university of bolton rak academic centre … · you must hand in this exam paper with your answer...

OCD036

UNIVERSITY OF BOLTON

RAK ACADEMIC CENTRE

ACCOUNTANCY

SEMESTER ONE EXAMINATIONS 2017/18

FINANCIAL ACCOUNTING AND REPORTING

MODULE NO: ACC5001 Date: Tuesday 16th January 2018 Time: 1:00pm – 4:00pm INSTRUCTIONS TO CANDIDATES: There are FIVE questions in this

examination Section A - Answer ALL questions Section B – Answer ONE question This is a closed book examination. You must hand in this exam paper

with your answer booklet.

of 12 University of Bolton RAK Academic Centre Accountancy Semester 1 Examination 2017/2018 Financial Accounting & Reporting Module No. ACC5001

Section A answer ALL questions

Question 1

Part A Jim and Lisa were in partnership sharing profits and losses equally. On 1st January 2018, after several years of successful trading in the SCUBA diving and travel industry, they decide to convert the partnership into a limited company as they felt the company was starting to grow at increasing rates, the new company was to be named Collier Ltd. The latest trail balance for the partnership on 31st December 2017 were is below:

Dr £000

Cr £000

Capital – Jim 1,000 Capital – Lisa 680 Cash/bank 180 Land and buildings 1,200 Fixtures and fittings 400 Motor vehicles 160 Accumulated depreciation – Fixtures and fittings 168 Accumulated depreciation – Motor vehicles 72 Inventory 184 Trade receivables 408 Trade payables 372 Loan: Lisa 240

2,532 2,532

The following information is to be taken into consideration: (a) Jim was to take one of the vehicles for personal use at an agreed

valuation of £16,000. (b) Collier Ltd. Was to take over all other assets and liabilities with the

exception of the Cash/bank which was to be used to settle the balances on the partners’ accounts after all adjustments had been made.

(c) The assets and liabilities of the partnership were revalued at : £000 Land and buildings 1,500 Fixtures and fittings 190 Motor vehicles 48 Inventory 174 Trade receivables 376 Trade payables 372


Question 1 continues over the page…. PLEASE TURN THE PAGE….

Question 1 continued….

(d) The balance on Lisa’s loan account was to be transferred to her capital

account. (e) Costs of conversion were estimated at £48,000 (f) The purchase consideration was to be 2,000,000 £1 ordinary shares in

the company, valued at par, and shared equally among the partners. Required: Prepare the necessary accounts to bring about the closure of the partnership using the ‘T’ account double entry system (DO NOT amalgamate any transactions) AND Prepare the opening balance sheet of Collier Ltd. on 1st January 2018.

(20 marks) Part B Write a short briefing paper for a meeting with Jim and Lisa outlining the differences between the regulatory requirements for a partnership versus being an incorporated company. (5 marks) Total 25 Marks

PLEASE TURN THE PAGE….


Question 2

As the financial accountant at Boyde plc, a company that manufactures elite sports equipment for university gymnasiums. You have been asked by the finance director to assist him in the preparation of the year-end financial statements. He has already prepared the Statements of comprehensive income and financial position but has not completed the statement of cash flows. The Statement of financial position and an extract from the Statement of comprehensive income for the year ended 31 December 2017 are as follows: Statement of financial position as at 31 December 2017

2017 2016

£000 £000 Non-current assets Property and equipment 9,840 9,000 Development costs 1,080 960 Other investments 840 600

11,760 10,560

Current assets Inventory 3,330 3,744 Trade receivables 2,892 2,376 Bank 18 84

6,240 6,204

TOTAL ASSETS 18,000 16,764

Equity and liabilities Ordinary shares £1 each 6,000 5,400 Share premium 1,200 540 Retained earnings 6,168 5,244

13,368 11,184

Non-current liabilities 7% Debentures - 2,400

Current liabilities Trade payables 3,264 2,208 Taxation 1,014 792 Accrued dividend 120 180 Bank overdraft 234 -

4,632 3,180

TOTAL EQUITY AND LIABILITIES 18,000 16,764

Question 2 continues over the page….



Question 2 continued…. Extract from Statement of comprehensive income for the year ended 31 December 2017

2017

£000 Operating profit 2,016 Dividends received 72 Premium on debentures (240) Interest (288)

Profit before taxation 1,560 Taxation (516)

Profit after taxation 1,044

Additional information: Operating profit is stated after charging amortisation on development costs of £204,000 and depreciation on property and equipment amounting to £636,000. Equipment that had originally cost the company £480,000 with associated accumulated depreciation of £36,000 was sold during the year at a loss of £312,000. The debentures were redeemed at a premium of 10%. Dividends are paid in full in the year following the year end. Required:

a) Prepare a statement of cashflows for the year ended 31 December 2017 for

Boyde Plc in accordance with IAS7.

(20 marks)

b) Briefly explain the usefulness of a statement of cashflows in comparison to

the statement of comprehensive income. (5 marks)

Total 25 marks



Question 3

As a student at the University of Bolton studying accountancy you have been

employed as a financial accountant at a local manufacturing company Marsh

Limited. The year ended 31 December 2017 has just passed and you have just run

the year end trial balance in readiness of the preparation of the first draft of the

financial statements.

The trial balance is as follows:

Dr Cr

£000 £000

Freehold land 4,200

Buildings (cost £9,360,000) 8,252

Production machinery (cost £6,192,000) 3,716

Computer equipment (cost £1,728,000) 1,382

Investments 960

Trade receivables 14,526

Trade payables 5,182

Inventory @ 31/12/16 AND 31/12/17 23,588

Bank 23,122

Grant 170

Profit on land sale 1,072

Sales 763,200

Purchases 637,958

Administration costs 18,000

Distribution costs 70,200

Directors emoluments 1,124

Bad deb write off’s 314

Audit fees 224

Equipment hire 4,800

Interest 1,210

Preference dividends paid 324

Ordinary dividends paid 852

Loan (9%) 14,400

Preference shares 7,200

Ordinary shares 10,800

Retained earnings 12,728

814,752 814,752




Question 3 continued. Additional information not reflected in the trial balance:

a) The authorised share capital of the company is 8 million 9% preference

shares with a par value of £1 each and 18 million 50p par value ordinary

shares.

b) Depreciation is yet to be provided for and is charged at 20% on cost for

production machinery, 10% on cost for computers and 2% on cost for

buildings. It is company policy to charge all depreciation to cost of sales.

c) The tax charge which is yet to be provided for has been calculated to be

£10,696,000.

d) Government grants received in the year amounted to £170,000, the company

has decided to follow IAS 20 and defer the grants and release these at 20%

per year. The first year’s release (disclosed as other income) has yet to be

accounted for.

e) Inventory costing £1,000,000 has a net realisable value in accordance with

IAS 2 of £500,000.

f) During the year assets with a net book value of £1,440,000 realised

£2,632,000 when sold.

g) Dividends of 3p per share was declared prior to the year-end as well as the

remainder of the preference dividend which is to be accounted for.

h) The land was valued by a district valuer at the year-end and was valued at

£5,000,000.

Required: Using the trial balance and additional information, prepare the Statement of comprehensive income and the Statement of financial position for Marsh Limited for the 31 December 2017 year end (all amounts to nearest £000).

Total 25 Marks

END OF SECTION A



Section B – Answer ONE question only Question 4 Statements of comprehensive income for the year ended 31 December 2017

Mo Ltd Kashif Ltd

£000 £000 Turnover 24,000 30,000

Gross profit 6,000 7,800 Distribution costs 1,000 1,200 Administration expenses 3,000 2,000

Operating profit 2,000 4,600 Interest receivable 160 200 Interest payable 800 700

Profit before taxation 1,360 4,100 Taxation 480 1,440

Profit after taxation 880 2,660

Statements of financial position as at 31 December 2017

Non-current assets Intangible assets 400 - Tangible assets 8,000 14,000 Investments 1,200 1,600

9,600 15,600

Current assets Inventory 500 600 Trade receivables 3,500 5,000 Bank 3,000 400

7,000 6,000

TOTAL ASSETS 16,600 21,600

Equity and liabilities Ordinary shares 2,000 2,000 Share premium 2,000 2,000 Revaluation reserve 2,220 3,500 Retained earnings 6,380 7,100

12,600 14,600

Non-current liabilities Debentures 2,000 4,000

Current liabilities Trade payables 2,000 3,000


TOTAL EQUITY AND LIABILITIES 16,600 21,600

Question 4 continues over the page…. PLEASE TURN THE PAGE….

Question 4 continued…. Required: Part A Your company is considering purchasing one of the above companies. Prepare a report to the directors of your company that outlines which company (with justifications) you would recommend investing in. It is expected your report will include comparison of the following key ratios:

i Gross profit margin

ii Net profit margin

iii Trade receivables collection period

iv Trade payables period

v Inventory turnover (number of times)

vi Current ratio

vii Acid test

viii Gearing.

(20 marks) Part B Briefly explain the drawbacks / limitations of ratio analysis when analysing other company’s financial statements.

(5 marks)

Total 25 Marks



Question 5 You are a newly qualified accountant working at a large firm of accountants that recognise that your degree from the University of Bolton makes you one of the best accountants globally and hence the reason they employed you immediately upon graduation. One of the partners of the firm you work for has asked if you can assist two of his clients (both Plc’s reporting under IFRS/IAS regulations) with a few queries, both companies have a reporting period end date of 31 December each year. The information regarding both companies is as follows: Pacitin Plc: Pacitin PLC manufactures products to help health organisations treat patients quit smoking. The company purchased a new machine for its production department on 30 June 2017 at a cost of £840,000. Upon review of the purchase order the breakdown of the cost of the machine is as follows: £ Cost price of the machine 760,000 Discount negotiated by the chairman (76,000)

684,000 Transportation to site costs 13,600 Costs relating to the installation and ground preparation 59,200 1 year’s maintenance charge 54,000 Supplementary spares 29,200

Total cost 840,000

Khan Plc: Khan Plc is a listed company that supplies boxing related products to gymnasiums and boxing academies and is based in Bolton. On 1 January 2007 the company purchased a freehold property at a cost of £1,600,000 and includes land of £600,000 and £1,000,000 of buildings. The company has accounting policies that state that buildings are depreciated over a 40-year period using the straight-line method of depreciation. It is anticipated that at the end of the useful economic life (UEL) of the building that they will have no residual value.




Question 5 continued…. At the start of the current financial year the directors took the decision to have the land and buildings revalued. An independent (RIC’s) valuer advised that the land had a carrying value of £800,000 and the buildings were to be valued at £900,000. The directors wish to have these revised values reflected in the current 31 December 2017 reporting period end financial statements. There are to be no changes to the UEL or residual values of these assets. Required:

i Giving two examples of each type of asset, distinguish between non-current

and current assets. (4 marks)

ii With appropriate examples, explain the differences between transactions that

may be classed as revenue expenditure and those classed as capital

expenditure. (5 marks)

iii If either of the companies had incorrectly accounted for an item of capital

expenditure (i.e. posted the purchase to the Income Statement), what would

the effect on the year-end financial statements be, in addition explain the

effect on future years financial statements. (5 marks)

iv IAS 16 (Property plant and equipment) provides information on how to

account for, and disclose items meeting the criteria of expenditure on a non-

current property plant and equipment transaction. Taking this standard into

consideration calculate the amount that should be included in the cost

disclosure note as additions in the financial statements of Pacitin Plc. Your

answer should also clearly explain all items that are/are not included in the

capitalised amounts. (6 marks)

v As noted in the information relating to Khan Plc a revaluation took place on 1

January 2017. Prepare the journal that should be posted to the general ledger

to reflect the revaluations, in addition compute the revised amount of


depreciation that should be charged to the income statement for the reporting

period just ended. (5 marks)

Total 25 marks

END OF QUESTIONS

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