned in good condition. The cost of the goods was $66,000.

(4) Accounts receivable amounting to $92,000 are to be written off.

(5) An allowance for doubtful debts is to be set up for 5% of the accounts receivable total.

(6) The manager of the main selling outlet of Perseus is entitled, from 1 January 2012, to a commission of 2% of the company’s profit after charging that commission. The profit amounted to $1,101,600 before including the commission, and after adjusting for items (1) to (5) above. The manager has already received $25,000 on account of the commission due during the year ended 31 December 2012.

Required:

(a) (i) Explain how adjustment should be made for the error in the opening inventory, according to IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. (Assume that it constitutes a material error.)

(ii) State two disclosures required by IAS 8 in the financial statements at 31 December 2012 for the adjustment in (i) above. (6 marks)

(b) Show how the final figures for current assets should be presented in the statement of financial position at 31 December 2012. (14 marks)

(20 marks)

Sample



Question 16 JENSON

The timing of revenue (income) recognition has long been an area of debate and inconsistency in accounting. Industry practice in relation to revenue recognition varies widely; the following are examples of different points in the operating cycle of businesses that revenue and profit can be recognised:

on the acquisition of goods; during the manufacture or production of goods; on delivery/acceptance of goods; when certain conditions have been satisfied after the goods have been delivered; receipt of payment for credit sales; on the expiry of a guarantee or warranty.

In the past the “critical event” approach has been used to determine the timing of revenue recognition. The International Accounting Standards Board in its Conceptual Framework for Financial Reporting (“the Framework”) has defined the “elements” of financial statements, and it uses these to determine when a gain or loss occurs.

Required:

(a) Explain what is meant by the critical event in relation to revenue recognition and discuss the criteria used in the Framework for determining when a gain or loss arises. (5 marks)

(b) For each of the stages of the operating cycle identified above, explain why it may be an appropriate point to recognise revenue and, where possible, give a practical example of an industry where it occurs. (12 marks)

(c) Jenson has entered into the following transactions/agreements in the year to 31 March 2013:

(i) Goods, which had cost of $20,000, were sold to Wholesaler for $35,000 on 1 June 2012. Jenson has an option to repurchase the goods from Wholesaler at any time within the next two years. The repurchase price will be $35,000 plus interest charged at 12% per year from the date of sale to the date of repurchase. It is expected that Jenson will repurchase the goods.

(ii) Jenson owns the rights to a fast food franchise. On 1 April 2012 it sold the right to open a new outlet to Mr Cody. The franchise is for five years. Jenson received an initial fee of $50,000 for the first year and will receive $5,000 per year thereafter. Jenson has continuing service obligations on its franchise for advertising and product development that amount to approximately $8,000 per year per franchised outlet. A reasonable profit margin on rendering the continuing services is deemed to be 20% of revenues received.

(iii) On 1 September 2012 Jenson received total subscriptions in advance of $240,000. The subscriptions are for 24 monthly publications of a magazine produced by Jenson. At the year end Jenson had produced and despatched six of the 24 publications. The total cost of producing the magazine is estimated at $192,000 with each publication costing a broadly similar amount.

Required:

Describe how Jenson should treat each of the above examples in its financial statements in the year to 31 March 2013. (8 marks)

(25 marks)

Sample



Question 17 ALLRIGHTS

Allrights is an old established company operating in the highly competitive business of manufacturing and marketing radios and television sets.

A new board of directors is considering the draft accounts, prepared under the historical cost convention, for the year ended 31 March 2013. The main executive directors involved in the policy discussions are:

– Stevie Striver (managing) – Charlie Chatty (sales) – Gordon Gloome (production) You are in attendance to give advice. A standard model radio has the following disclosed costs: $ Direct labour and material 38 Bought-in components 5 Factory overhead costs 8 Royalty on sale payable to the owner of a patent 2 For 1,000 radio sets, the other overhead costs are $14,000 made up as follows: $ Salary and space costs of executive responsible for production planning 4,000 General office administration 2,500 Selling and distribution costs, including a fixed $4 per set commission payable to salesmen 7,500 The advertised selling price of the model has recently been reduced to $60 because of intensive competition. The three directors have expressed the following views on the most appropriate method of valuing the company’s closing inventories: (1) Stevie Striver

“A most prudent approach is necessary, particularly as the company has a cash flow problem which means that the amount locked up in inventory should be kept as low as possible. I propose a valuation of $43 per set.”

(2) Charlie Chatty

“All the functions of the company are directed towards the production and sale of a good finished product and therefore I think each set should be valued at the total cost involved, including the other overhead costs.”

(3) Gordon Gloome

“$47 per set, because that’s what the production cost would have been if we had been more efficient and kept in line with budgets.”

Required:

Draft, for inclusion in a report, your opinions on the views expressed by each director, stating the principles involved.

(8 marks)

Sample



Question 18 SAMPI

(a) IAS 2 Inventories requires inventories of raw materials and finished goods to be valued in financial statements at the lower of cost and of net realisable value.

Required:

(i) Describe three methods of arriving at cost of inventory which are acceptable under IAS 2 and explain how they are regarded as acceptable. (5 marks)

(ii) Explain how the cost of an inventory of finished goods held by the manufacturer would normally be arrived at when obtaining the figure for the financial statements. (3 marks)

(b) Sampi is a manufacturer of garden furniture. The company has consistently used FIFO (first in, first out) in valuing inventory, but it is interested to know the effect on its inventory valuation of using weighted average cost instead of FIFO

At 28 February 2013 the company had inventory of 4,000 standard plastic tables, and has computed its value on each side of the two bases as:

Basis Unit Total cost value $ $ FIFO 16 64,000 Weighted average 13 52,000

During March 2013 the movements on the inventory of tables were as follows:

Received from factory: Production Number cost per Date of units unit $ 8 March 3,800 15 22 March 6,000 18

Revenue: Number of units 12 March 5,000 18 March 2,000 24 March 3,000 28 March 2,000

On a FIFO basis the inventory at 31 March was $32,400.

Required:

Compute what the value of the inventory at 31 March 2013 would be using weighted average cost (5 marks)

In arriving at the total inventory values you should make calculations to two decimal places (where necessary) and deal with each inventory movement in date order.

(13 marks)

Sample



Question 19 WILLIAM

William, a company which designs and builds racecourses, commenced a four year contract early in 2009. The price was initially agreed at $12,000,000. Profit, which was reasonably foreseeable from the year ended 31 December 2009, is to be taken on a costs basis, and revenue is to be taken on a consistent basis. Relevant figures are as follows: 2009 2010 2011 2012 $000 $000 $000 $000 Costs incurred in year 2,750 3,000 4,200 1,150 Anticipated future costs 7,750 7,750 1,550 – Work certified and invoiced to date 3,000 5,000 11,000 12,500 Required:

Show how the above would be disclosed in the statement of profit or loss and statement of financial position of William for each of the four years ended 31 December 2012. (12 marks) Question 20 MERRYVIEW

Merryview specialises in construction contracts. One of its contracts, with Better Homes, is to build a complex of luxury flats. The price agreed for the contract is $40 million and its scheduled date of completion is 31 December 2013. Details of the contract to 31 March 2012 are:

Commencement date 1 July 2011 Contract costs: $000 Architects’ and surveyors’ fees 500 Materials delivered to site 3,100 Direct labour costs 3,500 Overheads are apportioned at 40% of direct labour costs Estimated cost to complete (excluding depreciation – see below) 14,800

Plant and machinery used exclusively on the contract cost $3,600,000 on 1 July 2011. At the end of the contract it is expected to be transferred to a different contract at a value of $600,000. Depreciation is to be based on a time apportioned basis.

Inventory of materials on site at 31 March 2012 is $300,000.

Better Homes paid a progress payment of $12,800,000 to Merryview on 31 March 2012.

At 31 March 2013 the details for the construction contract have been summarised as:

Contract costs to date (i.e. since the start of the contract) excluding all depreciation 20,400 Estimated cost to complete (excluding depreciation) 6,600

A further progress payment of $16,200,000 was received on 31 March 2013.

Merryview accrues profit on its construction contracts using the percentage of completion basis as measured by the percentage of the cost to date compared to the total estimated contract cost.

Sample



Required:

Prepare extracts of the financial statements of Merryview for the construction contract with Better Homes for:

(i) the year to 31 March 2012; (8 marks) (ii) the year to 31 March 2013. (7 marks)

(15 marks)

Question 21 ADJUSTMENTS

Adjustments manufactures items for use in engineering products. You note that amongst its many tangible non-current assets it has the following:

(a) A lathe was purchased on 1 January 2006 for $150,000. The plant had an estimated useful life of twelve years, residual value of nil. Depreciation is charged on the straight line basis. On 1 January 2012, when the asset’s carrying amount is $75,000, the directors decide that the asset’s total useful life is only 10 years.

(b) A grinder was purchased on 1 January 2009 for $100,000. The plant had an estimated useful

life of 10 years and a residual value of Nil. Depreciation is charged on the straight line basis. On 1 January 2012, when the asset’s carrying amount is $70,000, the directors decide that it would be more appropriate to depreciate this asset using the sum of digits approach. The remaining useful life is unchanged.

(c) The company purchased a fifty year lease some years ago for $1,000,000. This was being

depreciated over its life on a straight line basis. On 1 January 2012, when the carrying amount is $480,000 and twenty-four years of the lease are remaining, the asset is revalued to $1,500,000. This revised value is being incorporated into the accounts.

Required:

As the company’s financial accountant, prepare a memorandum for the attention of the board explaining the effects of these changes on the depreciation charge and indicating what additional disclosures need to be made in the accounts for the year to 31 December 2012.

(15 marks) Question 22 FAM

Fam had the following tangible non-current assets at 31 December 2011:

Cost Depreciation Carrying amount $000 $000 $000 Land 500 – 500 Buildings 400 80 320 Plant and machinery 1,613 458 1,155 Fixtures and fittings 390 140 250 Assets under construction 91 – 91 ——— —— ——— 2,994 678 2,316 ——— —— ———

Sample



In the year ended 31 December 2012 the following transactions occur: (1) Further costs of $53,000 are incurred on buildings being constructed by the company. A

building costing $100,000 is completed during the year. (2) A deposit of $20,000 is paid for a new computer system which is undelivered at the year end. (3) Additions to plant are $154,000. (4) Additions to fixtures, excluding the deposit on the new computer system, are $40,000. (5) The following assets are sold: Cost Depreciation Proceeds brought forward $000 $000 $000 Plant 277 195 86 Fixtures 41 31 2 (6) Land and buildings were revalued at 1 January 2012 to $1,500,000, of which land is worth

$900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on the basis of existing use value on the open market.

(7) The useful economic life of the buildings is unchanged. The buildings were purchased 10

years before the revaluation. (8) Depreciation is provided on all assets in use at the year end at the following rates: Buildings 2% per year straight line Plant 20% per year straight line Fixtures 25% per year reducing balance Required:

Show the disclosure under IAS 16 in relation to non-current assets in the notes to the published accounts for the year ended 31 December 2012.

(14 marks) Question 23 STOAT

The directors of Stoat, a limited liability company, are reviewing the company’s draft financial statements for the year ended 30 June 2013.

Two matters under discussion are depreciation and non-current asset valuation – several directors are of the opinion that the company’s depreciation methods and rates are unsatisfactory, and that the statement of financial position values of some of the non-current assets are unrealistic.

Required:

Draft a memorandum for the directors dealing with the following matters:

(a) The purpose of depreciation and the factors affecting the assessment of useful life according to IAS 16 “Property, Plant and Equipment”. (7 marks)

(b) Three items of evidence obtainable from inside or outside the company, to check whether the company’s depreciation rates are in fact likely to be too low. (3 marks)

Sample



Answer 1 IASB

(a) Objectives

To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their world-wide acceptance and observance.

To work generally for the improvement and harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements.

(b) Producing an IFRS

A Steering Committee is set up, chaired by a Board representative, and usually including representatives of at least three other countries.

The Steering Committee identifies and reviews all the accounting issues associated with the topic. These will include:

the application of the IASB Conceptual Framework for Financial Reporting; and

review of existing national and regional accounting requirements and practice.

The Steering Committee then submits a Point Outline to the Board.

After receiving comments from the Board, the Steering Committee prepares and publishes a Draft Statement of Principles. Comments are invited from all interested parties during an exposure period, usually between four and six months.

The next stage is the preparation of a final Statement of Principles, which is submitted to the Board by the Steering Committee. This final Statement is used as a basis for preparing an Exposure Draft of a proposed IFRS. The final Statement of Principles is available to the public on request, but is not formally published.

The Steering Committee prepares a draft Exposure Draft for approval by the Board. After revision, and with the approval of at least 9 members of the board, the Exposure Draft is published. Comments are invited from all interested parties during an exposure period, usually six months.

The Steering Committee reviews the comments and prepares a draft IFRS for review by the Board. After revision, and with the approval of at least 9 members of the board, the IFRS is published.

During the process, the Board may decide to issue a Discussion Paper for comment, or to issue more than one Exposure Draft. Sam

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Answer 2 NETTE

The Conceptual Framework for Financial Reporting provides a conceptual underpinning for the International Financial Reporting Standards (IFRS). The framework is in the process of being updated by the IASB and as at 2012 it is a mixture of the “old” framework document plus two new chapters that have been issued by the IASB as a replacement for sections of the old framework.

IFRS are based on the Framework and its aim is to provide a framework for the formulation of accounting standards. If accounting issues arise which are not covered by accounting standards then the Framework can provide a basis for the resolution of such issues. The Framework deals with several areas:

the objective of financial statements the underlying assumption the qualitative characteristics of useful financial information the elements of financial statements recognition in financial statements measurement in financial statements concepts of capital and capital maintenance

The Framework adopts an approach which builds corporate reporting around the definitions of assets and liabilities and the criteria for recognising and measuring them in the statement of financial position. This approach views accounting in a different way to most companies. The notion that the measurement and recognition of assets and liabilities is the starting point for the determination of the profit of the business does not sit easily with most practising accountants who see the transactions of the company as the basis for accounting. The Framework provides a useful basis for discussion and is an aid to academic thought. However, it seems to ignore the many legal and business roles that financial statements play. In many jurisdictions, the financial statements form the basis of dividend payments, the starting point for the assessment of taxation, and often the basis for executive remuneration. A statement of financial position, fair value system which the IASB seems to favour would have a major impact on the above elements, and would not currently fit the practice of accounting. Very few companies fit this practice of accounting. Very few companies take into account the principles embodied in the Framework unless those principles themselves are embodied in an accounting standard. Some International Financial Reporting Standards are inconsistent with the Framework primarily because they were issued earlier than the Framework. The Framework is a useful basis for financial reporting but a fundamental change in the current basis of financial reporting will be required for it to have any practical application. The IASB seems intent on ensuring that this change will take place.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors makes reference to the use of the Framework where there is no IFRS or IFRIC in issue. The standard says ‘in making the judgement, management shall refer to, and consider the applicability of, the following sources in descending order:

the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and

the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the framework.’ Sam

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Answer 3 LIMITATIONS

The following list includes some of the limitations of financial statements:

Nowadays, financial statements prepared under a financial reporting framework (e.g. IFRS) contain very complex and detailed information. Most users will not be able to fully understand what the financial statements are trying to communicate. For example, accounting for financial instruments encompasses detailed rules, which even accountants may struggle to understand.

Decision-making processes undertaken by management require timely information on matters that are not incorporated in financial statements. Therefore financial statements are of limited use to management.

The values used in financial statements are mixed in nature. Some transactions and balances are accounted for at historic cost whilst others are incorporated at fair value. Without detailed knowledge of how these figures have been determined, their meaning can be difficult to construe.

The financial statements are mainly historic in nature and summarise what has happened, not what is going to happen. They cannot be used to make predictions about the future.

Many items are excluded from the financial statements. For example, many internally-generated intangible assets (e.g. a brand name) can never be recognised in the statement of financial position of the reporting entity. The only way in which such assets can be recognised is if the entity is acquired, but even then they are recognised only in the consolidated statement of financial position of the acquiring company.

Management may be very creative in how information is presented in the financial statements. Much of the information which is required to be disclosed is subjective in nature and management may interpret the accounting requirements to portray information in a particular light. Enron is the “classic” example of management being creative and, in doing so, the financial statements not showing a realistic picture.

How the financial market perceives an entity cannot be recognised in the financial statements. The market value of a company is very different to the carrying value presented in the financial statements because market value reflects, for example, shareholders’ expectations of future returns.

It can be quite difficult to judge at what point revenue should be recognised. When complex contractual agreements are made between parties it may also be difficult to specify an appropriate amount of revenue to be included. Therefore the statement of comprehensive income may be inadequate in reflecting the amount of profit made in a period.

Financial statements are drawn up at a specified point in time. A cut-off therefore has to be established to be able to prepare the financial statements. The point of cut-off could be in the middle of a very detailed or complex transaction or related transactions which again the financial statements may not be able to reflect fully.

From the end of the reporting period to when the statements are authorised for publication is usually a minimum of three months. A lot can happen in that three-month period, so the statements become out of date very quickly.

Many transactions take place between related parties. Although certain disclosures should be made regarding related party transactions it is still difficult for the financial statements to fully reflect the impact of these transactions.

Sample



Answer 4 FRAMEWORK

(a) Main purpose

To assist the Board of IASCF in developing future International Financial Reporting Standards (IFRSs) and reviewing existing ones

To promote harmonisation of regulations by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs

To assist national standard-setting bodies in developing national standards

To assist preparers of accounts in applying IFRSs and in dealing with topics that have yet to be covered by an IFRS.

To assist auditors in forming an opinion on whether the accounts comply with IFRS.

To assist users of financial statements in the interpretation of information contained in those statements.

To provide those who are interested in the work of the IASB with information about its approach to the formulation of standards.

(b) Status

The Framework is not an IFRS hence it does not define standards.

Nothing in the framework overrides any specific IFRS.

In a limited number of cases where a conflict between the framework and an IFRS arises, the IFRS prevails.

(c) Underlying assumption

Going concern

Financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future.

Therefore is assumed that the enterprise has neither intention nor need to liquidate or curtail materially the scale of operations.

If such an intention or need exist, the financial statements may have to be prepared on a different basis (and the basis used is disclosed).

Answer 5 REGULATORY FRAMEWORK

A regulatory framework has been defined as “a system of regulations and the means to enforce them, usually established by a governing body to regulate a specific activity.” Without such a framework the system would fail to function properly and ad hoc rules and regulations would emerge which individuals and bodies would not be able to understand fully. There would be no direction or guidelines governing the content, or rules, that should be followed and parties would devise their own rules.

1 per point to max 4

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A regulatory framework is needed for financial reporting to ensure that all relevant parties understand exactly what should be reported by the entity, and how. The framework may be a set of rules and regulations detailing exactly what and to whom an entity should report or it may be a less formal framework providing guidance for reporting.

Company law and/or accounting standards can be issued to create Generally Accepted Accounting Practice (GAAP) for reporting entities to follow when preparing their financial statements. There is a need for some form of regulatory framework in financial reporting to ensure there is consistency in accounting treatments so that comparisons can be made between financial statements (e.g. year-on-year and between companies).

Under IFRS the IASB has issued the Conceptual Framework for Financial Reporting. This is a conceptual framework which is used by the IASB to assist relevant parties in the needs and requirements of users of financial statements. It is used in conjunction with International Financial Reporting Standards to form a set of principles with which reporting entities should comply when preparing and presenting their financial statements. The conceptual framework is not in itself a regulatory framework as there is no formal means of enforcing the issued standards, and as they are principles-based they are open to interpretation.

Other GAAPs have formed regulatory frameworks in order to regulate the financial reporting activities of their members. UK GAAP is formed of company law issued by the UK government and accounting standards issued by the Accounting Standards Board. The ASB has a body within it, the Financial Reporting Review Panel, whose function is to “police” the financial statements issued by UK companies. It aims to ensure that published financial statements are prepared in conformity with the UK regulatory framework.

Answer 6 FOUR CONCEPTS

(a) Entity concept

In accounting, it is necessary to define the boundaries of the entity concerned. In the case of a limited liability company, only transactions of that company must be included. There must be no confusion between the transactions of the company and the transactions of its owners and managers.

If the entity concept is not followed, the profit, financial position and cash flow may all be distorted to the point where they become meaningless.

A limited liability company is therefore a separate entity which can sue and be sued in its own name.

(b) Going concern concept

The going concern is that financial statements are prepared on the basis that the entity will continue for the foreseeable future – that there is no intention or necessity to liquidate or curtail the scale of operations.

If the going concern concept is followed when it is not appropriate, assets may be overstated, liabilities may continue to be shown as non-current when the collapse of the going concern status of the entity renders them current liabilities, and the profit is likely to be overstated.

(c) Materiality

Information is material if its omission from, or misstatement in, the financial statements could influence the economic decisions of users. Materiality cannot always be measured in monetary or percentage terms, but a commonly used measure is 5% of normal pre-tax profit. Above that level, for example, the transaction would need to be disclosed in the financial statements.

Sample



Materiality is not solely related to the size of a transaction; it would also be necessary to consider the nature of the transaction and the fact that the nature would give rise to an item being treated as material and require disclosure.

If the materiality concept is not followed, financial statements could become confused by the inclusion of unnecessary detail of trivial matters, or could be rendered misleading by the exclusion of reference to important matters.

(d) Fair presentation (true and fair view)

Fair presentation really means that all figures in financial statements have been arrived at accurately when accuracy is possible (true) and that when judgement or estimation is needed it has been exercised without bias (fair). Compliance with generally accepted concepts and principles will normally result in fair presentation.

Failure to present information fairly will obviously mean that users may be misled by the financial statements.

Answer 7 COMPARABILITY

(a) Meaning and types

Comparability means that users are able to draw conclusions about the performance or financial position of a business by relating amounts for a particular period to other relevant amounts. Possible types of comparison are with:

figures for the same business for earlier periods; figures for other businesses for the same period; budgets or forecasts.

Tutorial note: Two types only required for full marks.

(b) Aid to comparability

The IASB’s Framework and the requirements of accounting standards aid comparability by:

requiring the disclosure of accounting policies (IAS 1 Presentation of Financial Statements) and the effect of changes in them (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors);

reducing or eliminating the number of possible alternative treatments for similar items available to businesses;

requiring businesses to treat similar items in the same way in each period and from one period to the next (unless a change is required to comply with accounting standards or to ensure that a more appropriate presentation of events or transactions is provided). Sam

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Answer 8 SUBSTANCE OVER FORM

Preparing accounts on a substance over form basis means that they should reflect the commercial effect of transactions rather than their legal form. The arguments for and against this treatment are discussed below. Framework

The IASB’s Conceptual Framework for Financial Reporting notes that financial statements are frequently described as showing a “true and fair view” (as in the UK), or as “presenting fairly” the financial position (as in the US). Many other countries adopt similar requirements for financial statements, particularly in Europe where the requirements of directives state that all member states’ financial statements should give a true and fair view. This is, for example, translated as “donner une image fidele” in France. Some countries interpret this as meaning in accordance with their own legislation, particularly in Germany, but generally speaking, legislatures and accounting standard setters increasingly recognise an overriding notion of truth and fairness. One of the fundamental qualitative characteristics required by the Framework is that of “faithful representation”. To faithfully represent a transaction the entity must reflect the economic reality (substance) rather than its legal form, if there is a difference. It gives the example of an entity disposing of an asset in such a way that the documentation purports to pass legal ownership to a third party, but where agreements exist to ensure that the entity continues to enjoy the future economic benefits embodied in the assets. In such circumstances the reporting of a sale would not represent faithfully the transaction entered into. Application of the principle

IAS 17 Leases requires that finance leases be capitalised in the statement of financial position where certain conditions are met. In such cases the legal form of the transaction is that the lessor retains the legal title to the assets. The economic substance of the transaction however is that the lessee is the true “owner” of the asset as the lease transfers substantially all the risks and rewards incident to the ownership of the asset. The lessee therefore includes it in its financial statements. Not to do so would distort gearing ratios. IFRS 10 Consolidated Financial Statements requires that group accounts be prepared to show information about the group as that of a single entity, without regard for the legal boundaries of the separate legal entities. IAS 32 Financial Instruments: Presentation recognises that some financial instruments take the legal form of equity, but are liabilities in substances and requires that classification of an instrument is made on the basis of an assessment of its substance when it is first recognised. IAS 1 Presentation of Financial Statements states the importance of prudence, substance over form and materiality in the selection and application of accounting policies and the preparation of financial statements. Sam

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Other areas where the principle applies include the factoring of receivables and the sale and repurchase of inventories. Factored debts are “sold” to a third party in exchange for a proportion of the carrying amount of the debt. Such agreements vary considerably in their nature and some leave the entity with most of the risks associated with the collection of the receivables. In such circumstances it may be appropriate to keep the receivables on the face of the statement of financial position and recognise the cash received from the factor as a liability, rather than accounting for the transaction as a sale of the receivable.

Consistency, comparability and subjectivity

Another argument put forward against the use of substance over form is that it introduces yet more subjectivity into accounts (the judgment of the true substance). It is argued that if transactions were accounted for on a legal basis, there would be greater certainty and objectivity in the preparation of accounts and hence more comparability. It may be true that the certainty of legal form would increase, but this does not mean the comparability. In fact most accountants would say that it is the substance over form principle which is designed to increase comparability by making transactions of a similar nature treated in similar ways.

It may introduce another element of subjectivity, but accounts preparation inevitably does involve many judgmental decisions. It is these judgments that make accounts fair as well as true, and hence duly comparable. Accounting or extra disclosure

A further argument against the proposal is that it may not be essential to account on the basis of substance over form, but merely to provide additional disclosure. The argument here rests on whether any amount of disclosure can compensate for a transaction which is fundamentally misleadingly treated in the accounts. If additional disclosure is not so much addition as contradictory to the accounting treatment, then surely the result is confusing the user and hence still misleading and not true and fair. Conclusion

Broadly speaking, the Anglo-Saxon world regards economic substance as being more important than legal form. This is at least in part due to the historical separation of fiscal and financial accounting. Countries with civil, as opposed to common law legal traditions place more emphasis on the fiscal correctness of financial statements. With increasing globalisation of capital markets the trend, at the moment seems to be away from legal form, and towards economic substance. However, the inherent uncertainties in the notion of economic substance mean that there is an ever increasing volume of accounting standards on what exactly is meant by “substance” as it is very easily abused. Answer 9 HUGHES AND CUSTOM CARS

(a) Hughes

The Conceptual Framework for Financial Reporting states that financial statements should show the economic substance of transactions over their legal form.

Hughes has entered into a sale and repurchase agreement with the Wodwo Bank. Hughes

has received $36 million now. If Hughes exercises its call option after one month, it will repurchase the inventory at a premium of $1.8 million which represents a finance charge of 5% for the month. If the Wodwo Bank exercises its put option after two months, Hughes will repurchase the inventory at a premium of $3.7 million which represents a finance charge of 5% for each of the two months.

Sample



It is highly likely that one or other of the options will be exercised. Taking the transactions as a whole, the commercial substance is that of a short-term loan secured on the inventory.

The inventory should remain in inventory at $30 million at year end. $36 million should

be shown in current liabilities. The interest payable to 31 December 2012of $1.2 million ($1.8m 21/31) should be charged to profit or loss and added to the liability in the statement of financial position.

(b) Custom Cars

Unless Sigma’s cash contribution is very substantial (say 80% as opposed to 20% of the expenditure incurred by Custom Cars), there should be no doubt that Custom Cars owns the extension (and has the risks and rewards of ownership).

The fittings supplied free of charge by Sigma could be excluded from the statement of

financial position on the grounds that they are not owned by Custom Cars. Also their economic benefit is primarily to Sigma in promoting Sigma’s product.

Answer 10 OBJECTIVES

(a) Users Information needs

(1) Investors and their advisers performance of management in achieving profit growth while ensuring the continued solvency of the company;

the risk inherent in the company’s operations.

(2) Employees stability and survival of the company;

ability of the company to provide remuneration, employment opportunities and retirement benefits.

(3) Lenders the solvency of the company;

profitability, to ensure payment of interest when due;

asset values.

(4) Suppliers and other creditors information as to the solvency of the company and its ability to pay, probably over a shorter period than lenders.

(5) Customers information about the continuance of the company, especially if they have a long term involvement with it.

(b) Achieving objectives

Users of financial statements are interested in three main areas in their use of company financial statements:

profitability; solvency/liquidity; the risk of the operation.

Sample



The statement of comprehensive income provides a measure of profitability. However, the use of historical cost accounting means that the profit is often overstated as depreciation is often based on historical cost of the assets and inventory tends to be valued at an historic cost which does not match itself to the current revenue figure.

The statement of financial position details of current assets and liabilities enable users to form a reasonable assessment of a company’s solvency, because they are reasonably reliably valued. Lack of information about the dates of payments to sundry accounts payable or receipts from sundry accounts receivable could affect the position. Users would be very interested in seeing the age analysis of the accounts receivable balances in order that they may make a more informed judgement on the solvency of the business.

The leverage ratio (percentage of total assets financed by debt) provides a reasonably reliable assessment of the financial risk of the company’s operation.

Two ways in which the quality of information disclosed in financial statements could be improved:

requiring regular revaluation of non-current assets; reducing the number of alternative accounting treatments allowed by accounting

standards.

Answer 11 MERCURY

(a) Statement of comprehensive income for the year ended 30 June 2013

$000 $000 $000

Revenue 3,000 Opening inventory 450 Purchases 2,030

_____

2,480 Less closing inventory (500)

_____

Cost of sales 1,980

_____

Gross profit 1,020 Distribution costs (240 + (20% × (1,020 – 370)) + 30) 400

Administrative expenses (205 + (5% × 900)) 250 Other expenses (50+ 5 (W1)) 55

___

Profit before interest and tax 315 Finance costs Loan note interest (10% × 500) 50 Preference dividend (7% × 500) 35 (85)

___

Profit before tax 230 Income tax 55

___

Profit after tax 175

___

Sample



(b) Statement of changes in equity for the year ended 30 June 2013

Share Share Retained capital premium earnings Total $000 $000 $000 $000

Balance at 1 July 2012 250 180 70 500 Bonus issue 100 (100) Profit for the period 175 175 Ordinary dividend (25) (25) _____ _____ _____ _____

Balance at 30 June 2013 350 80 220 650 –––––

–––––

–––––

–––––

(c) Statement of financial position as at 30 June 2013

Cost Accumulated Net book depreciation value Tangible non-current assets $000 $000 $000 Land 300 300 Buildings 900 180 720 Plant 1,020 500 520 _____ ___ _____

2,220 680 1,540 _____ ___

Current assets Inventory 500 Trade receivables (600 – 30) 570 Bank 110

_____ 1,180

_____

Total assets 2,720

_____

Capital and reserves 50 cent ordinary shares (250 + (2/3 × 250)) 350 Share premium account (180 – 100) 80 Retained earnings 220

_____

650 Non-current liabilities 10% Loan notes 500 7% Preferred shares of $1 500 Current liabilities Trade payables 900 Income tax 55 Accrued expenses (50 + 30) 80 Dividends 35

_____ 1,070

_____

Total equity and liabilities 2,720

_____

Sample



WORKING

(1) Allowance for doubtful debts

$000 5% trade receivables (5% × 600) 30 Brought forward (25)

__

Expense 5

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Answer 12 SULPHUR

(i) Statement of total comprehensive income for the year ended 30 June 2013

Profit or loss $

Revenue (530,650 – 1,880) 528,770 Cost of sales (W1) (363,960) ______

Gross profit 164,810 Other operating income (1,500 + 12,000) 13,500 ______

178,310 Distribution costs (W1) (48,126) Administrative expenses (W1) (18,710) ______

Profit before tax 111,474 Income tax expense (38,100) ______

Profit for year 73,374 Other Comprehensive income Revaluation surplus 40,000 ______

Total comprehensive income for year 113,374 ______

(ii) Statement of changes in equity

Share Revaluation Retained capital surplus earnings Total $ $ $ $

Balance at 1 July 2012 150,000 – 160,030 310,030 Comprehensive income 40,000 73,374 113,374 Bonus issue 75,000 (75,000) – _______ ______ _______ _______

225,000 40,000 158,404 423,404 _______ ______ _______ _______ Sample



(iii) Statement of financial position as at 30 June 2013

$ $ ASSETS Non-current assets Land and buildings (at valuation) 390,000 Delivery vehicles (carrying amount) ($19,230 – $3,846) 15,384 Factory plant and equipment (carrying amount) ($24,000 – $2,400) 21,600 ––––––– 426,984 Investments 30,000 Current assets Inventories 29,170 Trade receivables ($15,690 – $460) 15,230 Cash 410 ______

44,810 ––––––– Total assets 501,794 ––––––– EQUITY AND LIABILITIES Capital and reserves Issued ordinary capital 225,000 Revaluation surplus 40,000 Retained earnings 158,404 ––––––– 423,404 Current liabilities Trade payables ($34,700 – $700) 34,000 Accrued expenses 1,240 Bank overdraft ($4,820 + $690 – $460) 5,050 Income tax 38,100 ______

78,390 ––––––– Total equity and liabilities 501,794 ––––––– WORKING

(1) Cost analysis Cost of sales Distribution Administrative

$ $ $

Opening inventory 24,680 Purchases 298,400 Discount received (10) Closing inventory (29,170) Factory overheads (66,420 + 1,240) 67,660 Per trial balance 44,280 18,710 Depreciation (as calculated in (a)) 2,400 3,846 _______ ______ ______

363,960 48,126 18,710 _______ ______ ______

Sample



Answer 13 CAYMAN

Statement of total comprehensive income for the year ended 30 September 2012

Profit or loss $000

Revenue (7,400 – 12) 7,388 Cost of sales (W1) (5,140) _____

Gross profit 2,248 Distribution costs (W2) (711) Administrative expenses (W2) (871) _____

Profit from operations 666 Finance cost (12% × $1m) (120) _____

Profit for the year 546 Other comprehensive income Revaluation deficit (250) _____

Total comprehensive income 296 _____

WORKINGS

(1) Cost of sales

$000

Opening inventory 695 Production costs 4,140 Depreciation 80% × ([2% × $4m] + [20% × $6.4m]) 1,088 Less: Closing inventory (780k – 5k + 8k) (783) _____

5,140 –––––

(2) Cost classification

Distribution Admin $000 $000

Per list of balances 540 730 Prepayments (60) (30) Accrued expenses 95 35 Depreciation – buildings (10% × 2% × $4m) 8 8

– plant and equipment (10% 20% × $6.4m) 128 128 ___ ___

711 871 ––– –––

Sample



Statement of financial position at 30 September 2012

$000 $000 ASSETS Non-current assets Property, plant and equipment (W3) 11,735

Current assets Inventory (W1) 783 Trade receivables (2,060 – 12) 2,048 Prepayments (60 + 30) 90

––––– 2,921 ______

Total assets 14,656 ––––––

EQUITY AND LIABILITIES Capital and reserves Issued capital 7,000 Share premium account 2,000 Revaluation surplus 1,250 Retained earnings 1,836 ______

12,086 Non-current liabilities Interest bearing borrowings – 12% Loan (2019) 1,000 Current liabilities Trade payables 1,120 Operating overdraft 40 Accrued expenses (95 + 35) 130 Interim dividend (14m × 2c) 280

––––– 1,570 ______

14,656 ––––––

Statement of changes in equity for the year ended 30 September 2012

Share Share Revaluation Retained capital premium surplus earnings Total $000 $000 $000 $000 $000

Balance at 1 October 2011 5,000 () 1,000 () 1,500 1,570 9,070 Comprehensive income (250) 546 296 Dividends (14m × 2c) (280) (280) Issue of share capital 2,000 1,000 3,000 (4m × 50c and 25c)

_____ _____ _____ _____ ______

Balance at 30 September 2012 7,000 2,000 1,250 1,836 12,086 ––––– ––––– ––––– ––––– –––––– Sam

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WORKINGS

(3) Property, plant and equipment

$000

Land 5,000 Buildings (4,000 – 1,065 – 80) 2,855 Plant and equipment (6,400 – 1,240 – 1,280) 3,880 ______

11,735 ––––––

Answer 14 OSCAR

(a) Profit or loss for the year ended 31 March 2013 $000 Notes

Sales 2,010 Operating costs $(140 + 960 – 150 + 420 + 210 + 16) (1,596) ——— Operating profit before interest 414 Income from investments $(75 + 20) 95 (2) ——— Profit before taxation 509 (1) Income tax (49) (3) ——— Profit for year 460 ——— Extract from statement of changes in equity (not required by question) Opening retained earnings 180 Profit for year 460 Dividends (120) —— Closing retained earnings 520 ——

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Statement of financial position as at 31 March 2013 $000 $000 Notes Assets Non-current assets Tangible assets 530 (4) Investments 580 (5) —— 1,110 Current assets Inventory 150 Receivables 470 —— 620 —–— 1,730 —–— Equity and liabilities Capital and reserves Share capital 600 (8) Retained earnings 520 —— 1,120 Non-current liabilities Provisions for liabilities and charges 196 (7) Current liabilities 414 (6) ——— 1,730 ——— The following notes form part of these accounts: Notes to the accounts for the year to 31 March 2013

(1) Included in operating profit $000

Depreciation $(27 + 5) 32 Directors’ emoluments 45 (2) Income from financial asset investments $000

Listed financial asset investments 75 Gain in value of investment 20 —— (3) Income tax $000

Income tax based on the profits for the year at a rate of 33% 74 Over provision for tax in the previous year (25) —— 49 ——

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(4) Tangible assets – plant and machinery $000

Cost at 1 April 2012 and 31 March 2013 750 —— Accumulated depreciation At 31 March 2012 188 Charge for the year $(27 + 5) 32 —— At 31 March 2013 220 ——

Carrying amount at 31 March 2013 530 ——

(5) Investments $000

The financial asset investments are classed as “fair value though profit or loss”, their fair value at 31 March 2013 was $580,000. The gain in value of $20,000 has been credited to profit or loss.

(6) Current liabilities $000

Trade payables 260 Income tax 74 Bank overdraft 80 —— 414 —— (7) Provisions for liabilities and charges $000 Pollution costs At 1 April 2012 180 Provided in the year 16 —— At 31 March 2013 196 —— (8) Called up share capital Authorised Issued $000 $000

Ordinary shares of $1 each 1,000 600 ——— ——– Answer 15 PERSEUS

(a) Adjustments to be made

(i) For inventory

The opening balance of retained earnings should be adjusted in the statement of changes in equity.

Comparative information should be restated, unless it is impracticable to do so

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(ii) IAS 8 required disclosure

The nature of the error.

The amount of the correction for the current period and for each prior period presented.

The fact that comparative information has been restated or that it is impracticable to do so.

(b) Current assets

$ Inventory (W1) 4,249,800 Trade receivables (W2) 2,674,300 Prepayments 773,400 Cash at bank 940,000 WORKINGS

(1) Inventory

$ $ As originally taken 4,190,000 (i) Reduction to net realisable value Original cost 16,000 Net realisable value (10,400 – 600) 9,800 (6,200) (ii) Goods on sale or return at cost 66,000 _________

4,249,800 _________

(2) Trade receivables

As originally stated Accounts receivable ledger 2,980,000 Less: Goods on sale or return 88,000 _________

2,892,000 Less: Debts written off 92,000 _________

2,800,000 Less: Allowance for doubtful debts 5% × $2,800,000 140,000 _________

2,660,000 Accounts payable ledger balances 14,300 _________

2,674,300 _________

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(3) Prepayments

$ $ As originally stated 770,000 Payments on account 25,000 Less: Commission due 2/102 × $1,101,600 21,600

______ 3,400 _______

773,400 _______

Answer 16 JENSON

(a) Critical event

Problems of revenue recognition in accounting arise from the requirement to produce financial statements for specific periods of reporting. Consequently accounting principles and practices have evolved which focus on when and at what value transactions should be recognised in financial statements. Annual reporting creates artificial periods that are not related to the natural operating cycle of an entity. A typical operating cycle (for a manufacturing company) would comprise of acquiring goods or raw materials from which a saleable product is manufactured, at some stage orders would be obtained for these goods and they would then be delivered to and accepted by customers. The collection of cash for these sales is often considered to be the end of this process, but it should be borne in mind that in some cases further risks can exist in relation to product warranties or other after-sale commitments. The critical event theory argues that there comes a stage in the operating cycle, beyond which there is either no further significant risks or uncertainties or that they can be estimated with sufficient accuracy to enable revenue to be recognised. The point at which there remain no further risks is referred to as the critical event. For most transactions the critical event is synonymous with full performance, but in theory, the critical event could occur at almost any point in the operating cycle.

The traditional view of determining profit involves matching revenues earned with the related cost of earning those revenues. This involves the use of the accruals, matching and prudence concept, with prudence being closely related to the principle of realisation. Under this approach the statement of financial position is effectively a statement of unexpired costs and un-discharged liabilities.

In its Framework, the IASB advocates a different approach; it takes a “balance sheet” approach to the process of revenue recognition. It chooses to define the elements of financial statements, principally assets and liabilities, and uses these to determine income (gains) and expenses (losses). Recognition of gains and losses takes place when there is an increase or decrease in equity other than from contributions to, or withdrawals of, equity. Thus increases in economic benefits in the form of enhancements of assets or decreases in liabilities result in income, and decreases in economic benefits in the form of outflows or depletions of assets or incurrences of liabilities results in losses (expenses). Recognition is the incorporation of an item in the financial statements. It involves the depiction of the item in words and at a monetary amount. For a transaction to be recognised as giving rise to a new asset or liability, or to add to an existing one, it must meet the following recognition criteria:

(i) it is probable that any future economic benefit associated with the item will flow to the entity; and

(ii) the item has a cost or value that can be measured with reliability.

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(b) Acquisition of goods or raw materials

For most industries this event is a routine occurrence that could not be considered as critical. However where this is a very difficult task, perhaps due the rarity or scarcity of materials, then it may be critical. A rare practical example of this is in the extraction of precious metals (e.g. gold mining). Because gold is a valuable and readily marketable commodity the real difficulty in deriving income from it is obtaining it, so this is the critical event. A logical progression of this point would be to say that any industry whose products are normally sold on a commodities market could consider the obtaining of the product to be the critical event. Such industries may include, for example, growing coffee beans.

During the manufacture or production of goods

Again for most industries this is not the critical event. Normally there would be far too many uncertainties remaining in the operating cycle. For example the manufacturing process could be flawed and therefore not produce saleable goods. Even if the goods are manufactured properly, it does not necessarily mean someone will buy them. It could be argued that where there is a firm order for the goods this would overcome some of the uncertainties, but it would still be imprudent to recognise firm orders as sales. There are however some industries where, due to a long production period, revenues are recognised during the production or manufacturing period. The most common example of this is the percentage of completion method of profit recognition for construction contracts under IAS 11 Construction Contracts. Where companies adopt this approach to revenue (and profit) recognition it is generally referred to as the “accretion approach”.

Delivery/acceptance of the goods

For the vast majority of businesses this is the point at which revenue is recognised, and it usually coincides with the transfer of the legal title to the goods and represents the point of full performance. Although there may be some uncertainties beyond this point (e.g. the goods may prove to be faulty or the customer may not be able to pay for them), these can usually be quantified and provided for with reasonable accuracy based on past experience.

When a condition has been satisfied after the goods have been delivered

The most common occurrence of this type of sale is where the customer has the right to return goods and not incur a liability for them. In most cases the condition is the passage of time (e.g. goods may be returned within three months of delivery), but it may also occur in relation to some other event such as their subsequent resale to another party. Traditionally with this type of sale, its recognition is delayed until the condition has been met, however one could argue that the substance of these transactions should be considered. Although a customer may have the right to return goods, if it can be demonstrated that in practice this never actually occurs, then recognising the sale before the expiry of the return period could be justified. Another example of this type of condition is where the terms of a sale of say an item of equipment required the seller to install and test the equipment. If this involves significant expense or risk then recognition of this type of sale would be deferred until completion of the installation.

Collection of cash

For most (credit) sales the risk of non-payment is relatively low. Revenue recognition would only be delayed to the point of receipt of cash if its collection was perceived to be particularly difficult or risky. Revenues (and profits) from high risk credit sale agreements may be examples of this. Another possibility is sales made to risky overseas countries/customers, particularly if they are in non-convertible currencies or the country has strict exchange controls.

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Expiry of guarantees/warranties

This serves as a reminder that not all the risks and associated costs are resolved when cash is received. For some products such costs can be significant (e.g. with the supply of new motor vehicles or rectification work on construction contracts); however it is normally possible to reliably estimate these costs and provide for them at the time of the sale. It would be unrealistic, and may cause distortions, if revenues were not recognised until such obligations had elapsed.

(c) Transactions

(i) Although this agreement may be worded as a sale, and even if the title to the goods passes to Wholesaler, it seems clear that this is not a sale – it is a secured loan. Therefore Jenson should not treat the income from Wholesaler as revenue, but instead as a loan in its statement of financial position. The goods should continue to be recognised as inventory, and accrued interest of $3,150 ($35,000 × 12% × 9/12) should be provided for against profit or loss.

(ii) It appears that the on-going fees after the first initial payment are insufficient to cover Jenson’s servicing cost and provide a reasonable profit. In these circumstances IAS 18 Revenue requires part of the initial fee of $50,000 to be deferred and recognised in future periods as the servicing costs are incurred. As there is a requirement to earn a (reasonable) profit of 20% on revenues, with on-going servicing costs of $8,000, revenues of $10,000 would need to be recognised in the next four years. The actual fees receivable are $5,000; therefore Jenson will have to defer $20,000 ($5,000 × four years) of the initial fee. Thus in the year to 31 March 2013 Jenson would recognise $30,000 ($50,000 – $20,000) of the initial franchise fee.

(iii) An accruals/matching approach to this problem would be to say that the profit on each publication would be $2,000 (($240,000 – $192,000)/24). In the year to 31 March 2013, as six of the 24 publications have been produced and delivered, the profit or loss would include: $

Sales (6 × 240,000/24) 60,000 Cost of sales (6 × 192,000/24) (48,000)

–––––– Profit 12,000

––––––

Deferred income on the statement of financial position would be $180,000 ($240,000 – $60,000).

The problem with the above approach is that the deferred income does not seem to fit the definition of liability in the Framework and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. A liability is defined as “an obligation of an entity to transfer economic benefits as a result of past transactions or events”. The Framework effectively says that a statement of financial position comprises only of assets, liabilities and equity. Deferred income does not satisfy the definition of any of the elements. The liability of Jenson is to produce and deliver the next 18 publications. The cost of this liability is $144,000 ($192,000 × 18/24). Thus adopting the balance sheet approach to revenue recognition advocated in the Framework would mean recognising only $144,000 as a liability on the statement of financial position instead of $180,000 as deferred income under the accruals approach. The balance sheet approach would mean that Jenson would recognise all of the profit on the publications on receipt of the subscriptions. Many commentators have criticised the Framework for its lack of prudence in reporting profit and being contrary to existing accounting practice and, in some cases IFRS.

A similar argument to the above could be applied to the deferred franchise fees in (ii) above.

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Answer 17 ALLRIGHTS

Directors’ views on inventory valuation Striver: A prudent approach is necessary, but the concept of accruals is also important. It is not acceptable to undervalue inventories. Valuing inventories at low figures will not of itself help cash flow although, as profit will be reduced, the outgoings for bonuses, taxation and dividends may also be reduced. Chatty: It is not acceptable to include selling costs or costs not related to production in the cost calculation. Gloome: Budgeted cost is not acceptable. Opinion Inventories should be valued at the lower of cost and net realisable value under IAS 2 Inventories. “Cost” means all costs of purchase, of conversions and other costs incurred in bringing inventories to their present location and condition. They include a systematic allocation of fixed and variable production overheads including depreciation and maintenence of factory buildings and the cost of factory management and administration. The allocation of these overheads must however be based on the normal capacity of production facilities such that the value of inventories is not increased as a result of inefficiencies. In this case, Gloom indicates that there may have been some inefficiencies and these should be noted carefully before any final decision is made. Costs to be included are therefore as follows: $ Direct labour and materials 38 Bought-in components 5 Factory overheads 8 Production planning ($4,000 ÷ 1,000) 4 —— 55 ——

“Net realisable value” means the selling price to be obtained on sale in the normal course of business less any costs inevitably incurred on sale (i.e. $60 less royalty $2 and commission $4 = $54). Inventories therefore should be valued at $54.

Answer 18 SAMPI

(a) IAS 2 treatment

(i) Three acceptable methods

(1) Unit cost

Inventory is priced at the actual amount paid for each individual item of inventory held

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(2) First in first out

Inventory is assumed to be composed of the items most recently purchased, regardless of whether this is actually the case. Inventory is therefore valued according to the price paid for the most recent purchase. If this purchase is insufficient to cover the quantity in inventory, the price of the next most recent purchase is taken as necessary.

(3) Average cost

Inventory is priced at the moving weighted average price at which each inventory line was purchased during the accounting period, or brought forward from the previous period.

All three of these methods are acceptable under IAS 2 because they are either the actual cost of the inventory (method 1) or a reasonably close approximation to that actual cost (methods 2 and 3).

(ii) Finished goods valuation

The cost of the inventory of finished goods would normally be arrived at by taking the labour and materials consumed in manufacturing the items plus an allocation of overheads. The overhead allocation should be based on the normal level of production and should exclude selling expenses and general management expenses.

(b) Computation of value of inventory

Value using weighted average basis

Number Weighted Total value of units average of closing cost inventory $ $ Opening inventory 4,000 13.00 8 March 3,800 15.00

_____

Balance 7,800 13.97 12 March (5,000)

_____

2,800 13.97 18 March (2,000)

_____

800 13.97 22 March 6,000 18.00

_____

6,800 17.53 24 March (3,000)

_____

3,800 17.53 28 March (2,000)

_____

1,800 17.53 31,554

_____

_____

Tutorial note: Or 31,558 without rounding differences.

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Answer 19 WILLIAM

(a) Statement of profit or loss (extracts) for the year ended 31 December 2009 2010 2011 2012 $000 $000 $000 $000 Revenue(W3) 3,143 1,968 5,272 2,117 Cost of sales (2,750) (3,861) (3,339) (1,150) ——– ——– ——– ——– Gross profit/(loss) (W1) 393 (1,893) 1,933 967 ——– ——– ——– ——–

(b) Statement of financial position (extracts) as at 31 December 2009 2010 2011 2012 $000 $000 $000 $000 Contract revenue recognised as revenue in the period: 3,143 1,968 5,272 2,117 ——– ——– ——– ——– Contract costs incurred and recognised profits ( less recognised losses ) to date 3,143 4,250 10,383 12,500 ——– ——– ——– ——– Gross amounts due from customers for contract work (W2) 143 Nil Nil Nil ——– ——– ——– ——– Gross amounts due to customers for contract work (W2) Nil 750 617 Nil ——– ——– ——– ——–

WORKINGS (1) Expected profit

2009 2010 2011 2012 $000 $000 $000 $000 Contract price 12,000 12,000 12,000 12,500 Less Costs to date (2,750) (2,750+3,000) (5,750) (5,750+4,200) (9,950)(9,950+1,150) (11,100) Est. future costs (7,750) (7,750) (1,550) – ——– ——– ——– ——– 1,500 (1,500) 500 1,400 ——– ——– ——– ——– Allocate on costs basis 393 (loss in full) (1,500) 433 1,400 (see W3 for fraction) Less prior periods – (393) 1,500 (433) —— ——– ——– —— 393 (1,893) 1,933 967 —— ——– ——– ——

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(2) Disclosure workings 2009 2010 2011 2012 Contract costs incurred 2,750 5,750 9,950 11,100 Profits/losses 393 (1500) 433 1,400 ––––– ––––– –––––– –––––– 3,143 4,250 10,383 12,500

Billings (3000) (5,000) (11,000) (12,500) ––––– ––––– –––––– –––––– * 143 (750) (617) nil ––––– ––––– –––––– ––––––

*Positive = a receivable; Negative = a payable. (3) Revenue

Allocate on a costs basis 2009 2010 2011 2012 $000 $000 $000 $000

Costs to date 2,750 5,750 9,950 11,100 Total costs (2,750+7,750) (5,750+7,750) (9,950+1,550) 11,100 % complete 26% 43% 86% 100% × tender value × 12,000 × 12,000 × 12,000 × Actual (12,500) Revenue to date 3,143 5,111 10,383 12,500 Less taken in prior periods – (3,143) (5,111) (10,383) ——– ——– ——– ——– Revenue in year 3,143 1,968 5,272 2,117 ——– ——– ——– ——–

Answer 20 MERRYVIEW

(i) Merryview – Statement of comprehensive income (extracts) – year to 31 March 2012

$000 Sales revenue (40,000 × 35% (W1)) 14,000 Cost of sales (W1) (9,100) ______

Profit on contract 4,900 ______

Statement of financial position (extracts) as at 31 March 2012

Non-current assets Plant and machinery (3,600 – 900 (W2)) 2,700 Current assets Amount due from customer (W3) 1,500

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(ii) Merryview – Statement of comprehensive income (extracts) – year to 31 March 2013

$000 Sales revenue (40,000 × 75% – 14,000 (W1)) 16,000 Cost of sales (22,500 – 9,100 (W1)) (13,400) _______

Profit on contract 2,600 _______

Statement of financial position (extracts) as at 31 March 2013

Non-current assets Plant and machinery (3,600 – 900 – 1,200 (W2)) 1,500 Current assets Amount due from customer (W3) 1,000 WORKINGS (all figures $000):

(1) Contract costs as at 31 March 2012

Architects’ and surveyors’ fees 500 Materials used (3,100 – 300 inventory) 2,800 Direct labour costs 3,500 Overheads (40% of 3,500) 1,400 Plant depreciation (9 months (W2)) 900 ______

Cost at 31 March 2012 9,100 Estimated cost to complete: Excluding depreciation 14,800 Plant depreciation (3,600 – 600 – 900) 2,100 16,900 ______ _______

Estimated total costs on completion 26,000 _______

Percentage of completion at 31 March 2012 (9,100/26,000) = 35% Contract costs as at 31 March 2013 Summarised costs excluding depreciation 20,400 Plant depreciation (21 months at $100 per month) 2,100 _______

Cost to date 22,500 Estimated cost to complete: Excluding depreciation 6,600 Plant depreciation (9 months) 900 7,500 ______ _______

Estimated total costs on completion 30,000 _______

Percentage of completion at 31 March 2013 (22,500/30,000) = 75% (2) The plant has a depreciable amount of $3,000 (3,600 – 600 residual value)

Its estimated life on this contract is 30 months (1 July 2011 to 31 December 2013)

Depreciation would be $100 per month i.e. $900 for the period to 31 March 2012;

$1,200 for the period to 31 March 2013; and a further $900 to completion.

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(3) Amount due from customer at 31 March 2012

Contract cost incurred (9,100 + 300 materials inventory) 9,400 Recognised profit 4,900 _______

14,300 Cash received at 31 March 2012 (12,800) _______

Amount due at 31 March 2012 1,500 _______

Amount due from customer at 31 March 2013 Contract costs incurred 22,500 Recognised profit (4,900 + 2,600) 7,500 _______

30,000 Cash received – 31 March 2012 (12,800) – 31 March 2013 (16,200) (29,000) _______ _______

Amount due at 31 March 2013 1,000 _______

Answer 21 ADJUSTMENTS

Internal memorandum

To Members of the Board From S Bean, Financial Accountant Date 5 February 2013

Re Adjustments to depreciation At the board meeting on 1 January 2012 it was decided to modify the depreciation charge on a number of assets of the company. Set out below is the effect that these modifications will have on the accounts for the year to 31 December 2012.

(a) Lathe

The lathe was purchased in 2006 and was originally being written off over an estimated useful life of 12 years. As at 1 January 2012 six of the years have elapsed with a further six years remaining. It was decided that the machine will now only be usable for a further four years.

IAS 16 Property, Plant and Equipment requires that where the original estimate of useful

life is revised, adjustments should be made in current and future periods (not in prior periods). I therefore propose that the unamortised cost of the asset should be charged to revenue over the remaining useful life of the asset. The carrying amount of $75,000 should therefore be charged over the remaining four years of useful life, giving an annual depreciation charge of $18,750.

The revision is not a change in accounting policy, or an error. It is merely a refinement of an existing policy to reflect changed circumstances. It is therefore not appropriate to deal with any excess depreciation by adjusting opening retained earnings.

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