past papers-1p1-financial-accounting-and-ifrs-for-smes-jan-2011-[1]

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INSTITUTE OF FINANCIAL ACCOUNTANTS

JANUARY 2011 EXAMINATION

P1. Financial Accounting and IFRS for SMEs

Instructions to candidates

1. Time allowed is 3 hours and 10 minutes, which includes 10 minutes reading time.2. This is a closed book examination. 3. Use of a silent, non-programmable calculator, which is NOT part of a mobile

phone or any other device capable of communication, is allowed.4. Put your candidate number on the top of each answer page.5. Start each new question on a new page. 6. Include any workings.

Answer ALL questions:

Part A: all questions are worth 10 marks

Part B: all questions are worth 20 marks

Part C: question worth 30 marks

©IFA Financial Accounting and IFRS for SMEs January 2011

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Part A Answer ALL questions

Question 1(a) Section 2.8 of the IFRS for SMEs states “Transactions and other events and

conditions should be accounted for and presented in accordance with their substance and not merely their legal form”.

Required:

Briefly discuss the above statement giving two examples where substance over form takes precedence over the legal position. (6 marks)

(b) Briefly describe two other qualitative characteristics of information in financial statements. (4 marks)

(Total 10 marks)


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Question 2

(a) Your organisation issued a bond for $100,000 on 1 January 2010. Under the terms of the bond interest of 3% per annum is paid annually in arrears over the next five years after which the bond will be mandatorily redeemed at $123,000. The effective interest rate on the bond is 7%. The organisation’s year-end is 31 December.

Required:

Calculate the finance income to be shown in the statement of comprehensive income for years ending 31 December 2010, 2011 and 2012. (5 marks)

(b) On 1 July 2010 the organisation entered into a finance lease for a piece of machinery costing $36,000. The organisation has the “risks and rewards incidental to ownership” for the machinery. The rate implicit in the lease is 5% per annum and the lease payments are in arrears.

Required:

Prepare the journal entries to record the above transaction for the year ended 31 December 2010. (3 marks)

(c) On 31 July 2010 the organisation entered into an operating lease to acquire a machine costing $500 per month for the year to 31 July 2011.

Required:

Record the above transaction for the year ended 31 December 2010. (2 marks)

(Total 10 marks)


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Question 3

Over many years there has been a debate about whether small and medium sized entities should be audited. Companies in this group are often owned and managed by the same people so it could be argued that few if any stakeholders receive any benefit from an audit.

Required:

Discuss the arguments for and against maintaining the small company audit identifying four user groups.

(Total 10 marks)


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Part BAnswer ALL questions

Question 4You have just produced Rome Co’s statement of financial position at 31 December 2010 and statement of comprehensive income for the year ended 31 December 2010.

Statement of comprehensive income for the year ended 31 December 2010

$’000

Revenue 1,383

Cost of sales (1,111)

Gross profit 272

Investment income 13

Administrative expenses (30)

Distribution costs (57)

Operating profit 198

Finance costs (16)

Profit before tax 182

Income tax expense (56)

Profit/Total comprehensive income for the year 126

Statements of financial positions


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2010 2009

$’000 $’000

Non-current assets 930 716

Current assets

Inventories 164 144

Trade and other receivables 138 142

Bank 54 108

356 394

Total assets 1,286 1,110

Equity

Share capital $1 shares 300 200

Share premium 46 30

Retained earnings 517 423

863 653

Non-current liabilities

Loan stock 120 250

Current liabilities

Trade payables 180 102

Accruals 55 65

Income tax 68 40

303 207

Total equity and liabilities 1286 1,110

The following information is also available with respect to the year in question:


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Non-current assets with a net book value of $30,000 were disposed of resulting in a loss of $18,000.

The depreciation charge for the year was $118,000.

Dividends paid during the year amounted to $32,000.

Included within accruals at 31 December 2010 is interest of $5,000, (2009 $6,000).

Required:

(a) Prepare a statement of cash flows as per section 7 of the IFRS for SMEs using the indirect method for the year ended 31 December 2010. (15 marks)

(b) Briefly explain the information produced in the statement of cash flows. (5 marks)

(Total 20 marks)

Question 5


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Murray Co is an exploration company that has been experiencing difficult times with its American operations. It decided to close those operations in November 2010. Murray Co’s trial balance at 31 December 2010 is as follows:

$’000 $’000Ordinary shares 12,00010% Redeemable 2014 preference shares 9,600Retained earnings 12,825Land and buildings at cost 50,000Buildings – depreciation at 1 January 2010 3,500Plant and machinery at cost 33,000Plant & machinery – depreciation at 1 January 2010

8,250

Investment Property 3,000Income tax 708Deferred tax 2,304Trade payables 11,620Inventories at 31 December 2010 8,920Trade receivables 10,460Bank 7,600Revenue 107,588Property investment income 400Cost of sales 53,251Net book value of plant and machinery sold 4Administrative expenses 8,880Distribution costs 7,800Ordinary dividend paid 600Preference dividend paid 480

176,395 176,395The following information is also available:

Non-current assets:

The building element included in land and buildings was $35,000,000. Buildings are depreciated at 2% per annum, which is charged to

administrative expenses. Plant and machinery has been sold for $5,000 with the proceeds being

included in revenue. The net book value of this plant and machinery sold is shown separately in the above trial balance.

Plant and machinery is to be depreciated at 20% on the reducing balance method and charged to cost of sales. No deprecation is to be charged in the year of disposal.

Income tax


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The income tax balance on the trial balance is an under/over provision of the 2009 provision.

The income tax for 2010 is estimated to be $10,000,000

Deferred taxation

During 2010 Murray’s temporary timing differences increased by $8,400,000. This increase should be included in the income statement. The tax rate applicable is 30%.

Discontinued operations

On 1 November 2010 the Directors decided to close down its American operations. The figures for the year relevant to this operation were as follows:

$’000Revenue 2,300Cost of sales 1,510Administrative costs 980Net assets sold (included in cost of sales) 690

Investment property

Murray has owned an investment property, which has fallen in value during 2010 by 10%. Section 16.7 of the IFRS for SMEs states that “a property can be relavalued at fair value at the reporting date if the valuation can be acquired without undue cost or effort”. This was the case for Murray.

Required:

Prepare for Murray a statement of comprehensive income for the year ended 31 December 2010 and statement of financial position at that date

(Total 20 marks)

Part C


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Question 6

Helsinki Co acquired 3,360,000 of the ordinary shares of S Co on 31 December 2006 for $5,760,000 when the retained earnings were $1,150,000. On 31 December 2007 Helsinki Co also acquired 1,200,000 of the ordinary shares in A Co for $2,880,000 when the retained profits were $856,000.

The statements of financial position for the companies at 31 December 2010 were as follows:

Helsinki$’000

S Co$’000

A Co$’000

Non-current assetsProperty 11,232 7,200 2,880Other non-current assets 4,580 2,160 1,640Investments 8,640

24,452 9,360 4,520Current assetsInventories 3,312 1,628 1,526Receivables 1,900 1,670 2,131Bank 288 692 117

5,500 3,990 3,774Total assets 29,952 13,350 8,294Equity and liabilitiesOrdinary $1 shares 11,520 5,600 4,000Retained earnings 8,410 5,158 2,566

19,930 10,758 6,566Non-current liabilities10% Loan notes 2,880 576 -

Current liabilitiesPayables 3,916 2,016 1,728Bank overdraft 3,226

7,142 2,016 1,72829,952 13,350 8,294

The following information is also available:


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The goodwill of S Co is to be written off over 5 years. An impairment loss of $1,500,000 is to be written off A Co.

When S was acquired the fair value of its property was $2,000,000 greater than its book value. This revaluation has not been included in the accounting records of S. The building element was 60% of the total cost and is depreciated at 2% per annum on a straight-line basis.

Required:

(a) Prepare a statement of financial position for Helsinki Co at 31 December 2010.(26 marks)

(b) Helsinki are planning to enter into a joint ownership project. Describe how joint ownership would be recognised in Helsinki’s financial statements.

(4 marks)

(Total 30 marks)


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