PSA - Financial Accounting (Question Bank)

CA in Bangladesh
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The Institute of Chartered Accountants of Bangladesh
FINANCIAL ACCOUNTING
Professional Stage Application Level
Question Bank
www.icab.org.bd
Financial accounting
The Institute of Chartered Accountants of Bangladesh Professional Stage
These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales
ISBN: 978-1-84152-838-0
First edition 2009
All rights reserved. No part of this publication may be reproduced or
transmitted in any form or by any means or stored in any retrieval system, or
transmitted in, any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without prior permission of the publisher.
ii
The Institute of Chartered Accountants in England and Wales, March 2009
Contents
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Page
Preparation of full single entity

financial statements
1
2
3
4
5
6
7
8
9
10
Howells Ltd
Berwick Ltd
Angus Ltd
Goblins Ltd
Harry Ltd
Frodo Ltd
Plodder Ltd
Copeland Ltd
Pippin Ltd
Merry Ltd
Preparation of extracts from

11
12
13
14
15
16
17
18
19
20
21
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28
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30
Montrose Ltd
Gandalf Ltd
Cagreg Ltd
Roberts Ltd
Dumfries Ltd
Crieff Ltd
ITC Solutions Ltd
Withington Ltd
Islay Ltd
Greenstones Ltd
Okehampton Ltd
Banchory Ltd
Banff Ltd
Skinner Ltd
Rosetta Ltd
Arran Ltd
Elie Ltd
Wester Ross Ltd
Shadowlands Ltd
Scribo Ltd
iii
Title
Marks
Time
allocation
Mins
Question
Answer
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24
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22
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15
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20
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36
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260
Page
Preparation of full consolidated

31
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Hemmingway Ltd
Highland Ltd
Ullapool Ltd
Law Ltd
Heeley Ltd
Harris Ltd
Lowland Ltd
Vanguard Ltd
Heaton Ltd
Jerome Ltd
Hardmead Ltd
Tain Ltd
Glencoe Ltd
Herdings Ltd
Camden Ltd
Gallant Ltd
Slick Ltd
Senorita Ltd
Single entity financial statements

Objective test questions
49
50
51
52
53
54
55
56
57
58
59
60
61
62
iv
Accounting and reporting concepts

BAS 1 Presentation of Financial Statements
BAS 2 Inventories
BAS 7 Cash Flow Statements (single company
only)
BAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors
BAS 10 Events after the Balance Sheet Date
BAS 16 Property, Plant and Equipment
BAS 17 Leases
BAS 18 Revenue
BAS 32 and BAS 39 Financial Instruments
BAS 36 Impairment of Assets
BAS 37 Provisions, Contingent Liabilities and
Contingent Assets
BAS 38 Intangible Assets
BFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
Title
Marks
Time
allocation
Mins
Page
Question
Answer
101
263
107
110
114
265
266
268
Consolidated financial statements

Objective test questions
63
64
65
66
Consolidated balance sheets

Consolidated statements of financial
performance
Consolidated cash flow statements
Group accounts accounting standards
vi
CA in Bangladesh
Question Bank
Your exam will consist of
Part one
5-15 short-form questions

(worth 1-4 marks each)
20 marks
Part two
4 questions
(each worth around 20 marks)
80 marks
Time available
2.5 hours
QUESTION BANK
Preparation of full single entity financial statements
Howells Ltd
The trial balance of Howells Ltd as at 31 December 20X8 is as follows.
Share capital
CU1 ordinary shares
CU1 5% preference shares (irredeemable)
Retained earnings
General reserve as at 31 December 20X8
Intangible assets
Land and buildings
Cost
Accumulated depreciation
Plant and machinery
Cost
Inventories at 1 January 20X8
Sundry net current assets
Revenue
Purchases
Debenture interest paid
Royalties received
Administrative salaries
Salesmen's salaries and commission
Factory wages
Operating lease rentals
Gain on sale of property
Administrative expenses
Selling and distribution expenses
Dividend received from Morgans Ltd
10% Debentures (issued and redeemable at par)
20X7 final dividend paid
CU
20,500
450,000
82,000
CU
100,000
50,000
56,015
20,000
81,000
18,000
58,045
261,349
1,600,047
907,989
6,260
14,005
126,232
24,291
54,117
6,002
18,822
9,600
12,500
2,037,707
25,040
11,000
62,600
2,037,707
You are provided with the following information in respect of 20X8.

(1) The gain on sale of the property is not expected to recur.
(2) Depreciation is to be provided on the basis of the following policies.
Buildings
Plant and machinery
Straight line over 50 years

Straight line over 10 years
The land originally cost CU115,000. In previous years the policy in respect of plant and machinery had
been to depreciate on a reducing balance basis. All the plant was acquired on 1 January 20X5 with the
exception of a machine acquired for CU22,000 at the start of 20X8.
(3) The intangible asset is a brand arising on the purchase of a sole trader which is held in the books at
original cost. Following an impairment review, fair value less costs to sell has been estimated at
CU10,000 and value in use at CU12,000.
(4) Howells Ltd wishes to propose an ordinary dividend of CU25,000 which will be paid on 25 March
20X9. The 20X8 preference dividends have been declared but not yet paid.
(5) Tax of CU22,500 is to be charged for the current year.
(6) During the year the directors transferred CU10,000 to the general reserve.

(7) Inventories held at 31 December 20X8 are valued at cost of CU68,000. Within this amount there are
1,000 units of finished goods valued at CU20 each. These units are now expected to sell at a
discounted price of CU18 each and incur CU1 selling costs per unit.
Requirements
(a)
Prepare the income statement, statement of changes in equity and notes thereto for the year ended
31 December 20X8 in a form suitable for publication to the extent the information is available. You
should classify expenses by function.
(20 marks)
(b) Explain the concept of 'fair presentation'.
(4 marks)
(24 marks)
Berwick Ltd
Berwick Ltd has produced the following trial balance as at 31 January 20X5.
CU
Profit before tax
Interim dividends paid
Final dividends paid
Development expenditure capitalised
Land and buildings
Revalued
Plant and machinery
Cost
Motor vehicles
Cost
Inventories and work in progress
Trade receivables and trade payables
Prepayments and accruals
Value added tax
Bank balance in hand and overdrawn
Bank loan
Share capital ordinary shares of CU1 each
Retained earnings
Revaluation reserve
Share premium account
CU
370,000
22,000
66,000
70,000
1,500,000
650,000
160,000
250,000
90,000
370,000
420,000
97,000
249,000
3,694,000
380,000
100,000
50,000
110,000
200,000
850,000
770,000
564,000
50,000
3,694,000
Additional information
(1) The companys land and buildings were revalued on 1 February 20X4 at CU1.5 million (land element
CU300,000). The remaining useful life of the buildings at that date was estimated at 40 years. The
property originally cost CU1 million on 1 February 20X0 (land element CU200,000) and was being
depreciated over 50 years.
The company intends to transfer to retained earnings that element of the revaluation reserve realised
by depreciation but has not yet done so for the year ended 31 January 20X5.
(2) No adjustments have been made for the depreciation charges for the year ended 31 January 20X5.
Depreciation rates are as follows.
Land and buildings
Plant and machinery
Motor vehicles
see (1) above

10% straight line
20% reducing balance
(3) The bank loan is repayable over five years in equal annual instalments starting on 30 June 20X5.
(4) Tax on profits for the year has been estimated at CU135,000 and has yet to be provided for in the
trial balance.
QUESTION BANK
(5) The development expenditure was incurred during the year and relates to a single product.
Development will be completed in 20X6. The company believes it has a reasonable expectation of
future benefits but has been unable to demonstrate this.
(6) One of Berwick Ltd's customers was declared insolvent on 15 February 20X5. The customer owed
Berwick Ltd CU20,000 at 31 January 20X5.
Requirement
Prepare the balance sheet of Berwick Ltd as at 31 January 20X5 and the statement of changes in equity for
the year ended 31 January 20X5 in a form suitable for publication to the extent the information is available.
You are not required to prepare any notes to the financial statements.
(20 marks)
Note: Work to the nearest CU'000.
Angus Ltd
An extract from Angus Ltd's nominal ledger at 28 February 20X7 is as follows.
CU'000
Freehold land and buildings
Cost
Accumulated depreciation at 29 February 20X6
Revenue
Operating expenses
Income tax charge for period
Ordinary share capital
Retained earnings at 29 February 20X6
16,000
2,800
200,000
180,000
6,000
200,000
300,000
The following additional information is available. This information is not reflected in the balances above.
(1) On 1 March 20X6 the company commissioned a valuation of its freehold land and buildings for the
first time. This valuation showed an open market value of CU20 million (land element CU4 million)
and an existing use value of CU15 million (land CU3 million). The accounting records have not yet
been adjusted to reflect this valuation. Depreciation for the year ended 28 February 20X7 has not yet
been charged and is to be based on a 40-year useful life. Previously, annual depreciation of CU280,000
had been charged.
(2) The company announced the intended sale of its European operations on 31 January 20X7, when a
formal disposal plan was approved and adopted for full implementation by 30 June 20X7. Plant and
equipment with a carrying amount of CU3 million was classified as held for sale, its fair value at the
date of classification being estimated at CU2.85 million and the costs to sell it at CU50,000. On
10 February 20X7 the company contracted to terminate various operating leases for a payment of
CU50,000. Other costs flowing from this disposal decision were estimated at CU100,000. The
European operations contributed 10% of the revenue and 20% of the expenses shown above. The
company uses the cost model as its accounting policy for plant and equipment.
(3) As a result of the sale in (2) above the company will need to carry out a reorganisation of its other
activities at a cost of CU1.25 million. This reorganisation was announced to the workforce and the
public at the same time as the above.
(4) Prior to the year end the company declared an ordinary dividend of CU2 million.
(5) During April 20X6 a major project on inventory valuation had revealed that inventories in America on
28 February 20X6 had been overvalued by CU355,000 due to a compilation error. No adjustment has
been made for this error, which is considered material but not fundamental.

Requirements
(a)
Prepare, as far as the information permits, the following statements, in a form suitable for publication,
for Angus Ltd for the year ended 28 February 20X7.
(i)
Income statement
(ii)
Statement of changes in equity
(b) Explain the objectives of financial statements, giving appropriate examples.
(15 marks)
(6 marks)
(21 marks)
Goblins Ltd
Goblins Ltd is a computer games manufacturer based in the East End of London. At 31 December 20X4 the
following balances have been extracted.
CU
Patent rights
60,000
Work in progress, 1 January 20X4
125,500
Leasehold buildings
300,000
Ordinary share capital CU1 nominal value
500,000
5% Preference share capital (redeemable 20X8) CU1 nominal value
120,000
Revenue
1,740,600
Staff costs
260,400
Accumulated depreciation on buildings, 1 January 20X4
60,000
Inventories of finished games, 1 January 20X4
155,600
Consultancy fees paid
44,000
Directors' emoluments
360,000
Computers used on site
50,000
Accumulated depreciation on computers, 1 January 20X4
20,000
Income tax
12,400
Ordinary dividend paid, 30 September 20X4
50,000
Bank account
515,200
Trade and other receivables
420,300
Trade and other payables
80,200
Raw materials
294,500
Retained earnings, 1 January 20X4
102,300
The following additional information is available.
(1) Closing finished inventories are valued at cost of CU180,000 whilst work in progress has increased to
CU140,000. These valuations do not take into account the fact that, at the year end physical inventory
count, it was discovered that ten computer games consoles with a cost CU500 each had been badly
damaged. These items have a scrap value of CU50 each.
(2) The patent rights were acquired on 1 January 20X4 in respect of a program with a three-year lifespan.
If the company chose to do so it could sell these rights on without there being a significant impact on
the remainder of the business.
(3) Buildings are depreciated over 30 years. At 1 January 20X4 they were revalued to CU360,000. This
has not been reflected in the accounts. Computers are depreciated over five years. Goblins Ltd makes
a transfer between the revaluation reserve and retained earnings each period as a result of the
revaluation in accordance with best practice.
(4) A final dividend of 15p per ordinary share was declared on 15 December 20X4 and was paid shortly
after the year end. The preference dividend has not yet been paid.
(5) A necessary provision for specific receivables amounting to 5% of year-end receivables is to be
created. In addition, Goblins Ltd received notice on 15 January 20X5 that one of its customers had
gone into liquidation. This customer owed CU45,000 at the year end.
(6) There is an estimated income tax bill in relation to 20X4 of CU120,000. The income tax figure in the
trial balance (a credit balance) represents the difference between the opening provision and the income
tax paid in the year.
QUESTION BANK
Requirements
(a)
Prepare the income statement for Goblins Ltd for the year ended 31 December 20X4 and the balance
sheet at that date in a form suitable for publication to the extent the information is available. You
should classify expenses according to their nature.
(22 marks)
(b) Explain briefly how assets and liabilities are recorded/carried under each of the four different
measurement bases referred to in BFRS Framework for the Preparation and Presentation of Financial
Statements.
(4 marks)
(26 marks)
Harry Ltd
Harry Ltd is a company which makes exclusive furniture to customers precise specifications. An extract
from Harry Ltds nominal ledger at 31 December 20X5 is as follows.
Raw materials and consumables
Salaries and wages
Work in progress at 1 January 20X5
Finished inventories at 1 January 20X5
Cost (land CU2 million)
Accumulated depreciation at 1 January 20X5
Plant and machinery
Cost
Office furniture
Cost
Intangible assets
Lease payment
Retained earnings at 1 January 20X5
Ordinary share capital CU1 nominal value
Preference share capital 4% redeemable CU1 shares
Cash and cash equivalents
Revenue
CU
1,570,000
1,250,500
45,600
13,400
3,600,000
640,000
520,000
375,000
32,000
28,500
15,000
10,000
37,500
25,400
1,968,600
500,000
120,000
200,000
263,500
3,500,000
The following additional information is relevant.

(1) During the year the company used employees idle time to produce new furniture for the companys
offices. The old furniture was all scrapped. Raw materials costing CU54,000 were used. The
employees time amounted to a cost to the company of CU20,500. No adjustment has been made for
this in the above.
(2) On 1 January 20X5 Harry Ltd entered into a lease agreement for a new machine. The fair value of this
machine was CU53,000. The lease agreement provides for six annual payments of CU10,000 on
31 December each year. Interest is to be allocated on the sum-of-the-digits basis. No other plant was
purchased or sold during the year.
(3) Freehold land and buildings were revalued for the first time on 1 January 20X5. The surveyor
performing the valuation estimated an alternative use valuation of CU5 million (including CU4 million
for the land) and an existing use valuation of CU3.5 million (including CU3 million for the land).
Buildings are to continue to be depreciated on a straight-line basis at a rate of 4% but Harry Ltd makes
no transfer between the revaluation reserve and retained earnings in respect of this.
Plant is depreciated on a reducing balance basis at a rate of 20%. Office furniture is depreciated on a
15% straight line basis.

(4) During the year the company made a 1 for 5 bonus issue of its ordinary shares. No entries have been
made in respect of this. Transaction costs amounted to legal costs of CU5,000 and an estimate of
directors time amounting to a cost of CU10,000. Both of these costs have been charged against the
share premium account.
(5) The preference shares are redeemable in 20X9. Dividends of 10p per share on the ordinary shares
and at the coupon rate on the preference shares were declared on 15 December 20X5 and paid early
in 20X6. The income tax charge for the period has been estimated at CU250,000.
(6) The intangible asset relates to a patent acquired on the purchase of a sole trader on 1 January 20X5.
This patent is considered to have a useful life of 20 years. The annual impairment review has indicated
that the patent has a recoverable value at 31 December 20X5 of CU14,000.
(7) Closing inventories at cost amounted to work in progress of CU50,200 and finished goods of
CU15,000. The latter included a table with a cost of CU5,000. The customer who had ordered this
table has been declared bankrupt. He had paid a CU1,000 deposit (which has been credited to
revenue) and owed CU10,000 at the year end in respect of other items. It is estimated that the table
can be sold for CU4,000.
Requirement
Prepare an income statement for Harry Ltd for the year ended 31 December 20X5 and a balance sheet as
at that date in a form suitable for publication. You should classify expenses according to their nature.
(25 marks)
Frodo Ltd
Frodo Ltd is a company which publishes a single textbook and provides tuition courses relating to that text.
An extract from Frodo Ltds nominal ledger at 31 March 20X6 is as follows.
Manufacturing costs
Selling and distribution costs
Inventories at 1 April 20X5
Cost (land CU1,750,000)
Accumulated depreciation at 1 April 20X5
Plant and machinery
Cost
Accumulated depreciation at 1 April 20X5
Borrowings
Retained earnings at 1 April 20X5
Ordinary share capital 50p nominal value
Preference share capital 5% irredeemable CU1 shares
Revenue
Finance costs
CU
4,450,000
410,500
375,000
113,400
2,550,000
480,000
620,000
337,000
200,000
37,500
25,400
212,500
500,000
200,000
63,500
6,700,000
35,000

(1) The borrowings are repayable in ten equal instalments, commencing on 1 April 20X6.
(2) Revenue is made up of the following.
Tuition fees
Book sales
Advances
CU
1,500,000
5,100,000
100,000
6,700,000
QUESTION BANK
The tuition fees all relate to courses held during the year except for fees of CU300,000 which relate
to a ten-week course. Five weeks of this course had already been held by the year end. The remainder
is to be held in June 20X6. The advances relate to a new publication which Frodo Ltd has
commissioned and advertised heavily but which is not yet in production.
(3) There were no movements of non-current assets during the year. However, on 28 February 20X6,
Frodo Ltd decided to sell a major item of plant for which it no longer has any use. This plant cost
CU120,000 on 1 April 20X1 and was advertised for sale on 1 March 20X6 at a price of CU5,000. In
April 20X6 a buyer was identified at the advertised price. The sale is expected to be completed in May
20X6.
Plant is depreciated on a 10% straight line basis, taking into account the month of sale or purchase.
Freehold buildings are depreciated over their useful life of 40 years. Depreciation on plant is charged
to cost of sales. Depreciation on freehold land and buildings is charged to administrative expenses.
(4) At the year end the company was in the throes of a legal action by one of its competitors which claims
that Frodos textbook has breached copyright. The case is not due to be decided until June 20X6 but
Frodo Ltds legal advisors think that the company has a 60% chance of losing the case and estimates
that this would cost Frodo Ltd CU100,000.
(5) One of Frodo Ltds customers who owed CU10,000 at the year end was declared bankrupt on 1 May
20X6.
(6) Closing inventories at cost amounted to CU120,000. Within this valuation is an amount of CU50,000
relating to fixed overheads, being a share of total fixed overheads of CU1 million. Frodo Ltd had
expected to produce one million books during the year but, due to production difficulties only in fact
produced 800,000. Overheads have been allocated on the basis of CU1.25 per book.
(7) The following should be provided for at the year end.
Income tax of CU350,000
An ordinary dividend of 20p per share
The preference dividend
Requirements
(a)
Prepare an income statement for Frodo Ltd for the year ended 31 March 20X6 and a balance sheet as
at that date in a form suitable for publication. You should classify expenses by function.
(21 marks)
(b) Explain the considerations underlying the accounting requirements for not-for-profit entities, including
the possible relevance of BFRSs and IPSASs.
(5 marks)
(26 marks)
Plodder Ltd
As at 30 November 20X0 and 30 November 20W9 Plodder Ltd had the following summarised balance
sheets.
20X0
20W9
CU
CU
CU
CU
ASSETS
Non-current assets
Property, plant and equipment
2,918,000
2,401,000
Intangibles
550,000
584,000
Investments
406,000
3,874,000
2,985,000
Current assets
Inventories
685,000
598,000
480,000
465,000
Prepayments
96,000
126,000
226,000
200,000
1,487,000
1,389,000

20X0
CU
Total assets
EQUITY AND LIABILITIES
Capital and reserves
Revaluation reserve
Retained earnings
Non-current liabilities
Borrowings
Current liabilities
Accruals
Taxation
Provisions
Total equity and liabilities
20W9
CU
5,361,000
CU
CU
4,374,000
1,100,000
342,000
375,000
1,785,000
3,602,000
1,000,000
200,000
1,311,000
2,511,000
500,000
1,000,000
749,000
108,000
282,000
120,000
427,000
131,000
165,000
140,000
1,259,000
5,361,000
863,000
4,374,000
Plodder Ltd's income statement for the year ended 30 November 20X0 was as follows.
CU
5,762,000
(4,630,000)
1,132,000
(236,000)
(127,000)
769,000
(68,000)
55,000
756,000
(232,000)
524,000
Revenue
Cost of sales
Gross profit
Distribution costs
Profit from operations
Finance charge
Investment income
Profit before tax
Income tax expense
Profit for the period
(1) Included within trade and other payables at 30 November 20X0 is CU351,000 (20W9 CU106,000)
relating to purchases of property, plant and equipment.
(2) Included within accruals at 30 November 20X0 is CU25,000 (20W9 CU50,000) in respect of interest
payable.
(3) Property, plant and equipment and intangible assets can be analysed as follows.
20X0
CU
Cost or valuation
Intangibles
Cost
Accumulated amortisation
20W9
CU
7,839,000
(4,921,000)
2,918,000
6,375,000
(3,974,000)
2,401,000
883,000
(333,000)
550,000
938,000
(354,000)
584,000
(4) During the year, plant with an original cost of CU479,000 and a carrying amount at the date of
disposal of CU326,000 was sold for CU424,000 which was received in cash. Intangible assets with
accumulated amortisation at the date of disposal of CU40,000 were sold for CU12,000.
10
QUESTION BANK
(5) On 30 November 20X0 freehold land which originally cost CU175,000 (and had not been
depreciated) was revalued to CU550,000.
Requirement
Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations in
accordance with BAS 7 Cash Flow Statements for Plodder Ltd for the year ended 30 November 20X0, using
the indirect method.
(22 marks)
Copeland Ltd
As at 31 May 20X1 and 31 May 20X2 Copeland Ltd had the following summarised balance sheets.
20X2
CU
ASSETS
Non-current assets
Cost or valuation
Intangibles
Cost
5,164,000
(2,198,000)
9,360,000
(3,690,000)
1,112,000
948,000
95,000
489,000
Total assets
Revaluation reserve
Retained earnings
15% debenture loan
Current liabilities
Interest payable
Taxation
Dividends payable
20X1
CU
CU
4,347,000
(2,001,000)
2,966,000
Investments
Current assets
Inventories
Prepayments
CU
5,670,000
2,145,000
10,781,000
2,644,000
13,425,000
2,346,000
8,645,000
(2,715,000)
1,086,000
840,000
108,000
322,000
5,930,000
127,000
8,403,000
2,356,000
10,759,000
1,800,000
1,543,000
1,880,000
2,739,000
7,962,000
1,000,000
1,421,000
1,256,000
746,000
4,423,000
3,000,000
4,500,000
1,417,000
225,000
641,000
180,000
896,000
337,000
503,000
100,000
2,463,000
13,425,000
1,836,000
10,759,000
11

Copeland's income statement for the year ended 31 May 20X2 was as follows.
Revenue
Cost of sales
Gross profit
Distribution costs
Finance cost
Investment income
Profit before tax
Income tax expense
CU
8,646,000
(3,705,000)
4,941,000
(465,000)
(571,000)
3,905,000
(563,000)
78,000
3,420,000
(684,000)
2,736,000

(1) On 31 May 20X2 property which was originally purchased for CU734,000 (and which had not
previously been revalued) was revalued to CU1,000,000. There were no other movements on the
revaluation reserve during the year.
(2) During the year plant and equipment with an original cost of CU1,201,000 and a carrying amount at
the date of disposal of CU496,000 was sold at a loss of CU189,000. As at 31 May 20X2 CU165,000 of
the sale proceeds had yet to be received and is included within trade and other receivables. As at
31 May 20X1 the corresponding figure in respect of disposals made during the year then ended was
CU79,000, which was received in full in June 20X1.
(3) As in the previous year, all acquisitions of property, plant and equipment made during the year were
paid for in cash at the date of acquisition. However, included within trade and other payables as at 31
May 20X2 is CU376,000 (20X1 CUnil) relating to the acquisition of intangible assets.
(4) There were no disposals of intangible assets or investments during the year. Trade and other
receivables as at 31 May 20X2 include CU10,000 (20X1 CU8,000) in respect of interest receivable
on investments.
(5) As at 31 May 20X1 the ordinary share capital of Copeland Ltd consisted of 1 million shares, each with
a CU1 nominal value. The following day the company made a 1 for 2 bonus issue of 500,000 shares
(utilising available profits).
(6) The dividend payable at both balance sheet dates represents a 10p per share dividend on the
companys ordinary shares. Dividends of CU243,000 were charged to retained earnings in the year
ended 31 May 20X2.
(7) Copeland Ltd has not yet prepared its statement of changes in equity for the year ended 31 May 20X2.
Requirement
Prepare a cash flow statement and a note reconciling profit before tax to cash generated from operations in
accordance with BAS 7 Cash Flow Statements for Copeland Ltd for the year ended 31 May 20X2, using the
indirect method.
(24 marks)
12
QUESTION BANK
Pippin Ltd
The following are the draft financial statements for Pippin Ltd for the year ended 31 December 20X7.
Income statement for the year ended 31 December 20X7
CU
7,350,500
(4,560,600)
2,789,900
(1,060,800)
(768,000)
961,100
(75,000)
886,100
(350,000)
536,100
Revenue
Cost of sales
Gross profit
Distribution costs
Finance charge
Profit before tax
Income tax expense
Balance sheet as at 31 December 20X7
20X7
CU
ASSETS
Non-current assets
Intangibles
560,500
169,000
25,000
10,700
Total assets
Revaluation reserve
Retained earnings
Preference share capital (redeemable)
CU
7,500,400
350,700
7,851,100
Current assets
Inventories
Investments
Current liabilities
Taxation
Ordinary dividend payable
20X6
CU
CU
6,950,300
300,500
7,250,800
765,100
144,500
12,400
20,200
765,200
8,616,300
942,200
8,193,000
4,000,000
1,200,000
500,000
1,357,800
7,057,800
3,500,000
950,000
236,800
2,206,700
6,893,500
500,000
400,000
148,500
410,000
500,000
139,500
360,000
400,000
1,058,500
8,616,300
899,500
8,193,000
Statement of changes in equity for the year ended 31 December 20X7 (extract)
Transfer from revaluation reserve

Dividends on ordinary shares
Balance brought forward
Balance carried forward
Retained
earnings
CU
15,000
536,100
(1,400,000)
2,206,700
1,357,800
13

(1) During the year Pippin Ltd issued both further ordinary shares and further redeemable preference
shares. The latter were issued at par.
(2) Investments categorised as current assets are held for the short-term and are readily convertible into
cash on demand.
(3) During the year Pippin Ltd sold plant and equipment with a carrying amount of CU560,500 for
CU600,000. Total depreciation charges for the year were CU750,600.
(4) Trade and other payables include accrued interest of CU5,000 (20X6 CU7,000).
(5) Intangibles relate to development costs capitalised in accordance with BAS 38 Intangible Assets. Costs
amounting to CU77,500 were capitalised during the year.
Requirement
Prepare a cash flow statement and note reconciling profit before tax to cash generated from operations in
accordance with BAS 7 Cash Flow Statements for Pippin Ltd for the year ended 31 December 20X7, using
the indirect method.
(18 marks)
10
Merry Ltd
The following are the draft financial statements for Merry Ltd for the year ended 31 March 20X5.
Income statement for the year ended 31 March 20X5
CU
5,650,500
(3,460,600)
2,189,900
(978,800)
(256,000)
955,100
(89,000)
866,100
(297,600)
568,500
Revenue
Cost of sales
Gross profit
Distribution costs
Finance charge
Profit before tax
Income tax expense
Balance sheet as at 31 March 20X5
ASSETS
Non-current assets
Investments
Current assets
Inventories
Total assets
14
20X5
CU
CU
20X4
CU
4,360,400
172,000
4,532,400
460,600
269,000
135,000
CU
2,950,300
156,000
3,106,300
365,100
244,500
120,200
864,600
5,397,000
729,800
3,836,100
QUESTION BANK
20X5
CU
Retained earnings
Finance lease liabilities
Current liabilities
Taxation
CU
20X4
CU
3,000,000
1,050,000
142,500
4,192,500
1,800,000
850,000
74,500
2,724,500
500,000
400,000
348,500
300,000
56,000
289,600
350,000
72,000
704,500
5,397,000
CU
711,600
3,836,100

(1) Merry Ltd has not yet prepared its statement of changes in equity.
(2) During the year Merry Ltd made a 1 for 10 bonus issue of its ordinary shares. It subsequently issued
further shares at the market price. No dividends were payable as at 31 March 20X5 or 20X4.
(3) Cash paid to and on behalf of employees during the year amounted to CU2,650,000.
(4) An impairment review at 31 March 20X5 identified a fall in the recoverable amount of certain
investments. As a result, an impairment loss of CU12,000 was identified and written off to
administrative expenses.
(5) During the year Merry Ltd acquired plant and equipment for cash of CU2,057,000. In addition, plant
and equipment with a fair value of CU600,000 was acquired under a finance lease. All finance costs
relate to finance leases. The depreciation charge for the year, charged to cost of sales, was
CU750,600. A loss on sale of plant of CU55,000 was made during the year.
Requirements
(a)
Prepare a cash flow statement in accordance with BAS 7 Cash Flow Statements using the direct method
and a note of gross operating cash flows for Merry Ltd for the year ended 31 March 20X5.
(21 marks)
(b) Prepare the note reconciling profit before tax to cash generated from operations for Merry Ltd for
the year ended 31 March 20X5 as it would appear under the indirect method.
(4 marks)
(25 marks)
15
16
QUESTION BANK
Preparation of extracts from financial statements
11
Montrose Ltd
Montrose Ltd has various outstanding matters to resolve regarding inventories in preparing its financial
statements for the year ended 30 September 20X4.
(1) Overheads relating to finished goods and work in progress have yet to be included in the final
inventory valuation. An analysis of the company's costing records shows the following.
CU
1,000,000
660,000
300,000
200,000
150,000
Direct labour
Production overheads
General administration overheads
Distribution overheads
Design and marketing overheads
The company's production activity has been as follows.
Year ended
30 September 20X3
30 September 20X4
30 September 20X5 (projected)
Actual units
650,000
500,000
Budget units
650,000
700,000
800,000
Full capacity of the plant is 900,000 units.

A new production process will be introduced in 20X5.
(2) The supply of raw materials in the year ended 30 September 20X4 was interrupted, due to a fire at a
supplier's premises. As compensation for production delays, the supplier agreed to a one-off payment
of CU100,000, which was received on 31 August 20X4, and this was credited to production
overheads.
(3) Raw materials are imported at a purchase cost of CU5.00 per unit. Other costs arising are as follows.
CU per unit
1.00
0.50
1.00
Import duty
Transport to factory
Storage and handling costs
(4) Half of the work in progress is 75% complete, and the remainder is 50% complete as to labour and
overheads, all raw materials having been issued.
(5) The company manufactures to customers' requirements for all orders. The final selling price is
determined on a cost plus standard mark-up basis for the majority of orders.
(6) Inventory at 30 September 20X4 amounted to the following.
Raw materials
Work in progress
Finished goods
Units
100,000
50,000
50,000
17

(7) The total net realisable value (NRV) of finished goods is CU560,000. The following is an analysis of
major orders in finished goods at the year end.
Units
Order M147
Order M293
Order M467
Order M364
Order M191
1,800
5,555
6,500
4,630
3,240
21,725
NRV
CU
22,000
55,000
60,000
54,000
40,000
231,000
Requirements
(a)
Calculate the amount to be included in the financial statements of Montrose Ltd for the year ended
30 September 20X4 in respect of inventories, preparing all relevant extracts from the financial
statements excluding accounting policy notes.
(12 marks)
(b) Explain the different concepts of capital and capital maintenance used in accrual basis accounting,
illustrating your explanation with appropriate examples.
(6 marks)
(18 marks)
12
Gandalf Ltd
At 1 July 20X5 the capital and reserves section of Gandalf Ltd's balance sheet showed the following.
Ordinary share capital (CU1 shares)
Revaluation reserve
Retained earnings
CU
500,000
120,000
420,000
347,500
1,387,500
The accountant of Gandalf Ltd has prepared a draft income statement for the year ended 30 June 20X6
which shows a profit for the period of CU135,500. However, there are certain matters which he is unsure
how to deal with and these are set out below. He has also asked for your assistance in preparing the
statement of changes in equity for that year. It is Gandalf Ltd's policy to maintain as high a possible balance
on retained earnings, whilst following BFRS.
(1) During the year Gandalf Ltd issued a further 300,000 ordinary shares at a price of CU1.25 per share. It
also issued 200,000 7% 50p irredeemable preference shares at par and 100,000 5% 50p redeemable
preference shares at a price of 70p per share. Transaction costs in relation to these share issues were
CU5,000, CU3,000 and CU1,000 respectively.
(2) During the year an ordinary interim dividend of CU30,000 was paid. The accountant has debited this
to finance charges. A further ordinary dividend of CU25,000 was declared on 15 June 20X6 and is
expected to be paid shortly. The accountant has made no entries in respect of this dividend or the
two preference dividends which had been declared by the year end and are due to be paid shortly.
(3) On 1 July 20X5 Gandalf Ltd revalued its freehold land and buildings which were carried in the books at
that date at a cost of CU500,000 (land CU300,000 and buildings CU200,000) and accumulated
depreciation of CU50,000. Depreciation is charged on a straight-line basis over an original estimated
useful life of 40 years. The valuation showed a fair value for the land of CU600,000 and for the
buildings of CU400,000. The estimated remaining useful life of the buildings was reassessed at the
same date and is believed to be 50 years. Depreciation for the year on freehold land and buildings has
not yet been charged.
(4) On 1 July 20X5 Gandalf Ltd decided to change its depreciation policy for plant and machinery from
20% straight-line to 25% reducing balance. Prior to charging depreciation for the year ended 30 June
20X6 the plant and machinery account showed a cost of CU357,800 and accumulated depreciation of
CU125,700. There were no movements on the plant and machinery account during the year. The
accountant has not yet calculated the depreciation charge for the year as he is unsure how to do this.
18
QUESTION BANK
(5) Whilst preparing the draft financial statements the accountant discovered an error in the previous
year's financial statements. Expenditure of CU42,500 had been capitalised as an intangible asset
whereas in fact this was in contravention of BAS 38. This expenditure has been subject to an
amortisation charge of 10% in the current year.
Requirements
(a)
Calculate a revised profit for the period reflecting the above matters.
(4 marks)
(b) Prepare the statement of changes in equity for Gandalf Ltd for the year ended 30 June 20X6.
(11 marks)
(c)
Explain the difference between financial statements prepared using the accrual basis and those
prepared using the cash accounting or break-up bases, illustrating your answers with simple
calculations.
(8 marks)
(23 marks)
13
Cagreg Ltd
Cagreg Ltd manufactures and sells heavy plant. The company also hires out plant for monthly periods (or
multiples thereof).
You ascertain the following details.
(1) Freehold land
Freehold land was acquired on 1 February 20X8 for CU100,000 to build a new factory. Due to
planning difficulties, building has not yet been started. The directors wish to revalue the land to its fair
value of CU130,000 at 30 September 20X9.
(2) Buildings
On 1 October 20X8 the directors reviewed the useful life of the buildings and determined that the
remaining life was 56 years. The buildings were acquired for CU200,000 on 1 October 20X4, when
their useful life was estimated at 40 years.
(3) Plant and machinery
Plant and machinery is accounted for under the cost model accounting policy and is depreciated at the
rate of 40% per annum based on carrying amount. Such plant has an estimated life of five years.
(i)
Plant which cost CU20,000 on 1 October 20X6 was classified as held for sale on 1 February
20X9. The sale was agreed at CU5,600 and completed on 31 March 20X9.
(ii)
New plant acquired cost CU60,000 on 1 January 20X9.
At 1 October 20X8 the cost of plant and machinery (not leased) was CU200,000, with accumulated
depreciation of CU72,000.
(4) Computer
Previously this has been depreciated on a straight-line basis at the rate of 10% per annum on cost. The
computer was acquired on 1 January 20X7 for CU60,000, and by the beginning of this accounting year
CU10,500 of depreciation had been charged. In an effort to charge out computer time to departments,
a record is now kept of computer time used. Management wish to depreciate the computer on a
usage basis. The manufacturer's estimate of total usage time of the computer's life is 40,000 hours. The
data processing manager estimates that some 10,000 hours have been worked prior to the current
accounting period. During the current year the record shows 4,800 hours worked. The computer will
have a scrap value of CU4,500 at the end of its useful life.
Requirements
(a)
Prepare the schedule of non-current assets which will form the note to the company's published
balance sheet at 30 September 20X9.
(16 marks)
(b) Briefly explain the qualitative characteristics contained in BFRS Framework for the Preparation and
Presentation of Financial Statements illustrating your answer with reference to the provisions of BAS 16
Property, Plant and Equipment.
(6 marks)
(22 marks)
19
14
Roberts Ltd
Roberts Ltd is a pharmaceutical company owning significant non-current tangible assets which are all initially
recorded at cost. Subsequently, land and buildings are remeasured at fair value when this differs materially
from the carrying amount. Roberts Ltd adopts the policy of transferring the revaluation surplus included in
equity to retained earnings as it is realised.
During the year ended 31 December 20X4 the following events have occurred.
(1) On 30 September 20X4 a fire occurred in the Newcastle factory. All of the inventories and the
majority of the non-current assets located at the site were fully insured and therefore the company
has suffered no loss in respect of those assets. However, one item of specialised machinery had been
transferred into the Newcastle factory on 1 June 20X4 to help the company fulfil a special order.
Unfortunately the insurance company was not notified about this and has refused any compensation.
The specialised machinery originally cost CU2.8 million on 1 February 20X0 and was being depreciated
over eight years. Following the damage caused by the fire, Roberts Ltd has identified two options.
(i)
Sell the machine. A prospective purchaser has been identified and has indicated that he would pay
65% of the carrying amount at the date of the fire. However, before the sale takes place, the
purchaser expects Roberts Ltd to carry out repairs to the asset. This work can be done by
employees of Roberts Ltd and will take approximately 600 hours of skilled labour. Such labour is
routinely charged out to customers at an hourly rate of CU38.40 (including a profit margin of
20% on cost). In addition Roberts Ltd will have to pay for the machinery to be moved to its new
location. An estimate of CU21,000 has been obtained from a transport company, and there will
also be a one-off insurance cost for the journey of CU2,000.
(ii)
Repair the asset, transfer it to a factory in Belgium and use it there for approximately three years.
The local accountant in Belgium has prepared detailed cash flow projections (which include the
repair costs) and estimates the value in use to be CU600,000.
(2) On 1 April 20X1 Roberts Ltd acquired a plot of land in Cardiff at a cost of CU2.6 million. During
20X1 a factory was built on the land at a cost of CU1.7 million. Additional architects' fees of
CU80,000 were also incurred. The building work was finished on 1 May 20X2, when the factory was
occupied and brought into use.
On 31 December 20X3 the land and buildings were revalued to their fair value of CU7.8 million (with
60% of the value relating to the land). At this date the directors also reassessed the total useful life of
the building, increasing it from 30 to 40 years.
On 31 December 20X4 it was discovered that toxic chemicals had been leaking from the factory into
the land. The building can no longer be used. However, a waste disposal company has offered CU1.5
million for the site (the purchaser intends to demolish the building and use the site for landfill).
Requirements
(a)
Calculate the carrying amounts of the land and the buildings (separately) at 31 December 20X3 and
31 December 20X4 and the balance on the revaluation reserve at 31 December 20X4.
(6 marks)
(b) Calculate the impairment charges to the income statement for the year ended 31 December 20X4 and
show how they would be disclosed.
(7 marks)
(13 marks)
20
QUESTION BANK
15
Dumfries Ltd
Dumfries Ltd, which uses the straight-line method of depreciation, entered into leasing contracts on
1 May 20X4 for certain items of plant and machinery and office equipment. The following information is
relevant.
(1) Plant and machinery with a fair value of CU109,140 was leased under an agreement which required
annual payments of CU31,300 payable in advance. The primary period of the lease is four years, after
which the company can continue to lease the plant and machinery at a nominal rent and is likely to do
so.
Dumfries Ltd has estimated the useful life of the plant and machinery at five years and its residual value
as CUnil. Using the interest rate implicit in the lease of 10%, the present value of the minimum lease
payments is CU109,143. The company is fully responsible for the insurance and maintenance of the
plant and machinery.
(2) Office equipment with a fair value of CU60,510 was leased under an agreement which required annual
payments of CU15,000 payable in advance. The company is committed to the lease for three years but
the lessor is responsible for the insurance and maintenance of the equipment. The lessor has
estimated the useful life of the office equipment at 12 years. Using the interest rate implicit in the lease
of 10%, the present value of the minimum lease payments is CU41,040.
Requirements
(a)
Indicate how the accounting treatment of assets acquired under finance leases reflects the definition of
elements, the recognition criteria and the measurement bases set out in BFRS Framework.
(6 marks)
(b) For leases (1) and (2) above, using the actuarial method, calculate the amounts to be included in the
income statement for each year of the leases and in the balance sheet as at 30 April 20X5, preparing
the reconciliation note for property, plant and equipment and the other notes specifically required by
BAS 17 Leases.
(14 marks)
(20 marks)
16
Crieff Ltd
Crieff Ltd had the following transactions in the year ended 30 June 20X8.
(1) A computer-controlled cutting machine was leased at a cost of CU40,000 per annum payable in
advance. The primary lease term is for five years from 1 July 20X7 and the machine is expected to
have a useful life of five years, with no residual value. The machine would have cost CU175,000 if
bought outright. Crieff Ltd is responsible for the maintenance and insurance of the asset. The interest
rate implicit in the agreement is 8% per annum and the present value of the minimum lease payments
is CU172,480.
(2) Items of office equipment were leased at a cost of CU7,500 per month payable in advance. The lease
term is for two years from 1 September 20X7 and can be cancelled at any time by either party to the
lease. Any maintenance is carried out by the lessor. The office equipment would have cost CU300,000
if bought outright, and is expected to have a useful life of six years.
(3) An agreement was entered into on 1 July 20X7 for the lease of an automatic packing machine at an
annual cost of CU30,000 payable in arrears on 30 June each year. The agreement is for five years and
Crieff Ltd has the option to purchase the asset at the end of the five years at a nominal cost. The asset
is expected to have a useful life of eight years. The machine would have cost CU120,000 if bought
outright. The interest rate implicit in the agreement is 8% per annum and the present value of the
minimum lease payments is CU119,790.
(4) A long-term lease of 40 years for land and buildings with lease payments of CU60,000 per annum in
advance was entered into on 1 July 20X7. The fair value of the leasehold interests has been estimated
at CU600,000 of which CU60,000 relates to land and CU540,000 to buildings.
21

The useful life of the buildings has been professionally assessed at 45 years. The interest rate implicit in
the lease is 10% and the present value of the minimum lease payments attributable to the buildings is
CU528,120.
Requirements
(a)
Briefly explain the concepts underlying the accounting treatments required by BAS 17 Leases with
reference to BFRS Framework.
(3 marks)
(b) Calculate the appropriate amounts to be disclosed in the financial statements for the year ended
30 June 20X8, preparing all relevant disclosure notes. You should use the actuarial method to
apportion any finance charges. You are not required to produce any notes relevant to the cash flow
statement or accounting policies notes.
(20 marks)
(23 marks)
17
ITC Solutions Ltd

ITC Solutions Ltd (ITC) is a company assembling and selling computers. You are the financial accountant of
the company and you have prepared draft annual financial statements for the year ended 28 February 20X5,
for the approval of the board.
The CEO has challenged the figure for revenue as it is less than the figure he was expecting, based on his
personal records. He asked you to provide an analysis of revenue from each client, which he compared to
his own figures, and he has found three apparent discrepancies. These apparent discrepancies relate to the
following transactions:
(1) ITC entered into a fixed price contract for CU120,000 with Arial Ltd to build a computer. Work had
begun on this project; the costs incurred to date were CU60,000 and it was estimated to be twothirds completed. However, the engineers have just discovered an incompatibility between two key
components and the work on the computer to date will need major revisions. It is difficult to estimate
the costs of completing the work because of the complexity of the new hardware. It is considered that
CU50,000 of the costs incurred to date are recoverable from Arial Ltd.
(2) ITC acts as an agent for ProMarket Ltd, a marketing company. The arrangement is that ITC offers to
its clients the services of ProMarket Ltd. If an ITC client uses ProMarket Ltd then the gross fee is paid
to ITC, who then remit the fee, less 15% commission, to ProMarket Ltd. In the year ended
28 February 20X5 ITC received gross fees of CU300,000 for marketing services provided by
ProMarket Ltd.
(3) ITC is the exclusive retailer of computers manufactured by LapTop Ltd. LapTop Ltd have announced
that its latest model, which has a very high specification, is now ready for sale and will be released to
the market in mid-April 20X5. ITC will buy the computers for CU600 and sell them for CU1,000. In
the short term, demand for the computer will exceed supply and 500 customers of ITC have each paid
a deposit of CU150 in February 20X5 to secure a computer.
The CEO cannot understand your figures and he considers that the total revenue from these three projects
is:
CU
(1)
120,000
(2)
300,000
75,000
(3) 500 CU150 =
495,000
Requirements
Prepare notes for a meeting with the CEO which:
(a)
Explain what is meant by elements of financial statements and the principles of recognition of those
elements.
(4 marks)
(b) Applies these principles to the above three transactions, showing how you have calculated revenue in
the financial statements for the year ended 28 February 20X5.
(12 marks)
22
QUESTION BANK
(16 marks)
18
Withington Ltd
Withington Ltd is organised into several divisions. The following events relate to the year ended
31 December 20X0.
(1) A number of customers have initiated legal proceedings relating to the supply of electrical transformer
units during 20X0. Two thousand units were installed during the year. A number proved to be faulty.
Following adverse publicity substantially all of the customers are claiming the units are faulty.
Withington Ltd's lawyers have confirmed that they believe 25% of the claims are defendable at no cost.
The average level of damages per successful claim is estimated at CU1,000. A similar provision was in
place at 31 December 20W9 disclosed in the balance sheet at CU1 million. CU800,000 was paid out in
such claims during 20X0.
(2) A mechanical transformer unit supplied to Swithin Ltd during the year exploded, causing a fire. Swithin
Ltd has initiated legal proceedings for damages of CU10 million against Withington Ltd. A legal expert
has advised Withington Ltd that there is only a 30% chance of defending the claim successfully. The
present value of this claim has been estimated at CU9 million. The expert has investigated the cause of
the problem with a team of accident consultants. Together they have concluded that parts supplied by
George Ltd to Withington Ltd for inclusion in the transformer unit were defective and contributed to
the explosion. They have estimated that George Ltd's contributory negligence is 40% of any final
settlement. Negotiations have commenced with George Ltd and the legal expert believes that this
claim is likely to succeed.
(3) On 1 January 20X0 Withington Ltd installed a new electric machine. The electric machine cost
CU200,000 and has an expected life of 20 years. The machine is lined with a special compound. The
lining needs replacing every four years. The cost of the lining included within the machine cost is
CU40,000. The financial controller proposes to capitalise the machine at CU200,000 and depreciate
over 20 years, while building up a replacement provision over four years for the relining of the
machine.
(4) Withington Ltd has begun the extraction of metal ore in an overseas country, Didland. On 1 January
20X0 Withington Ltd erected some infrastructure on the site at a cost of CU200,000. Withington Ltd
has a five year operating licence issued by Didland government for the site. Didland has no
environmental clean-up law enacted. Withington Ltd made public statements during the licence
negotiations that as a responsible company it would restore the environment at the end of the licence.
At the end of five years the cost of removing the infrastructure has been estimated at CU100,000. In
addition, further clean-up costs will be progressively created as the ore is extracted. On the basis of
the planned extraction, the total cost of cleaning up the extracted ore hole will be CU400,000 at the
end of five years. Extraction commenced on 1 January 20X0 and is currently at planned levels.
(5) On 1 July 20X0 Withington Ltd entered into a two-year, fixed price, long run manufacturing contract
with Franklin Ltd. Withington Ltd is manufacturing 1,000 processor units per month. The forecast
profit per unit was CU10 but, due to unforeseen cost increases and production problems, each unit is
anticipated to make a loss of CU7. The compensation payable for not fulfilling the contract is CU2
million.
(6) During the year a restructuring of the Chuckholder division began. The aim of the plan was to reduce
costs and improve business efficiency. The division has not been separately reported as a business
segment, and accounts for only 2% of group revenue. The plan was implemented on 1 September
20X0, when the main attributes were announced to the workforce.
At 31 December 20X0 the anticipated further costs to be incurred are as follows.
CU'000
Redundancy costs
1,000
Lease termination
2,300
Retraining
1,100
Relocation
2,100
Marketing relaunch
1,400
Investment in new systems
1,000
8,900
23

Requirements
(a)
Prepare the provisions and contingencies note for the financial statements for the year ended
31 December 20X0, including narrative commentary.
(15 marks)
(b) Calculate the annual depreciation charge for 20X0 arising from the above transactions.
(3 marks)
(18 marks)
19
Islay Ltd
Islay Ltd has acquired the following businesses.
(1) Savalight, a business specialising in the production of low-cost, energy-efficient light bulbs, acquired on
1 June 20X6 for CU580,000. The identifiable assets, liabilities and contingent liabilities of the business
had a net carrying amount of CU550,000, and were valued at CU500,000 on 1 June 20X6. An
impairment loss of CU20,000 in relation to the goodwill acquired in this business combination was
recognised in the year ended 31 May 20X8.
(2) Green Goods, a business specialising in the distribution of a range of environmentally-friendly
products, acquired on 1 June 20X7 for CU1.8 million. The assets, liabilities and contingent liabilities of
the business had a net carrying amount of CU1.1 million and were valued at CU1.3 million on
1 June 20X7, including goodwill of the business of CU150,000 and a patent of CU70,000 allowing Islay
Ltd sole use of unique distribution systems for ten years. An impairment loss of CU50,000 in relation
to the goodwill acquired in this business combination is to be recognised in the year ended 31 May
20X9.
(3) 70% of Smart IT Ltd, a business specialising in the distribution of computers, acquired on 1 June 20X8
for CU1.1 million cash. The identifiable assets, liabilities and contingent liabilities of the business had a
net carrying amount of CU1 million and were valued at CU1.2 million on 1 June 20X8. In addition, the
directors of Smart IT Ltd believe that they have built up goodwill within the company and that it is
worth CU200,000.
Islay Ltd revalued one class of its property, plant and equipment on 1 June 20X8, and created a revaluation
reserve of CU600,000. The revalued assets have a remaining useful life of ten years.
The group's capital and reserves (before reflecting any goodwill impairment or amortisation of intangibles
arising from the above acquisitions) in the draft consolidated financial statements as at 31 May 20X9 are as
follows.
CU'000

Called up share capital (5,000,000 ordinary shares of CU1 each)
Revaluation reserve (before any 20X9 transfer to retained earnings)
Retained earnings (CU175,500 for the year ended 31 May 20X9)
5,000
600
700
6,300
Requirement
Calculate and disclose the amounts for intangible assets to be included in the consolidated financial
statements for Islay Ltd for the year ended 31 May 20X9, providing the following disclosures.
24
Balance sheet extracts
Disclosure note for intangibles (a schedule showing the movements in the year)
Statement of changes in equity attributable to the equity holders of Islay Ltd.
(11 marks)
QUESTION BANK
20
Greenstones Ltd
Greenstones Ltd is a large international company operating in high-tech industries and it incurs significant
costs in researching and developing new products. During the year to 31 December 20X8 its Rajshahi
division has been working on three key projects.
Project Alpha
Development of a new microchip on behalf of Codack Ltd (costs plus 40% to be

reimbursed by Codack Ltd).
Project Beta
Research into the next generation of digital cameras.
Project Gamma
Development of a new and improved nylon substitute for material currently used in
the casings for digital cameras.
At 1 January 20X8 the following costs had been capitalised.
Specialised equipment
Accumulated depreciation (useful life 60 months)
Research and development
Project
Alpha
CU
Project
Beta
CU
160,000
Project
Gamma
CU
500,000
(200,000)
650,000
At 31 December 20X8 Project Alpha was held up awaiting supply of a suitable electronic microscope. It is
envisaged that commercial production by Codack Ltd will start in 20Y0.
Project Beta shows great promise but significant production problems still remain.
Project Gamma was completed on 1 October 20X8 with the start of production of the new product. On 1
April 20X7, when the accumulated research and development costs stood at CU470,000, the final technical
problems were overcome. On 1 October 20X8 the specialised equipment was transferred to other
projects at a carrying amount of CU140,000.
During the year the following costs were incurred.
Materials
Labour
Project
Alpha
CU
22,000
45,000
Project
Beta
CU
15,000
65,000
Project
Gamma
(to 1
October
20X8)
CU
98,000
75,000
In the three months to 31 December 20X8 sales of the new camera casings exceeded expectations and
profit margins were above forecast. It is estimated that the product will have a life of five years.
Requirements
(a)
Explain the qualitative characteristics of relevance and reliability and the potential for conflict between
them, giving an appropriate example.
(3 marks)
(b) Evaluate the treatment of development expenditure set out in BAS 38 Intangible Assets against the
characteristics of relevance and reliability.
(4 marks)
(c)
Prepare extracts from the financial statements for the year ended 31 December 20X8 reflecting the
above. The only note required is that relating to charges against operating profits.
(10 marks)
(17 marks)
25
21
Okehampton Ltd
Okehampton Ltd carries land and buildings under the revaluation model allowed by BAS 16 Property, Plant
and Equipment and plant and equipment under the cost model.
On 30 June 20X6 Okehampton Ltd decided to sell four of its non-current assets, all of which met the held
for sale criteria under BFRS 5 Non-current Assets Held for Sale and Discontinued Operations on that date.
Details of these four assets are as follows.
(1) The George House land and buildings had a carrying amount of CU300,000 at 31 December 20X5 and
as it had originally cost CU200,000, a surplus of CU100,000 stood in the revaluation reserve in respect
of it at that date. Depreciation on the buildings element is charged at the rate of CU6,000 per annum;
on historical cost the annual charge would have been CU4,000. On 30 June 20X6 and 31 December
20X6 its fair value was estimated as CU320,000 and the costs to sell at CU9,000. It was sold in 20X7
for CU350,000 net of selling expenses.
(2) The Elizabeth House land and buildings had a carrying amount of CU400,000 at 31 December 20X5
and as it had originally cost CU350,000, a surplus of CU50,000 stood in the revaluation reserve in
respect of it at that date. Depreciation on the buildings element is charged at the rate of CU12,000
per annum; on historical cost the annual charge would have been CU8,000. On 30 June 20X6 and 31
December 20X6 its fair value was estimated as CU360,000 and the costs to sell at CU8,000. It was
sold in 20X7 for CU310,000 net of selling expenses.
(3) The Axford item of plant had a carrying amount of CU200,000 at 31 December 20X5. Depreciation is
charged at the rate of CU20,000 per annum. On 30 June 20X6 and 31 December 20X6 its fair value
was estimated as CU140,000 and the costs to sell at CU9,000. It was sold in 20X7 for CU120,000 net
of selling expenses.
(4) The Waterman item of plant had a carrying amount of CU600,000 at 31 December 20X5.
Depreciation is charged at the rate of CU90,000 per annum. On 30 June 20X6 and 31 December
20X6 its fair value was estimated as CU620,000 and the costs to sell at CU15,000. It was sold in 20X7
for CU635,000 net of selling expenses.
The balance on Okehampton Ltd's revaluation reserve at 31 December 20X5 was CU370,000 and there
were no movements on that reserve other than those in respect of George House and Elizabeth House.
Requirements
Prepare detailed calculations of:
(a)
The carrying amounts of these four assets at 31 December 20X6 and the balance on the revaluation
reserve on that date.
(9 marks)
(b) The amounts to be recognised in respect of these assets in the income statement for the year ended
31 December 20X6.
(4 marks)
(c)
The amounts to be recognised in respect of these assets in the income statement for the year ended
31 December 20X7 and the balance on the revaluation reserve on that date.
(4 marks)
(17 marks)
22
Banchory Ltd
You have been approached by the financial controller of Banchory Ltd. She has asked you to prepare some
information in relation to the company's draft financial statements for the year ended 30 April 20X0 which
show a draft consolidated profit before tax of CU2,665,000. Details are as follows.
(1) Banchory Ltd has lodged a claim of CU500,000 against one of its suppliers for faulty materials supplied
and the consequential loss arising from their use. The supplier has contested the validity of this claim
and the legal costs arising from this dispute amounted to CU40,000 by 30 April 20X0. The companys
solicitors have advised the directors that, although the outcome is not clear, they have a good case,
and the draft accounts show a receivable for CU500,000 due from the supplier with the corresponding
credit to cost of sales. No adjustment has been made for the legal costs which have not yet been paid.
26
QUESTION BANK
On 31 May 20X0 Banchory Ltds quality control staff obtained independent evidence which shows that
the materials were faulty. The companys solicitors advise that it is now probable that the claim will be
settled in full.
(2) Banchory Ltd issues one-year warranties to customers on the supply of some of its products. The
company has experienced a significant rise in the incidence of claims by customers since 1 May 20W9.
Agreed claims now amount to 10% of the sales of these products. Claims tend to arise two months
after the date of sale of the products. Sales subject to warranty in the last six months of the year
amounted to CU6 million. No adjustments have been made to the financial statements in respect of
this matter.
(3) Banchory Ltds solicitors have advised the directors about correspondence from a past employee
claiming unfair dismissal with effect from 4 May 20X0. The claim, which has been provided for in the
draft financial statements, amounts to CU300,000 and the solicitors consider that it is highly unlikely
the company will have to pay any amount.
(4) The companys issued share capital on 1 May 20W9 was 2,000,000 ordinary shares of CU1 each, with
an authorised share capital of 4,000,000 ordinary CU1 shares. There was also an opening balance on
the share premium account of CU450,000. Retained earnings on 1 May 20W9 were CU3,672,000.
This figure is before any retrospective adjustments posted in the year ended 30 April 20X0.
On 31 March 20X0 the company made a 1 for 10 bonus issue. This was followed by a rights issue of 1
for 4 ordinary shares at CU1.75 on 15 April 20X0, when the current market price of each share was
CU2.00.
The entire proceeds of the rights issue were immediately used to acquire the share capital of a
company whose net assets at the date of acquisition had a carrying amount of CU850,000 and a fair
value of CU950,000. The acquired business has not performed to expectations and an impairment
write-down to CUnil is required.
(5) During the year the decision was taken to close down one of the companys two factories, completing
the process, including the sale of the factory unit, prior to the year end. The only gain or loss relating
to this closure was that on the disposal of the factory unit and this has been reflected in the draft
results. At the time this decision was taken, the fair value of the factory was estimated at CU3.05
million and the costs to sell it at CU50,000. The factory was eventually sold for CU3.1 million, net of
selling expenses. At the time of classification as held for sale the factory had a carrying amount of
CU2.1 million. The factory had been included in the balance sheet at valuation and the profit on
disposal, which has been included in the draft results, is based on the historical cost carrying amount of
CU1.3 million. The opening balance on the revaluation reserve was CU800,000.
(6) A machine bought on 1 May 20W7 for CU1,800,000 was then thought to have a useful life of ten
years. However, as at 1 May 20W9 it was discovered that the total useful life of this asset is actually
only six years. The revision of the useful life has been dealt with as a change in accounting policy. This
asset is being depreciated on a straight-line basis with an estimated residual value of CUnil.
(7) On 30 October 20W9 Banchory Ltd revalued a freehold building, which had a remaining life of 50
years. The revaluation surplus of CU500,000 has not been recognised in the financial statements but
the depreciation charge for the period, which has been included in the draft profit, has been based on
the revalued amount.
Requirements
(a)
Prepare the provisions and contingencies notes for the financial statements for the year ended
30 April 20X0.
(4 marks)
(b) Calculate a revised consolidated profit before tax figure for the year ended 30 April 20X0. (6 marks)
(c)
Prepare the consolidated statement of changes in equity for the year ended 30 April 20X0. (8 marks)
(18 marks)
27
23
Banff Ltd
Banff Ltd sells computer hardware, with or without support services, and also develops unique software.
The following matters are outstanding in the preparation of the published financial statements for the year
ended 30 April 20X1.
(1) The company has drawn up a detailed formal plan for the closure of its distribution division, which has
operated as a separate cost centre, intending to sub-contract this work in the future. This plan has
been approved by the board of directors and announced to employees by the year end. The plan
identified the following costs.
Redundancy costs
Costs of early termination of existing contracts
Anticipated future operating losses 1 May 20X1 to date of closure in June 20X1
CU
250,000
100,000
190,000
The company expects to realise a profit of CU90,000 on disposal of the non-current assets in the
division to be closed. These assets are accounted for under the cost model accounting policy.
(2) The company has been constructing a specialised item of plant and machinery for its own use. The
item had been completed by the year end, and the construction director has summarised the costs
which his department was charged.
CU
Materials
100,000
Labour costs
Factory staff
100,000
Supervision staff (one additional supervisor employed for this project)
15,000
Professional fees sub-contracted designers
22,000
Installation costs
13,000
Administration costs recharged by other departments payroll, personnel,
purchasing (no additional staff required)
11,000
Labour costs include CU20,000 relating to delays in the delivery of components. These arose through
Banff Ltd mis-scheduling deliveries.
The plant is expected to have a useful life of ten years with no residual value. Major overhauls will
need to be carried out every four years at a cost of CU80,000. The company intends to provide
CU20,000 annually to meet this cost.
(3) Banff Ltd entered into a six-year finance lease for plant and machinery on 1 May 20X0, paying a
deposit of CU100,000 to be followed by five equal annual instalments of CU150,000 on 1 May in each
subsequent year. The purchase price of the asset if bought outright would be CU780,000. The
company uses the sum-of-the-digits method to allocate finance charges. Apart from recording the
payment of the deposit on 1 May 20X0, no other accounting entry has been made for this finance
lease.
(4) The hardware division made a sale of a computer on 1 May 20X0. The proceeds of CU4 million were
received on 1 July 20X0 and recognised as revenue. The fee included the supply of hardware and a
four year maintenance contract covering maintenance support. The costs of providing that support on
similar contracts have been CU500,000 per annum, and the mark-up on those maintenance contracts
was 50% on cost.
(5) The software division entered into a CU3 million contract on 1 May 20W9 to develop a unique
product for a customer. At 30 April 20X0 the contract was estimated at 25% complete. However, as
the costs to complete could not be estimated reliably, only the costs incurred of CU200,000 were
recognised as revenue. During the year to 30 April 20X1 a further CU2 million of costs have been
incurred and included within inventory. The contract is now thought to be 75% complete, something
confirmed by an independent expert assessor who has also estimated the costs to complete as
CU400,000 and has confirmed the feasibility of the product. No invoice has yet been rendered to the
customer.
(6) On 1 May 20W9 Banff Ltd acquired an item of plant for CU1 million. The useful life was estimated as
eight years. The carrying amount in the financial statements at 30 April 20X1 is CU750,000 under the
cost model accounting policy. On 1 February 20X1 the plant was considered to be surplus to
requirements and the management concluded that the carrying amount would be principally recovered
28
QUESTION BANK
through sale. A professional agent estimated its fair value as CU900,000 and it was advertised for sale
on 1 February 20X1 at that price. The agent charges a 3% commission. While the plant is available for
immediate sale, Banff Ltd has continued to use it for training and incidental production purposes. The
other activities undertaken on the machine have been transferred to other items of plant. A third
party has made an offer at the asking price and it is expected that the sale will be completed during
20X1.
Requirements
(a)
Prepare relevant extracts from the income statement for Banff Ltd for the year ended 30 April 20X1
and the balance sheet as at that date. You are not required to prepare any disclosure notes.
(21 marks)
(b) Calculate the values for the six-year lease which would have appeared in the income statement and
balance sheet if the lease had been classified as an operating lease.
(2 marks)
(23 marks)
24
Skinner Ltd
You have been asked to help the directors of Skinner Ltd complete the financial statements for the year
ended 30 June 20X3. You have been asked to provide draft information to the board of directors based on
the following information provided by the assistant accountant of Skinner Ltd.
(1) Property, plant and equipment as at 30 June 20X2 was as follows.
Cost
Plant and machinery
CU
1,620,000
1,278,000
2,898,000
Depreciation
CU
148,800
539,600
688,400
Carrying
amount
CU
1,471,200
738,400
2,209,600
The freehold land and buildings relate to the factory site, of which the land cost CU1 million. On 1 July
20X2 the site was revalued to CU2.36 million, of which CU1.6 million relates to the land.
The annual review of the expected lives of the property, plant and equipment has revealed that a
machine purchased for CU150,000 on 1 July 20X0 now has a remaining useful life of only five years.
Plant and machinery costing CU430,000 was purchased on 1 January 20X3. There were no disposals.
Depreciation is provided on cost on a straight-line basis. The rates used are 2% per annum for
buildings and 10% per annum for plant and machinery.
(2) On 1 July 20X2 the company leased a grinding machine under an eight year contract. Lease payments
are CU65,000 per annum payable in arrears, commencing on 30 June 20X3. The only entry made in
the accounts has been to recognise this years lease payment as an expense in the income statement as
part of administrative expenses.
The lease agreement shows that the rate of interest implicit in the lease is approximately 5%, and the
lessee is responsible for the maintenance of the machine. The present value of the minimum lease
payments is CU419,900.
Other working papers show that the cash price of the machine was CU450,000, and it has an
expected useful life of ten years.
(3) Skinner Ltd manufactures one product, a food processor. The costs of making a processor have been
established as follows.
CU
Variable cost per unit
Raw materials
Import duties on above
Direct labour
10.00
1.00
15.00
26.00
29

In addition, the following costs are also incurred every month.
Factory power
Factory supervisors' salaries
Depreciation of plant
Selling costs
Distribution costs
Total cost
CU
3,000
2,000
7,000
6,000
2,000
20,000
Cost/5,000
units
CU
0.60
0.40
1.40
1.20
0.40
4.00
Cost/4,000
units
CU
0.75
0.50
1.75
1.50
0.50
5.00
The normal activity level is 5,000 units produced per month. The selling price is CU32 per unit.
Inventory at 30 June 20X3 comprises the 4,000 units produced in June.
Requirements
(a)
Prepare the note analysing the movement on property, plant and equipment for the year ended
30 June 20X3 and any other narrative notes required in respect of property, plant and equipment as a
result of the above information.
(10 marks)
(b) Prepare a note analysing future lease payments on the gross basis and show how the above lease will
be reflected in the financial statements for the year ended 30 June 20X3 (including the cash flow
statement). No other notes to the financial statements are required.
(6 marks)
(c)
Calculate the carrying amount of inventory at 30 June 20X3.
(3 marks)
(19 marks)
25
Rosetta Ltd
Rosetta Ltd, a listed group, is a multinational enterprise that focuses on developing and delivering
psychometric tests for recruitment purposes and a wide range of training courses/products.
The group is currently finalising its consolidated financial statements for the year ended 31 December 20X2.
These were prepared by the CEO in the absence of a financial controller. The draft income statement
shows profit before tax of CU17 million, which represents a 16% increase on the previous year.
As the newly-appointed financial controller you have been asked to review the following matters.
(1) At the start of the year an extensive review was carried out on all the property, plant and equipment
held by the group. Following advice from an independent industry expert, the following changes were
made with effect from 1 January 20X2.
The method of depreciation used on certain items of printing equipment was changed. The
equipment was originally purchased on 1 January 20X1 for CU12 million and was initially
depreciated using a 15% reducing-balance method. This is to be changed to straight-line over a
total useful life of five years.
The total useful life of some property originally purchased on 1 January 20X0 for CU40 million
was reduced from 25 to 20 years.
In the draft accounts both of the above items have been dealt with as adjustments to the retained
earnings brought forward at 1 January 20X2. Retained earnings as restated are shown as CU35 million
in the draft accounts.
(2) During the current year the group has expanded into the computer-based training market. This has
been achieved in two ways.
(i)
30
Via the acquisition on 1 January 20X2 of 60% of Newtrain Ltd, a company which already had a
portfolio of CD-Rom training products. To integrate Newtrain Ltd into the group, Rosetta Ltd
planned substantially to reorganise its operations over the first three months of ownership, so at
QUESTION BANK
the acquisition date a reorganisation provision of CU1.2 million was recognised. Goodwill arising
in the business combination was then measured at CU6 million.
In the draft accounts the goodwill has been amortised over its estimated useful life of twenty
years. An impairment review at 31 December 20X2 revealed its recoverable amount to be
CU4.1 million.
(ii)
Via the internal development of new IT technology which allows for close monitoring of trainees
progression through the learning material. The project was started in early February 20X2 and
the final product was successfully launched on 30 November 20X2. At that date the following
costs were capitalised as an intangible non-current asset.
IT hardware (purchased 1 February 20X2, useful life 48 months)
Employment costs of those developing the product
Costs incurred in training staff to deliver the new product
CU
600,000
1,800,000
480,000
2,880,000
This total cost is being amortised over the product's expected useful life of 72 months.
60% of the employment costs were incurred prior to 31 August 20X2, the date on which the
technical feasibility and financial viability of the product were confirmed. A competitor has
recently approached Rosetta Ltd and offered CU6 million for the know-how embodied in the
product. As a result, the intangible asset has been revalued to CU6 million in the draft financial
statements, and a gain of CU3,160,000 recognised in the income statement.
Intangible assets at 1 January 20X2 comprised goodwill in respect of an earlier acquisition of
CU2,100,000. Accumulated impairment losses in relation to that goodwill at 1 January 20X2 were
CU300,000. A further CU200,000 still needs to be recognised in the current year.
Requirements
(a)
Prepare the note analysing the movement on intangible assets which would appear in the financial
statements of Rosetta Ltd for the year ended 31 December 20X2.
(6 marks)
(b) Calculate a revised pre-tax profit for the year ended 31 December 20X2 and the correct retained
earnings brought forward.
(11 marks)
(17 marks)
26
Arran Ltd
The board of directors of Arran Ltd have asked you, as financial controller, to prepare some information in
relation to the companys draft financial statements for the year ended 31 May 20X1. Details are as follows.
(1) On 1 June 20W8 Arran Ltd acquired 75% of the ordinary share capital of Jura Ltd and 80% of the
ordinary share capital of Islay Ltd. On 1 December 20X0 Arran Ltd purchased 30% of the ordinary
share capital of Millport Ltd. On 31 January 20X1 Arran Ltd disposed of its entire holding in Islay Ltd
for CU2.5 million.
31

The draft income statements of the four companies for the year ended 31 May 20X1 were as follows.
Revenue
Cost of sales
Operating expenses
Profit before tax
Tax
Arran Ltd
CU
10,000,000
(7,400,000)
2,600,000
(1,100,000)
1,500,000
(450,000)
1,050,000
Jura Ltd
CU
6,500,000
(4,500,000)
2,000,000
(650,000)
1,350,000
(400,000)
950,000
Islay Ltd
CU
3,900,000
(2,700,000)
1,200,000
(390,000)
810,000
(240,000)
570,000
Millport Ltd
CU
14,500,000
(10,000,000)
4,500,000
(1,700,000)
2,800,000
(840,000)
1,960,000
Arran Ltd acquired its holding in Islay Ltd for CU1,600,000 when the fair value of the net assets
of Islay Ltd was CU1,400,000. The net assets of Islay Ltd on 1 June 20X0 were CU1,700,000.
Goodwill impairment reviews to the start of the current year revealed cumulative impairments of
CU96,000 in relation to the acquisition of Islay Ltd.
Millport Ltd sold goods to Arran Ltd on 1 January 20X1 for CU480,000, at a mark-up on cost of
331/3%. Arran Ltd still had half of these goods in inventory at the year end.
Arran Ltd has not yet accounted for the disposal of Islay Ltd.
(2) Property, plant and equipment in the draft financial statements is currently stated as follows.
CU
5,500,000
3,400,000
1,200,000
200,000
Arran Ltd
Jura Ltd
Islay Ltd
Millport Ltd
The directors had planned to carry out an impairment review of certain items of plant at 31 May
20X1. However, they were too busy to do this and the review was therefore carried out in June
20X1. It revealed the following in respect of machines owned by Jura Ltd and Millport Ltd.
Carrying amount
Fair value
Costs to sell
Value in use
Jura Ltd
CU
500,000
400,000
50,000
390,000
Millport Ltd
CU
100,000
80,000
10,000
60,000
No falls below carrying amounts were identified at that date in respect of the plant and machinery of
Arran Ltd. However, a fire at one of Arran Ltds processing units on 1 July 20X1 destroyed much of
the plant at that unit. This plant had a carrying amount at 31 May 20X1 of CU1 million. Unfortunately,
the directors had not kept their insurance valuations up to date and, as a result, only expect to
recover 50% of this amount.
Depreciation and impairments on plant and machinery are charged to cost of sales. The income
statement extracts above do not reflect the above issues. All falls in value are considered to have
taken place in the second half of the year to 31 May 20X1.
Requirements
(a)
Calculate the following amounts for inclusion in the consolidated income statement of Arran Ltd for
the year ended 31 May 20X1.
(i)
Cost of sales
(ii)
Profit arising on the disposal of Islay Ltd
(iii) Share of profits of associates

(iv) Tax charge
32
(12 marks)
QUESTION BANK
(b) Calculate the carrying amount of property, plant and equipment for inclusion in the consolidated
balance sheet of Arran Ltd as at 31 May 20X1 and prepare any relevant extracts from the financial
statements arising from (2) above.
(3 marks)
(c)
Explain the rationale for the required treatment of each of the items in (a) above.
(6 marks)
(21 marks)
27
Elie Ltd
The directors of Elie Ltd are in the process of preparing financial statements for the year ended 30 June
20X2. They have asked you to assist them with certain calculations, details of which are set out below.
(1) On 1 July 20X1 Elie Ltd acquired 80% of the CU1 million ordinary share capital of Monans Ltd by
issuing 200,000 CU1 ordinary shares. Elie Ltds ordinary shares were quoted at CU17 on 1 July 20X1.
Professional fees to support the acquisition process amounted to CU90,000. A further amount of
CU92,000 is payable in cash on 1 July 20X2.
An issue of a further 24,000 shares is contingent on Monans Ltd achieving a 10% increase in revenue in
the year ended 31 October 20X2. These extra shares would be issued on 1 July 20X3. Monans Ltd has
achieved increases in revenue over the past five years of 11%, 8%, 10%, 11% and 12% (from the
earliest to the most recent year).
The net assets of Monans Ltd in its accounts as at 1 July 20X1 were CU3 million, with fair value CU1
million higher than carrying amount.
Elie Ltd has identified the following matters not recognised in the financial statements of Monans Ltd
as at 1 July 20X1.
A legal claim had been made by Monans Ltd against a supplier for damages suffered as a result of
faulty goods supplied to Monans Ltd. At the acquisition date the companys lawyers considered it
virtually certain that the claim would succeed. The fair value of the claim was assessed as
CU200,000 and this amount was received in December 20X1. Monans Ltd disclosed CU200,000
as a contingent asset at the acquisition date.
Operating losses of CU300,000 were expected to be incurred in the 6 months after acquisition.
Reorganisation costs of CU100,000 were to be incurred to bring Monans Ltds systems into line
with those of the group. A detailed plan for these changes was not yet in existence and no
announcement for such changes had been made.
A fall of CU50,000 in the value of inventories held on 30 June 20X1 due to a fire at a warehouse
on 5 July 20X1. The inventories now have a net realisable value of CU5,000. All inventories in the
group at 30 June 20X2 were correctly valued.
The goodwill impairment review at 30 June 20X2 revealed a loss of CU70,000 in relation to this
acquisition.
(2) The consolidated income statement currently shows a profit for the period of CU1,456,500 but has
not yet been adjusted to reflect any adjustments required as a result of matter (1) above.
In addition to the ordinary shares issued on acquisition of Monans Ltd Elie Ltd also issued 300,000
redeemable and 200,000 irredeemable preference shares during the year. All preference shares were
issued at a premium of CU0.20p over their nominal value of CU1 per share and have a coupon rate of
5%.
The following ordinary dividends were declared by Elie Ltd.
15 July 20X1
10 July 20X2
10p per share

15p per share
All of the preference dividends were declared before the end of the year.
No adjustments to the draft financial statements have been made in respect of these dividends.
On 1 July 20X1 Elie Ltd had the following balances on its consolidated capital and reserves.
33

CU
1,000,000
500,000
250,000
5,678,500
7,428,500
Ordinary shares
Share premium
Revaluation reserve
Retained earnings
(3) The revaluation reserve arose in 20X0 when the companys plant and machinery was revalued. One
item of plant, which was purchased on 1 July 20W8 for CU100,000 and was revalued to CU120,000
on 1 July 20X0, was subjected to an impairment review on 30 June 20X2. The review revealed that
this asset now has a recoverable amount of CU50,000.
Elie Ltds depreciation policy is to depreciate all plant on a 10% straight-line basis, whether based on
cost or on revalued amount. Elie Ltd makes an annual transfer between the revaluation reserve and
retained earnings as a result of its revaluations in accordance with best practice.
Depreciation for the year ended 30 June 20X2 has already been correctly charged to the income
statement and includes depreciation on the above impaired asset. No adjustment has been made as yet
in respect of the above impairment. If total depreciation had been calculated on cost as opposed to on
revalued amounts, the charge would have been CU45,000 lower.
Requirements
(a)
Calculate the amount of goodwill acquired in the business combination with Monans Ltd that would be
carried in the group accounts of Elie Ltd for the year ended 30 June 20X2.
(6 marks)
(b) Prepare the following columns only from the consolidated statement of changes in equity for Elie Ltd
for the year ended 30 June 20X2: ordinary share capital, irredeemable preference share capital, share
premium and revaluation reserve.
(10 marks)
(16 marks)
28
Wester Ross Ltd

On 1 February 20X0 Wester Ross Ltd acquired 75% of the ordinary share capital of Ullapool Ltd, financed
by the issue of 2 million CU1 ordinary shares of Wester Ross Ltd at CU7 per share and by CU7 million in
cash.
On 10 March 20W8 Wester Ross Ltd acquired 30% of the ordinary share capital of Glenelg Ltd for CU2
million cash.
The summarised balance sheets of the companies were as follows.
ASSETS
Non-current assets
Property, plant and
equipment
Investments
Current assets
Inventories
Total assets
34
At 31 October 20X0 (draft)

Wester Ross
Ullapool
Glenelg
Ltd
Ltd
Ltd
CU'000
CU'000
CU'000
At acquisition
Ullapool
Glenelg
Ltd
Ltd
CU'000
CU'000
42,000
9,000
18,000
3,000
17,000
2,300
4,000
8,500
63,500
2,500
1,700
700
22,900
500
400
3,900
2,000
1,500
300
20,800
300
100
2,700
QUESTION BANK

(CU1 shares)
Revaluation reserve
General reserve
Retained earnings
Equity
Current liabilities
At 31 October 20X0 (draft)

Wester Ross
Ullapool
Glenelg
Ltd
Ltd
Ltd
40,000
10,000
3,000
53,000
5,500
5,000
63,500
12,000
2,000
4,000
2,600
20,600
1,000
1,300
22,900
1,500
1,900
3,400
300
200
3,900
At acquisition
Ullapool
Glenelg
Ltd
Ltd
12,000
1,500
3,500
2,000
19,000
800
1,000
20,800
1,500
900
2,400
200
100
2,700
(1) The fair value of freehold property in Glenelg Ltd was CU1.5 million above carrying amount at the
date of acquisition; all of this related to the land element of the property.
(2) Wester Ross Ltd has not yet accounted for the shares issued in acquiring Ullapool Ltd but has fully
accounted for the cash element of the consideration for both Ullapool Ltd and Glenelg Ltd.
(3) Ullapool Ltd sold various items of property, plant and equipment to Wester Ross Ltd for CU750,000
on 30 April 20X0. The assets originally cost CU1 million on 30 April 20W5 and are being depreciated
over ten years on a straight-line basis. Wester Ross Ltd is depreciating the assets over their remaining
useful life.
(4) As at 31 October 20X0 the impairment reviews revealed cumulative losses of CU810,000 in relation
to the goodwill acquired in the business combination with Ullapool Ltd and of CU276,000 in respect
of the investment in Glenelg Ltd.
(5) At the time Ullapool Ltd was acquired the company was in dispute with one of its suppliers, giving rise
to a contingent liability of CU110,000. The fair value of this liability as at acquisition was assessed as
CU98,000 and the liability was still outstanding as at the year end. In addition, at acquisition Ullapool
Ltd held raw materials which had cost CU30,000 but which had a replacement cost of CU42,000. This
inventory was all sold following the acquisition.
(6) After Wester Ross Ltd's draft balance sheet had been prepared, it was decided that the provision for
uncollectible trade receivables at 31 October 20X0 should be increased by CU400,000.
(7) On 1 January 20X0 the companies paid the following ordinary dividends.
Wester Ross Ltd
Ullapool Ltd
Glenelg Ltd
10p per share

5p per share
20p per share
These dividends have been correctly and consistently accounted for.

Requirements
(a)
From the above data calculate the following amounts for the consolidated balance sheet of Wester
Ross Ltd as at 31 October 20X0.
(i)
Goodwill arising on the acquisition of Ullapool Ltd
(ii)
Investments in associates
(iii) Retained earnings
(11 marks)
(b) Prepare extracts from the consolidated cash flow statement for the year ended 31 October 20X0 in
so far as the information is available, including any relevant notes.
(9 marks)
(c)
Explain the purpose of group financial statements and the concepts underlying their preparation.
(5 marks)
(25 marks)
35
29
Shadowlands Ltd
You are the newly-appointed financial controller of Shadowlands Ltd. The directors have asked you to
prepare certain items of information for the financial statements for the year ended 31 December 20X7.
The following information is relevant.
(1) The directors have prepared the following summarised consolidated income statement.
Operating profit
Investment income
Interest payable
Profit before taxation
Income tax
Profit after taxation
CU
3,500,000
950,000
(50,000)
4,400,000
(1,700,000)
2,700,000
Current assets and liabilities at 31 December 20X7 and 31 December 20X6 and the depreciation
charges for those years were as follows.
20X7
20X6
CU
CU
Inventories
350,600
460,700
279,600
256,900
10,500
7,850
178,500
182,300
Depreciation charges
356,000
372,000
(2) On 1 January 20X7 Shadowlands Ltd entered into a finance lease for a machine with a fair value of
CU105,000. On that date the company paid a deposit of CU10,000. On 31 December 20X7 the
company paid the first instalment of CU30,000. Three other instalments of CU30,000 each are due.
The directors have debited the payments to date to cost of sales.
(3) In 20X3 Shadowlands Ltd had purchased 30% of the ordinary share capital of Bacardi Ltd for
CU300,000 and has treated Bacardi Ltd as an associated undertaking since that date. Bacardi Ltds
capital and reserves have been as follows.
At 31 December
20X7
At acquisition
CU
CU
500,000
500,000
Retained earnings
200,000
650,300
In the year to 31 December 20X7 Bacardi Ltd took CU110,200 to retained earnings. Shadowlands Ltd
disposed of its holding in Bacardi Ltd on 30 June 20X7 for CU750,000. The directors have credited
this amount to investment income. Up until 31 December 20X6 Shadowlands Ltd had recognised
impairments in respect of Bacardi Ltd of CU20,000 in both its individual and its group accounts.
Requirements
(a)
Prepare the note to the consolidated cash flow statement for the year ended 31 December 20X7
which reconciles profit before tax to cash generated from operations.
(6 marks)
(b) Calculate the liability in respect of the finance lease at 31 December 20X7 and show how this would
be disclosed in the financial statements. Use the sum-of-the-digits basis to allocate interest. Notes to
the accounts are not required.
(4 marks)
(c)
Calculate the profit or loss on the disposal of Shadowlands Ltds interest in Bacardi Ltd in both the
group accounts and Shadowlands Ltds individual accounts.
(5 marks)
(15 marks)
Note: Ignore taxation.
36
QUESTION BANK
30
Scribo Ltd
Scribo Ltd is a large publishing company which is organised into several divisions. The financial controller
has asked you, as assistant accountant, to prepare certain items of information for the financial statements
for the year ended 30 June 20X6. The following information is relevant.
(1) The financial controller has calculated a preliminary figure for revenue for the year ended 30 June
20X6. This is made up of the following.
Revenue
CU
356,700
789,400
3,450,800
367,700
4,964,600
Division
Magazine subscriptions
Magazines sold via newsagents
Book sales
Advances for books yet to be published
The company publishes one magazine, sales of which commenced on 1 March 20X6. Magazine
subscriptions are purchased on an annual basis for CU30 each and magazines are despatched on the
first working day of the month. 50% of the above revenue from magazine subscriptions arose prior to
the first issue, 25% in March and 25% in April.
Magazines are also sold via newsagents on a sale or return basis for CU3 each. When they receive the
next months delivery newsagents are required to return any unsold magazines for the previous
month, together with a returns note detailing how many copies are being returned. Within the next
week they are invoiced by Scribo Ltd for the previous months purchases. Returns notes received by
Scribo Ltd on 5 July 20X6 showed returns of 10,500 copies.
(2) The financial statements for the previous year showed that Scribo Ltd had the following recorded
within non-current assets at 30 June 20X5 in respect of intangible assets.
Cost
Goodwill
Publishing titles
Technical know-how
CU
450,000
120,000
300,000
Accumulated
amortisation/impairments
CU
120,000
12,000
90,000
The goodwill was acquired on the purchase of a sole trader on 1 July 20X2. At that time it was
estimated that the goodwill had a useful life of ten years. The technical know-how, which relates to
Scribo Ltds printing methods, is protected by a legal right which has a life of ten years.
On the last day of the year Scribo Ltd purchased the assets of one of its competitors, including
customer lists valued at CU30,000, publishing titles valued at CU45,000 and goodwill of CU100,000.
Impairments to be recognised in the current year amount to CU50,000 in respect of goodwill.
Publishing titles and customer lists are considered to have useful lives of five years.
Requirements
(a)
Calculate revenue for inclusion in the income statement for the year ended 30 June 20X6. (3 marks)
(b) Prepare the note showing the movements on intangible assets which would appear in the financial
statements for the year ended 30 June 20X6.
(4 marks)
(7 marks)
37
38
QUESTION BANK
Preparation of full consolidated financial statements
31
Hemmingway Ltd
Hemmingway Ltd has investments in Steinbeck Ltd which is a subsidiary and Innes Ltd which is an investment.
The draft balance sheets of Hemmingway Ltd and Steinbeck Ltd at 30 June 20X4 are shown below.
ASSETS
Non-current assets
Investment in Steinbeck Ltd
Investment in Innes Ltd
Hemmingway Ltd
CU'000
CU'000
6,720
1,540
1,200
Steinbeck Ltd
CU'000
CU'000
820
9,460
Current assets
Inventories
Amount due from Steinbeck Ltd
360
370
75
15
Total assets
Issued CU1 ordinary shares
Revaluation reserve
Retained earnings
Equity
Borrowings
Current liabilities
Amount due to Hemmingway Ltd
170
230
10
820
10,280
410
1,230
5,000
200
1,210
6,410
600
40
220
860
3,200
50
670
270
50
670
10,280
820
320
1,230
(1) Hemmingway Ltd acquired 450,000 CU1 ordinary shares in Steinbeck Ltd on 1 July 20X2 for CU1.54
million. At that date the balance on Steinbeck Ltd's retained earnings was a credit of CU140,000 and the
balance on the revaluation reserve was a credit of CU28,000.
(2) Innes Ltd is not an associate of Hemmingway Ltd.
(3) The fair value of the plant of Steinbeck Ltd was CU200,000 in excess of its carrying amount at 1 July
20X2. This plant is to be depreciated over five years from the acquisition date on a straight-line basis, with
no residual value.
(4) Hemmingway Ltd sold plant to Steinbeck Ltd on 1 July 20X3 for CU96,000; the plant had cost CU100,000
on 1 July 20X2 and had a carrying amount of CU80,000. The plant is to be depreciated over its estimated
remaining useful life of four years.
(5) Hemmingway Ltd sold goods to Steinbeck Ltd at a price of CU25,000 on 30 June 20X4, which were not
received by Steinbeck Ltd until 5 July 20X4. Hemmingway Ltd calculates selling price at a mark-up of 25%
on cost.
39

Requirements
(a)
Prepare the consolidated balance sheet of Hemmingway Ltd at 30 June 20X4.

(15 marks)
(b) Hemmingway Ltd is considering the purchase of more shares in Innes Ltd which will make Innes Ltd an
associate of Hemmingway Ltd. State briefly and justify the appropriate accounting treatment in the
consolidated balance sheet of Hemmingway Ltd if Innes Ltd becomes an associate.
(3 marks)
(18 marks)
32
Highland Ltd
The draft summarised balance sheets of Highland Ltd and Lowland Ltd at 31 December 20X2 are set out
below. On 31 March 20X2 Highland Ltd acquired for cash 75% of the CU1 ordinary shares in Lowland Ltd. The
retained earnings of the two companies at 1 January 20X2 were CU2,800,000 and CU1,500,000 respectively.
ASSETS
Non-current assets
Investment in Lowland Ltd
Current assets
Inventories
Trade receivables group
Trade receivables other
Highland Ltd
CU'000
CU'000
Lowland Ltd
CU'000
CU'000
3,560
2,940
6,500
1,150
400
1,500
100
2,800
2,800
550
800
50
Total assets
3,150
9,650

Retained earnings
Equity
3,500
700
3,500
7,700
900
170
2,300
3,370
1,100
110
Borrowings
Current liabilities
Trade payables group
Trade payables other
Dividends
700
150
850
9,650
400
240
80
1,400
4,200
720
4,200
(1) The fair value of Lowland Ltd's property on 31 March 20X2 was CU200,000 above its carrying amount. All
of this relates to the buildings element of the property, which is being depreciated at 4% per annum.
(2) At the date of acquisition the replacement cost of raw material inventories was CU400,000. The carrying
amount was CU300,000. At 31 December 20X2 30% of these raw materials remained in inventory. The
rest had been converted to finished goods and sold to third parties.
(3) Highland Ltd has not yet recognised in its draft balance sheet the dividend receivable from Lowland Ltd,
which was declared out of post-acquisition profits.
(4) Since the date of acquisition Highland Ltd has sold to Lowland Ltd inventories valued at CU800,000; half
of these goods remained in the inventories of Lowland Ltd at 31 December 20X2. Highland Ltd calculated
the transfer price of the goods at cost plus a mark-up of 25%.
40
QUESTION BANK
(5) It is the accounting policy of Highland Ltd to undertake annual reviews for goodwill impairment. At
31 December 20X2 an impairment of CU20,000 was identified in respect of Lowland Ltd.
Requirements
(a)
Prepare the consolidated balance sheet of Highland Ltd as at 31 December 20X2.

(18 marks)
(b) Explain the purpose of group financial statements and the concepts underlying their preparation.
(6 marks)
(24 marks)
33
Ullapool Ltd
Ullapool Ltd acquired 70% of the ordinary share capital of Kyle Ltd on 1 May 20X7. The consideration
comprised CU500,000 cash payable 1 May 20X7 and 3 million 25p ordinary shares issued on 1 May 20X7
(market value 50p). Professional advisers' fees on the acquisition amounted to CU250,000.
On 31 August 20X7 Ullapool Ltd acquired 30% of the ordinary share capital of Portree Ltd (incorporated on
1 November 20X6) for CU590,000 cash. Portree Ltd should be accounted for as an associate.
The draft summarised balance sheets of the three companies at 31 October 20X7 showed the following.
ASSETS
Non-current assets
Property, plant and
equipment
Investments
Ullapool Ltd
CU'000
CU'000
6,500
2,840
Kyle Ltd
CU'000
CU'000
2,900
9,340
Current assets
Inventories
Trade receivables
Total assets
Issued CU1 ordinary
shares
Issued 25p ordinary shares
Share premium
Retained earnings
Equity
Current liabilities
Trade payables
900
430
330
1,660
11,000
Portree Ltd
CU'000
CU'000
1,800
2,900
830
350
120
1,300
4,200
1,800
420
130
150
700
2,500
1,700
800
4,750
1,250
2,200
8,200
1,850
3,550
1,200
2,000
2,800
11,000
650
4,200
500
2,500
(1) The CU2,840,000 investments in the balance sheet of Ullapool Ltd comprise CU2,250,000 in respect of
Kyle Ltd and CU590,000 in respect of Portree Ltd.
(2) The company estimates that a further cost of the acquisition of Kyle Ltd was CU50,000 for its own staff
time. This has been charged to the income statement in the year ended 31 October 20X7.
(3) At the date of acquisition land held by Kyle Ltd had a market value of CU290,000 in excess of its carrying
amount. In addition inventories included raw materials at an original cost of CU150,000, which had a
replacement cost of CU182,000. These inventories had all been sold by the year end.
(4) As at 31 October 20X7 the impairment review indicated losses of CU1,000 in relation to the acquisition
of Portree Ltd.
41

(5) At the dates of acquisition the retained earnings of Kyle Ltd and Portree Ltd were CU1.25 million and
CU1 million respectively.
(6) The inventories of Ullapool Ltd include goods purchased from Kyle Ltd for CU51,000 on 10 October
20X7. Kyle Ltd applies a mark-up of 50% on the cost of its goods. Ullapool Ltd had paid for CU31,000 of
these goods on 20 October. The final CU20,000 was paid on 30 October 20X7, but Kyle Ltd did not
receive and account for the CU20,000 cheque until 3 November 20X7.
Requirement
Prepare the consolidated balance sheet of Ullapool Ltd as at 31 October 20X7.
(14 marks)
34
Law Ltd
Law Ltd acquired holdings in Balgay Ltd and Newtyle Ltd as follows.
Balgay Ltd
Newtyle Ltd
70% of the ordinary share capital on 1 July 20X0 for CU5.5 million cash.
40% of the ordinary share capital on 10 May 20W7 for CU1 million cash.
The summarised balance sheets of the companies as at 31 August 20X1 were as follows.
ASSETS
Non-current assets
Investments
Intangibles
Current assets
Inventories
Total assets
Preference share capital (irredeemable)
Revaluation reserve
Retained earnings/(losses)
Current liabilities
Dividends
Law Ltd
CU'000
Balgay Ltd
CU'000
Newtyle Ltd
CU'000
7,500
6,500
100
6,000
120
2,500
1,000
1,100
200
16,400
500
450
50
7,120
200
190
90
2,980
10,000
2,000
3,000
15,000
6,000
500
(280)
6,220
1,000
1,820
2,820
700
700
16,400
720
180
7,120
110
50
2,980
(1) The intangibles carried by Balgay Ltd are CU70,000 goodwill acquired on the acquisition of the net assets
and trade of an unincorporated business in 20W9, and CU50,000 relating to legal rights acquired in the
same year over specialised machinery, without which Balgay Ltd cannot operate.
42
QUESTION BANK
(2) The reserves of the companies on the dates of acquisition of share capital were as follows.
Revaluation
reserve
CU'000
Newtyle Ltd
Balgay Ltd
10 May 20W7
1 July 20X0
500
Retained
earnings
CU'000
900
600
(3) There have been no changes in the share capitals of the companies since Law Ltd acquired the shares.
(4) As at 31 August 20X1 the impairment reviews revealed cumulative losses of CU116,000 relating to the
goodwill arising in the business combination with Balgay Ltd and CU120,000 in respect of the investment
in Newtyle Ltd. Goodwill in respect of Balgay Ltd was originally estimated to have a useful life of five
years.
(5) Balgay Ltd sold a property to Law Ltd on 1 September 20X0 for CU400,000. The property had a carrying
amount of CU300,000 in the accounts of Balgay Ltd as at 1 September 20X0, with an original cost of
CU600,000 in September 20W5 and an estimated useful life of ten years from that date.
(6) Current liabilities of the companies include the following amounts for dividends declared before the year
end.
Ordinary
shares
CU'000
500
180
50
Law Ltd
Balgay Ltd
Newtyle Ltd
Preference
shares
CU'000
200
Law Ltd has not yet accounted for any dividends receivable.
Requirement
Prepare the consolidated balance sheet of Law Ltd as at 31 August 20X1.
35
(17 marks)
Heeley Ltd
Heeley Ltd, a listed company, has investments in two companies, Sothall Ltd and Aughton Ltd. The draft
summarised balance sheets of the three companies at 31 December 20X3 are shown below.
Heeley Ltd
CU'000
CU'000
ASSETS
Non-current assets
Property, plant and
equipment
Investments
5,200
18,600
Sothall Ltd
CU'000
CU'000
4,000
23,800
Current assets
Inventories
Trade and other
receivables
Amount due from
Sothall Ltd
Aughton Ltd
CU'000
CU'000
8,000
4,000
8,000
2,300
1,600
4,500
4,800
2,400
3,700
500
1,100
300
400
8,700
32,500
4,300
8,300
8,600
16,600
43

Heeley Ltd
CU'000
CU'000
Issued
CU1
ordinary
shares
Equity
Borrowings
Current liabilities
Taxation
Amount due to Heeley
Ltd
20,000
5,000
6,500
Aughton Ltd
CU'000
CU'000
6,000
(1,000)
5,000
26,500
4,000
11,000
2,000
3,700
2,300
Sothall Ltd
CU'000
CU'000
1,500
500
300
6,000
32,500
4,200
1,400
2,300
8,300
5,600
16,600
(1) Heeley Ltd acquired 3 million CU1 ordinary shares in Sothall Ltd on 1 April 20X1 for CU3 cash per share.
At that date the credit balance on Sothall Ltd's retained earnings was CU4 million.
(2) On 1 April 20X3 Heeley Ltd acquired 2.4 million CU1 ordinary shares in Aughton Ltd for CU4 cash per
share. Aughton Ltd should be accounted for as an associate. The draft profit of Aughton Ltd for the year
ended 31 December 20X3 was CU6 million, which accrued evenly over the year.
(3) Professional fees of CU500,000 incurred by Heeley Ltd, which are directly attributable to the acquisition
of Aughton Ltd, have been charged in the income statement of Heeley Ltd.
(4) The fair value of the freehold land of Sothall Ltd was CU1 million in excess of its carrying amount at the
date of acquisition.
(5) Impairment reviews carried out since acquisition have revealed the following losses in relation to goodwill
and the investment in the associate.
For year ended 31 December
20X1
20X2
20X3
Sothall Ltd
CU'000
300
800
700
Aughton Ltd
CU'000
1,500
(6) On 27 December 20X3 Sothall Ltd sent a cash payment of CU200,000 to Heeley Ltd. Heeley Ltd received
the cash on 5 January 20X4.
(7) Heeley Ltd sold goods at a transfer price of CU1 million to Sothall Ltd during the year; three quarters of
these goods remained in the inventory of Sothall Ltd at the year end. Heeley Ltd calculates the price of
the goods using a gross profit of 20% on the transfer price.
(8) After Aughton Ltd's draft balance sheet was prepared, it was discovered that no revenue had been
recognised for sales totalling CU200,000 made on the last three days of the accounting period, even
though the relevant goods had been despatched to customers and excluded from Aughton Ltd's
inventories at 31 December 20X3.
Requirement
Prepare the consolidated balance sheet of Heeley Ltd as at 31 December 20X3.
44
(16 marks)
QUESTION BANK
36
Harris Ltd
Harris Ltd has investments in two companies, Scalpay Ltd and Auskerry Ltd. The draft, summarised balance
sheets of the three companies at 31 December 20X5 are shown below.
Harris Ltd
Scalpay Ltd
Auskerry Ltd
CU'000
20,200
20,000
4,000
CU'000
15,100
CU'000
8,600
Current assets
Inventories
Trade receivables
Total assets
3,500
2,300
200
50,200
2,700
1,600
300
19,700
1,400
900
100
11,000

Issued CU1 ordinary shares
Retained earnings
35,000
6,000
15,000
2,300
8,000
1,900
6,000
1,000
500
3,200
50,200
1,200
200
19,700
600
11,000
ASSETS
Non-current assets
Investment in Scalpay Ltd
Investment in Auskerry Ltd
Debentures
Current liabilities
Trade payables
Dividends
(1) Harris Ltd acquired 75% of the CU1 ordinary shares in Scalpay Ltd on 1 October 20X3. At that date the
balance on Scalpay Ltd's retained earnings was CU1,800,000.
(2) On 1 October 20X5 Harris Ltd acquired 30% of the CU1 ordinary shares in Auskerry Ltd. The profit for
Auskerry Ltd for the year ended 31 December 20X5 was CU600,000, and this profit accumulated evenly
over the year. Auskerry Ltd paid no dividends in the year ended 31 December 20X5. Auskerry Ltd should
be accounted for as an associated company of Harris Ltd.
(3) Harris Ltd has calculated that the costs incurred in acquiring Auskerry Ltd were CU200,000 and this sum
has been charged to the income statement of Harris Ltd. This comprises CU120,000 allocated overheads
from the acquisitions department and CU80,000 of directly attributable costs.
(4) The fair value of the land in Scalpay Ltd was CU1 million in excess of carrying amount at the date of
acquisition.
(5) Harris Ltd has not recognised the dividend receivable from Scalpay Ltd in its draft balance sheet at
31 December 20X5.
(6) At 1 October 20X3 Scalpay Ltd had a contingent liability relating to a legal claim against the company of
CU400,000, for which the fair value was estimated at CU300,000. An out of court settlement was agreed
on 30 June 20X5 and CU300,000 was paid to settle the case.
(7) Harris Ltd has carried out annual impairment reviews on goodwill. On 31 December 20X4 an impairment
loss of CU100,000 was recognised on the goodwill relating to Scalpay Ltd, but there have been no further
impairment losses identified.
(8) Scalpay Ltd sold goods to Harris Ltd valued at CU800,000 during the year ended 31 December 20X5 and
a quarter of these goods have been re-sold by Harris Ltd. Scalpay Ltd calculated the transfer price of the
goods at cost plus a mark-up of 25%.
(9) Harris Ltd's draft financial statements at 31 December 20X5 included a note explaining a contingent asset
of CU200,000. This sum was received on 31 January 20X6. This should now be accounted for as an
adjusting event after the balance sheet date.
45

Requirements
(a)
Prepare the consolidated balance sheet of Harris Ltd at 31 December 20X5.
(15 marks)

(b) Explain in what circumstances, if any, Auskerry Ltd could have been considered to be an associated
company of Harris Ltd if the shareholding had been 15%, rather than 30%.
(4 marks)
(19 marks)
37
Lowland Ltd
Lowland Ltd acquired two subsidiaries as follows.
1 July 20X1
80% of Aviemore Ltd for CU5 million when the carrying amount of the net assets of
Aviemore Ltd was CU4 million (represented by share capital of CU3,800,000 and
retained earnings of CU200,000).
30 November 20X7
65% of Buchan Ltd for CU2 million when the carrying amount of the net assets of
Buchan Ltd was CU1.6 million (represented by share capital of CU1,200,000 and
retained earnings of CU400,000).
The income statements of the companies for the year ended 31 March 20X8 were as follows.
Revenue
Cost of sales
Gross profit
Net operating expenses
Finance cost
Investment income
Profit/(loss) before tax
Income tax expense
Profit/(loss) for the year
Lowland
Ltd
CU'000
5,000
(3,000)
2,000
(1,000)
230
1,230
(300)
930
Aviemore
Ltd
CU'000
3,000
(2,300)
700
(500)
(50)
150
(50)
100
Buchan
Ltd
CU'000
2,910
(2,820)
90
(150)
(210)
(270)
(270)
Extracts from the statements of changes in equity of the companies (all relating to retained earnings) for the
year ended 31 March 20X8 were as follows.
Net profit/(loss) for the year

Interim dividends on ordinary shares
Lowland
Ltd
CU'000
930
(200)
730
1,500
2,230
Aviemore
Ltd
CU'000
100
(50)
50
240
290
Buchan
Ltd
CU'000
(270)
(270)
580
310
(1) On 1 April 20X7 Buchan Ltd issued CU2.1 million 10% loan stock to Lowland Ltd. Interest is payable
twice yearly on 1 October and 1 April. Lowland Ltd has accounted only for the interest received on
1 October 20X7.
(2) On 1 April 20X7 Aviemore Ltd sold a freehold property to Lowland Ltd for CU800,000 (land element
CU300,000). The property originally cost CU900,000 (land element CU100,000) on 1 April 20W7. The
property's total useful life was 50 years on 1 April 20W7 and there has been no change in the useful life
since that time. Aviemore Ltd has credited the profit on disposal to 'Net operating expenses'.
(3) The property, plant and equipment of Buchan Ltd on 30 November 20X7 was valued at CU500,000
(carrying amount CU350,000) and was all acquired in April 20X7. Those assets have a total useful life of
ten years. Buchan Ltd has not adjusted its accounting records to reflect fair values.
46
QUESTION BANK
(4) Lowland Ltd charges Aviemore Ltd an annual fee of CU85,000 for management services. This has been
recognised by Lowland Ltd in 'Investment income'.
(5) Lowland Ltd has recognised its dividend received from Aviemore Ltd in 'Investment income'.
(6) In 20X2 the impairment review revealed a loss of CU1,080,000 in relation to Aviemore Ltd. A further
loss of CU180,000 has been identified in the current year. In addition, the impairment review in relation
to the acquisition of Buchan Ltd has revealed a loss of CU102,000.
Requirement
Prepare the consolidated income statement for Lowland Ltd for the year ended 31 March 20X8 and the
movement on retained earnings and minority interest as they would appear in the consolidated statement of
changes in equity for the year ended 31 March 20X8.
(22 marks)
38
Vanguard Ltd
Vanguard Ltd owns 75% of the ordinary share capital of Formidable Ltd and 45% of the ordinary share capital
of Albion Ltd. The draft income statements of the three companies for the year ended 31 March 20X4 were as
follows.
Vanguard
Ltd
CU
346,932
(261,023)
85,909
(53,811)
32,098
(2,301)
24,244
54,041
(15,753)
38,288
Revenue
Cost of sales
Gross profit
Net operating expenses
Finance cost
Investment income
Profit before tax
Income tax expense
Formidable
Ltd
CU
289,028
(202,319)
86,709
(55,606)
31,103
(1,500)
3,242
32,845
(6,982)
25,863
Albion
Ltd
CU
75,201
(55,342)
19,859
(9,765)
10,094
(1,121)
8,973
(1,863)
7,110
Extracts from the statements of changes in equity of the companies (all relating to retained earnings) for the
year ended 31 March 20X4 were as follows.
Vanguard
Ltd
CU
38,288
(9,000)
29,288
539,260
568,548
Net profit for the year

Formidable
Ltd
CU
25,863
(20,500)
5,363
327,530
332,893
Albion
Ltd
CU
7,110
(5,500)
1,610
25,850
27,460
(1) Details of intra-group trading are as follows.
Sales by Vanguard Ltd to Formidable Ltd
Cost to Formidable Ltd of inventory items purchased from Vanguard Ltd
At 31 March 20X3
At 31 March 20X4
CU
35,908
5,600
8,350
Vanguard Ltd has a standard mark-up on cost of 25% for sales to Formidable Ltd. Vanguard Ltd held no
inventories purchased from Albion Ltd at either the start or the end of the year.
(2) All dividends have been fully accounted for in the draft figures given.
47

(3) Formidable Ltd was acquired on 1 April 20X0 for CU415,000 when the carrying amount of its net assets
was CU485,000. Retained earnings of Formidable Ltd were CU150,000 at this date.
(4) During the acquisition process the management of Vanguard Ltd identified a number of intangible assets
which were not recognised in the financial statements of Formidable Ltd. The fair values were measured
reliably at CU15,000. The useful life of these intangible assets was estimated at 20 years. No other fair
value adjustments were identified.
(5) Albion Ltd was acquired in April 20X2 for CU53,000 when its retained earnings were CU3,500 and the
carrying amount of its net assets was CU90,000. There was no material difference between the carrying
amount and fair value of Albion Ltd's net assets.
(6) An impairment loss in respect of the goodwill acquired in the business combination with Formidable Ltd
of CU12,000 was recognised in the financial statements for the year ended 31 March 20X3. A further loss
of CU4,000 still needs to be recognised in the current year financial statements. A current year
impairment loss of CU1,250 still needs to be recognised in the financial statements in respect of the
investment in Albion Ltd. No previous impairment losses had been identified in respect of Albion Ltd.
Requirements
(a)
Prepare the consolidated income statement of Vanguard Ltd for the year ended 31 March 20X4, and the
movement on retained earnings as it would appear in the consolidated statement of changes in equity for
the year ended 31 March 20X4.
(16 marks)
(b) Calculate the carrying amount of goodwill in respect of Formidable Ltd that would appear in the
consolidated balance sheet of Vanguard Ltd as at 31 March 20X4.
(2 marks)
(18 marks)
39
Heaton Ltd
Heaton Ltd has investments in two companies, Sharston Ltd and Ardwick Ltd. Extracts from the draft financial
statements of the three companies for the year ended 31 March 20X4 are shown below.
Income statements
Revenue
Cost of sales
Gross profit
Expenses
Finance cost
Dividend received
Profit before tax
Income tax expense
Heaton
Ltd
CU'000
23,700
(17,580)
6,120
(2,870)
3,250
(220)
320
3,350
(1,230)
2,120
Sharston
Ltd
CU'000
12,500
(9,770)
2,730
(700)
2,030
(50)
1,980
(650)
1,330
Ardwick
Ltd
CU'000
5,200
(3,350)
1,850
(430)
1,420
(40)
1,380
(480)
900
Extracts from statement of changes in equity (retained earnings)
Net profit for period

Ordinary share dividends
Heaton
Ltd
CU'000
2,120
(1,000)
1,120
4,250
5,370
The only equity reserve of each company is retained earnings.
48
Sharston
Ltd
CU'000
1,330
(400)
930
2,200
3,130
Ardwick
Ltd
CU'000
900
900
1,450
2,350
QUESTION BANK
(1) The issued share capital of each company is
CU1 ordinary shares
6 million
5 million
4 million
Heaton Ltd
Sharston Ltd
Ardwick Ltd
There have been no movements in share capital since 1 April 20X2.
(2) Heaton Ltd acquired 80% of the CU1 ordinary shares in Sharston Ltd on 1 April 20X2 for CU6.4 million.
At that date the balance on Sharston Ltd's retained earnings was a credit balance of CU625,000.
(3) On 1 October 20X3 Heaton Ltd acquired 30% of the CU1 ordinary shares in Ardwick Ltd for CU1.97
million. Ardwick Ltd should be accounted for as an associate.
(4) Profits accrued evenly over the current year.
(5) The fair value of the plant and equipment of Sharston Ltd was CU500,000 in excess of its carrying amount
at the date of acquisition. The remaining useful life of the plant and equipment was assessed at five years
from that date.
(6) The impairment reviews relating to Sharston Ltd and Ardwick Ltd revealed the following losses.
Year ended 31 March
Sharston
Ltd
CU'000
300
300
20X3
20X4
Ardwick
Ltd
CU'000
20
(7) Heaton Ltd sold goods at a transfer price of CU2 million to Ardwick Ltd in January 20X4; one half of
these goods remained in Ardwick Ltd's inventories at the year end. Heaton Ltd calculates the price of the
goods using a mark up of 25% on cost.
Requirements
(a)
Prepare the consolidated income statement of Heaton Ltd for the year ended 31 March 20X4.(8 marks)
(b) Prepare the retained earnings and minority interest sections of the consolidated statement of changes in
equity of Heaton Ltd for the year ended 31 March 20X4.
(5 marks)
(c)
Explain the single entity concept.
(2 marks)
(15 marks)
40
Jerome Ltd
Jerome Ltd acquired 400,000 ordinary shares of George Ltd ten years ago for CU1,820,000. The share capital
of George Ltd was 500,000 CU1 ordinary shares. Goodwill acquired in the business combination was
CU800,000.
On 1 July 20X7 Jerome Ltd acquired 40,000 of Harris Ltd's 100,000 CU1 ordinary share capital for CU4
million. The carrying amount of the assets at acquisition was CU8,500,000. No fair value adjustments were
identified.
49

The results for these companies for the year ended 31 December 20X7 are as follows.
Jerome Ltd
George Ltd
CU'000
CU'000
Revenue
3,268
2,500
Cost of sales
(1,840)
(1,375)
Gross profit
1,428
1,125
Distribution costs
(115)
(190)
(93)
(245)
1,220
690
Finance cost
(50)
(15)
Investment income
335
Profit before tax

1,505
675
Income tax expense
(315)
(175)
Profit after tax
1,190
500
Harris Ltd
CU'000
1,500
(1,050)
450
(25)
(45)
380
(20)
360
(100)
260
Extracts from the statement of changes in equity (all relating to retained earnings) for the year ended
31 December 20X7 are as follows.
Jerome Ltd
George Ltd
Harris Ltd
CU'000
CU'000
CU'000
Profit for the year
1,190
500
260
Dividends on ordinary shares (declared on
1 April 20X7 and paid on 1 May 20X7)
(200)
(300)
(80)
990
200
180
5,310
12,520
340
6,300
12,720
520
The following information is available.

(1) On 1 January 20X6 George Ltd transferred a non-current asset to Jerome Ltd for CU28,000. George Ltd
had purchased this asset on 1 January 20X3 for CU30,000. The asset had a total useful life of ten years
with a residual value of nil.
Depreciation on this non-current asset is allocated to administrative expenses.
(2) Jerome Ltd has accounted for its share of any dividends received from George Ltd and Harris Ltd.
(3) The 20X7 impairment review revealed that no impairment adjustment needed to be made in respect of
George Ltd, but that an impairment loss of CU31,000, which has not yet been accounted for, was
required in respect of the investment in Harris Ltd.
(4) On 1 April 20X6 Jerome Ltd made loans of CU100,000 to George Ltd and CU150,000 to Harris Ltd.
Both of these loans carry interest at 10%.
(5) Profits accrue evenly over the year.
Requirements
(a)
Prepare the consolidated income statement for Jerome Ltd for the year ended 31 December 20X7.
(9 marks)
(b) Prepare the movement on retained earnings as it would appear in the consolidated statement of changes
in equity for the year ended 31 December 20X7.
(6 marks)
(c)
Calculate the carrying amount of the investment in Harris Ltd that would be presented in the
consolidated balance sheet of Jerome Ltd at 31 December 20X7.
(2 marks)
(17 marks)
50
QUESTION BANK
41
Hardmead Ltd
Hardmead Ltd prepares its consolidated financial statements in accordance with BFRS. Hardmead Ltd has
investments in two companies, Stony Ltd and Stratford Ltd.
Extracts from the draft financial statements of the three companies at 30 September 20X5 are shown below:
Income statements
Hardmead
Ltd
CU'000
10,040
(8,760)
1,280
(400)
880
80
960
(400)
560
Revenue
Cost of sales
Gross profit
Operating expenses
Dividends received
Profit before taxation
Income tax expense
Net profit for year
Stony Ltd
Stratford Ltd
CU'000
7,500
(6,900)
600
(420)
180
180
(60)
120
CU'000
4,600
(3,000)
1,600
(1,120)
480
480
(160)
320
Extracts from statements of changes in equity

Hardmead
Ltd
CU'000
2,500
560
(600)
2,460

Net profit for period
Ordinary share dividends
Retained earnings
Stony Ltd
CU'000
6,400
120
(100)
6,420
Stratford Ltd
CU'000
2,000
320
2,320
(1) The issued share capital of each company is:
Hardmead Ltd
Stony Ltd
Stratford Ltd
CU1 ordinary shares

2 million
1 million
3 million
(2) Hardmead Ltd acquired 80% of the CU1 ordinary shares in Stony Ltd on 30 September 20X1 for CU6
million. The retained earnings of Stony Ltd on that date were CU6 million.
(3) On 1 November 20X2, Hardmead Ltd acquired 60% of the CU1 ordinary shares in Stratford Ltd for CU4
million. The retained earnings of Stratford Ltd at that date were CU3 million.
(4) Hardmead Ltd disposed of its entire holding in Stratford Ltd for CU3 million on 31 March 20X5. It has
not yet accounted for this disposal. Profits in Stratford Ltd have accrued evenly throughout the year.
(5) The fair value of the plant and equipment of Stony Ltd was CU200,000 in excess of its carrying amount at
the date of acquisition. The remaining useful life of the plant and equipment was assessed at four years
from that date.
(6) Stony Ltd sold goods to Hardmead Ltd at a transfer price of CU180,000 during the year ended
September 20X5. The transfer price was based on a mark-up of 50% on cost. One third of the goods
remained in the inventory of Hardmead Ltd at the year end.
30
(7) Hardmead Ltd's inventory includes 5,000 finished goods items with a carrying amount of CU100 each. The
normal selling price of these items is CU120 per item and selling commissions are CU30 per item.
Hardmead Ltd had a contract in place to sell 2,000 items to a customer at CU70 per item in October
20X5. No selling commissions will be incurred under this contract.
(8) Hardmead Ltd has undertaken annual impairment reviews of goodwill. At 30 September 20X4 impairment
losses of CU120,000 and CU50,000 for Stony Ltd and Stratford Ltd respectively needed to be recognised.
A further impairment loss of CU30,000 has been identified in respect of Stony Ltd for the year ended 30
September 20X5.
51

Requirements
(a)
Prepare the consolidated income statement of Hardmead Ltd for the year ended 30 September 20X5.(14
marks)
Note: You should assume that the disposal of Stratford Ltd constitutes a discontinued operation in
accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
(b) Prepare the movements on retained earnings and minority interest that would appear in the consolidated
statement of changes in equity for the year ended 30 September 20X5.
(7 marks)
(c)
Set out the principles you have applied in accounting for the disposal of Stratford Ltd.
(2 marks)
(23 marks)
42
Tain Ltd
Tain Ltd acquired holdings in other companies as follows.
Banchory Ltd
55% of the ordinary share capital was purchased for CU2.5 million on 1 November 20X4.
Dornoch Ltd
Tain Ltd holds 75% of the ordinary share capital acquired in 20X6. No goodwill was acquired in this business
combination. Retained earnings at the date of acquisition were CU80,000.
Nairn Ltd
30% of the ordinary share capital was purchased for CU1 million on 1 May 20X9. The net assets of Nairn Ltd
had a carrying amount of CU3 million and a fair value of CU2.7 million at 1 May 20X9.
The income statements of the companies for the year ended 31 October 20X9 were as follows.
Revenue
Cost of sales
Operating expenses
Dividends received
Profit before tax
Income tax expense
Profit after tax
Tain Ltd
CU'000
10,600
(7,400)
3,200
(1,700)
375
1,875
(460)
1,415
Banchory Ltd
CU'000
5,500
(3,700)
1,800
(900)
Dornoch Ltd
CU'000
4,700
(3,520)
1,180
(700)
900
(280)
620
480
(140)
340
Nairn Ltd
CU'000
5,900
(4,130)
1,770
(880)
890
(290)
600
(1) Banchory Ltd had the following balances on its reserves.
1 November 20X4
31 October 20X8
Retained
earnings
CU'000
1,600
2,000
Revaluation
reserve
CU'000
300
400
There has been no change to the revaluation reserve since 31 October 20X8.
(2) The issued share capitals of Tain Ltd and Banchory Ltd have remained for many years at 5 million and
2 million CU1 ordinary shares respectively.
(3) On 31 October 20X9 Tain Ltd disposed of its entire holding in Banchory Ltd for CU3.5 million. Tain Ltd
has not yet accounted for this disposal.
(4) On 1 July 20X9 Dornoch Ltd sold goods to Tain Ltd for CU500,000 on the basis of cost plus a mark-up of
one third. Tain Ltd had CU200,000 of these goods in its inventory at 31 October 20X9.
52
QUESTION BANK
(5) The goodwill impairment review in relation to the acquisition of Banchory Ltd revealed cumulative
impairments of CU142,000 at 31 October 20X8. In addition, the 20X9 review in relation to the
investment in Nairn Ltd revealed that an impairment loss of CU19,000 should be recognised.
(6) During the year Tain Ltd and Dornoch Ltd declared total dividends of CU700,000 and CU500,000
respectively.
(7) Retained earnings at 31 October 20X8 for the other group companies were as follows.
CU'000
2,356
152
562
Tain Ltd
Dornoch Ltd
Nairn Ltd
These companies have no other equity reserves.
Requirement
Prepare the consolidated income statement and consolidated statement of changes in equity of Tain Ltd for the
year ended 31 October 20X9 (excluding the section relating to the minority interest).
Note: You should assume that the disposal of Banchory Ltd constitutes a discontinued operation in
accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations. You are not required to
provide any additional disclosure notes required by BAS 28 Investments in Associates. Work to the nearest
CU'000.
(18 marks)
43
Glencoe Ltd
Glencoe Ltd acquired holdings in other companies as follows.
Date of acquisition
Cost of acquisition
Percentage of ordinary share capital acquired
Carrying amount of net assets at date of acquisition
(equal to fair value)
Rannoch Ltd
1 September 20X7
CU3 million
75%
Leven Ltd
1 May 20X6
CU10 million
80%
CU4 million
CU11.7 million
The companies' draft income statements for the year ended 31 August 20Y0 and draft balance sheets as at that
date were as follows.
Income statements for the year ended 31 August 20Y0
Revenue
Cost of sales
Operating expenses
Profit before tax
Income tax expense
Profit after tax
Glencoe Ltd
CU'000
50,000
(32,000)
18,000
(10,000)
8,000
(2,500)
5,500
Rannoch Ltd
CU'000
11,000
(7,000)
4,000
(2,000)
2,000
(600)
1,400
Leven Ltd
CU'000
35,000
(23,000)
12,000
(7,000)
5,000
(1,500)
3,500
CU'000
CU'000
CU'000
3,500
10,000
5,900
9,400
8,000
18,000
Balance sheets as at 31 August 20Y0

ASSETS
Non-current assets
Investments
Current assets
Total assets
29,500
(3,000)
36,000
62,500
53

Glencoe Ltd
CU'000

Retained earnings
35,000
17,500
52,500
10,000
62,500
Current liabilities
Rannoch Ltd
CU'000
Leven Ltd
CU'000
4,000
1,400
5,400
4,000
9,400
7,000
9,000
16,000
2,000
18,000
(1) Glencoe Ltd disposed of its entire holding in Leven Ltd for CU14 million on 1 June 20Y0. It has not yet
accounted for this disposal except to debit bank and credit the sales proceeds to investments. Profits in
Leven Ltd have accrued evenly throughout the year.
(2) Glencoe Ltd disposed of one-fifth of its holding in Rannoch Ltd for CU2,000,000 on the last day of its
financial year. The only accounting entries made have been, as for Leven Ltd, to debit bank and credit the
sales proceeds to investments.
(3) As at 31 August 20X9 the impairment reviews revealed cumulative losses of CU256,000 in relation to the
acquisition of Leven Ltd.
(4) There has been no change in the issued share capitals of the companies since the dates of acquisition.
(5) After Rannoch Ltd's draft financial statements had been prepared, it was discovered that operating
expenses invoices totalling CU200,000 had been omitted in error from trade payables at 31 August 20Y0.
Requirement
Prepare the consolidated income statement of Glencoe Ltd for the year ended 31 August 20Y0 and the
consolidated balance sheet as at that date.
Note: You should assume that the disposal of Leven Ltd constitutes a discontinued operation in accordance
with BFRS 5 Non-Current Assets Held for Sale and Discontinued Operations but that the disposal of Rannoch Ltd
does not. Work to the nearest CU'000.
(17 marks)
44
Herdings Ltd
Herdings Ltd acquired 8,000,000 CU1 ordinary shares in Sandygate Ltd on 1 April 20X1 for CU2.50 cash per
share. At that date the balance on Sandygate Ltd's retained earnings was CU5,000,000. On 1 October 20X2
Herdings Ltd acquired 1,500,000 CU1 ordinary shares in Abbeydale Ltd for CU4 cash per share. Abbeydale Ltd
should be accounted for as an associate.
The draft summarised balance sheets of the three companies at 31 March 20X3 are shown below.
Herdings Ltd
CU'000
CU'000
ASSETS
Non-current assets
Property, plant and
equipment
Investments
13,100
23,500
Sandygate Ltd
CU'000
CU'000
16,400
36,600
Current assets
Inventories
Trade receivables
Total assets
54
8,100
6,850
3,750
18,700
55,300
Abbeydale Ltd
CU'000
CU'000
12,200
16,400
5,230
4,950
150
10,330
26,730
12,200
3,000
4,140
50
7,190
19,390
QUESTION BANK
Herdings Ltd
CU'000
CU'000
Issued CU1 ordinary
shares
Retained earnings
7% secured bank debt
Current liabilities
Trade payables
Taxation
Dividends
12,000
10,000
9,740
5,560
1,700
300
Sandygate Ltd
CU'000
CU'000
Abbeydale Ltd
CU'000
CU'000
5,000
8,200
9,000
21,740
18,200
14,000
26,000
2,000
7,560
55,300
5,450
880
200
6,530
26,730
4,600
790
5,390
19,390
(1) The fair value of the plant of Sandygate Ltd was CU2,000,000 in excess of its carrying amount at the date
of acquisition. The group policy is to depreciate plant over ten years.
(2) At the acquisition date the financial statements of Sandygate Ltd disclosed a contingent liability for an
environmental damages claim. An independent expert quantified the fair value of the claim as CU100,000
at that date.
(3) Herdings Ltd has not recognised the dividend receivable from Sandygate Ltd in its draft balance sheet.
(4) Herdings Ltd has undertaken annual reviews of goodwill for impairment. At 31 March 20X2 an
impairment loss of CU1,680,000 was recognised in respect of Sandygate Ltd.
(5) Sandygate Ltd sold goods valued at CU3,300,000 to Herdings Ltd during the year; half of these goods
remained in the inventories of Herdings Ltd at the year end. Sandygate Ltd calculated the transfer price of
the goods at cost plus a mark-up of 10%.
(6) On 30 September 20X2 Herdings Ltd sold 1,000,000 of its 8,000,000 shares in Sandygate Ltd for
CU3,500,000. Herdings Ltd recorded the profit on sale correctly in its own financial statements.
(7) The profits of Sandygate Ltd and Abbeydale Ltd for the year of CU3,000,000 and CU4,000,000
respectively accrued evenly over the year.
Requirements
(a)
Calculate the group profit on the disposal of the shares in Sandygate Ltd.
(3 marks)
(b) Prepare the consolidated balance sheet of Herdings Ltd as at 31 March 20X3.
(18 marks)
(c)
A third party controls 60% of the ordinary shares in Abbeydale Ltd. Discuss whether Herdings Ltd should
continue to classify its investment in Abbeydale Ltd as an associate.
(2 marks)
(23 marks)
55
45
Camden Ltd
Camden Ltd holds 72% of the ordinary share capital of Kentish Ltd (acquired on 1 March 20X5) and 60% of the
ordinary share capital of Tufnell Ltd (acquired on 1 October 20X3). Camden Ltd paid CU2 million and
CU3 million respectively for these investments. Retained earnings of Tufnell Ltd on acquisition were
CU450,000.
Camden Ltd has no other investments and none of the companies has any preference share capital. Kentish Ltd
has share capital of CU1 million and Tufnell Ltd of CU1.5 million.
The income statements for the year ended 30 September 20X5 are set out below.
Revenue
Cost of sales and expenses (after crediting
dividends received from Kentish Ltd and Tufnell Ltd)
Income tax expense
Camden Ltd
CU'000
151,360
Kentish Ltd
CU'000
32,400
Tufnell Ltd
CU'000
95,040
(134,904)
16,456
(5,436)
11,020
(28,750)
3,650
(1,250)
2,400
(83,750)
11,290
(3,820)
7,470
(1) The three companies paid interim dividends of CU2,820,000, CU336,000 and CU2,460,000 respectively
on 1 May 20X5. Retained earnings at 1 October 20X4 were as follows.
Camden Ltd
Kentish Ltd
Tufnell Ltd
CU'000
11,820
5,430
8,210
(2) On 30 June 20X5 Camden Ltd sold half of its shares in Tufnell Ltd for CU5 million but retained significant
influence over that company. No impairments in the value of the investment have ever been identified.
Camden Ltd has credited the sales proceeds to a suspense account.
(3) Included in the inventories of Kentish Ltd at 30 September 20X5 was CU240,000 for goods purchased in
June 20X5 from Camden Ltd, which the latter company had invoiced at a 20% gross profit margin. These
were the only goods sold by Camden Ltd to Kentish Ltd. During the year, prior to the sale of shares in
Tufnell Ltd, Camden Ltd made sales of CU345,000 to Tufnell Ltd, none of which were included in
inventory at the year end.
Requirements
(a)
Prepare a consolidated income statement and extracts from the statement of changes in equity for
Camden Ltd (retained earnings and minority interests columns only) for the year ended 30 September
20X5. You should assume that the partial disposal of Tufnell Ltd does not constitute a discontinued
operation in accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
(22 marks)
(b) Calculate the carrying amount of Tufnell Ltd in the consolidated balance sheet of Camden Ltd as at
30 September 20X5.
(2 marks)
(c)
Explain your accounting treatment of the following items in the consolidated income statement of
Camden Ltd, referring to the principles underlying the preparation of group accounts.
(i)
Consolidation of Kentish Ltd
(ii)
Dividends received by Camden Ltd
(iii) Intra-group trading

(iv) Unrealised profits in inventories
(6 marks)
(30 marks)
56
QUESTION BANK
46
Gallant Ltd
Gallant Ltd has a number of subsidiary companies and one associated company. There have been no changes in
the holdings of any of these investments for a number of years. The following are the draft consolidated
financial statements for Gallant Ltd for the year ended 31 December 20X7. Gallant Ltd has not yet prepared its
consolidated statement of changes in equity.
Consolidated income statement for the year ended 31 December 20X7
CU
5,680,500
(3,120,600)
2,559,900
(987,800)
(458,000)
1,114,100
(75,000)
345,600
1,384,700
(420,000)
964,700
Revenue
Cost of sales
Gross profit
Distribution costs
Finance cost
Share of profits of associate
Profit before tax
Income tax expense
Attributable to
Equity holders of Gallant Ltd
Minority interest
617,900
346,800
964,700

CU
ASSETS
Non-current assets
Intangibles
Current assets
Inventories
670,500
269,000
30,700

Revaluation reserve
Retained earnings
Attributable to the equity holders of Gallant Ltd
Minority interest
Equity
CU
CU
8,396,200
420,000
1,795,800
10,612,000
Total assets
Current liabilities
Taxation
Ordinary dividend payable
20X7
970,200
11,582,200
20X6
CU
7,078,400
540,500
1,678,900
9,297,800
865,100
244,500
20,200
1,129,800
10,427,600
4,000,000
1,300,000
400,000
1,357,800
7,057,800
2,345,900
9,403,700
2,400,000
2,050,000
236,800
1,393,100
6,079,900
2,948,200
9,028,100
376,000
768,500
410,000
124,000
500,000
639,500
360,000
400,000
1,802,500
11,582,200
1,399,500
10,427,600
57

(1) The intangibles balance relates to goodwill arising on acquisition of subsidiaries, in respect of which certain
impairment losses have been written off during the year.
(2) On 1 January 20X7 Gallant Ltd made a 1 for 3 bonus issue of ordinary shares. This was followed, later in
the year, by an issue at full market price.
(3) An analysis of the movement on group property, plant and equipment during the year showed that plant
with a carrying amount of CU760,500 was sold for CU800,000. Total depreciation charges for the year
were CU970,600.
(4) The finance cost in the consolidated income statement relates to the group's only finance lease, which was
taken out at the start of the year, with the first instalment of CU100,000 being paid on the last day of the
year. This lease has been correctly accounted for in accordance with BAS 17 Leases.
Requirement
Prepare a consolidated cash flow statement and note reconciling profit before tax to cash generated from
operations for Gallant Ltd for the year ended 31 December 20X7, in accordance with BAS 7 Cash Flow
Statements, using the indirect method.
(17 marks)
47
Slick Ltd
Slick Ltd has a number of subsidiary companies, one of which, Kay Ltd, was acquired during the current year,
the year ended 30 June 20X7. The following are the draft consolidated financial statements for Slick Ltd for the
year ended 30 June 20X7 and the balance sheet of Kay Ltd as at the date of acquisition. Slick Ltd has not yet
prepared its consolidated statement of changes in equity.
Consolidated income statement for the year ended 30 June 20X7 (extract)
CU'000
(611)
(25)
(636)
(20)
(656)
Loss from operations

Finance cost
Loss before tax
Income tax expense
Loss for the period
Attributable to
Equity holders of Slick Ltd
Minority interest
(686)
30
(656)
Balance sheets
Slick Ltd consolidated
30 June 20X7 30 June 20X6
CU'000
CU'000
ASSETS
Non-current assets
Intangibles
Current assets
Inventories
Total assets
58
Kay Ltd
at acquisition
CU'000
2,145
215
2,360
1,980
130
2,110
500
500
670
520
10
3,560
590
610
35
3,345
130
200
50
880
QUESTION BANK
Slick Ltd consolidated

30 June 20X7 30 June 20X6
CU'000
CU'000
Retained earnings
Minority interest
Equity
Current liabilities
Taxation
Kay Ltd
at acquisition
CU'000
1,500
700
367
2,567
341
2,908
800
500
1,064
2,364
352
2,716
500
110
120
730
730
521
131
3,560
489
140
3,345
100
50
880
(1) Slick Ltd issued 500,000 CU1 ordinary shares at a premium of 25p and paid a substantial cash sum, in
consideration for 80% of Kay Ltd's shares. At the date of acquisition all of Kay Ltd's assets and liabilities were
recorded at their fair values, with the exception of property, plant and equipment which had a fair value of
CU100,000 in excess of its carrying amount. Goodwill arising on the acquisition was CU100,000.
(2) During the year Slick Ltd made a further issue of ordinary shares, again, at a premium over nominal value.
(3) An analysis of the movement on group property, plant and equipment during the year showed that plant
with a carrying amount of CU500,000 was sold for CU420,000. Total depreciation charges for the year
were CU657,000.
(4) Intangibles comprise the goodwill arising on the acquisition of Kay Ltd, which has suffered no subsequent
impairment, and research and development expenditure capitalised in accordance with BAS 38 Intangible
Assets. The costs relate to a single project which is now complete and in respect of which amortisation
commenced during the year.
Requirement
Prepare a consolidated cash flow statement, note reconciling profit/loss before tax to cash generated from
operations and note showing the effects of the acquisition of Kay Ltd for Slick Ltd for the year ended 30 June
20X7, in accordance with BAS 7 Cash Flow Statements, using the indirect method.
48
(20 marks)
Senorita Ltd
Senorita Ltd has two subsidiary companies, both of which were acquired several years ago. On 1 April 20X5
Senorita Ltd sold its 75% interest in Amigo Ltd for cash of CU500,000. The following are the draft consolidated
financial statements for Senorita Ltd for the year ended 31 December 20X5. Senorita Ltd has not yet prepared
its consolidated statement of changes in equity.
Consolidated income statement for the year ended 31 December 20X5 (extract)
Continuing operations
Profit before tax
Income tax expense
Profit for the period from continuing operations
Discontinued operations
Profit for the period from discontinued operations
Attributable to
Equity holders of Senorita Ltd
Minority interest
CU'000
950
(130)
820
100
920
770
150
920
59

Consolidated balance sheet as at 31 December 20X5
ASSETS
Non-current assets
Current assets
Inventories
Total assets
Retained earnings
Minority interest
Equity
Current liabilities
Taxation
Bank overdraft
Dividends payable to minority
20X5
CU'000
20X4
CU'000
3,457
3,045
570
420
45
4,492
490
310
3,845
1,000
600
1,664
3,264
740
4,004
800
300
1,019
2,119
1,052
3,171
221
167
100
4,492
339
150
35
150
3,845
(1) The net assets of Amigo Ltd on 1 April 20X5 were as follows.
Inventories
Taxation
CU'000
450
120
145
12
(132)
(15)
580
(2) An analysis of the movement on group property, plant and equipment during the year showed that new
plant was purchased for cash of CU1,350,000 and old plant was sold for cash of CU600,000. Total
depreciation charges for the year were CU257,000.
(3) The profit for the period from discontinued operations, all of which is attributable to the disposal of
Amigo Ltd, can be analysed as follows.
Profit before tax
Income tax expense
Profit on disposal
CU'000
45
(10)
65
100
Requirement
Prepare a consolidated cash flow statement, note reconciling profit before tax to cash generated from
operations and note showing the effects of the disposal of Amigo Ltd for Senorita Ltd for the year ended
31 December 20X5, in accordance with BAS 7 Cash Flow Statements using the indirect method.
(18 marks)
60
QUESTION BANK
Single entity financial statements: objective test questions
49

1
Which of the following characteristics of financial information contribute to reliability, according to

BFRS Framework for the Preparation and Presentation of Financial Statements?
(1) Freedom from bias
(2) Freedom from material error
(3) Faithful representation
(4) Consistency
All of the above
(1), (2) and (3)
(1), (2) and (4)
(3) and (4)
Which two of the following, per BFRS Framework for the Preparation and Presentation of Financial
Statements, represent the underlying assumptions relating to financial statements?
(1) The accounts have been prepared on an accrual basis
(2) Users are assumed to have sufficient knowledge to be able to understand the financial statements
(3) The accounting policies used have been disclosed
(4) The business is expected to continue in operation for the foreseeable future
(5) The information presented is free from material error or bias
(1) and (3)
(2) and (3)
(1) and (4)
(3) and (5)
Which of the following are the four principal qualitative characteristics of financial information as set
out in BFRS Framework for the Preparation and Presentation of Financial Statements?
A
Fair presentation, relevance, reliability and comparability
Relevance, comparability, materiality and understandability
Relevance, reliability, comparability and understandability
Materiality, comparability, reliability and fair presentation
61

4
According to BFRS Framework for the Preparation and Presentation of Financial Statements which of the
following does an entitys income statement, balance sheet and cash flow statement primarily measure?
Income statement
Balance sheet
Cash flow statement
Financial position
Financial performance
Financial adaptability
Financial position
Financial position
Financial position
Financial position
Which of the following does BFRS Framework for the Preparation and Presentation of Financial Statements
regard as the essential features of an asset?
(1) The item is acquired at a cost which can be reliably measured
(2) Rights to future economic benefits from the item must be legally enforceable
(3) Rights to future economic benefits from the item must be controlled by the entity
(1) and (2)
(2) only
(3) only
All of the above
Which of the following does BFRS Framework for the Preparation and Presentation of Financial Statements
regard as the essential features of a liability?
(1) The amount of the obligation must be certain
(2) The obligation must be legally enforceable
(3) Settlement of the obligation must involve an outflow of cash
(4) The obligation must arise from past events
62
(1) and (3)
(2) only
(4) only
(3) and (4)
QUESTION BANK
According to BFRS Framework for the Preparation and Presentation of Financial Statements, which of the
following characteristics should make financial information relevant to users?
(1) Materiality
(2) Predictive value and confirmatory value
(3) Completeness
(4) Faithful representation
(5) Comparability
(1), (2) and (3)
(2) and (4)
(1) and (2)
(4) and (5)
Which of the following are roles of the International Accounting Standards Committee Foundation
(IASCF)?
(1) To issue IFRS
(2) To examine any identified or alleged departures from IFRS
(3) To guide the International Accounting Standards Board (IASB)
(4) To secure finance
(1) and (2)
(1) and (3)
(2) and (4)
(3) and (4)
Which of the following capital maintenance concepts is most closely associated with historic cost
accounting?
A
Real financial capital maintenance
Money financial capital maintenance
Operating capital maintenance
Physical capital maintenance
63

10
Brodie Ltd has been in business for one year, making all sales at a constant margin of 50%.
During the year, Brodie Ltd sold goods with a total selling price of CU210,000. CU130,000 of these
sales were made to credit customers, of which CU100,000 had been received by the end of the year.
The remaining CU80,000 were cash sales. Expenses paid during the year amounted to CU20,000 with
CU2,000 accrued expenses at the year end.
How much profit did Brodie Ltd make for the year under the accrual basis and under the cash
accounting basis?
11
Accrual basis
Cash accounting basis
CU85,000
CU68,000
CU83,000
CU70,000
CU83,000
CUnil
CU48,000
CU40,000
Doyle Ltd made a profit of CU100,000 for 20X4 based on historic cost accounting principles. General
price indices during the year have increased by 5% and specific price indices by 10%.
How much profit should Doyle Ltd record for 20X4 under three different capital maintenance concepts?
12
CU100,000 under real financial capital maintenance, CU95,000 under money financial capital
maintenance, and CU90,000 under physical capital maintenance
CU100,000 under money financial capital maintenance, CU90,000 under real financial capital
Gene Ltd has the following assets and liabilities at 31 December 20X5.
Fixtures and fittings at carrying amount
Receivables
Payables
Note
(1)
(2)
CU
10,000
8,000
1,000
(5,000)
14,000
Notes
(1) The fixtures and fittings have been held for three years and had an estimated useful life of six years.
If the fixtures and fittings were to be sold on 31 December 20X5 they would realise CU14,000.
(2) If Gene Ltd was to cease trading it is estimated that an allowance against receivables of CU500
would need to be made.
At what amount would the net assets be stated in the balance sheet of Gene Ltd at 31 December
20X5 under the break-up basis and under the cash accounting basis?
64
Break-up basis
Cash accounting basis
CU17,500
CU21,000
CU15,000
CU11,000
CU17,500
CU11,000
CU15,000
CU21,000
QUESTION BANK
13
Which of the following contribute to the qualitative characteristic of comparability, according to

BFRS Framework for the Preparation and Presentation of Financial Statements?
(1) Neutrality
(2) Corresponding information
(3) Disclosure of accounting policies
(4) Materiality
14
All of the above
(1), (2) and (3)
(1), (2) and (4)
(2) and (3)
Sam Ltd owns a building with a fair value and carrying amount on 30 June 20X3 of CU500,000. On 1
July 20X3 Sam Ltd sold this building to Tyler Ltd for CU400,000. The sale agreement provides for Sam
Ltd to repurchase the building in four years time for CU600,000, when the fair value of the building is
estimated to be at least CU700,000.
How should the above transaction be accounted for in the financial statements of Sam Ltd for the year
ended 30 June 20X4?
15
16
A loss on disposal of a non-current asset of CU100,000
A profit on disposal of a non-current asset of CU100,000
A loan of CU500,000
A loan of CU400,000 and accrued interest
Which of the following shows the meaning of the term GAAP in the UK?
A
Generally accepted accounting procedures
General accounting and audit practice
Generally agreed accounting practice
Generally accepted accounting practice
The BFRS Framework for the Preparation and Presentation of Financial Statements defines a number of
elements of financial statements.
Which of the following represents those elements of the financial statements directly related to the
measurement of financial position?
A
Assets, liabilities and cash flows
Assets, liabilities and equity
Income, expenses and equity
Income, expenses and cash flows
65
50

1
According to BAS 1 Presentation of Financial Statements which of the following statements are correct?
(1) The accounting policies adopted by a company must be disclosed in the notes to the financial
statements
(2) Inappropriate accounting policies can be rectified by disclosure of the policies used or by the
inclusion of explanatory material
(3) Companies may choose to prepare their financial statements (except for the cash flow
statement) on either the accrual basis or the cash basis
All of the above
(1) and (2)
(2) and (3)
(1) only
According to BAS 1 Presentation of Financial Statements which of the following items can appear in a
companys statement of changes in equity?
(1) Net profit or loss for the period
(2) Dividends paid
(3) Surplus on revaluation of properties
(4) Proceeds of issue of share capital
All of the above
(1), (2) and (3)
(1), (3) and (4)
(2) and (4)
BAS 1 Presentation of Financial Statements requires certain items to be disclosed on the face of the
financial statements and others to be disclosed in the notes.
Which two of the following items must be shown on the face of the income statement?
(1) Depreciation
(2) Revenue
(3) Closing inventory
(4) Finance cost
(5) Dividends
66
(1) and (4)
(3) and (5)
(2) and (3)
(2) and (4)
BAS 1 Presentation of Financial Statements suggests two possible formats for the income statement, the
difference between them being whether expenses are classified by their nature or by their function.
QUESTION BANK
Which of the following items will be disclosed on the face of the income statement if a manufacturing
entity classifies expenses by their function?
(1) Raw materials and consumables used
(2) Distribution costs
(3) Employee benefit costs
(4) Cost of sales
(5) Depreciation and amortisation expense
(1), (3) and (4)
(2) and (4)
(1) and (5)
(2), (3) and (5)
Bromyard Ltd had a balance of CU700,000 on its retained earnings at 1 January 20X7. During the year
ended 31 December 20X7 the company:
Revalued property with a cost of CU1 million and accumulated depreciation of CU600,000 to
CU1.2 million. No annual transfers between reserves are to be made
Issued shares at a premium of CU100,000
Made a profit for the year of CU400,000
On 1 December 20X7 the directors proposed a dividend of CU250,000 for the year ended
31 December 20X7.
In accordance with BAS 1 Presentation of Financial Statements, what is the closing balance on retained
earnings in Bromyard Ltds statement of changes in equity for the year ended 31 December 20X7?
CU750,000
CU850,000
CU1,100,000
CU1,650,000
Worcester Ltd had a balance of CU2 million as its total equity at 1 January 20X2. During the year
ended 31 December 20X2 the company:
Revalued property with a cost of CU2 million and accumulated depreciation of CU1,600,000 to
CU1.5 million
Issued shares with a nominal value of CU500,000 at a premium of CU100,000
Made a profit for the year of CU750,000
On 1 February 20X3 the directors declared a dividend of CU250,000 for the year ended 31
December 20X2.
In accordance with BAS 1 Presentation of Financial Statements, what is the closing balance on total equity
in Worcester Ltds statement of changes in equity for the year ended 31 December 20X2?
A
CU4,350,000
CU4,450,000
CU4,200,000
CU3,850,000
67

7
Finstock Ltd, a company which builds houses, has a normal operating cycle of 18 months and a year
end of 30 June 20X5.
According to BAS 1 Presentation of Financial Statements, which of the following assets should be
classified as current in Finstock Ltds balance sheet as at 30 June 20X5?
(1) Inventory which is expected to be realised in September 20X6
(2) A house constructed by Finstock Ltd which is expected to be sold in December 20X5
(3) Marketable securities which are expected to be realised in September 20X6
51
(1) and (2)
(2) and (3)
(1) and (3)
All of the above
BAS 2 Inventories
1
In accordance with BAS 2 Inventories, the cost of interchangeable inventories must be arrived at using
cost formulas.
Which of the following statements is correct?
(1) As long as the formula used is disclosed, any reasonable formula may be used
(2) First-in, first-out (FIFO) is the only acceptable formula
(3) Last-in, first-out (LIFO) is not an acceptable method
(4) An entity must use the same cost formula for all inventories having a similar nature
(1), (3) and (4)
(1) and (4)
(2) only
(3) and (4)
Which of the following items should be included in arriving at the cost of the inventory of finished
goods held by a manufacturing company, according to BAS 2 Inventories?
(1) Carriage inwards on raw materials delivered to the factory
(2) Carriage outwards on goods delivered to customers
(3) Factory supervisors salaries
(4) Factory heating and lighting
(5) Cost of abnormally high idle time in the factory
(6) Import duties on raw materials
68
(1), (3), (4) and (6)
(1), (2), (4), (5) and (6)
(3), (4) and (6)
(2), (3) and (5)
QUESTION BANK
During the year ended 30 September 20X6, Kidderminster Ltd produced 10,000 widgets, compared to
a normal production level of 12,000 widgets. 1,000 finished widgets were held at the year end.
Production costs incurred for the year were as follows.
CU
Raw materials
100,000
Direct labour
50,000
Variable overheads
40,000
Fixed overheads
120,000
In accordance with BAS 2 Inventories, what is the value of Kidderminster Ltds finished goods at
30 September 20X6?
CU19,000
CU25,000
CU29,000
CU31,000
Which of the following items would be classified as inventories in accordance with BAS 2 Inventories?
(1) Finished tables held at the year end by a furniture manufacturing company
(2) Shares held at the year end by a company dealing in shares
(3) A construction contract in progress at the year end at a company which designs and builds
motorway bridges
(1) only
(1) and (2)
(1) and (3)
All of the above
Tintagel Ltd commenced business on 1 October 20X5. During its first year of trading the company
produced 10,000 widgets, compared to an anticipated normal production level of 15,000 widgets. At
30 September 20X6 there were 1,000 finished widgets in closing inventory.
Production costs incurred for the year were as follows.
CU
100,000
50,000
40,000
120,000
Raw materials
Direct labour
Variable overheads
Fixed overheads
In accordance with BAS 2 Inventories, how much of the above costs will be carried forward in
inventory at 30 September 20X6 and how much will have been recognised in the income statement
for the year ended 30 September 20X6?
In closing inventory
In income statement
CU27,000
CU279,000
CU31,000
CU279,000
CU27,000
CU283,000
CU31,000
CU283,000
69

6
Wythenshawe Ltd commenced business on 1 June 20X4 manufacturing a single type of widget, which
had a selling price throughout that year of CU45. During the year the company made 10,000 widgets
and incurred the following costs.
CU
150,000
75,000
50,000
37,500
40,000
Materials
Labour
Variable production overheads
Fixed production overheads
Administrative, selling and distribution costs
Towards the end of Wythenshawe Ltds first year of trading, market conditions deteriorated and the
company was left with 3,000 finished widgets in inventory at its year end. These widgets can be sold
for CU35 each but only after incurring CU6 per unit selling costs.
In accordance with BAS 2 Inventories, what was Wythenshawe Ltds net profit for the year ended
30 June 20X5?
CU49,500
CU56,250
CU74,250
CU67,500
Newcastle Ltd has the following units in inventory at the end of 20X5.
Units
Raw materials
Work in progress
Finished goods
7,000
2,500
1,000
Cost per unit

CU
20
25
30
Finished items usually sell for CU35 per unit. However, difficult trading conditions have meant that the
company expects to have to discount its finished items by 20% and to incur selling costs of CU2 per
item. A further CU2.50 per unit is still to be incurred to finish off the items of work in progress.
In accordance with BAS 2 Inventories, at what amount should inventories be stated in the balance sheet
of Newcastle Ltd as at the end of 20X6?
70
CU232,500
CU233,500
CU224,750
CU230,500
QUESTION BANK
52
BAS 7 Cash Flow Statements (single company only)

1
In the year ended 31 December 20X7 Drewstead Ltd made a new issue of 7,000 CU1 ordinary shares
at CU2 per share and used part of the proceeds of this issue to repay long-term borrowings of
CU4,100.
In accordance with BAS 7 Cash Flow Statements, what is the net cash flow from financing activities in
Drewstead Ltds cash flow statement for the year ended 31 December 20X7?
CU2,900
CU9,900
CU11,100
CU18,100
Parrot Ltd had the following balances in its accounts at 30 April 20X6 and 30 April 20X7.
30 April 20X6
CU
1,000
41,627
50,000
Cash in hand
Bank overdraft
Cash at bank
Long-term bank loan
30 April 20X7
CU
1,100
21,932
25,000
In accordance with BAS 7 Cash Flow Statements, what amount should be shown under net change in
cash and cash equivalents in the companys cash flow statement for the year ended 30 April 20X7?
CU16,695 decrease
CU63,659 increase
CU63,559 increase
CU20,295 decrease
The summarised balance sheets of Anteater Ltd were as follows.

31 December 20X7
CU
CU
Non-current assets
Cost
Current assets
Inventories and trade receivables
Share capital
Retained earnings
Current liabilities: Trade payables
31 December 20X6
CU
CU
28,000
(10,000)
18,000
55,000
1,000
56,000
74,000
30,000
30,000
14,000
74,000
27,000
(8,000)
19,000
48,000
8,000
56,000
75,000
30,000
25,000
20,000
75,000
Assume that no interest, tax or dividends were paid or charged during the year, and that no noncurrent assets were sold.
71

What is the cash generated from or used in operations in accordance with BAS 7 Cash Flow Statements
which would appear in Anteater Ltds cash flow statement for the year ended 31 December 20X7?
CU6,000 generated
CU8,000 generated
CU(6,000) used
CU(8,000) used
Which of the following items would appear in the reconciliation of profit before tax to cash generated
from operations in a cash flow statement prepared in accordance with BAS 7 Cash Flow Statements?
(1) Increase in provision for warranty costs
(2) Decrease in income tax payable
(3) Depreciation charge
(4) Change in dividends payable
(1) and (2)
(1) and (3)
(2) and (3)
(2) and (4)
The proposed final dividend for Zebra Ltd for the year ended 30 April 20X2 was CU25,000. This was
paid in May 20X2. The interim dividend for the year ended 30 April 20X3 was CU15,000 and the
declared final dividend for the year then ended was CU30,000. The final dividend for 30 April 20X3
was declared on 25 April 20X3.
In accordance with BAS 7 Cash Flow Statements, what is the figure for dividends paid which will appear
in the cash flow statement for Zebra Ltd for the year ended 30 April 20X3?
CU25,000
CU30,000
CU40,000
CU70,000
The accounting records of Tiger Ltd for 20X6 show the following amounts.
Carrying amount of property, plant and equipment at 31 December 20X5
Proceeds of sales of property, plant and equipment
Depreciation charged on property, plant and equipment
Profit on sale of property, plant and equipment
Carrying amount of property, plant and equipment at 31 December 20X6
CU
330,000
60,000
90,000
15,000
270,000
In accordance with BAS 7 Cash Flow Statements, what amount would appear in Tiger Ltds cash flow
statement for 20X6 for purchase of property, plant and equipment?
72
CU90,000
CU75,000
CU60,000
CU30,000
QUESTION BANK
During 20X1 Lion Ltd issued 200,000 ordinary CU1 shares at CU1.20 per share and 100,000
redeemable CU1 preference shares at CU1.10 per share. During 20X1 Lion Ltd also made a 1 for 4
bonus issue of the ordinary shares held at the start of the year by the existing 200,000 shareholders.
In accordance with BAS 7 Cash Flow Statements, how much should be shown in Lion Ltds cash flow
statement for 20X1 in respect of proceeds from the issue of equity share capital in respect of the
above share issues?
CU200,000
CU240,000
CU350,000
CU550,000
Gazelle Ltds balance sheets at 31 December 20X6 and 20X7 showed income tax payable of
CU10,000 and CU15,500 respectively. Income tax charges in the relevant income statements were
CU11,000 and CU16,000 respectively.
How will income tax be reflected in Gazelle Ltds cash flow statement and reconciliation of profit
before tax to cash generated from operations for 20X7 in accordance with BAS 7 Cash Flow
Statements?
Cash flow statement
Reconciliation
Income taxes paid CU10,000
Income tax charge CU16,000
Does not appear
Does not appear
Income tax charge CU16,000
Moonbeam Ltds balance sheets showed the following liabilities.

31 December
20X7
20X6
CU
CU
Borrowings
Current liabilities
Accrued interest
30,000
25,000
500
700
Moonbeam Ltds income statement for 20X7 showed a finance cost of CU600.
In accordance with BAS 7 Cash Flow Statements, how should the above be reflected in Moonbeam Ltds
cash flow statement and reconciliation of profit before tax to cash generated from operations for
20X7?
A
CU5,000 as a financing inflow, CU600 added back to profit before tax
CU5,000 as a financing inflow, CU800 as an operating outflow, CU600 added back to profit
before tax
CU800 as an operating outflow, CU5,000 as an investing inflow, CU600 added back to profit
before tax
CU5,000 as a financing inflow, CU800 as an operating outflow
73

10
Animalus Ltd has a profit before tax for 20X1 of CU52,000 after charging depreciation of CU21,600.
Its trade receivables have increased by CU15,500 during 20X1 and its trade payables by CU14,600.
In accordance with BAS 7 Cash Flow Statements, what is Animalus Ltds cash generated from operations
for 20X1?
11
CU29,500
CU31,300
CU72,700
CU74,500
The following information relates to Magi Ltd.
Ordinary shares of CU1 each

30 September
20X7
20X6
CU
CU
50,000
40,000
27,500
25,200
On 1 January 20X7 the company made a 1 for 10 bonus issue, and on 1 July 20X7 it issued shares for
cash.
How much should appear in Magi Ltds cash flow statement for the year ended 30 September 20X7 in
respect of these transactions?
12
13
CU8,300
CU10,000
CU12,300
CU16,300
In a companys cash flow statement how would the payment of VAT to NBR be shown?
A
An operating cash outflow
A decrease in creditors
An adjustment between profit before tax and cash generated from operating activities
It would not feature in the statement at all
Golden Ltds balance sheets at 30 June 20X6 and 20X7 showed carrying amounts of property, plant
and equipment of CU225,600 and CU301,700 respectively.
During the year ended 30 June 20X7 Golden Ltd revalued an asset with a carrying amount of
CU16,500 to CU31,000. It disposed of assets for a price of CU40,000, making a profit of CU10,100 on
the transactions.
What should appear in Golden Ltds cash flow statement for the year ended 30 June 20X7 in respect
of purchase of property, plant and equipment?
74
CU91,500
CU101,600
CU106,000
CU116,100
QUESTION BANK
14
The schedule of accruals and prepayments for Metallic Ltd for the years ended 30 April 20X7 and
20X8 show the following.
30 April 20X8
30 April 20X7
CU
CU
Accrued interest
610
590
Other accruals
1,560
1,670
Prepayments
2,550
2,300
In accordance with BAS 7 Cash Flow Statements, what is the net effect of the above on Metallic Ltds
reconciliation of profit before tax to cash generated from operations for the year ended 30 April
20X8?
15
Deduct CU340
Deduct CU360
Add back CU340
Add back CU360
During the year ended 31 December 20X6 Tara Ltd undertook the following transactions.
(1) Issued 100,000 CU1 ordinary shares at a price of CU1.20 per share
(2) Sold property, plant and equipment for CU10,000
(3) Purchased property, plant and equipment for CU109,000
(4) Paid CU25,000 off long-term borrowings
What total amounts in respect of the above will appear in cash flows from investing activities and cash
flows from financing activities in the cash flow statement of Tara Ltd for 20X6 in accordance with
BAS 7 Cash Flow Statements?
Cash inflow/(outflow)
Investing
Financing
activities
activities
CU
CU
16
21,000
(25,000)
(99,000)
95,000
(99,000)
145,000
(124,000)
120,000
On 1 July 20X5 Verity Ltd entered into a finance lease agreement. The terms of the agreement
provided for annual payments of CU5,000 on 1 July each year. The asset had a fair value at the
inception of the lease of CU25,000. CU750 of interest in relation to this agreement was paid and
charged to the income statement in the year ended 30 June 20X6.
In addition to the above transaction, on 1 October 20X5 Verity Ltd purchased a machine for cash of
CU6,500.
In accordance with BAS 7 Cash Flow Statements, how should the above be reflected in Verity Ltds cash
flow statement for the year ended 30 June 20X6?
A
CU31,500 as investing outflows
CU6,500 as an investing outflow, CU5,000 as a financing outflow
CU6,500 as an investing outflow, CU4,250 as a financing outflow, CU750 as an operating outflow
CU10,750 as investing outflows, CU750 as an operating outflow
75

17
Veronica Ltd prepares its financial statements to 31 December. During 20X8 Veronica Ltd made sales
of CU850,000 and incurred costs of CU610,500. At the beginning of 20X8 customers owed
CU125,500 and at the end of the year they owed CU135,400. At the beginning of 20X8 Veronica Ltd
owed CU45,500 to its suppliers and employees and at the end of the year it owed CU35,700.
During 20X8 Veronica Ltd received interest of CU14,500 and paid interest of CU500.
In accordance with BAS 7 Cash Flow Statements, what was Veronica Ltds net cash from operating
activities under the direct method for the year ended 31 December 20X8?
53
CU258,700
CU233,800
CU219,800
CU219,300
BAS 8 Accounting Policies, Changes in Accounting Estimates and

Errors
1
Which of the following constitute a change of accounting policy according to BAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors?
A
A change in the basis of valuing property
A change in depreciation method
A decision to capitalise borrowing costs relating to the construction of non-current assets, rather
than writing them off as incurred
Adopting an accounting policy for a new type of transaction not previously dealt with
According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which of the following
items would qualify for treatment as a change in accounting estimate?
(1) Provision for obsolescence of inventory
(2) Correction necessitated by a material error
(3) A change as a result of the adoption of a new International Accounting Standard
(4) A change in the useful life of a non-current asset
76
All of the above
(2) and (3)
(1) and (3)
(1) and (4)
In accordance with BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how is a change
in accounting policy accounted for?
A
By changing the current year figures but not the previous years figures
Via retrospective application
No alteration of any figures but disclosure in the notes
No alteration of any figures nor disclosure in the notes
QUESTION BANK
Which one of the following would be regarded as a change of accounting policy under BAS 8
Accounting Policies, Changes in Accounting Estimates and Errors?
A
An entity changes its method of depreciation of machinery from straight line to reducing balance
An entity has started capitalising borrowing costs for non-current assets whereas it previously
wrote those costs off to its income statement as incurred
An entity changes its method of calculating the provision for warranty claims on its products sold
An entity disclosed a contingent liability for a legal claim in the previous years accounts. In the
current year, a provision has been made for the same legal claim
According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how are each of the
following types of transactions dealt with?
(1) Change in accounting policy
(2) Change in accounting estimate
(3) Correction of a material prior period error
(1) and (2) are dealt with retrospectively, (3) is dealt with prospectively
All are dealt with retrospectively
From the years ended 31 December 20X6 to 31 December 20X8 Zorro Ltd capitalised CU10,000 of
finance costs in relation to self-constructed plant. By 31 December 20X8 these costs had been 50%
depreciated.
During 20X9 Zorro Ltd capitalised a further CU2,000 of such costs. On the last day of the year, just
prior to calculating the annual depreciation charge, when the carrying amount of plant stood at
CU250,000, Zorro Ltd decided to change its accounting policy to write-off such finance costs as
incurred. Retained earnings at 1 January 20X9 were CU350,000. Draft profit for 20X9 was CU45,000,
after charging the correct figure for depreciation of CU30,000.
In accordance with BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors what should the
following figures be stated at in Zorro Ltds financial statements for the year ended 31 December
20X9?
Profit for the year
CU
Retained earnings brought forward

CU
Carrying amount of plant

CU
43,000
340,000
208,000
47,000
340,000
208,000
43,000
345,000
213,000
47,000
345,000
213,000
77

7
Harriet Ltd has proposed the following changes to its current accounting practices to be used in its
next financial statements.
(1) Motor vehicles have always been depreciated on a straight-line basis. The company has now
decided to change to the reducing balance basis as it now believes that this better reflects the
consumption of economic benefits.
(2) In preparing its income statements, Harriet Ltd has previously classified depreciation on
directors motor vehicles as administrative expenses. These depreciation charges are now to be
classified as distribution costs as the company now believes that this gives a more reliable and
relevant presentation.
According to BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors which, if any, of these
changes represent a change in accounting policy?
54
(1) only
(2) only
Neither of the above
Both of the above
BAS 10 Events After the Balance Sheet Date

1
Which of the following statements concerning BAS 10 Events After the Balance Sheet Date are correct?
(1) Notes to the financial statements must give details of all material adjusting events reflected in
those financial statements
(2) Notes to the financial statements must give details of all non-adjusting events affecting users
ability to understand the companys financial position
(3) Financial statements should not be prepared on a going concern basis if, after the balance sheet
date, the directors decide to liquidate the company
78
All three statements are correct
(1) and (2)
(1) and (3)
(2) and (3)
QUESTION BANK
Georgina Ltds income statement for 20X3 showed a profit before tax of CU1,800,000. Early in 20X4,
before the financial statements were authorised for issue, the following events took place.
(1) The value of an investment held at the balance sheet date fell by CU85,000 due to a fire at that
companys premises early in 20X4
(2) A customer who owed CU116,000 at the balance sheet date went bankrupt owing a total of
CU138,000
(3) Inventory valued at a cost of CU161,000 in the balance sheet was sold for CU141,000
(4) Assets with a carrying amount at the balance sheet date of CU240,000 were unexpectedly
expropriated by the Government
In accordance with BAS 10 Events After the Balance Sheet Date what is Georgina Ltds profit for 20X3
after making the necessary adjustments for the above events?
CU1,399,000
CU1,579,000
CU1,664,000
CU1,557,000
The financial statements of Anna Ltd for the year ended 31 January 20X5 were approved for
publication on 15 May 20X5.
According to BAS 10 Events After the Balance Sheet Date which of the following would be treated as a
non-adjusting event in the financial statements for the year ended 31 January 20X5?
Notice was received on 31 March 20X5 that a major customer of Anna Ltds had ceased trading
and was unlikely to make any further payments
Inventory items at 31 January 20X5, with an original cost of CU30,000, were sold in April 20X5
for CU20,000
During 20X4, a customer commenced legal action against Anna Ltd. At 31 January 20X5, Anna
Ltds legal advisers were of the opinion that Anna Ltd would lose the case, so Anna Ltd created a
provision of CU200,000 for the damages claimed by the customer. On 27 April 20X5, the court
awarded damages of CU250,000 to the customer
On 2 May 20X5 there was a fire in Anna Ltds main warehouse which destroyed 50% of Anna
Ltds total inventory
The financial statements of Louise Ltd for the year ended 31 December 20X1 were approved for
publication on 20 May 20X2. The following events occurred after the year end.
(1) The directors declared a dividend of 50p per ordinary share on 17 February 20X2. Louise Ltd has
200,000 CU1 ordinary shares in issue.
(2) An insurance claim for storm damage to property, caused by unusually high winds, was under
negotiation at the balance sheet date. The claim was settled with the insurers in March 20X2
leaving uninsured damage amounting to CU75,000.
What liabilities should be recognised in the financial statements of Louise Ltd for the year ended
31 December 20X1 in accordance with BAS 10 Events After the Balance Sheet Date?
Dividend
Storm damage
CU100,000
CUNil
CU100,000
CU75,000
CUNil
CUNil
CUNil
CU75,000
79

5
55
According to BAS 10 Events After the Balance Sheet Date, which of the following would be a nonadjusting post balance sheet event when preparing Gawain Ltds group financial statements as at
31 March 20X5?
A
A decision is made on 9 April 20X5 to sell Gawain Ltds major trading activities in Kenya
The financial statements of Knight Ltd, an unlisted company, in which Gawain Ltd owns 8% of the
share capital, are received on 9 April 20X5 and state that Knight Ltd is going into liquidation
A customer, against whose debt a provision had been made at 31 March 20X5, was declared
bankrupt on 8 April 20X5
An insurance claim is agreed on 10 June 20X5 for compensation for a fire in March which
destroyed part of Gawain Ltds inventory

1
The components of the cost of a major item of equipment are given below.
Purchase price
Import duties
Sales tax (refundable)
Site preparation
Installation costs
Pre-production costs
Initial operating losses before the asset reaches
planned performance
Estimated cost of dismantling and removal of the asset,
recognised as a provision under BAS 37 Provisions,
Contingent Liabilities and Contingent Assets
CU
780,000
117,000
78,000
30,000
28,000
18,000
50,000
100,000
1,201,000
In accordance with BAS 16 Property, Plant and Equipment what amount should be recognised as the cost
of the asset?
80
CU956,000
CU1,055,000
CU1,073,000
CU1,201,000
QUESTION BANK
According to BAS 16 Property, Plant and Equipment, which, if any, of the following statements about
depreciation are correct?
(1) The main purpose of depreciation is to reflect the fall in value of an asset over its useful life
(2) When an asset is revalued, subsequent depreciation relating to the revaluation surplus should be
debited to the revaluation reserve rather than to the income statement
(3) The provision for depreciation ensures that there are funds available to replace an asset when
this becomes necessary, though in times of inflation additional amounts may need to be set aside
(4) A change in depreciation method constitutes a change in accounting policy and must be
accounted for as such
(1) and (4)
(2) and (3)
(4) only
None of the statements is correct
Mario Ltd purchased a machine for CU50,000 on 1 January 20X1. The machine was judged to have a
five-year life with a residual value of CU5,000. On 31 December 20X2 CU15,000 was spent on an
upgrade to the machine. This extended its remaining useful life to five years, with the same residual
value. During 20X3, the market for the product declined and the machine was sold on 1 January 20X4
for CU7,000.
According to BAS 16 Property, Plant and Equipment, what was the loss on disposal?
CU31,000
CU35,000
CU31,600
CU35,600
Gray Ltd purchased a machine on 1 April 20X2 for CU16,000. In the years ended 31 March 20X3 and
31 March 20X4 Gray Ltd depreciated the machine at 25% per annum on a straight-line basis. On
1 April 20X4 the machine was revalued to CU12,000 with its estimated useful life being unchanged.
In accordance with BAS 16 Property, Plant and Equipment what was the effect of this revaluation on
Gray Ltds profit for the year ended 31 March 20X5?
A
An increase of CU1,000
An increase of CU2,000
A decrease of CU1,000
A decrease of CU2,000
81

5
White Ltd owns many items of property, plant and equipment and accounts for them on a revaluation
basis.
In the year ended 31 March 20X2 White Ltd revalued three of its assets, all of which are in current
use, as set out below.
Carrying amount
Valuation
CU
CU
Turning machine (asset number 1001)
10,000
7,500
12,000
9,000
Finishing machine (asset number 1012)
8,000
6,500
The company had a revaluation reserve of CU6,500 at 1 April 20X1 due to previous revaluations. This
balance of CU6,500 relates to the following assets.
Finishing machine (asset number 1015)
CU3,000
CU1,500
CU2,000
In accordance with BAS 16 Property, Plant and Equipment what amount should be charged to the
income statement for the year ended 31 March 20X2 in respect of the above revaluations?
CU500
CU2,500
CU4,000
CU4,500
On 1 July 20X7 Brown Ltd bought a machine for CU48,000. The machine was depreciated at 25% per
annum on a straight-line basis until 30 June 20X9.
On 1 July 20X9 the machine was revalued to CU30,000. Brown Ltd considers that its remaining useful
life is now three years.
According to BAS 16 Property, Plant and Equipment, what should the depreciation charge for the year
ended 30 June 20Y0 and the minimum balance on the revaluation reserve as at 30 June 20Y0 be?
Depreciation charge
Revaluation reserve
CU8,000
CU4,000
CU8,000
CU6,000
CU10,000
CU4,000
CU10,000
CU6,000
Captain Ltd purchased a piece of land during the year ended 30 June 20X5 for CU1 million and
revalued this land on 30 June 20X5 to CU1.3 million. On 1 March 20X6 the land was sold for CU1.4
million.
In accordance with BAS 16 Property, Plant and Equipment what is the net amount in respect of this land
which will appear in Captain Ltds statement of changes in equity for the year ended 30 June 20X5 and
year ended 30 June 20X6?
Year ended 30 June
82
20X5
20X6
CU300,000
CU400,000
CUNil
CU400,000
CU300,000
CU100,000
CUNil
CU100,000
QUESTION BANK
On 1 January 20X1, Barbosa Ltd purchased an item of plant for CU300,000 which was to be
depreciated over its useful life of 10 years.
On 1 January 20X5, the plant was revalued to its fair value of CU600,000, with no revision to its
remaining useful life.
On 1 January 20X6, the plant was sold for CU700,000.
In accordance with BAS 16 Property, Plant and Equipment, what was the profit on disposal to be
included in Barbosa Ltds income statement for the year ended 31 December 20X6?
CU200,000
CU260,000
CU300,000
CU400,000
Sparrow Ltd owns a building, currently carried in its accounting records at CU800,000. It has agreed
to exchange this building for a building owned by Turner Ltd. The building currently owned by
Sparrow Ltd has a fair value of CU1 million. The building currently owned by Turner Ltd has a fair
value of CU1.1 million. Sparrow Ltd has agreed to pay the legal costs of the transfer which amount to
CU10,000.
According to BAS 16 Property, Plant and Equipment at what value should the building currently owned
by Turner Ltd be recorded at initially in Sparrow Ltds accounting records?
10
CU800,000
CU1 million
CU1.1 million
CU990,000
With regard to BAS 16 Property, Plant and Equipment which of the following statements is true?
A
Any assets where management believe the carrying amounts and market values are materially
different may be revalued
Assets which are carried under the revaluation model must be revalued every five years
Increases in value on an initial revaluation are always credited directly to equity
The fair value of land and buildings must be determined on an existing use basis
83
56
BAS 17 Leases
1
Obi Ltd purchased a machine via a finance lease. The terms of the agreement provided for a primary
period of four years and a secondary period of two years. Payments are CU20,000 per annum over
the primary period. The cash price of the plant is CU60,000 and its expected life is five years. Under
normal circumstances there is an expectation that the secondary period will be used. Residual value is
expected to be insignificant.
According to BAS 17 Leases on what value should the depreciation charge on the machine be based
and over what period should depreciation be charged?
Value
Period
CU80,000
4 years
CU80,000
6 years
CU60,000
4 years
CU60,000
5 years
On 1 January 20X4 Jedi Ltd entered into a finance lease for a machine with a fair value of CU2,050.
Lease payments of CU500 are payable annually in advance for five years, starting on 1 January 20X4.
Jedi Ltd allocates finance charges on a sum-of-the-digits basis.
According to BAS 17 Leases what is Jedi Ltds non-current liability in respect of this finance lease as at
31 December 20X4?
CU1,200
CU1,230
CU1,365
CU1,500
At what amount does BAS 17 Leases require a lessee to capitalise a finance lease at?
A
The assets fair value
The cash price of the asset
The minimum lease payments less the residual value of the asset
The lower of the assets fair value and the present value of the minimum lease payments
On 1 June 20X5 Aretoo Ltd acquired a machine under a finance lease. The machine would have had a
cash price of CU24,000 but Aretoo Ltd agreed to pay a deposit of CU6,000 and ten quarterly
repayments of CU2,600 each, starting on 31 August 20X5. The charge for interest is to be spread
over the period of the lease on the sum-of-digits basis.
In accordance with BAS 17 Leases how much interest would be allocated to the fourth quarterly
repayment?
84
CU1,067
CU1,018
CU800
CU582
QUESTION BANK
On 1 January 20X4 Luke Ltd entered into a finance lease for a machine with a fair value of CU2,050.
Lease payments of CU500 are payable annually in arrears for five years, starting on 31 December
20X4. Luke Ltd allocates finance charges on a sum-of-the-digits basis.
According to BAS 17 Leases what is Luke Ltds liability in respect of this finance lease as at
31 December 20X4?
CU1,550
CU1,230
CU1,320
CU1,700
In respect of an operating lease BAS 17 Leases requires which of the following to be disclosed in a
companys financial statements?
(1) The period-end liability
(2) The amount charged to the income statement for the period
(3) The total lease payments the company is committed to making over the coming years
(1) and (2)
(2) only
(2) and (3)
(3) only
In accordance with BAS 17 Leases which of the following is true with regard to leases of land and
buildings?
A
Leases of land will always be treated as operating leases; leases of buildings will always be treated
as finance leases
Leases of buildings will always be treated as operating leases; leases of land will always be treated
as finance leases
Leases of land and buildings should be split and classified according to their substance
Leases of land and buildings should be treated as a combined lease and classified according to its
substance.
On 1 January 20X5, the first day of its accounting year, Anakin Ltd entered into an operating lease.
The terms of the lease provided for an initial non-returnable deposit of CU60,000 and then three
annual rentals of CU30,000, payable on the last day of each year.
According to BAS 17 Leases what is the charge to the income statement for the year ended 31
December 20X5 and what balance is reflected in the balance sheet as at 31 December 20X5 in respect
of this lease?
Income statement charge
Balance sheet
CU30,000
CUNil
CU90,000
CUNil
CU50,000
Asset of CU40,000
CU50,000
Liability of CU40,000
85

9
10
The treatment of leases in accordance with BAS 17 Leases follows which of the qualitative
characteristics of the BFRS Framework for the Preparation and Presentation of Financial Statements?
A
Reliability
Relevance
Comparability
Understandability
On 1 January 20X7 Darth Ltd entered into a finance lease agreement. The terms of the lease were as
follows.
CU
Cash price
36,000
Less: Deposit payable on 1 January 20X7
(12,000)
24,000
Interest at 9% for two years
4,320
Balance payable on 31 December 20X7 and 20X8
28,320
The rate of interest implicit in the lease is approximately 12%.
Applying the provisions of BAS 17 Leases, what is the finance charge in Darth Ltds income statement
for the year ended 31 December 20X7?
57
CU2,160
CU2,880
CU3,240
CU4,320
BAS 18 Revenue
1
Northanger Ltds draft balance sheet at 30 June 20X7 includes inventories of CU110,000 and trade
receivables of CU190,000. Trade receivables include goods sent out on sale or return at a selling price
of CU20,000. These goods remained unsold at 30 June 20X7 and had a cost of CU15,000.
In accordance with BAS 18 Revenue at what amounts should Northanger Ltds inventories and trade
receivables be stated on 30 June 20X7?
86
Inventories
Trade receivables
CU125,000
CU175,000
CU125,000
CU170,000
CU130,000
CU175,000
CU130,000
CU170,000
QUESTION BANK
On 1 July 20X7 Mansfield Ltd entered into a CU5 million contract for the supply of computer
software and five years of after-sales support. The cost of providing after-sales support is estimated at
CU500,000 per annum and the mark-up on similar after-sales only contracts is 30% on cost.
In accordance with BAS 18 Revenue how much revenue should be included in Mansfield Ltds income
statement for the year ended 30 June 20X8 in respect of the above contract?
CU1.75 million
CU2.4 million
CU2.5 million
CU5 million
On 1 July 20X5 Price Ltd entered into a CU3 million contract for the supply of computer hardware.
An additional CU1 million was agreed for the provision of after-sales support until 30 June 20X9.
In accordance with BAS 18 Revenue how much revenue should be included in Price Ltds income
statement for the year ended 30 June 20X6 in respect of the above contract?
CU4 million
CU3 million
CU3.25 million
CU2.25 million
On 31 December 20X7 Darcy Ltd sold goods to Willoughby Ltd for CU300,000. These goods had a
cost of CU250,000. Willoughby Ltd has been granted interest-free credit and will pay for these goods
in full on 31 December 20X9. At the date of sale the fair value of the CU300,000 receivable was
CU290,000.
In accordance with BAS 18 Revenue how much revenue should be included in Darcy Ltds income
statement for the year ended 31 December 20X7 in respect of the above sale?
CUNil
CU250,000
CU290,000
CU300,000
Lydia Ltd has entered into a fixed-price contract for the provision of services to Jane Ltd. The contract
commenced in July 20X1 and will be completed in 20X2. The contract price is CU1 million and costs
are recoverable as incurred.
At 31 December 20X1, Lydia Ltds year end, costs of CU300,000 had been incurred and the contract
has been assessed as 40% complete. Costs to complete are estimated at CU500,000. All figures are
reliable estimates.
In accordance with BAS 18 Revenue how much revenue should be included in Lydia Ltds income
statement for the year ended 31 December 20X1 in respect of this contract?
A
CUNil
CU300,000
CU400,000
CU1 million
87

6
Rochester Ltd has entered into a fixed-price contract for the provision of services to Adele Ltd. The
contract commenced in September 20X2 and will be completed in 20X3. The contract price is CU2
million and costs are recoverable as incurred.
At 31 December 20X2, Rochester Ltds year end, costs of CU500,000 have been incurred. The
contract has been assessed as 30% complete, however, costs to complete cannot be estimated reliably.
In accordance with BAS 18 Revenue how much revenue should be included in Rochester Ltds income
statement for the year ended 31 December 20X2 in respect of this contract?
CUNil
CU500,000
CU600,000
CU2 million
Rainorshine Ltd produces a series of outdoor theatre productions each spring/summer. The
companys year end is 30 June. For the 20X6 season, five productions are planned, one in each month
from May through to September. A season ticket covering all five events costs CU100. Due to adverse
weather conditions, Junes production was delayed until 2 July.
In accordance with BAS 18 Revenue how much revenue should be included from each ticket sold for
the 20X6 season in Rainorshine Ltds income statement for the year ended 30 June 20X6?
58
CUNil
CU100
CU40
CU20

1
On 3 October 20X6 Corbin Ltd issued 100,000 5% redeemable CU1 preference shares. These shares
are redeemable on 3 October 20Y1.
In accordance with BAS 32 Financial Instruments: Presentation how will these shares and their related
dividend be shown in Corbin Ltds financial statements for the year ended 31 December 20X6?
88
Shares
Dividend
Income statement
Equity
Income statement
Equity
QUESTION BANK
On 5 March 20X7 Marchant Ltd issued 200,000 5% irredeemable CU1 preference shares.
In accordance with BAS 32 Financial Instruments: Presentation how will these shares and their related
dividend be shown in Marchant Ltds financial statements for the year ended 31 March 20X7?
Shares
Dividend
Income statement
Equity
Income statement
Equity
According to BAS 32 Financial Instruments: Presentation which of the following could be classified as
financial assets?
(1) Bank overdraft
(2) Cash at bank
(3) Inventories
(4) A current asset investment
(5) A forward contract
(1), (2) and (5)
(2), (4) and (5)
(2) and (4)
(3), (4) and (5)
According to BAS 39 Financial Instruments: Recognition and Measurement at what amount should a
financial instrument initially be measured?
A
Cost
Fair value of consideration given
Fair value of consideration given plus directly attributable transaction costs
Fair value of consideration given less directly attributable transaction costs
89
59

1
In accordance with BAS 36 Impairment of Assets which of the following statements are true?
(1) Non-current assets must be checked annually for evidence of impairment
(2) An impairment loss must be recognised immediately in the income statement, except that all or
part of a loss on a previously revalued asset should be charged against any related revaluation
surplus
(3) If the fair value less costs to sell exceeds the carrying amount of an asset there is no need to
estimate value in use
(1) and (2)
(1) and (3)
(2) and (3)
(1), (2) and (3)
A non-current asset has a carrying amount of CU20,000. It could be sold for CU18,500 with selling
costs of CU500. Its value in use is CU22,000 and its replacement cost CU50,000.
According to BAS 36 Impairment of Assets what is the recoverable amount of this asset?
CU18,000
CU20,000
CU22,000
CU50,000
Chloe Ltd purchased equipment on 1 April 20X2 for CU100,000. The equipment was depreciated
using the reducing balance method at 25% per annum. Chloe Ltd prepares accounts to 31 March
annually.
Depreciation was charged up to and including 31 March 20X6. At that date, the recoverable amount
of this equipment was CU22,000.
According to BAS 36 Impairment of Assets what was the impairment loss on this equipment calculated
on 31 March 20X6?
CUNil
CU3,000
CU9,640
CU20,187
Lauren Ltd bought some land on 1 January 20X4 for CU500,000. On 31 December 20X5 this land was
revalued to CU700,000. On 31 December 20X7 the fair value less costs to sell of this land was
estimated at CU400,000 and its value in use at CU450,000.
According to BAS 36 Impairment of Assets what amount will be included in the income statement of
Lauren Ltd for the year ended 31 December 20X7 in respect of the impairment loss on this land?
90
CUNil
CU50,000
CU200,000
CU250,000
QUESTION BANK
Alayna Ltd bought a machine on 1 January 20X2 for CU50,000. The useful life of this machine was
assessed as 10 years and it was depreciated on a straight-line basis.
On 31 December 20X3 the machine was revalued to a fair value of CU80,000 with no change to its
remaining useful life. On 31 December 20X6 the machine was identified as impaired and revalued to
CU20,000.
Alayna Ltd makes a transfer between the revaluation reserve and retained earnings each year as a
result of the revaluation in accordance with best practice.
According to BAS 36 Impairment of Assets what amount will be included in the income statement of
Alayna Ltd for the year ended 31 December 20X6 in respect of this impairment loss?
CUNil
CU5,000
CU25,000
CU30,000
In accordance with BAS 36 Impairment of Assets which of the following assets must be tested for
impairment annually?
(1) All assets
(2) Any assets where there is an indication of a potential impairment
(3) All intangible assets with indefinite useful lives
(4) Goodwill acquired in a business combination
60
(1) only
(2) only
(2) and (3)
(2), (3) and (4)
BAS 37 Provisions, Contingent Liabilities and Contingent Assets

1
According to BAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the following
statements are correct?
(1) Provisions should be made for constructive obligations as well as for legal obligations
(2) Discounting may be used when estimating the amount of a provision if the effect is material
(3) A restructuring provision must include the estimated costs of retraining or relocating continuing
staff
(4) A restructuring provision may only be made when a company has a detailed plan for the
reconstruction and a firm intention to carry it out
A
All four statements
(1), (2) and (4)
(1), (3) and (4)
(1), (2) and (3)
91

2
According to BAS 37 Provisions, Contingent Liabilities and Contingent Assets which of the following criteria
must be present in order for a company to recognise a provision?
(1) There is a present obligation as a result of past events
(2) It is probable that a transfer of economic benefits will be required to settle the obligation
(3) A reliable estimate of the obligation can be made
(1), (2) and (3)
(1) and (2)
(1) and (3)
(2) and (3)
Which of the following statements about contingencies, if any, are correct according to BAS 37
Provisions, Contingent Liabilities and Contingent Assets?
(1) A contingent liability should be disclosed by note if it is probable that an obligation will arise and
its amount can be estimated reliably
(2) A contingent asset should be disclosed by note if it is probable that it will arise
(3) An entity should not recognise a contingent asset
None of the statements is correct
(1) and (2)
(2) and (3)
All of the statements are correct
In which of the following circumstances would a provision be recognised under BAS 37 Provisions,
Contingent Liabilities and Contingent Assets in the financial statements for the year ending 31 March
20X6?
(1) A board decision was made on 15 March 20X6 to close down a division. Potential costs are
CU100,000. At 31 March 20X6 the decision had not been communicated to managers,
employees or customers
(2) There are anticipated costs from returns of a defective product in the next few months of
CU60,000. In the past all returns of defective products have always been refunded to customers
(3) It is anticipated that a major refurbishment of the companys head office will take place from June
20X6 onwards costing CU85,000
92
(1) and (2)
(2) and (3)
(2) only
(3) only
QUESTION BANK
Airedale Ltd has the following two legal claims outstanding.

(1) A legal action claiming compensation of CU500,000 filed against Airedale Ltd in March 20X4
(2) A legal action taken by Airedale Ltd against a third party, claiming damages of CU200,000 was
started in January 20X3 and is nearing completion
In both cases, it is more likely than not that the amount claimed will have to be paid.
According to BAS 37 Provisions, Contingent Liabilities and Contingent Assets how should Airedale Ltd
report these legal actions in its financial statements for the year ended 31 March 20X5?
Action (1)
Action (2)
Disclose as a note
No disclosure
Make a provision
No disclosure
Make a provision
Disclose as a note
Make a provision
Accrue the income
In accordance with BAS 37 Provisions, Contingent Liabilities and Contingent Assets which one of the following
would require a provision to be created by Wally Ltd at its balance sheet date of 31 October 20X5?
A
The government introduced new laws on data protection which come into force on 1 January
20X6. Wally Ltds directors have agreed that this will require a large number of staff to be
retrained. At 31 October 20X5, the directors were waiting on a report they had commissioned
that would identify the actual training requirements
At the balance sheet date, Wally Ltd was negotiating with its insurance provider about the
amount of an insurance claim that it had filed. On 20 November 20X5, the insurance provider
agreed to pay CU200,000
Although it has no legal obligation to do so, Wally Ltd makes refunds to customers for any goods
returned within 30 days of sale, and has done so for many years
A customer is suing Wally Ltd for damages alleged to have been caused by a product sold to it by
Wally Ltd. Wally Ltd is contesting the claim and, at 31 October 20X5, the directors have been
advised by the companys legal advisers that the company is very unlikely to lose the case
Flyaway Ltd operates a low-cost airline. One of its aircraft will require a major refit in 20X6, at a cost
of CU500,000, to upgrade the on-board facilities. At the same time, the aircraft will also have
additional safety equipment fitted, at a cost of CU200,000, to allow the company to comply with new
legislation which has been passed and which will come into force in 20X7.
Under BAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following is the correct
treatment in the financial statements for the year ended 31 December 20X5 for each of the above?
Refit
Safety equipment
Provision
Provision
No provision
Provision
Provision
No provision
No provision
No provision
93

8
Charlotte Ltd has been awarded a contract to build an office block for Kylie Ltd. The site preparation
work was sub-contracted to George Ltd. George Ltds work was sub-standard and this has caused a
delay in contract completion.
As a result of the delay the client is claiming CU10 million in damages from Charlotte Ltd who has
commenced legal action against George Ltd for CU8 million. Charlotte Ltds lawyers have advised that
it is probable that both actions will be successful.
In accordance with BAS 37 Provisions, Contingent Liabilities and Contingent Assets how should Charlotte
Ltd account for these legal actions in its financial statements?
61
Claim against Charlotte Ltd
Claim by Charlotte Ltd
Provide
Recognise asset
Provide
Disclose
Disclose
Ignore
Ignore
Disclose

1
In accordance with BAS 38 Intangible Assets and BFRS 3 Business Combinations which of the following
statements is correct?
(1) Negative goodwill should be shown on the balance sheet as a deduction from positive goodwill
(2) As an alternative to capitalisation, goodwill may be written off immediately against reserves
(3) As a business grows, internally generated goodwill may be revalued upwards to reflect that
growth
(4) Internally developed brands must not be capitalised
(1) and (4)
(2) and (3)
(3) only
(4) only
During the year ended 30 June 20X3, Emily Ltd spent CU300,000 on the development of a new range
of garden machinery. In order to carry out this work, Emily Ltd purchase some highly specialised
equipment, on 1 July 20X2 at a cost of CU100,000. The equipment is expected to have a useful life of
five years and is to be depreciated over that period by the straight-line method.
According to BAS 38 Intangible Assets, what is the maximum amount that Emily Ltd can carry forward
as development expenditure as at 30 June 20X3?
94
CU100,000
CU300,000
CU320,000
CU400,000
QUESTION BANK
According to BAS 38 Intangible Assets which of the following conditions would preclude any part of the
development expenditure from being capitalised as an intangible asset?
A
The development is incomplete
The benefits flowing from the completed development are expected to be at least equal to its
cost
Funds are unlikely to be available to complete the development
The development is expected to give rise to more than one product
According to BAS 38 Intangible Assets which of the following types of research and development
expenditure must be written off in the year it is incurred?
A
Costs of designing a pre-production prototype
Legal costs in connection with registration of a patent
Costs of searching for possible alternative products
Costs of research work which are to be reimbursed by a customer
In accordance with BAS 38 Intangible Assets which, if any, of the following statements is correct?
(1) Any intangible asset may be carried at its fair value, as opposed to being carried at cost
(2) Once an intangible asset has been revalued, further revaluations should be carried out annually to
ensure that the carrying amount does not differ from the fair value at the balance sheet date
(1) only
(2) only
(1) and (2)
Neither of the above
During the current accounting period Jack Ltd considered the recognition of the following costs as
intangible assets.
(1) CU40,000 spent on evaluating research findings
(2) CU60,000 spent on acquiring a brand name from a competitor
(3) CU50,000 spent on acquiring the legal rights to a production process, without which Jack Ltds
business cannot function
In accordance with BAS 38 Intangible Assets what is the maximum amount that Jack Ltd could recognise
as intangible assets?
A
CU60,000
CU100,000
CU110,000
CU150,000
95

7
During the current accounting period Silver Ltd considered the recognition of the following costs as
intangible assets.
(1) CU50,000 spent on development expenditure on Project X. The directors are confident of the
financial, commercial and technical viability of the project
(2) CU6,000 spent on developing a brand internally
(3) CU30,000 spent on acquiring goodwill in Gold Ltds books when Silver Ltd acquired the net
assets of Gold Ltd
What is the maximum amount that Silver Ltd could recognise as intangible assets in its consolidated
financial statements in accordance with BAS 38 Intangible Assets?
CU50,000
CU56,000
CU86,000
CU30,000
In order for an asset to be recognised as an intangible asset in accordance with BAS 38 Intangible Assets
which of the following recognition criteria must be met?
(1) The asset must be identifiable
(2) The asset must be separable
(3) The cost of the asset must be able to be measured reliably
(4) It must be possible that future benefits from the asset will flow to the entity
96
(1) and (3)
(2) and (3)
(1), (2) and (3)
(2), (3) and (4)
In accordance with BAS 38 Intangible Assets which of the following statements is correct?
A
All intangible assets should be amortised over their expected useful lives
When intangible assets are amortised a residual value should always be calculated
Provided a reliable value can be placed upon them, employees skills may be capitalised as an
intangible asset
Intangible assets should initially be recognised at cost
QUESTION BANK
62
BFRS 5 Non-current Assets Held for Sale and Discontinued Operations

1
Darren Ltd operates a number of divisions and has a year end of 31 December. On 15 December
20X4 the board made the decision to sell Darren Ltds manufacturing division. A buyer is expected to
be found within six months and the sale is expected to be completed in early 20X6.
In the companys financial statements for the year ended 31 December 20X4 and 31 December 20X5
how should this division be treated in accordance with BFRS 5 Non-current Assets Held for Sale and
Discontinued Operations?
As a discontinued operation in 20X4
As a discontinued operation in both 20X4 and 20X5
As a continuing operation in 20X4 and as a discontinued operation in 20X5
As a continuing operation in both 20X4 and 20X5
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what is the
minimum disclosure which must be made on the face of the income statement in respect of
discontinued operations?
A
Post-tax profit or loss on operations and any post-tax gain or loss on related assets
A combined figure for the post-tax profit or loss on operations and any post-tax gain or loss on
related assets
Revenue, expenses, pre-tax profit or loss and tax on operations and any post-tax gain or loss on
related assets
Revenue, expenses, pre-tax profit or loss and tax on operations, any pre-tax gain or loss on
related assets and tax on that gain or loss
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what is the
minimum disclosure which must be made on the face of the cash flow statement in respect of
discontinued operations?
A
Cash flows attributable to the operating, investing and financing activities of the discontinued
operations
Net cash flows arising from the operation of the discontinued operations and the sale of related
assets
Cash flows arising from the sale of the assets of the discontinued operations
No separate disclosure is required
Gary Ltd operates a number of divisions and has a year end of 30 June. On 30 June 20X7 the board
made and announced the decision to sell Gary Ltds retail division. The sale is expected to be
completed within six months.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, how should the
retail divisions property, plant and equipment be classified in the balance sheets as at 30 June 20X6
and 30 June 20X7?
A
As non-current assets at 30 June 20X6 and 30 June 20X7
As non-current assets held for sale at 30 June 20X6 and 30 June 20X7
As non-current assets at 30 June 20X6 and as non-current assets held for sale at 30 June 20X7
As non-current assets at 30 June 20X6 and as current assets at 30 June 20X7
97

5
During the year Sharon Ltd carried out a reorganisation as follows.

Division As operations were terminated in Bangladesh and moved to an overseas division.
Division B was Sharon Ltds distribution division. Sharon Ltd has now outsourced this part of the
business.
The results of both divisions have previously been reported separately.
Which, if any, of these operations could be a discontinued operation according to BFRS 5 Non-current
Assets Held for Sale and Discontinued Operations?
Neither division
Both divisions
Division A only
Division B only
At a board meeting held on 30 October 20X7 Rosa Ltd made the decision to sell a major division. The
actual closure took place on 12 February 20X8. In the year ended 31 December 20X7 the division
reported a loss of CU100,000. Costs of redundancies relating to the division to be incurred in 20X8
are expected to be CU30,000.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what will be
reported in Rosa Ltds income statement for the year ended 31 December 20X7 in respect of this
division?
CU100,000 loss from continuing operations
CU130,000 loss from continuing operations
CU100,000 loss from discontinued operations
CU130,000 loss from discontinued operations
On 30 September 20X1 the directors of Guido Ltd decided to sell the companys services division and
the division was classified as held for sale. The sale is expected to be completed, along with the sales
of related assets, in early December 20X1.
One item of plant within this division had originally cost CU30,000 and had a carrying amount of
CU15,000 on 1 November 20X0. Guido Ltd will carry on using this plant until it is sold.
Guido Ltd has a year end of 30 October and depreciates all plant on a monthly straight-line basis using
a monthly rate of 1%.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amount
will be recognised in the balance sheet of Guido Ltd as at 30 October 20X1 in respect of this plant?
98
CU11,400 in non-current assets held for sale
CU11,400 in current assets
CU11,700 in non-current assets held for sale
CU11,700 in non-current assets
QUESTION BANK
Valerie Ltd acquired a machine on 1 January 20X2 for CU70,000. On 1 January 20X5, when the
carrying amount of the machine was CU40,000, the machine was classified as held for sale. Its fair
value was estimated at CU30,000 and costs to sell at CU500. The asset was sold on 30 June 20X5 for
CU32,000.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amounts
will be recognised in respect of this asset in Valerie Ltds income statement for the year ended
31 December 20X5?
Impairment loss
Profit on sale
CU8,000
CUNil
CU10,500
CU2,500
CUNil
CU8,000
CU10,000
CU2,000
Paul Ltd acquired a building on 1 January 20W7 for CU800,000. The building had a useful life of 50
years and was being depreciated on a straight-line basis. On 1 January 20X9 the building was classified
as held for sale. Its fair value was estimated at CU600,000 and costs to sell at CU10,000. The building
was sold on 30 June 20X9 for CU580,000.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations what amounts
will be recognised in respect of this building in Paul Ltds income statement for the year ended
31 December 20X9?
10
Impairment loss
Loss on sale
CU28,000
CUNil
CU18,000
CU2,000
CUNil
CU28,000
CU18,000
CU10,000
Michael Ltd bought a piece of land on 1 January 20X5 for CU1 million. The company revalued this land
on 31 December 20X6 to CU1.5 million. On 1 September 20X7 the land was classified as held for
sale. Its fair value was estimated at CU1.7 million and costs to sell at CU20,000. The land was sold on
15 February 20X8 for CU1.8 million.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what amounts
will be recognised in respect of this land in Michael Ltds income statement and revaluation reserve for
the year ended 31 December 20X7?
Debit in income statement
Credit to revaluation reserve
CUNil
CU180,000
CU20,000
CU200,000
CUNil
CUNil
CU20,000
CU300,000
99

11
Harry Ltd revalued a machine on 1 January 20X6 to CU280,000. The machine had cost CU200,000 on
1 January 20X5 and was being depreciated on a reducing balance basis at a rate of 25%. The
depreciation policy was unchanged after revaluation. On 1 January 20X8 the machine was classified as
held for sale. Its fair value was estimated at CU80,000 and costs to sell at CU5,000. The machine was
sold on 30 June 20X8 for CU75,000.
In accordance with BFRS 5 Non-current Assets Held for Sale and Discontinued Operations, what amounts
will be recognised in respect of this machine in Harry Ltds income statement and revaluation reserve
for the year ended 31 December 20X8?
100
Debit in income statement
Debit to revaluation reserve
CUNil
CU130,000
CU5,000
CU130,000
CU82,500
CUNil
CU82,500
CU130,000
QUESTION BANK
Consolidated financial statements: objective test questions
63

1
The summarised balance sheets of Falcon Ltd and Kestrel Ltd at 31 December 20X8 were as follows.
Falcon Ltd
CUm
68
Net assets (at fair values)

Retained earnings
10
58
68
Kestrel Ltd
CUm
25
10
15
25
On 1 January 20X8 Falcon Ltd had purchased 80% of the ordinary share capital of Kestrel Ltd for
CU24 million. The fair value of the net assets of Kestrel Ltd was CU20 million at that date. The
goodwill arising on consolidation was impaired by 100%.
At what amount will retained earnings be stated in Falcon Ltd's consolidated balance sheet as at
31 December 20X8?
CU55 million
CU54 million
CU50 million
CU62 million
Ploughshare Ltd acquired 80% of the ordinary share capital of Sword Ltd on 30 September 20X1. On
31 December 20X1, the share capital and retained earnings of Sword Ltd were as follows.
Ordinary shares of 50p each
Retained profit for the year ended 31 December 20X1
CU'000
300
80
40
420
The profits of Sword Ltd have accrued evenly throughout 20X1. Goodwill arising on the acquisition of
Sword Ltd was CU20,000.
What was the cost of the investment in Sword Ltd?
A
CU356,000
CU328,000
CU348,000
CU430,000
101

3
Xanthe Ltd owns 75% of the ordinary share capital of QED Ltd. At the group's year end, Xanthe Ltd
held inventories valued at CU160,000 and QED Ltd held inventories valued at CU90,000. The
inventories held by Xanthe Ltd included CU20,000 of goods purchased from QED Ltd at a profit
margin of 30%. There were also inventories in transit between the two entities; this amounted to a
further CU10,000 at selling price.
To the nearest CU'000, at what value should inventories appear in the year end consolidated balance
sheet?
CU251,000
CU253,000
CU254,000
CU255,000
Xiao Ltd owns 80% of Yacht Ltd and 75% of Zebra Ltd. At 31 December 20X5, the three companies
had declared the following dividends for the year ended on that date.
Xiao Ltd
Yacht Ltd
Zebra Ltd
CU
60,000
30,000
20,000
Xiao Ltd had also paid an interim dividend of CU15,000. What is the total liability for dividends
payable in the consolidated balance sheet of Xiao Ltd as at 31 December 20X5?
CU56,000
CU60,000
CU71,000
CU110,000
Woolf Ltd acquired 80% of the ordinary share capital of Stephen Ltd on the incorporation of that
company many years ago. No goodwill arose on the acquisition.
At 31 December 20X9, the retained earnings of Woolf Ltd were CU202,000 and the consolidated
retained earnings of the Woolf Ltd group were CU230,000.
During the year ended 31 December 20X9, Stephen Ltd had sold goods to Woolf Ltd for CU25,000.
The goods originally cost CU20,000.
What were the retained earnings of Stephen Ltd as at 31 December 20X9?
102
CU30,000
CU32,000
CU33,000
CU40,000
QUESTION BANK
Outlook Ltd has one subsidiary. On 1 January 20X7 Outlook Ltd purchased 30% of the ordinary share
capital of View Ltd for CU12 million. The summarised balance sheet of View Ltd as at 31 December
20X7 was as follows.
CUm
30
Net assets (at carrying amount)

Net profit for the year ended 31 December 20X7
10
15
5
30
At 1 January 20X7 the fair value of the net assets of View Ltd was CU5 million greater than their
carrying amount. The difference, which has not been recorded in View Ltd's books, relates to land
which is still owned by View Ltd at 31 December 20X7.
At what amount should the investment in View Ltd be included in Outlook Ltd's consolidated balance
sheet as at 31 December 20X7?
CU12 million
CU13.5 million
CU17 million
CU9 million
On 1 January 20X2 Alfie Ltd purchased 40% of the equity share capital of Bailey Ltd for CU60,000. At
this date the retained earnings of Bailey Ltd stood at CU30,000. During the year ended 31 December
20X4 Alfie Ltd sold goods to Bailey Ltd for CU10,000. These goods were still in inventory at the year
end. Alfie Ltd makes a gross profit margin of 25% on intra-group sales.
At 31 December 20X4 the balance sheet of Bailey Ltd showed the following.
Net assets
Retained earnings
CU'000
320
100
220
320
At what amount should Alfie Ltd's interest in Bailey Ltd be stated in its consolidated balance sheet at
31 December 20X4?
A
CU135,000
CU135,200
CU136,000
CU147,000
103

8
On 1 January 20X4, Geranium Ltd acquired 60% of the equity share capital of Rose Ltd for CU5
million. At that date, the net assets of Rose Ltd were CU8 million. On 1 July 20X9 Geranium Ltd sold
three quarters of its holding in Rose Ltd for CU6.5 million.
The capital and reserves of Rose Ltd at 31 December 20X9 are shown below.
CU'000
5,000
6,500
2,000
13,500
At what amount should the investment in Rose Ltd be shown in Geranium Ltd's consolidated balance
sheet as at 31 December 20X9?
CU750,000
CU1,725,000
CU1,875,000
CU1,925,000
Aster Ltd owns a controlling interest in Chrysanthemum Ltd and exerts significant influence over
Flower Ltd, an entity in which it holds 30% of the ordinary share capital.
During the year ended 30 April 20X5, Flower Ltd sold goods to Aster Ltd for CU80,000. The cost of
the goods to Flower Ltd was CU60,000. 25% of the goods remained in Aster Ltd's inventories at 30
April 20X5.
Which of the following is the correct consolidation adjustment in respect of these inventories?
10
Dr Consolidated retained earnings CU5,000
Cr Consolidated inventories
CU5,000
Dr Consolidated retained earnings CU1,500
Cr Consolidated inventories
CU1,500
Dr Consolidated inventories
CU5,000
Cr Consolidated retained earningsCU5,000
Dr Consolidated inventories
CU1,500
Cr Consolidated retained earningsCU1,500
Dartmoor Ltd controls another entity, Clydesdale Ltd, owning 60% of that company's ordinary share
capital. At the group's year end, 31 December 20X5, Clydesdale Ltd included CU6,000 in its
receivables in respect of goods supplied to Dartmoor Ltd. However, the payables of Dartmoor Ltd
included only CU4,000 in respect of amounts due to Clydesdale Ltd. The difference arose because, on
31 December 20X5, Dartmoor Ltd sent a cheque for CU2,000 to Clydesdale Ltd, which was not
received by Clydesdale Ltd until 3 January 20X6.
Which of the following sets of consolidation adjustments to current assets and current liabilities is
correct?
104
Deduct CU6,000 from both consolidated receivables and consolidated payables
Deduct CU3,600 from both consolidated receivables and consolidated payables
Deduct CU6,000 from consolidated receivables and CU4,000 from consolidated payables, and
include cash in transit of CU2,000
Deduct CU6,000 from consolidated receivables and CU4,000 from consolidated payables, and
include inventories in transit of CU2,000
QUESTION BANK
11
Ella Ltd acquired 75% of the ordinary shares in Frances Ltd on 1 April 20X2. Ella Ltd has prepared a
consolidated balance sheet at 31 March 20X3, which shows goodwill of CU200,000 and consolidated
retained earnings of CU400,000. However, this consolidated balance sheet has ignored the fair value
of an item of plant held by Frances Ltd which at the date of acquisition was CU120,000 in excess of its
carrying amount. The asset has a remaining useful life of five years.
After adjusting for the above fair value, what amounts should be shown for goodwill and retained
earnings in Ella Ltd's consolidated balance sheet as at 31 March 20X3?
Goodwill
CU'000
12
Retained earnings
CU'000
80
376
110
382
110
376
200
382
Zara Ltd is the sole subsidiary of Anne Ltd. Zara Ltd's balance sheet at 31 December 20X1 can be
summarised as follows.
CU'000
1,000
Total assets
Retained earnings
Equity
Redeemable preference share capital
500
200
700
300
1,000
Anne Ltd holds 70% of Zara Ltd's ordinary shares and 60% of Zara Ltd's redeemable preference
shares. All shares were acquired when Zara Ltd's retained earnings were CU100,000. What is the
minority interest in Anne Ltd's consolidated balance sheet as at 31 December 20X1?
A
CU180,000
CU210,000
CU300,000
CU330,000
105

13
Sandra Ltd has a number of subsidiary companies. On 1 January 20X5 Sandra Ltd acquired 30% of the
10,000 CU1 ordinary shares of Fiona Ltd for CU14,000. The balance on Fiona Ltd's retained earnings
on that date was CU30,000. Sandra Ltd exerts significant influence over Fiona Ltd.
The balance sheet of Fiona Ltd at 31 December 20X9 is as follows.
CU'000
Total assets
68,000
10,000
Retained earnings
38,000
Liabilities
20,000
68,000
At 31 December 20X9 Sandra Ltd had identified an impairment loss of 40% in the value of goodwill
arising on its investment in Fiona Ltd.
At what value will the investment in Fiona Ltd be shown in the consolidated balance sheet of Sandra
Ltd as at 31 December 20X9?
14
CU14,400
CU15,600
CU16,400
CU20,400
The summarised balance sheets of Mandy Ltd and Len Ltd at 31 December 20X7 are shown below.
Total assets
Retained earnings
Liabilities
Mandy Ltd
CU
349,600
Len Ltd
CU
140,000
48,000
244,800
56,800
349,600
24,000
96,000
20,000
140,000
On 1 January 20X7 Mandy Ltd purchased 100% of the equity share capital of Len Ltd for CU144,000.
At that date, Len Ltd's net assets had a fair value of CU96,000. An impairment loss of 20% has been
identified by Mandy Ltd in the value of goodwill arising on the acquisition of Len Ltd. What is the
amount of consolidated retained earnings at 31 December 20X7?
106
CU340,800
CU259,200
CU268,800
CU331,200
QUESTION BANK
64
Consolidated statements of financial performance

1
Betty Ltd acquired a 60% holding in Doris Ltd many years ago. At 31 December 20X3 Betty Ltd held
inventories with a carrying amount of CU30,000 purchased from Doris Ltd at cost plus 20%.
What is the effect of the above transaction on the consolidated income statement for the year ended
31 December 20X3?
Profit attributable to
Equity holders of Betty Ltd
Minority interest
Reduce by CU3,000
Reduce by
CU2,000
Reduce by CU3,600
Reduce by
CU2,400
Reduce by CU5,000
No effect
Reduce by CU6,000
No effect
Pumpkin Ltd has held 90% of the equity share capital of Squash Ltd for many years. Cost of sales for
each company for the year ended 31 December 20X3 was as follows.
Pumpkin Ltd
Squash Ltd
CU
100,000
80,000
During the year, Squash Ltd sold goods costing CU5,000 to Pumpkin Ltd for CU8,000. At the year
end, all of these goods remained in inventories.
What figure should be shown as cost of sales in the consolidated income statement of Pumpkin Ltd for
the year ended 31 December 20X3?
CU169,000
CU172,000
CU175,000
CU176,000
Zante Ltd purchased 80% of Corfu Ltd's ordinary shares on 1 July 20X0 for CU2,360,000 when the
fair value of Corfu Ltd's net assets was CU2,240,000. As at 30 June 20X2 Zante Ltd had recognised
impairments in respect of goodwill arising on the acquisition of Corfu Ltd amounting to CU100,000.
On 30 June 20X3, Zante Ltd sold all its shares in Corfu Ltd for CU3,600,000. The net assets of Corfu
Ltd were CU3,310,000 at the date of disposal.
What is the profit on disposal of the shares in Corfu Ltd which should be included in the consolidated
income statement of Zante Ltd for the year ended 30 June 20X3?
A
CU384,000
CU484,000
CU952,000
CU270,000
107

4
On 1 January 20X4, Geranium Ltd acquired 60% of ordinary shares of Rose Ltd for CU5 million. At
that date, the fair value of the net assets of Rose Ltd was CU8 million. On 1 July 20X9 Geranium Ltd
sold three quarters of its holding in Rose Ltd for CU6.5 million.
The capital and reserves of Rose Ltd at 31 December 20X9 are shown below.
Share capital (CU1 ordinary shares)
CU'000
5,000
6,500
2,000
13,500
What is the profit or loss on disposal of the shares in Rose Ltd which should be included in the
consolidated income statement of Geranium Ltd for the year ended 31 December 20X9?
CU675,000 profit
CU725,000 loss
CU725,000 profit
CU3,025,000 loss
Magic Ltd acquired 90% of the ordinary share capital of Wizard Ltd many years ago. On 1 April 20X4
Magic Ltd sold one-third of its investment in Wizard Ltd. Wizard Ltd's profit for the year ended
31 December 20X4, which accrued evenly over that year, was CU576,000.
What amount of profit for the year is attributable to the minority interest in Wizard Ltd for the year
ended 31 December 20X4?
CU14,400
CU187,200
CU192,000
CU230,400
On 1 April 20X3, Bibury Ltd acquired 70% of the ordinary shares of Barnsley Ltd. The following
figures relate to the year ended 31 December 20X3.
Bibury Ltd
Barnsley Ltd
CU
CU
Revenue
769,000
600,000
Cost of sales
(568,500)
(420,000)
Gross profit
200,500
180,000
On 15 November 20X3 Barnsley Ltd sold goods which cost it CU5,000 to Bibury Ltd for CU7,000.
These goods were still held by Bibury Ltd at 31 December 20X3.
What are the amounts for revenue and gross profit in the consolidated income statement of Bibury
Ltd for the year ended 31 December 20X3?
108
Revenue
CU
Gross profit
CU
1,212,000
335,500
1,212,000
333,500
1,362,000
983,500
1,362,000
985,500
QUESTION BANK
Alexander Ltd acquired 30% of Bucephalus Ltd's ordinary shares in 20X5 for CU450,000 when the fair
value of Bucephalus Ltd's net assets was CU1 million. No impairment in the value of the investment
has been identified since that date.
On 30 June 20X9 Alexander Ltd disposed of all of its shares in Bucephalus Ltd for CU600,000 when
Bucephalus Ltd's net assets amounted to CU1.2 million. Bucephalus Ltd's profit for the year to
31 December 20X9, which accrued evenly over the year, was CU120,000.
What are the amounts for the share of associate's profits and profit on disposal of associate in
Alexander Ltd's consolidated income statement for the year ended 31 December 20X9?
Share of
associate's profits
CU
Profit on
disposal of associate
CU
18,000
90,000
36,000
90,000
18,000
240,000
36,000
240,000
Chloe Ltd, which has many subsidiaries, acquired 90% of the ordinary shares of Charlotte Ltd in 20X5.
On 31 December 20X8 Charlotte Ltd's net assets amounted to CU300,000. On 30 September 20X9
Chloe Ltd sold all of its shares in Charlotte Ltd. Charlotte Ltd's profit for the year to 31 December
20X9 was CU60,000, which accrued evenly over that year.
What amount will appear as a deduction from the minority interest column in Chloe Ltd's
consolidated statement of changes in equity for the year ended 31 December 20X9 in respect of
Charlotte Ltd?
CU4,500
CU30,000
CU34,500
CU36,000
Shadow Ltd acquired 80% of the ordinary shares of Pip Ltd in 20X6. On 31 December 20X8 Pip Ltd's
net assets amounted to CU400,000. On 30 September 20X9 Shadow Ltd sold one quarter of its
shares in Pip Ltd. Pip Ltd's profit for the year to 31 December 20X9 was CU120,000, which accrued
evenly over that year.
What amount will be added to the minority interest column in Shadow Ltd's consolidated statement
of changes in equity for the year ended 31 December 20X9 in respect of Shadow Ltd's decrease in
holding in Pip Ltd?
A
CU30,000
CU80,000
CU98,000
CU104,000
109

10
Alayna Ltd owns 75% of the ordinary shares in Ellen Ltd and 30% of the ordinary shares in Lauren Ltd,
over which it exercises significant influence. In the year ended 30 June 20X8 the companies paid the
following dividends.
Alayna Ltd
Ellen Ltd
Lauren Ltd
CU
500,000
200,000
100,000
What will be the total amount shown in Alayna Ltd's consolidated statement of changes in equity for
the year ended 30 June 20X8 in respect of dividends paid?
11
CU500,000
CU550,000
CU580,000
CU700,000
Parent Ltd owns 80% of the issued ordinary share capital of Subsidiary Ltd. For the year ended
31 December 20X6 Subsidiary Ltd reported a net profit of CU55 million. During 20X6, Subsidiary Ltd
sold goods to Parent Ltd for CU15 million at cost plus 20%. At the year end half these goods are still
held by Parent Ltd.
In the consolidated income statement for the year ended 31 December 20X6 what will be the amount
for profit attributable to the minority interest?
65
CU8 million
CU10.7 million
CU10.75 million
CU11 million

1
The consolidated financial statements of Paulo Ltd for the year ended 31 March 20X4 showed the
following.
Minority interest in the consolidated balance sheet at 31 March 20X4 was CU6 million (CU3.6 million
at 31 March 20X3).
Minority interest in the consolidated income statement for the year ended 31 March 20X4 was CU2
million.
During the year ended 31 March 20X4, the group acquired a new 75% subsidiary whose net assets at
the date of acquisition were CU6.4 million. On 31 March 20X4, the group revalued all its properties
and the minority interest in the revaluation surplus was CU1.5 million. There were no dividends
payable to minority shareholders at the beginning or end of the year.
In accordance with BAS 7 Cash Flow Statements what was the dividend paid to minority shareholders
that will be shown in the consolidated cash flow statement of Paulo Ltd for the year ended 31 March
20X4?
110
CU1.2 million
CU2.7 million
CU4.5 million
CU7.5 million
QUESTION BANK
Nigel Ltd acquired 30% of the shares of Nick Ltd a number of years ago and the investment has since
been accounted for as an associate in Nigel Ltd's consolidated financial statements. Both Nigel Ltd and
Nick Ltd have an accounting year end of 31 October. Nigel Ltd has no other investments in associates.
Nick Ltd's income statement for the year ended 31 October 20X4 showed a net profit for the year of
CU230,000. Nigel Ltd's consolidated balance sheet at 31 October 20X4 showed investments in
associates of CU700,000 (20X3 CU635,000).
In accordance with BAS 7 Cash Flow Statements what amount will be shown as dividends received from
associates in the consolidated cash flow statement of Nigel Ltd for the year ended 31 October 20X4?
CU165,000
CU765,000
CU4,000
CU295,000
Julie Ltd has one associated company, Andrew Ltd, in which Julie Ltd holds 40% of the issued 100,000
CU1 ordinary shares. The financial controller of Julie Ltd is unsure how the following transactions
should be reflected in the consolidated cash flow statement and has asked you to confirm the overall
impact.
(1) In the previous accounting period, Julie Ltd had made a cash advance of CU100,000 to Andrew
Ltd. During the current accounting period, Andrew Ltd repaid CU30,000 of this cash advance.
(2) During the current accounting period, Andrew Ltd sold an item of property, plant and machinery
at its carrying amount for CU20,000 cash.
(3) During the current accounting period, Andrew Ltd paid a dividend of 20p per share.
In accordance with BAS 7 Cash Flow Statements what is the impact of the above cash transactions on
Julie Ltd's consolidated cash flow statement for the current accounting period?
A
Cash from sale of associate's plant CU20,000; dividend paid by associate CU20,000
Cash from repayment of cash advance from associate CU30,000; cash from sale of associate's
plant CU20,000
Cash from repayment of cash advance from associate CU30,000; dividend received from
associate CU8,000
Dividend received from associate CU8,000
111

4
On 1 June 20X5 Faraday Ltd sold its wholly owned subsidiary, Electric Ltd. Faraday Ltd received cash
of CU2 million in respect of this sale on 1 July 20X5. A further CU500,000 is payable in cash on 1
January 20X6 if Electric Ltd exceeds certain profit targets.
On 1 June 20X5 the net assets of Electric Ltd were as follows.
Inventories
Receivables
Liabilities
Net assets acquired
CU
650,000
450,000
200,000
20,000
(130,000)
1,190,000
In accordance with BAS 7 Cash Flow Statements what amount should be shown in the investing
activities section of the consolidated cash flow statement of Faraday Ltd for the year ended 31
December 20X5?
CU2,000,000
CU2,480,000
CU2,500,000
CU1,980,000
On 30 September 20X8 Dougal Ltd acquired 80% of the ordinary shares of Lucy Ltd. The
consideration was made up of 100,000 of Dougal Ltd's ordinary shares, issued at a price of CU1.25 per
share and cash of CU400,000.
On 30 September 20X8 the net assets of Lucy Ltd were as follows.

Inventories
Receivables
Other liabilities
Net assets acquired
CU
450,000
250,000
130,000
(40,000)
(230,000)
560,000
In accordance with BAS 7 Cash Flow Statements what amount should be shown in the investing
activities section of the consolidated cash flow statement of Dougal Ltd for the year ended 31
December 20X8?
112
CU360,000
CU440,000
CU432,000
CU565,000
QUESTION BANK
On 1 January 20X3 Judith Ltd's consolidated balance sheet showed property, plant and equipment of
CU257,900. By 31 December 20X3 this figure was CU578,900. The following transactions in relation
to the property, plant and equipment of the group took place during 20X3.
(1) Total additions to property, plant and equipment, as shown in the notes to the consolidated
financial statements for 20X3, included CU40,000 in relation to assets acquired under finance
leases and CU35,000 in relation to assets acquired on the acquisition of a subsidiary during the
year.
(2) Plant with a carrying amount of CU32,000 was sold for CU38,000 during the year.
(3) Total depreciation for the year was CU135,000.
In accordance with BAS 7 Cash Flow Statements what amount will be shown in Judith Ltd's consolidated
cash flow statement for 20X3 as a cash outflow under investing activities in respect of transactions in
property, plant and equipment?
CU375,000
CU413,000
CU448,000
CU488,000
The financial controller of Judith Ltd is drafting the note to the consolidated cash flow statement
reconciling group profit before tax to cash generated from operations for the year ended
31 December 20X8. He has asked you to assist him with calculating the movement on receivables and
payables.
The following information is available.
Consolidated
31 December
31 December
20X8
20X7
CU'000
CU'000
340
235
(275)
(135)
Receivables
Payables
Acquired with
subsidiary on
1 June 20X8
CU'000
90
(165)
In accordance with BAS 7 Cash Flow Statements what amount will be shown in Judith Ltd's
reconciliation of profit before tax to cash generated from operations for 20X8 in respect of
receivables and payables?
Receivables
Payables
Increase of
CU195,000
Increase of CU305,000
Increase of
CU105,000
Increase of CU140,000
Increase of
CU15,000
Decrease of CU25,000
Decrease of
CU195,000
Decrease of CU305,000
113

8
On 30 June 20X8, Parry Ltd sold its investment in its only associate, Sasha Ltd, for a cash sum of
CU460,000. Parry Ltd has held 30% of Sasha Ltd's ordinary shares since its incorporation.
In the year ended 31 December 20X8 Sasha Ltd made a profit after tax of CU700,000. The net assets
of Sasha Ltd on 30 June 20X8 were as follows.
Inventories
Receivables
Other liabilities
CU
357,000
170,000
45,000
5,000
(87,000)
490,000
Parry Ltd's consolidated balance sheet at 31 December 20X7 reflected investments in associates of
CU120,600.
In accordance with BAS 7 Cash Flow Statements what amount will be shown as an investing inflow in
Parry Ltd's consolidated cash flow statement for the year ended 31 December 20X8 in respect of its
investment in Sasha Ltd?
66
CU460,000
CU455,000
CU225,600
CU685,600

1
Sarah Ltd has owned 100% of the ordinary share capital of Ulysses Ltd and Wally Ltd for many years.
Ulysses Ltd operates in a country in Central Africa. In June 20X3, civil war broke out in this country.
Essential services have been severely disrupted and it has been impossible to communicate with local
personnel for several months. This situation is unlikely to be resolved in the near future. Wally Ltd is
an insurance company. The rest of the group extracts and processes mineral ores.
In accordance with BAS 27 Consolidated and Separate Financial Statements and BFRS 3 Business
Combinations which of these companies must be consolidated by Sarah Ltd at 31 December 20X3?
114
Ulysses Ltd only
Wally Ltd only
Both Ulysses Ltd and Wally Ltd
Neither Ulysses Ltd nor Wally Ltd
QUESTION BANK
Consul Ltd owns the following equity shareholdings in the following companies and has a seat on the
board of each of those companies.
Admiral Ltd
Sultan Ltd
Warrior Ltd
25%
20%
25%
Consul Ltd holds the largest shareholding in Admiral Ltd, where no other shareholdings are larger
than 10%. Another entity owns 25% of the equity shares in Sultan Ltd and also has a seat on its board.
No other individual or entity owns more than 5% of the equity shares of Sultan Ltd. A single entity
holds the remaining 75% of Warrior Ltd's equity shares and has a seat on its board. In accordance with
BAS 28 Investments in Associates, which entities are likely to be associates of Consul Ltd?
Admiral Ltd only
Admiral Ltd and Sultan Ltd
Admiral Ltd and Warrior Ltd
Admiral Ltd, Sultan Ltd and Warrior Ltd
On 1 January 20X5 Plane Ltd acquired 60% of the ordinary shares of Sycamore Ltd. Goodwill of
CU100,000 arose on the acquisition.
Sycamore Ltd's performance for the years ended 31 December 20X5 and 31 December 20X6 slightly
exceeded budget. However, in the year ended 31 December 20X7 it made substantial losses that had
not been forecast.
According to BFRS 3 Business Combinations when should the goodwill arising on the acquisition of
Sycamore Ltd be reviewed for impairment?
Annually
In 20X5 only
In 20X7 only
In 20X5 and in 20X7
The following statements refer to a situation where an investing entity (Kyle Ltd) seeks to exert
control or influence over another entity (Lyle Ltd). Assume that Kyle Ltd is required to prepare
consolidated accounts because of other investments.
(1) If Kyle Ltd owns more than 20%, but less than 50% of the equity shares in Lyle Ltd, then Lyle Ltd
is bound to be an associate of Kyle Ltd
(2) If Kyle Ltd controls the operating and financial policies of Lyle Ltd, then Lyle Ltd cannot be an
associate of Kyle Ltd
(3) If Lyle Ltd is an associate of Kyle Ltd, then any amounts payable by Lyle Ltd to Kyle Ltd are not
eliminated on preparation of the consolidated balance sheet of Kyle Ltd
Which of the above statements are true?
A
(1) and (2) only
(2) only
(2) and (3) only
(1) and (3) only
115

5
On 1 March 20X5, Pompadour Ltd, a listed entity, acquired 80% of the three million issued ordinary
shares of Madame Ltd. The consideration for each share acquired comprised a cash payment of
CU1.20, plus two ordinary shares in Pompadour Ltd.
The market value of a CU1 ordinary share in Pompadour Ltd on 1 March 20X5 was CU1.50, rising to
CU1.60 by the company's year end on 31 March 20X5. Professional fees paid to Pompadour Ltd's
external accountants and legal advisers in respect of the acquisition were CU400,000.
According to BFRS 3 Business Combinations what is the fair value of consideration in respect of this
acquisition, for inclusion in Pompadour Ltd's own financial statements for the year ended 31 March
20X5?
CU10,080,000
CU10,480,000
CU10,560,000
CU10,960,000
On 30 September 20X5, Gary Ltd purchased 80% of the ordinary share capital of Jerry Ltd for CU1.45
million. The carrying amount of Jerry Ltd's net assets at the date of acquisition was CU1.35 million. A
valuation exercise showed that the fair value of Jerry Ltd's property, plant and equipment at that date was
CU100,000 greater than carrying amount, and Jerry Ltd immediately incorporated this revaluation into its
own books.
Jerry Ltd's financial statements at 30 September 20X5 contained notes referring to a contingent
liability (which had a fair value of CU200,000).
Gary Ltd acquired Jerry Ltd with the intention of restructuring the latter's production facilities. The
estimated costs of the restructuring plan totalled CU115,000.
According to BFRS 3 Business Combinations what is the amount of goodwill arising on the acquisition of
Jerry Ltd?
116
CU290,000
CU450,000
CU530,000
CU542,000
Answer Bank
117
118
ANSWER BANK
Howells Ltd
Marking guide
Marks
(a)
(b)
Income statement
Revenue
Cost of sales
Other operating income
Distribution costs
Finance costs
Investment income
Income tax expense
Presentation
Headings
Transfer
Profit
Ordinary dividends
Preference dividends
Balances brought forward
Presentation
Notes
Note 1
Note 2
Total available
Maximum
Paras 2 and 5
Other valid points (each)
Total available
Maximum
1
3
21
20
5
4
24
(a) Income statement for the year ended 31 December 20X8

Revenue
Cost of sales (W1)
Gross profit
Other operating income (W2)
Distribution costs (W1)
Administrative expenses (W1)
Finance cost
Investment income
Profit before tax
Income tax expense
4
1
3
1
Note
(1)
CU
1,600,047
(963,351)
636,696
39,045
(33,891)
(166,256)
475,594
(6,260)
11,000
480,334
(22,500)
457,834
119
Statement of changes in equity for the year ended 31 December 20X8

Attributable to the equity holders
of Howells Ltd
Recognised directly in equity
Transfer between reserves
Total recognised directly in equity
Total recognised income and
expense for the period
20X7 final dividends on ordinary
shares
20X8 dividends on preference
shares
Ordinary
share
capital
CU
Preference
share capital
(irredeemable)
CU
General
reserve
Retained
earnings
CU
Total
CU
CU
10,000
10,000
(10,000)
(10,000)
457,834
457,834
10,000
447,834
457,834
(12,500)
(12,500)
100,000
100,000
50,000
50,000
10,000
10,000
20,000
(2,500)
432,834
66,015
498,849
(2,500)
442,834
226,015
668,849
Notes to the financial statements (extracts)

(1) The profit from operations is arrived at after charging (crediting)
Depreciation (6,700 + 8,200) (W1)
Impairment of brand
Employee benefits (126,232 + 24,291 + 54,117)
CU
6,002
(25,040)
14,900
8,500
204,640
(2) An ordinary dividend for 20X8 of CU25,000 is proposed for payment on 25 March 20X9.
(b) Fair presentation

BAS 1 Presentation of Financial Statements describes the concept of fair presentation. Fair presentation
involves
Representing faithfully the effect of transactions, other events and conditions

In accordance with the definitions and recognition criteria in BFRS Framework
This is developed by stating that the application of IFRS, Interpretations and additional disclosures will
result in fair presentation.
BAS 1 requires the financial statements to present fairly the financial position and performance of an
entity rather than to give a true and fair view. Present fairly is further described as representing
faithfully the effects of transactions and as a result there is unlikely to be a difference between the two.
Whilst not dealing with the concepts directly, BFRS Framework uses the descriptions of fair
presentation and true and fair view interchangeably in its discussion of the application of the principal
qualitative characteristics of financial information.
120
ANSWER BANK
WORKINGS
(1) Allocation of costs
Opening inventories
Purchases
Salesmen's salaries
Factory wages
Closing inventories (68,000 (1,000 CU3))
Depreciation
Buildings ((450,000 115,000) 50)
Plant ((22,000 10) + ((60,000 18,000) 7))
Impairment of brand (20,500 12,000)
Cost of
sales
CU
58,045
907,989
Admin
expenses
CU
Distrib
costs
CU
126,232
24,291
54,117
6,002
18,822
9,600
(65,000)
6,700
8,200
963,351
8,500
166,256
33,891
(2) Other operating income

Royalties
CU
14,005
25,040
39,045
121
Berwick Ltd
Marking guide
Marks
Balance sheet
PPE
Inventories
Receivables
Cash
Share premium
Revaluation reserve
Retained earnings
Non-current borrowings
Payables
Taxation
Current borrowings
Presentation
Gain on revaluation
Transfer
Profit
Ordinary dividends
Balances brought forward
Presentation
Total available
Maximum
1
1
2
2
1
1
22
20
Balance sheet as at 31 January 20X5

ASSETS
Non-current assets
Property, plant and equipment (W1)
Current assets
Inventories
Trade and other receivables (W4)
Total assets
122
CU
CU
2,023,000
370,000
497,000
249,000
1,116,000
3,139,000
ANSWER BANK
Revaluation reserve
Retained earnings
Equity
Borrowings (200,000 40,000)
Current liabilities
Trade and other payables (W5)
Taxation
Borrowings (200,000 5)
850,000
50,000
552,000
712,000
2,164,000
160,000
640,000
135,000
40,000
815,000
3,139,000

Statement of changes in equity for the year ended 31 January 20X5
Ordinary
share
capital
CU
Gain on property revaluation (W2)
Transfer between reserves (W2)
Profit for the period (W3)
Total recognised income and
expense for the period
Final dividends on ordinary shares
Interim dividends on ordinary
shares
Share
premium
Revaluation
reserve
CU
CU
Retained
earnings
Total
CU
CU
564,000
(12,000)
552,000
12,000
12,000
18,000
564,000
18,000
552,000
30,000
(66,000)
582,000
(66,000)
850,000
850,000
50,000
50,000
552,000
552,000
(22,000)
(58,000)
770,000
712,000
(22,000)
494,000
1,670,000
2,164,000
WORKINGS
(1) Property, plant and equipment
Per TB
Value
Depreciation b/f
Depreciation for year
((1,500 300) 40)
(650 10%)
((250 90) 20%)
Land and
buildings
CU
Plant and
machinery
CU
Motor
vehicles
CU
1,500,000
650,000
(160,000)
250,000
(90,000)
Total
CU
(30,000)
(65,000)
1,470,000
425,000
(32,000)
128,000
2,023,000
(2) Transfer from revaluation reserve to retained earnings

New value of buildings 1 February 20X4 (1,500 300)
Carrying amount of buildings 1 February 20X4 (800 46/50)
Surplus on buildings
Transfer to retained earnings per annum (464 1/40)
Total surplus on revaluation = 464 + 100 on land = CU564,000
CU
1,200,000
(736,000)
464,000
12,000
123

(3) Profit for the period
CU
370,000
(127,000)
(135,000)
(20,000)
(70,000)
18,000
Draft for year

Less Depreciation (30 + 65 + 32) (W1)
Tax
Bad debt
Development expenditure
(4) Trade and other receivables
CU
400,000
97,000
497,000
Trade receivables (420,000 20,000)

Prepayments
(5) Trade and other payables
CU
380,000
100,000
50,000
110,000
640,000
Trade payables
Accruals
VAT
Bank overdraft
Note: We are not told of any right of set-off between the bank balance and the overdraft, so it would be
wrong to offset them in the balance sheet and show only a net figure.
Angus Ltd
Marking guide
Marks
(a)
(b)
124
Income statement
Revenue
Operating expenses (including depreciation)
Provision
Income tax expense
Loss from discontinued operations
Note
Presentation
Headings
Revaluation
Transfer
Profit
Dividends
Balances as previously stated
Correction of error
Presentation
Total available
Maximum
Para 1
Each other valid point or example
Total available
Maximum
3
1
1
1
1
1
1
16
15
1
6
21
ANSWER BANK
(a)
Financial statements
(i)
Income statement for the year ended 28 February 20X7
CU'000
Revenue (W3)
Operating expenses (W3)
Provision for costs of reorganisation
Profit before tax
Income tax expense
180,000
(143,965)
(1,250)
34,785
(6,000)
28,785
Loss for the period from discontinued operations (W3) (Note)
(16,430)
12,355
Note: The results for the year of the European operations (the intended sale of which has been
announced) were (W3): revenue CU20,000,000, expenses CU36,230,000, loss before tax
CU16,230,000, loss on measurement of non-current assets held for sale at fair value less costs to
sell CU200,000.
(ii)
Statement of changes in equity for the year ended 28 February 20X7

Ordinary
share
capital
CU'000
Revaluation of
non-current assets (W1)
Transfer between reserves re
depreciation on revaluations
(W2)
Total recognised income and expense
for the period
As previously stated
Correction of error
Revaluation
reserve
Retained
earnings
Total
CU'000
CU'000
CU'000
6,800
6,800
(120)
6,680
120
120
12,355
6,800
12,355
6,680
6,680
12,475
(2,000)
10,475
19,155
(2,000)
17,155
200,000
200,000
6,680
300,000
(355)
310,120
500,000
(355)
516,800
(b) Objectives of financial statements

The objective of financial statements as set out in BFRS Framework is to provide information about the
financial position, performance and changes in financial position of an enterprise that is useful to a wide
range of users in making economic decisions.
Users will include present and potential investors, employees, lenders, suppliers, customers,
government agencies and the general public.
However, this objective can usually be met by focusing exclusively on the information needs of present
and potential investors. This is because much of the financial information that is relevant to investors
will also be relevant to other users.
Information about financial position is primarily provided by the balance sheet which will allow users to
assess:
The entity's ability to generate cash (e.g. for a manufacturing company, from a strong non-current
asset base)
How future cash flows will be distributed (e.g. disclosed borrowings with applicable rates of
interest)
125
Requirements for future finance (e.g. disclosed expansion plans)
The ability to meet financial commitments as they fall due (e.g. disclosed due dates of
borrowings)
Information about financial performance is primarily provided by the income statement and statement
of changes in equity. For example, the disclosure of continuing and discontinued operations will
provide information about potential changes in the company's economic resources in the future.
Information about changes in financial position is given in the cash flow statement. This will show
where the company's cash has come from (e.g. from operating cash flows or only from one-off sources
such as sales of non-current assets) and its need to use what is generated (e.g. in meeting loan
repayment schedules).
WORKINGS
(1)
Revaluation surplus
CU'000
20,000
(13,200)
6,800
Revalued amount
Less Carrying amount (16,000 2,800)
Tutorial note
Under para 17 BAS 8 Accounting Policies, Changes in Accounting Estimates and Errors the initial application of a
policy to revalue assets is to be dealt with as a revaluation under BAS 16 Property, Plant and Equipment,
rather than as a change of accounting policy under BAS 8.
(2)
Excess depreciation
CU'000
400
(280)
120
Revalued depreciation charge ((20,000 4,000) 40 years)

Less Historical cost depreciation charge
(3)
Allocation of revenue/operating expenses

Total
Revenue (90:10)
Operating expenses (W5, split 80:20)
Correction of error re inventories
CU'000
200,000
(180,400)
355
(180,045)
Operating lease termination and other costs (50 + 100)

Revenue less expenses
Remeasurement of non-current assets held for sale (W4)
Loss for the period
(4)
Carrying amount before classification

Depreciation charge in operating expenses
Buildings element = CU20m CU4m = CU16m
Depreciation charge = CU16m 40 = CU400,000
Total operating expenses = CU180m + CU0.4m = CU180.4m
126
Discontinued
operations
CU'000
20,000
(36,080)
(36,080)
(150)
(36,230)
(16,230)
(200)
(16,430)
Impairment loss and other costs from disposal

Fair value on classification as held for sale
Less Costs to sell
(5)
Continuing
operations
CU'000
180,000
(144,320)
355
(143,965)
CU'000
2,850
(50)
2,800
3,000
(200)
ANSWER BANK
Goblins Ltd
Marking guide
Marks
(a)
(b)
(a)
Income statement
Revenue
Change in inventories
Employee benefits
Depreciation
Other expenses
Finance costs
Income tax expense
Presentation
Balance sheet
PPE
Intangibles
Inventories
Receivables
Cash
Revaluation reserve
Retained earnings
Payables
Dividend
Presentation
Total available
Maximum
Each explanation of asset for each measurement basis
Each explanation of liability for each measurement basis
Total available
Maximum
1
3
1
1
1
3
1
1
1
1
1
1
24
22
4
4
26

Revenue
Change in inventories of finished goods and work in progress (W2)
Raw materials and consumables used (W2)
Employee benefits expense (W2)
Depreciation and amortisation expense (W2)
Other expenses (W2)
Finance costs (W8)
Profit before tax
Income tax expense (W4)
CU
1,740,600
34,400
(294,500)
(620,400)
(45,000)
(107,765)
707,335
(6,000)
701,335
(107,600)
593,735
127

CU
ASSETS
Non-current assets
Intangibles (W5)
CU
365,000
40,000
405,000
Current assets
Inventories (W6)
315,500
356,535
515,200
1,187,235
1,592,235
Total assets
Revaluation reserve (W9)
Retained earnings (W9)
Equity
Current liabilities
Dividend payable (W9)
Taxation
500,000
115,000
576,035
1,191,035
120,000
86,200
75,000
120,000
281,200
1,592,235
(b) The four measurement bases
128
Measurement basis
Assets recorded/carried at
Liabilities recorded/carried at
Historical cost
The amount of cash or cash

equivalents paid, or the fair
value of the consideration
given, at the time of
acquisition.
The amount of the proceeds

received in exchange for the
obligations or the amount expected
to be paid to settle the liabilities in
the ordinary course of business.
Current cost

equivalents payable if the
same or equivalent assets
were acquired currently.
The undiscounted amount that

would be required to settle the
obligations currently.
Realisable
(settlement) value

equivalents currently
obtainable by selling assets
in an orderly disposal.
The undiscounted amount

expected to be paid to settle the
liabilities in the normal course of
business.
Present value
The discounted present

value of the future net cash
inflows expected to be
generated by the assets in
the normal course of
business.
The discounted present value of

the future net cash outflows
expected to be required to settle
the liabilities in the normal course
of business.
ANSWER BANK
WORKINGS
Cost
Revaluation
Depreciation
B/f
Revaluation
Charge (W2 & W3)
C/f
NBV c/f
Depn and
amortn
CU
Staff costs
Leasehold (W3)
Computers (50,000 5)
Patents (60,000 3)
Directors' emoluments
Raw materials
Bad and doubtful debts
(45,000 + 18,765 (W7))
Finished games (180,000
(10 CU450) 155,600)
Work in progress
(140,000 125,500)
Consultancy fees
Raw
materials
CU
15,000
10,000
20,000
294,500
Leasehold
CU
300,000
60,000
360,000
Computers
CU
50,000
50,000
Total
CU
60,000
(60,000)
15,000
15,000
345,000
20,000
10,000
30,000
20,000
365,000
Employee
benefits
CU
260,400
Changes in
inventories
CU
Other
expenses
CU
360,000
63,765
(19,900)
(14,500)
45,000
294,500
620,400
(34,400)
44,000
107,765
(3) Depreciation on leasehold

=
Carrying amount
Remaining useful life
CU360,000
24 years
CU15,000
Total of 30 years. At 1 January 20X4 CU60,000 depreciation

charged based on (CU300,000 30) CU10,000 per year. Therefore
buildings have 24 years remaining.
Annual transfer from revaluation reserve = CU15,000 CU10,000 = CU5,000.

(4) Income tax
For year
Overprovision re previous year
CU
120,000
(12,400)
107,600
(5) Intangibles
B/f
Amortisation for the year (W2)
C/f
CU
60,000
(20,000)
40,000
129

(6)
Inventories
CU
175,500
140,000
315,500
Finished games (180,000 (10 CU450))

WIP
(7) Trade and other receivables
CU
420,300
(45,000)
375,300
(18,765)
356,535
Per TB
Less Bad debt write off
Less
Specific allowance @ 5%

CU
80,200
6,000
86,200
Per TB
Accrued interest on preference shares (120,000 5%)
(9) Reserves
B/f
Revaluation (360,000 (300,000 60,000))
Ordinary dividends (50,000 + (15p 500,000))
Depreciation transfer (W3)
C/f
130
Retained
earnings
CU
102,300
593,735
(125,000)
5,000
576,035
Revaluation
reserve
CU
120,000
(5,000)
115,000
ANSWER BANK
Harry Ltd
Marking guide
Marks
Income statement
Revenue
Work capitalised
Employee benefits
Depreciation/amortisation
Other expenses
Impairment
Finance costs
Income tax expense
Presentation
Balance sheet
PPE
Intangibles
Inventories
Receivables
Cash
Share premium
Revaluation reserve
Retained earnings
Non-current finance lease liabilities
Dividend
Payables
Taxation
Current finance lease liabilities
Presentation
Total available
Maximum
1
3
1
1
1
3
1
1
1
1
1
1
1
2
1
27
25

Revenue (3,500,000 1,000)
Changes in inventories of finished goods and work in progress (W1)
Work performed by the enterprise and capitalised (W2)
Raw materials and consumables used
Employee benefits expense (1,250,500 + 10,000)
Other expenses (bad debt)
Depreciation and amortisation expense (W3)
Impairment of intangibles (15,000 750 (W3) 14,000)
Finance costs (W7)
Profit before tax
Income tax expense
CU
3,499,000
5,200
74,500
(1,570,000)
(1,260,500)
(9,000)
(95,025)
(250)
643,925
(6,800)
637,125
(250,000)
387,125
131

CU
ASSETS
Non-current assets
Intangibles
CU
5,181,725
14,000
5,195,725
Current assets
Inventories (W1)
Trade and other receivables (37,500 10,000)
64,200
27,500
263,500
355,200
5,550,925
Total assets
Ordinary share capital (W5)
Share premium account (W5)
600,000
110,000
2,040,000
2,295,725
5,045,725
Finance lease liabilities (W6)
120,000
36,667
156,667
Current liabilities
Trade and other payables (25,400 + 4,800 (W7))
Taxation
Finance lease liabilities (45,000 36,667 (W6))
60,000
30,200
250,000
8,333
348,533
5,550,925

WORKINGS
(1) Change in inventories
CU
59,000
(64,200)
(5,200)
Opening (45,600 + 13,400)

Closing (50,200 + 15,000 1,000)
Cost
B/f
Additions (54,000 + 20,500)
Revaluation
C/f
Acc dep
B/f
Revaluation
Charge (W3)
C/f
NBV c/f
132
Freehold
CU
Plant
CU
Equipment
CU
3,600,000
1,400,000
5,000,000
520,000
53,000
573,000
Sold (W3)
74,500
74,500
640,000
(640,000)
40,000
40,000
375,000
39,600
414,600
Sold (W3)
11,175
11,175
4,960,000
158,400
63,325
Total
CU
5,181,725
ANSWER BANK
(3) Depreciation and amortisation expense
CU
3,500
11,175
39,600
40,000
750
95,025
Loss on scrapped office equipment (32,000 28,500)

Depreciation on new furniture (74,500 (W2) 15%)
Depreciation on plant ((573,000 (W2) 375,000) 20%)
Depreciation on buildings (1,000,000 4%)
Amortisation of patent (15,000 20)
(4) Reserves
Retained
earnings
CU
1,968,600
(60,000)
387,125
2,295,725
B/f
Revaluation (5,000,000 (3,600,000 640,000))
Ordinary dividends (600,000 (W5) 10p)
For year
Revaluation
reserve
CU
2,040,000
2,040,000
(5) Bonus issue

Ordinary
shares
CU
500,000
100,000
600,000
B/f
Directors' time
Bonus issue
Share
premium
CU
200,000
10,000
(100,000)
110,000
(6) Finance lease

CU
60,000
(53,000)
7,000
Lease payments (6 CU10,000)

Fair value of asset
Total interest
SOTD =
n (n 1)
67
=
= 21
2
2
Year ended 31 December

20X5
20X6
B/f
CU
53,000
45,000
(6/21 CU7,000)
(5/21 CU7,000)
Interest
CU
2,000
1,667
Payment
CU
(10,000)
(10,000)
C/f
CU
45,000
36,667
(7) Finance charges

Lease (W6)
Preference dividend (120,000 4%)
CU
2,000
4,800
6,800
133
Frodo Ltd
Marking guide
Marks
(a)
(b)
134
Income statement
Revenue
Cost of sales
Distribution costs
Finance costs
Income tax expense
Presentation
Balance sheet
PPE
Inventories
Receivables
Cash
Non-current assets held for sale
Irredeemable preference share capital
Retained earnings
Non-current borrowings
Payables
Dividend
Taxation
Current borrowings
Provisions
Presentation
Total available
Maximum
Objective of most directors is to maximise profits
Not-for-profit entities have other considerations
For each example of a not-for-profit entity with explanation of
objectives (to maximum of 2 marks)
Success will be subject to non-profit measures
Example of non-profit measures
Reporting requirements:
BFRS for companies
Sector specific regulation
Foreign Donations Regulations 1978
IPSASs for public sector bodies
Total available
Maximum
1
3
1
1
3
1
1
1
22
21
7
5
26
ANSWER BANK
(a)
Income statement for the year ended 31 March 20X6
CU
6,450,000
(4,570,400)
1,879,600
(540,500)
(375,000)
964,100
(35,000)
929,100
(350,000)
579,100
Revenue (W5)
Cost of sales (W1)
Gross profit
Finance costs
Profit before tax
Income tax expense
Balance sheet as at 31 March 20X6
ASSETS
Non-current assets
Current assets
Inventories (W1)
Trade and other receivables (37,500 10,000)
CU
CU
2,211,000
110,000
27,500
63,500
201,000
5,000
206,000
2,417,000
Total assets
Preference share capital (irredeemable)
500,000
200,000
581,600
1,281,600
Borrowings (200,000 9/10)
Current liabilities
Taxation
Borrowings (200,000 1/10)
Provisions
180,000
275,400
350,000
210,000
20,000
100,000
955,400
2,417,000

(b) Accounting requirements for not-for-profit entities
The objective of most company directors is to make a profit in order to maximise return on the
shareholders' investment in that company. However, not-for-profit entities have other considerations.
For example, not-for-profit entities might include the following:
NGOs whose objective will be to maximise revenue and minimise running costs in order to pay
as much out as a 'cost' of charitable awards
Public sector schools whose objective will be to add as much value as possible to their pupils
whilst operating within their means (i.e. not to make a profit but to achieve good results whilst
not making a loss)
Public sector hospitals whose objective will be to provide a high quality of patient care, again,
whilst operating within their means.
The 'success' of such entities will often be subject to non-profit measures such as their position in
league tables (exam results for schools, patient survival rates for hospitals).
135

Nonetheless, many of these entities will be subject to various reporting requirements.
Many of these organisations may still operate as companies. In this case they will be subject to local
legislation and accounting regulation, such as Companies Act and BFRS.
In addition, many not-for-profit entities will need to comply with regulation specific to their
sector. For example, in Bangladesh, NGOs are required to comply with the Foreign Donations
Regulations 1978.
Public sector bodies will be subject to International Public Sector Accounting Standards (IPSASs)
where there is no national legislation.
WORKINGS
Manufacturing costs
Opening inventories
Depreciation (W2)
Provision
Bad debt
Closing inventories (120,000 (50,000 0.25/1.25))
Impairment on held-for-sale asset
(120,000 48,000 11,000 5,000)
Cost of
sales
CU
4,450,000
113,400
61,000
(110,000)
Admin
CU
410,500
20,000
100,000
10,000
Distribution
CU
375,000
56,000
4,570,400
540,500
375,000
Freehold
CU
Plant
CU
Total
CU
2,550,000
620,000
(120,000)
500,000
Cost
B/f
Held for sale
C/f
Acc depn
B/f
For year ((2,550,000 1,750,000) 40)
On held for sale asset (120,000 10% 11/12)
Held for sale asset ((120,000 10% 4) + 11,000)
On other plant (500,000 10%)
C/f
NBV c/f
2,550,000
480,000
20,000
337,000
500,000
11,000
(59,000)
50,000
339,000
2,050,000
161,000
2,211,000

Per TB
Fees in advance (W5)
Advances (W5)
CU
25,400
150,000
100,000
275,400
(4) Retained earnings

B/f
Ordinary dividend (500,000/50p 20p)
Preference dividend (200,000 5%)
For year
136
CU
212,500
(200,000)
(10,000)
579,100
581,600
ANSWER BANK
(5) Revenue
Per TB
Less Fees in advance (300,000 5/10)
Advances
CU
6,700,000
(150,000)
(100,000)
6,450,000
Plodder Ltd
Marking guide
Marks
Cash flow statement

Interest paid
Income tax paid
Purchase of PPE
Purchase of investments
Proceeds from sales of PPE
Proceeds from sales of intangibles
Interest received
Redemption of borrowings
Dividends paid
Proceeds from issue of ordinary shares
Opening and closing cash
Reconciliation
PBT
Investment income
Finance charge
Depreciation charge
Amortisation charge
Profit on disposal of PPE
Loss on disposal of intangibles
Change in receivables
Change in prepayments
Change in payables
Change in accruals
Change in provisions
Presentation
Total available
Maximum
1
1
3
1
1
1
1
1
1
1
1
1
24
22
137

Cash flow statement for the year ended 30 November 20X0
CU
Cash flows from operating activities

Cash generated from operations
Interest paid (W5)
Income tax paid (W7)
Net cash from operating activities
CU
1,780,000
(93,000)
(115,000)
1,572,000
Cash flows from investing activities

Purchase of property, plant and equipment (W3)
Proceeds from sales of property, plant and equipment
Proceeds from sales of intangible assets
Interest received
Net cash used in investing activities
(1,323,000)
(406,000)
424,000
12,000
55,000
Cash flows from financing activities

Dividends paid (W8)
Proceeds from issue of ordinary shares (W1)
(1,238,000)
(50,000)
242,000
(500,000)
Net cash used in financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
(308,000)
26,000
200,000
226,000
Note: Reconciliation of profit before tax to cash generated from operations

Profit before tax
Investment income
Finance charge
Depreciation charge (W4)
Amortisation charge (W2)
Profit on disposal of property, plant and equipment (W7)
Loss on disposal of intangible assets (W9)
Increase in inventories (685,000 598,000)
Increase in trade and other receivables (480,000 465,000)
Decrease in prepayments (126,000 96,000)
Increase in trade and other payables ((749,000 351,000) (427,000 106,000))
Increase in accruals ((131,000 50,000) (108,000 25,000))
Decrease in provisions (140,000 120,000)
CU
756,000
(55,000)
68,000
1,100,000
19,000
(98,000)
3,000
(87,000)
(15,000)
30,000
77,000
2,000
(20,000)
1,780,000
WORKINGS
(1)
SHARE CAPITAL AND PREMIUM

CU
C/d (1,100,000 + 342,000)
(2)
CU
1,200,000
242,000
1,442,000
INTANGIBLES ACCUMULATED AMORTISATION

Disposals
C/d
138
1,442,000
1,442,000
B/d (1,000,000 + 200,000)

Cash ()
CU
40,000
333,000
373,000
B/d
Income statement ()
CU
354,000
19,000
373,000
ANSWER BANK
(3)
PPE COST OR VALUATION

B/d
Revaluation
Cash ()
C/d
(4)
CU
6,375,000
375,000
1,323,000
351,000
8,424,000
B/d
Disposals
C/d
CU
106,000
479,000
7,839,000
8,424,000
PPE ACCUMULATED DEPRECIATION

Disposals (W7)
C/d
(5)
CU
153,000
4,921,000
5,074,000
B/d
Income statement ()
CU
3,974,000
1,100,000
5,074,000
FINANCE CHARGE
Cash ()
C/d
(6)
CU
93,000
25,000
118,000
B/d
Income statement
CU
50,000
68,000
118,000
INCOME TAX
Cash ()
C/d
(7)
CU
115,000
282,000
397,000
B/d
Income statement
CU
165,000
232,000
397,000
PPE DISPOSALS
Income statement ()
Cost
(8)
CU
98,000
479,000
577,000
Acc depn (479,000 326,000)

Cash
CU
153,000
424,000
577,000
RETAINED EARNINGS
Dividends ()
C/d
(9)
CU
50,000
1,785,000
1,835,000
B/d
Income statement
CU
1,311,000
524,000
1,835,000
INTANGIBLES DISPOSALS
Cost (938,000 883,000)
CU
55,000
55,000
Cash
Income statement ()
CU
40,000
12,000
3,000
55,000
139
Copeland Ltd
Marking guide
Marks
Cash flow statement

Interest paid
Income tax paid
Purchase of PPE
Purchase of intangibles
Interest received
Dividends paid
Reconciliation
PBT
Investment income
Finance charge
Depreciation charge
Amortisation charge
Loss on disposal of PPE
Change in prepayments
Change in payables
Presentation
Total available
Maximum
140
1
1
3
1
1
3
1
1
1
2
1
1
1
26
24
ANSWER BANK
Cash flow statement for the year ended 31 May 20X2
CU

Interest paid (W11)
CU
6,441,000
(675,000)
(546,000)
5,220,000

Purchase of intangible assets (W4)
Purchase of investments (W6)
Proceeds from sales of property, plant and equipment (W3)
Interest received (W10)
Dividends paid (W12)
Proceeds from issue of ordinary shares (W8)
(1,752,000)
(339,000)
(2,018,000)
221,000
76,000
(3,812,000)
(163,000)
422,000
(1,500,000)
(1,241,000)
167,000
322,000
489,000

Profit before tax
Investment income
Finance charge
Depreciation charge (W2)
Loss on disposal of property, plant and equipment
Increase in inventories (1,112,000 1,086,000)
Increase in trade and other receivables
((948,000 165,000 10,000) (840,000 79,000 8,000))
Decrease in prepayments (108,000 95,000)
Decrease in trade and other payables (1,417,000 376,000 896,000)
CU
3,420,000
(78,000)
563,000
1,260,000
975,000
189,000
(26,000)
(20,000)
13,000
145,000
6,441,000
WORKINGS
(1)
PPE COST OR VALUATION

B/d
Cash ()
(2)
CU
4,347,000
1,752,000
266,000
6,365,000
CU
PPE disposals
C/d
1,201,000
5,164,000
6,365,000
PPE ACCUMULATED DEPRECIATION

CU
PPE disposals
(1,201,000 496,000)
C/d
705,000
358,000
2,198,000
3,261,000
B/d
Income statement ()
CU
2,001,000
1,260,000
3,261,000
141

(3)
PPE DISPOSALS
B/d
PPE cost or valuation
CU
79,000
1,201,000
1,280,000
(4)
PPE acc dep (1,201,000 496,000)

Income statement
Cash ()
C/d
INTANGIBLES COST
CU
8,645,000
339,000
376,000
9,360,000
B/d
Cash ()
C/d
(5)
CU
C/d
9,360,000
9,360,000
INTANGIBLES ACCUMULATED AMORTISATION

CU
C/d
(6)
3,690,000
3,690,000
B/d
Income statement ()
CU
2,715,000
975,000
3,690,000
INVESTMENTS
B/d
Cash ()
(7)
CU
127,000
2,018,000
2,145,000
CU
C/d
2,145,000
2,145,000
INCOME TAX
Cash ()
C/d
(8)
CU
546,000
641,000
1,187,000
B/d
Income statement
CU
503,000
684,000
1,187,000

CU
C/d (1,800,000 + 1,543,000)
(9)
3,343,000
3,343,000
B/d (1,000,000 + 1,421,000)

Retained earnings
Cash ()
CU
2,421,000
500,000
422,000
3,343,000
REVALUATION RESERVE
CU
C/d
(10)
1,880,000
1,880,000
B/d
PPE cost (1,000,000 734,000)
Acc depn ()
CU
1,256,000
266,000
358,000
1,880,000
INVESTMENT INCOME
B/d
Income statement
142
CU
705,000
189,000
221,000
165,000
1,280,000
CU
8,000
78,000
86,000
Cash ()
C/d
CU
76,000
10,000
86,000
ANSWER BANK
(11)
FINANCE CHARGE
Cash ()
C/d
(12)
CU
675,000
225,000
900,000
CU
337,000
563,000
900,000
B/d
Income statement
DIVIDENDS
Cash ()
C/d
CU
163,000
180,000
343,000
CU
100,000
243,000
343,000
B/d
Retained earnings
Tutorial note
The retained earnings T account, which was not needed as a working, is as follows.
RETAINED EARNINGS
Share capital and premium (W8)
Dividends payable ()
C/d
CU
500,000
CU
746,000
2,736,000
B/d
Income statement
243,000
2,739,000
3,482,000
3,482,000
Pippin Ltd
Marking guide
Marks
Cash flow statement

Interest paid
Income tax paid
Purchase of PPE
Purchase of intangibles
Proceeds from issue of redeemable preference shares
Dividends paid
Reconciliation
PBT
Finance charge
Depreciation charge
Amortisation charge
Profit on disposal of PPE
Change in payables
Presentation
Total marks available
Maximum
1
1
2
1
1
1
1
1
1
1
1
1
19
18
143

Cash flow statement for the year ended 31 December 20X7
CU

Interest paid (W2)
1,890,600
(77,000)
(300,000)

Purchase of intangibles (W4)
Proceeds from sale of property, plant and equipment
(1,583,000)
(77,500)
600,000
CU
1,513,600

Proceeds from issue of ordinary share capital (5,200,000 4,450,000)
Proceeds from issue of redeemable preference
share capital (500,000 400,000)
Dividends paid (W7)
Cash and cash equivalents at beginning of period (12,400 + 20,200)
Cash and cash equivalents at end of period (25,000 + 10,700)
(1,060,500)
750,000
100,000
(1,300,000)
(450,000)
3,100
32,600
35,700

Profit before tax
Finance charge
Depreciation charge
Profit on disposal of property, plant and equipment (600,000 560,500)
Decrease in inventories (765,100 560,500)
Increase in trade and other payables (W6)
CU
886,100
75,000
750,600
27,300
(39,500)
204,600
(24,500)
11,000
1,890,600
WORKINGS
(1)
INCOME TAX
Cash ()
C/d
(2)
CU
300,000
410,000
710,000
CU
360,000
350,000
710,000
FINANCE CHARGE
Cash ()
C/d
CU
77,000
5,000
82,000
(3)
B/d
Income statement
CU
7,000
75,000
82,000
PPE
B/d
Cash ()
144
B/d
Income statement
CU
6,950,300
278,200
1,583,000
8,811,500
Disposals
Income statement
C/d
CU
560,500
750,600
7,500,400
8,811,500
ANSWER BANK
(4)
INTANGIBLES
B/d
Cash
(5)
CU
300,500
77,500
378,000
CU
27,300
350,700
378,000
Income statement ()
C/d
REVALUATION RESERVE
Retained earnings
C/d
CU
15,000
500,000
515,000
CU
236,800
278,200
515,000
B/d
PPE ()
CU
132,500
143,500
11,000
Opening (139,500 7,000)

Closing (148,500 5,000))
Increase
(7)
ORDINARY DIVIDENDS
Cash ()
C/d
10
CU
1,300,000
500,000
1,800,000
CU
400,000
1,400,000
1,800,000
B/d
Retained earnings
Merry Ltd
Marking guide
Marks
(a)
(b)
Cash flow statement

Interest paid
Income tax paid
Purchase of PPE
Payment of finance lease liabilities
Dividends paid
Gross operating cash flows
Cash received from customers
Cash paid to suppliers
Cash paid to employees
Presentation
Total available
Maximum
For each item
Total available
Maximum
1
3
3
1
1
1
6
1
23
21
4
25
145

(a)
Cash flow statement for the year ended 31 March 20X5

CU

Interest paid
CU
1,711,600
(89,000)
(347,600)
1,275,000

Purchase of property, plant and equipment
Purchase of investments (172,000 156,000 + 12,000)
Proceeds from sale of property, plant
and equipment (496,300 (W6) 55,000)
Proceeds from issue of ordinary share capital
(1,020,000 (W7) + 380,000 (W8))
Payment of finance lease liabilities (W3)
Dividends paid (W5)
Net cash from financing activities
(2,057,000)
(28,000)
441,300
(1,643,700)
1,400,000
(516,000)
(500,500)
383,500
14,800
120,200
135,000
Note: Gross operating cash flows

CU
5,626,000
(1,264,400)
(2,650,000)
1,711,600
Cash received from customers (W1)

Cash paid to suppliers (W9)
Cash paid to and on behalf of employees
(b) Note: Reconciliation of profit before tax to cash generated from operations
Profit before tax
Finance charge
Depreciation charge
Impairment write off
Loss on disposal of property, plant and equipment
Increase in inventories (460,600 365,100)
Increase in trade and other payables (348,500 289,600)
CU
866,100
89,000
750,600
12,000
55,000
(95,500)
(24,500)
58,900
1,711,600
WORKINGS
(1)
TRADE RECEIVABLES
B/d
Income statement
146
CU
244,500
5,650,500
5,895,000
Cash ()
C/d
CU
5,626,000
269,000
5,895,000
ANSWER BANK
(2) Purchases
CU
3,460,600
978,800
256,000
(12,000)
(365,100)
(750,600)
(55,000)
460,600
3,973,300
Cost of sales
Distribution costs
Adjustments:
Impairment write off
Opening inventory
Depreciation
Loss on sale
Closing inventory
(3)
FINANCE LEASE LIABILITIES

Cash ()
C/d
(4)
CU
516,000
556,000
1,072,000
B/d
PPE
CU
472,000
600,000
1,072,000
INCOME TAX
Cash ()
C/d
(5)
CU
347,600
300,000
647,600
B/d
Income statement
CU
350,000
297,600
647,600
RETAINED EARNINGS
Cash dividends paid ()
C/d
CU
500,500
142,500
643,000
(6)
B/d
Income statement
CU
74,500
568,500
643,000
PPE
B/d
Cash
(7)
CU
2,950,300
2,057,000
600,000
5,607,300
Income statement
Disposals ()
C/d
CU
750,600
496,300
4,360,400
5,607,300
SHARE CAPITAL
CU
C/d
(8)
3,000,000
3,000,000
B/d
Bonus issue
Cash ()
CU
1,800,000
180,000
1,020,000
3,000,000
SHARE PREMIUM
Bonus issue (W7)
C/d
(9)
CU
180,000
1,050,000
1,230,000
B/d
Cash ()
CU
850,000
380,000
1,230,000
TRADE PAYABLES
Cash to suppliers ()
Cash to employees
C/d
CU
1,264,400
2,650,000
348,500
4,262,900
B/d
Income statement (W2)
CU
289,600
3,973,300
4,262,900
147
148
ANSWER BANK
11
Montrose Ltd
Marking guide
Marks
(a)
(b)
(a)
Raw materials calculation (W1)

WIP calculation (W2)
Cost of conversion calculations (W3)
NRV calculations (W5)
Costed units (W4)
Note to IS
Presentation
Total available
Maximum
Statement of two main concepts (each)
Explanation of financial capital maintenance
Monetary or CPP terms (each)
Example of monetary terms
Explanation and example of CPP terms (each)
Explanation of operating capital maintenance
Example of operating capital maintenance
Total available
Maximum
2
2
3
4
1
13
12
1
1
1
1
8
6
18
Extracts from the financial statements for the year ended 30 September 20X4
Note to balance sheet inventories
Raw materials and consumables (100,000 units @ CU7.50 (W1))
Work in progress (W2)
Finished goods and goods for resale (W4)
CU
750,000
460,312
503,177
1,713,489
Note to income statement

Certain inventories have been written down by CU8,323 to their net realisable value.
(b) Different concepts of capital and capital maintenance
There are two main capital maintenance concepts: financial capital maintenance and physical capital
maintenance (also called operating capital maintenance).
Financial capital maintenance measures capital as the equity in the balance sheet. So profit will be
measured as the increase in capital over the period, after allowing for any inflows or outflows to or
from the owners of the business.
This increase in capital can either be measured in monetary terms or in terms of constant purchasing
power.
149

For example, say a business commenced on 1 January 20X1 with a contribution of CU1,000 from its
owners. During the year, this cash was used to purchase 100 units for CU10 each. These units were
then sold for CU1,100 cash.
Opening capital is CU1,000 and closing capital is CU1,100. Profit for the year would therefore be
measured as CU100.
However, the constant purchasing power variation of this system would also look at adjusting opening
capital in order to maintain the general purchasing power of the business. In the above example, say
that the increase in RPI over the year was 5%. An adjustment would be made to the opening capital of
CU50 (5% CU1,000) reducing profit for the year to CU50. This would ensure that even if the entity
paid out all of its profits it would retain sufficient funds in order to be able to continue in business. So,
assuming that units now cost CU10.50 each (CU10 105%), the business still has sufficient cash of
CU1,050 (CU1,100 minus the CU50 paid out) to purchase a further 100 units to sell.
However, the problem with this approach is that general price changes may not be appropriate to that
particular entity (or industry). The physical capital maintenance concept therefore looks at
adjusting opening capital in order to maintain the physical productive capacity of the business. It uses
specific as opposed to general price changes.
In the example, it may therefore be that these units actually now cost CU10.75 each to buy. Therefore
an adjustment of CU75 would be made to the opening capital, reducing profit for the year to CU25.
Even if all of that profit was paid out the entity would then still be left with sufficient cash of CU1,075
(CU1,100 minus the CU25 paid out) so that it can purchase a further 100 units to sell.
WORKINGS
(1) Raw materials
Purchase cost
Import duty
Transport to factory
Storage and handling costs
Cost per
unit
CU
5.00
1.00
0.50
1.00
7.50
(2) Work in progress

25,000 units @ (7.50 (W1) + (75% 2.73) (W3))
25,000 units @ (7.50 (W1) + (50% 2.73) (W3))
50,000 units
CU
238,687
221,625
460,312
(3) Cost of conversion and of bringing inventories to present location/condition

Direct labour
Production overheads (660,000 + 100,000)
Design and marketing overheads
CU
1,000,000
760,000
150,000
1,910,000
CU1,910,000 700,000 units = CU2.73 per unit

Cost of a completed unit is CU10.23 (7.50 + 2.73)
(4) Finished goods
50,000 units @ 10.23 (W3)
Less Provision (W5)
150
CU
511,500
(8,323)
503,177
ANSWER BANK
(5) Net realisable value

Units
Order M147
Order M293
Order M467
Order M364
Order M191
Other ()
1,800
5,555
6,500
4,630
3,240
28,275
50,000
NRV
CU
22,000
55,000
60,000
54,000
40,000
329,000
560,000
Cost
CU
56,828
66,495
NRV
CU
55,000
60,000
NRV
per unit
CU
12.22
9.90
9.23
11.66
12.35
11.64
Therefore reduce cost of finished goods for
Order M293: 5,555 units @ 10.23 (W3)

Order M467: 6,500 units @ 10.23 (W3)
Provision
CU
1,828
6,495
8,323
Tutorial notes and assumptions

(1) The budgeted level of production for 30 September 20X4 has been used in calculating the cost of a
finished goods unit, because it represents normal capacity. It is not appropriate to use the actual level
of production when it has been affected by the interruption to the supply of raw materials (BAS 2 para
13). The use of 700,000 units results in more cost being recognised as an expense in the year than if
the 500,000 had been used.
(2) The exclusion of the CU100,000 compensation received from the finished goods unit calculation has
the effect of leaving it as a credit in the income statement, to offset the abnormal additional expenses
written off under (1) above (BAS 2 para 16(a)).
(3) Design and marketing overheads have been included in the calculation on the grounds that the
company manufactures to customers' requirements for all orders, and on the assumption that there
are firm sales contracts. It would be possible to exclude them.
(4) It would be possible to include distribution overheads in the calculation on the basis that they are
internal overheads which have been incurred in bringing the product to its present location/condition.
151
12
Gandalf Ltd
Marking guide
Marks
(a)
(b)
(c)
(a)
Draft profit
Ordinary dividend
Amortisation
Depreciation on freehold
Finance charge
Depreciation on plant
Total available
Maximum
Headings
Revaluation
Transfer
Profit
Final ordinary dividends
Interim ordinary dividends
Issue of share capital
Balances brought forward as reported
Adjustment to prior year
Presentation
Total available
Maximum
Explanation of accrual basis: each valid point mark, maximum
Explanation of cash basis: each valid point mark, maximum
Example illustrating accrual basis, maximum
Example illustrating cash basis, maximum
Explanation of break-up basis: each valid point mark, maximum
Total available
Maximum
4
1
1
1
2
2
2
12
11
3
3
3
3
2
14
8
23
Revised profit for the period

Draft profit for the period
Add back: Ordinary dividend charged to profit in error
Amortisation of intangible (10% 42,500)
Less: Depreciation on freehold land and buildings (W)
Finance charge on redeemable preference shares (5% 50,000)
Depreciation on plant ((357,800 125,700) 25%)
152
1
1
4
CU
135,500
30,000
4,250
(8,000)
(2,500)
(58,025)
101,225
ANSWER BANK
(b) Statement of changes in equity for the year ended 30 June 20X6
Attributable to the equity holders of Gandalf Ltd
Preference
share
capital
Share
Revaluation
(irredeemable)
premium
reserve
Retained earnings
CU
CU
CU
CU
CU
Ordinary
share
capital
CU
Revaluation of
non-current assets (W)
Transfer between
reserves (W)
Total recognised directly
in equity
Total recognised income
and expenditure for
the period
Final dividends on
ordinary shares
Interim dividends on
ordinary shares
Dividends on irredeemable
preference shares
(100,000 7%)
(75,000 5,000 3,000)
as reported
Adjustment to correct prior
year error
As restated
(c)
550,000
Total
CU
550,000
5,000
545,000
5,000
101,225
550,000
101,225
545,000
106,225
651,225
(25,000)
(25,000)
(30,000)
(30,000)
(7,000)
(7,000)
300,000
300,000
100,000
100,000
67,000
67,000
545,000
44,225
500,000
120,000
420,000
347,500
800,000
100,000
187,000
965,000
(42,500)
(5,000)
467,000
1,056,225
1,387,500
(42,500)
305,000
349,225
2,401,225
Different bases of accounting

Under the accrual basis, transactions are recognised when they occur, not when the related cash flows
into or out of the entity. This means that:
Sales are recorded when the risks and rewards of ownership are transferred. This means that,
for credit sales, a receivable will be set up when the sale is recorded.
Expenses are recognised when the goods or services are consumed. So a payable will be set up
for any credit purchases and there will be an adjustment for opening and closing inventory.
The consumption of non-current assets will be recognised over their useful lives via a
depreciation charge.
Under the cash basis of accounting only the cash impact of a transaction is recorded. This means that:
Sales will only be recorded when the cash is received, so there will be no receivables in respect
of credit sales.
Expenses will only be recorded when the cash is paid, so there will be no payables in respect of
credit purchases and no inventory adjustment.
No depreciation will be charged on non-current assets as the purchase of an asset will be treated
as an expense at the time the cash is paid.
For example, say a business commenced on 1 January 20X1 with a cash contribution of CU1,000 from
its owners. That cash was used to buy goods costing CU400 and a machine with a useful life of four
years for CU200. Goods costing CU300 were purchased on credit and the business made cash sales of
CU500 and sales on credit of CU400. Closing inventory at cost is CU50.
153
Accrual
basis
CU
Income statement
Revenue (400 + 500)
Purchases (400 + 300)
Closing inventory
Depreciation charge/purchase of non-current asset (200 4)
Profit/(loss)
Balance sheet
Non-current asset (200 50)
Inventory
Trade receivables
Cash (1,000 400 200 + 500)
Trade payable
Capital
Retained earnings
Cash
basis
CU
900
(700)
50
(50)
200
500
(400)
(200)
(100)
150
50
400
900
(300)
1,200
900
900
1,000
200
1,200
1,000
(100)
900
The break-up basis is primarily relevant to the balance sheet. It reflects the fact that the business is no
longer a going concern. Under the break-up basis:
All assets and liabilities are classified as current.
Assets are valued on the basis of recoverable amounts rather than at cost. In the case of a forced
sale such values are likely to be less than cost.
WORKING
Revaluation
Fair value (600,000 + 400,000)
Less Carrying amount (500,000 50,000)
Revaluation surplus arising
Revaluation surplus due to building (400,000 (200,000 50,000))

Therefore annual reserve transfer = CU250,000 / 50 years
= CU5,000 pa
154
CU
1,000,000
(450,000)
550,000
CU
250,000
ANSWER BANK
13
Cagreg Ltd
Marking guide
Marks
(a)
(b)
(a)
Cost
Brought forward
Additions
Revaluation
Held for sale
Brought forward
Held for sale
Depreciation charges for year
Buildings
Held for sale plant
Plant held throughout year
Addition
Computer
Presentation
Total available
Maximum
Each valid point
Max for any one qualitative characteristic
Total available
Maximum
2
3
3
1
2
1
17
16
3
8
6
22
Non-current asset note

Freehold
land
CU
100,000
30,000
130,000
Buildings
CU
200,000
200,000
Plant and
machinery
CU
200,000
60,000
(20,000)
240,000
Computer
CU
60,000
60,000
Total
CU
560,000
60,000
30,000
(20,000)
630,000
20,000
3,214
23,214
72,000
67,280
(13,760)
125,520
10,500
7,200
17,700
102,500
77,694
(13,760)
166,434
Carrying amount
At 30 September 20X9
130,000
176,786
114,480
42,300
463,566
At 1 October 20X8
100,000
180,000
128,000
49,500
457,500
Cost or valuation
At 1 October 20X8
Additions
Revaluation surplus
Classified as held for sale
Depreciation
At 1 October 20X8
Charge for year (W1-3)
Classified as held for sale (W2a)
155

(b) Qualitative characteristics and BAS 16
Understandability
Information must be readily understandable to users so that they can perceive its significance. This is
dependent on how information is presented and how it is categorised.
For example, BAS 16 requires disclosures to be given by each class of property, plant and equipment.
Therefore it will be clear what types of assets have been purchased during the year and what types of
assets have been sold. If this information were merged over one class it would be less understandable.
Relevance
Information is relevant if it influences the economic decisions of users.
The choice of the revaluation model as a measurement model in BAS 16 provides relevant information by
showing up-to-date values. This will help give an indication as to what the entity's underlying assets are worth.
Reliability
Information is reliable if it is free from error or bias, complete and portrays events in a way that
reflects their reality.
Although the revaluation model gives relevant information this information is generally seen to be less
reliable than the cost model the other measurement model allowed by BAS 16. The cost model is
based on historic costs which are not the most relevant costs on which to base future decisions.
However, historic cost is reliable being based on fact.
Comparability
Users must be able to compare information with that of previous periods or with that of another
entity. Comparability is achieved via consistency and disclosure.
BAS 16 facilitates comparability between companies by requiring the disclosure of accounting policies
(in accordance with BAS 1) in respect of, for example, depreciation methods and measurement bases.
BAS 16 allows comparability between the cost and the revaluation model (for example to facilitate
comparison between two companies who have adopted different models) by requiring equivalent cost
information to be disclosed under the revaluation model. It also requires disclosures (in accordance
with BAS 8) of the effect of a change in an accounting estimate such as useful lives or depreciation
rates. This facilitates comparison.
WORKINGS
(1) Depreciation charges for the year on buildings
Carrying amount at 1 October 20X8 (200,000 36/40) CU180,000
Depreciation (180,000 1/56) CU3,214
(2) Plant and machinery
(a)
Held-for-sale asset
CU
Cost 1 October 20X6
Depreciation to
1 October 20X7 (40% 20,000)
1 October 20X8 (40% (20,000 8,000))
Depreciation to 1 February 20X9
(40% 4/12 7,200)
NBV on classification as held for sale
Total depreciation at date of reclassification
(12,800 + 960)
CU
20,000
Charge
for year
CU
8,000
4,800
(12,800)
7,200
(960)
6,240
960
13,760
Note: There will also be an impairment loss of 6,240 5,600 = CU640 to be charged against profits for
this plant, but the impairment loss does not have to be disclosed in the PPE note.
156
ANSWER BANK
(b) Plant held throughout year
Total at 1 October 20X8

Less Disposal
Plant held throughout year
Charge for year (40% (180,000 59,200))
(c)
Cost
CU
200,000
(20,000)
180,000
Depn
CU
72,000
(12,800)
59,200
48,320
107,520
48,320
Addition
Cost 1 January 20X9
Charge for year (40% 9/12 60,000)
60,000
(18,000)
42,000
Total charge for year
18,000
67,280
(3) Computer
CU
60,000
(10,500)
49,500
(4,500)
45,000
Cost
Depreciation to 1 October 20X8
Carrying amount at 1 October 20X8
Less Estimated residual value
Amount to be depreciated
Remaining useful life (40,000 10,000)
= 30,000 hours
Current usage
= 4,800 hours
Charge for year
= (
CU7,200
14
4,800
45,000) =
30,000
Roberts Ltd
Marking guide
Marks
(a)
(b)
Carrying amount of land and buildings

Original cost
Fees
Accumulated depreciation to 31 Dec 20X3
Revaluation surplus
Accumulated depreciation to 31 Dec 20X4
Revaluation reserve
Balance at 31 Dec 20X3
Annual transfer
Total available
Maximum
Calculation of impairment on land and buildings
Calculation of impairment on specialised machinery
Narrative to note
Impairment disclosure
Total available
Maximum
1
1
1
1
6
1
4
7
13
157

(a)
Carrying amount of land and buildings
Cost
Fees
Acc depn to 31 December 20X3 (1,780 20/360)
Carrying amount 31 December 20X3
Revaluation surplus ()
Revalued amount (60%/40%)
Acc depn to 31 December 20X4 (3,120 12/460*)
Carrying amount 31 December 20X4
Land
CU'000
2,600
2,600
2,600
2,080
4,680
4,680
Buildings
CU'000
1,700
80
1,780
(99)
1,681
1,439
3,120
(81)
3,039
Total
CU'000
7,800
* Revised total life = 480 months and the factory has been occupied for 20 months remaining life is
460 months.
Revaluation reserve
CU'000
Balance as at 31 December 20X3 (2,080 + 1,439)
Annual transfer
Depn based on value
Depn based on cost (1,681 12/460)
CU'000
3,519
81
(44)
(37)
3,482
Balance as at 31 December 20X4

(b) Income statement charges and disclosure
Note to the financial statements
The profit from operations is arrived at after charging
CU'000
3,187
Impairment of non-current assets (2,737 (W1) + 450 (W2))

WORKINGS
(1) Impairment of land and buildings
CU'000
7,719
(1,500)
6,219
(3,482)
2,737
Carrying amount at 31 December 20X4 (4,680 + 3,039)

Recoverable amount
Charged to revaluation reserve
Charge to income statement
(2) Impairment of specialised machinery
Carrying amount (2,800,000 40/96)
Fair value less costs to sell
Gross selling price (1,167 65%)
Less Repair costs (CU38.40 100/120 600)
Transport costs
Insurance
CU'000
CU'000
1,167
759
(19)
(21)
(2)
717
158
Value in use (given)
600
Impairment (1,167 717)
450
ANSWER BANK
15
Dumfries Ltd
Marking guide
Marks
(a)
Each valid point

Total available
Maximum
Income statements
Operating lease payments
Depreciation
Finance charges
Balance sheet
Notes
Additions
Depreciation charge
Assets held under finance leases (in heading)
Gross basis analysis
Net basis analysis
Commitments
Presentation
Total available
Maximum
(b)
(a)
7
6
1
1
3
1
1
1
1
1
2
14
14
20
BFRS Framework and accounting for finance leases

Elements of financial statements
Assets/liabilities
A non-current asset acquired under a finance lease meets the definition of an asset as it is
Controlled by the lessee (which has physical possession of the asset)
Results from a past event (e.g. the lease agreements signed on 1 May 20X4)
Gives rise to future economic benefits, i.e. the use of the asset to generate revenue
even though the asset is not legally owned by the lessee.

The lease payments are a liability as the company has an obligation arising from a past transaction to
transfer economic benefits, i.e. to make lease payments. Under most lease contracts the lessee will not
be able to cancel these payments.
Recognition
The asset and liability should be recognised if
It is probable that future economic benefits will flow to or from the company, and
Those benefits can be measured reliably.
The inflows and outflows are probable as a contract has been signed.
The benefits can be measured reliably at the present value of the minimum lease payments or fair value.
159

Measurement
The two main bases of measurement are historical cost and current cost. Leased assets are basically
included at historical cost, i.e. the minimum lease payments, although these are discounted to show
cost in 'today's pounds'.
(b) Extracts from the income statements for the years ended 30 April
Profit from operations is stated
after charging
Depreciation (109,1405)
Finance cost
Finance charges re finance
lease (W)
20X5
CU
20X6
CU
20X7
CU
20X8
CU
20X9
CU
15,000
21,828
15,000
21,828
15,000
21,828
21,828
21,828
7,784
5,432
2,844
Extracts from the balance sheet as at 30 April 20X5

CU
Finance lease liabilities (W)
Current liabilities
Finance lease liabilities (W)
54,324
31,300
Notes to the balance sheet

Cost
At 1 May 20X4
Additions
At 30 April 20X5
At 1 May 20X4
Charge for year
30 April 20X5
Carrying amount
At 30 April 20X5
At 30 April 20X4
Plant and machinery held

under finance leases
CU
X
109,140
X
X
21,828
X
X
X
(2) Analysis of finance lease liabilities

Gross basis
Finance lease liabilities include
Gross payments due within
One year
Two to five years (2 31,300)
Less Finance charges allocated to future periods ()
160
CU
31,300
62,600
93,900
(8,276)
85,624
ANSWER BANK
Net basis
CU
Amounts due within

One year
Two to five years
31,300
54,324
85,624
(3) Commitments
The minimum lease payments under non-cancellable operating leases are as follows.
CU
15,000
15,000
30,000
Within one year

Within two to five years
WORKING
Finance charges
Year to 30 April
20X5
20X6
20X7
20X8
B/f
CU
109,140
85,624
59,756
31,300
Payment
CU
(31,300)
(31,300)
(31,300)
(31,300)
Capital
CU
77,840
54,324
28,456
Interest
accrued
@ 10%
CU
7,784
5,432
2,844
C/f
CU
85,624
59,756
31,300
Total
CU85,624
Non-current
CU54,324
Current ()
CU31,300
161
16
Crieff Ltd
Marking guide
Marks
(a)
(b)
(a)
Qualitative characteristic of reliability

Faithful representation therefore substance
Substance different from form
Finance lease as example: risk and rewards transferred but not legal title
Definition and recognition of asset
Definition and recognition of liability
As elements of financial statements
Total available
Maximum
Income statement
Finance cost
Note to income statement
Depreciation
Balance sheet
Notes to balance sheet
Additions
Depreciation charge
Assets held under finance leases
Net basis analysis
Gross basis analysis
Presentation
Total available
Maximum
3
2
1
3
1
1
1
2
3
2
21
20
23
BAS 17 concepts
BAS Framework sets out the qualitative characteristics of financial statements, one of which is
reliability. One aspect of reliability is that of faithful representation. For information to represent
transactions faithfully, those transactions should be accounted for in accordance with substance and
economic reality, not merely legal form.
Substance is not always consistent with legal form. An example of this is a finance lease, where
substantially all the risks and rewards relating to a non-current asset are transferred to the lessee even
though legal title remains with the lessor.
As the lessee controls the asset and will gain benefit from it, it should be treated as an asset.
Conversely, the requirement to pay instalments to the lessor is a liability. BAS Framework requires the
lessee to recognise these elements in its financial statements.
162
ANSWER BANK
(b) Disclosure re leases

Income statement
CU
67,593
Finance cost (10,598 (W1) + 9,583 (W3) + 47,412 (W5))

Notes to the income statement
(1) Profit from operations is stated after charging
Depreciation of leased assets (49,470 (W4) + 13,203 (balance sheet note (1) below))
Operating lease payments (75,000 (W2) + 6,000)
CU
62,673
81,000
Balance sheet
Current liabilities
CU
116,050
Finance lease liabilities (40,000 (W1) + 22,050 (W3) + 54,000 (W5))

CU
647,933
Finance lease liabilities (103,078 (W1) + 77,323 (W3) + 467,532 (W5))

Notes to the balance sheet
Land and
buildings
CU
X
528,120
(X)
X
Plant and
machinery
CU
X
292,270
(X)
X
X
(X)
13,203
X
X
(X)
49,470
X
Carrying amount
At 30 June 20X8
At 30 June 20X7
Cost
At 1 July 20X7
Additions (172,480 + 119,790)
Disposals
At 30 June 20X8
At 1 July 20X7
Eliminated on disposals
Charge for the year (528,120 40) (W4)
At 30 June 20X8
Of the carrying amount of non-current assets CU757,717 relates to assets held under finance
leases.
(2) Analysis of finance lease liabilities
Net basis
Amounts due within
One year
Two to five years (W6)
Over five years (W6)
CU
116,050
214,033
433,900
763,983
163

Gross basis
CU
Gross payments due within

One year (40,000 + 30,000 + 54,000)
Two to five years ((40,000 3) + (30,000 3) + (54,000 4))
Over five years (34 54,000)
Less
124,000
426,000
1,836,000
2,386,000
(1,622,017)
763,983
Finance charges allocated to future periods ()

(143,078 + 99,373 + 521,532)
WORKINGS
(1) Cutting machine (finance lease)
Payment table
Year ended
B/f
CU
172,480
143,078
30 June 20X8
30 June 20X9
Payment
Capital
CU
(40,000)
(40,000)
CU
132,480
103,078
Interest
@ 8%
CU
10,598
8,246
C/f
CU
143,078
111,324
Total liability
CU143,078
Non-current
CU103,078
Current
CU40,000 ()
(2) Office equipment (operating lease)

10 months' rental included in the financial statements.
10 CU7,500 = CU75,000
(3) Packing machine (finance lease)
Payment table
Year ended
B/f
CU
119,790
99,373
30 June 20X8
30 June 20X9
Interest
@ 8%
CU
9,583
7,950
Payment
CU
(30,000)
(30,000)
Total liability
CU99,373
Non-current
CU77,323
Current
CU22,050 ()
(4) Depreciation plant and machinery

Cutting machine (172,480 5)
Packing machine (119,790 8)
164
CU
34,496
14,974
49,470
Capital
c/f
CU
99,373
77,323
ANSWER BANK
(5) Buildings (finance lease)

Payment table
Year ended
30 June 20X8
30 June 20X9
B/f
CU
528,120
521,532
Payment
Capital
CU
(54,000)
(54,000)
CU
474,120
467,532
Interest
@ 10%
CU
47,412
46,753
C/f
CU
521,532
514,285
Total liability
CU521,532
Non-current
CU467,532
Current
CU54,000 ()
(6) Net basis analysis

CU
Two to five years

Cutting machine
Packing machine
Buildings (per below)
103,078
77,323
33,632
214,033
Over five years

Buildings (W5)
Less Years 2 5 ()
More than 5 years (W7)
467,532
(33,632)
433,900
(7) Continuation of buildings payment table

Year ended
30 June 20Y0
30 June 20Y1
30 June 20Y2
30 June 20Y3
B/f
CU
514,285
506,314
497,545
487,900
Payment
Capital
CU
(54,000)
(54,000)
(54,000)
(54,000)
CU
460,285
452,314
443,545
433,900
Interest
@ 10%
CU
46,029
45,231
44,355
C/f
CU
506,314
497,545
487,900
Tutorial notes
(1) As the office equipment operating lease is cancellable at any time by either party, no operating lease
commitment disclosure is required.
(2) Useful life is taken to be eight years for agreement (3) rather than the agreement term of five years.
This is because the option to acquire at the end of the agreement is assumed to take place from the
outset of the agreement, given the nominal cost involved.
(3) Assets held under finance leases should be capitalised at the lower of fair value (normally cash price)
and the present value of minimum lease payments.
165
17
ITC Solutions Ltd

Marking guide
Marks
(a)
Meaning of elements
Elements relevant to balance sheet
Elements relevant to income statement
Conditions for recognition
Meaning of recognition
Total available
Maximum
Revenue calculations
Transaction (1), discussion of revenue recognition
Transaction (1), discussion of costs recognition and resultant loss
Transaction (2)
Transaction (3), discussion of revenue recognition
Transaction (3), discussion of treatment of deposits as liability
Total available
Maximum
(b)
(a)
1
1
1
1
1
5
4
2
2
2
2
2
1
12
12
16
Recognition of elements of financial statements

Financial statements portray the financial effects of transactions and other events. BFRS Framework
splits these transactions into broad classes according to their economic characteristics. These classes
are referred to as the 'elements' of financial statements.
Elements relevant to the measurement of financial position in the balance sheet are: assets, liabilities
and equity.
Elements relevant to the measurement of financial performance in the income statement are: income
and expenses.
Although there are specific definitions which relate to each type of element, each element is only
'recognised' in the financial statements if:
It is probable that any future economic benefit associated with the item will flow to or from the
entity, and
The item has a cost or value which can be measured reliably.
Recognition means incorporating the item into the income statement or balance sheet by depicting the
item in words and by including it as a monetary amount.
(b) Application of the above principles to the three transactions
(1) Fixed price contract to build computer
Revenue = recoverable costs = CU50,000
Because the outcome of the project is uncertain it is not yet probable that future benefits for the
whole of this CU120,000 will flow to the entity. There is only certainty over the CU50,000 which
is considered to be recoverable and can be reliably measured (being part of actual costs incurred
of CU60,000). Hence only CU50,000 should be recognised as revenue this year.
The costs incurred this year of CU60,000, which have already led to an outflow of benefits and
can be reliably measured (as actual costs) should also have been recognised (as an expense). As a
result, a loss of CU10,000 will be recognised in the current year.
166
ANSWER BANK
(2) Agency commission

Revenue = agency commission = CU300,000 15% = CU45,000
Although the CU300,000 can be reliably measured, the economic benefit from the whole
CU300,000 does not flow to ITC as ITC has to remit 85% of this back to ProMarket Ltd. ITC's
inflow is only 15% of this.
ITC should therefore recognise only the 15% commission as revenue. It should not recognise the
total amount received as revenue, and the 85% paid out as an expense.
(3) Deposits
Revenue = CUnil
ITC should not recognise any revenue as it has not yet provided any goods to customers and
therefore has no probability of any economic benefit. The revenue should only be recognised
when the computers are delivered to the customer and the receipt of the final instalment can be
reliably measured.
ITC will have to refund the deposits if the supplier fails to deliver. There is therefore a future
obligation which meets the definition of a liability. Hence the deposits of CU75,000 should be
shown in the balance sheet as 'deferred' under current liabilities.
18
Withington Ltd
Marking guide
Marks
(a)
(b)
Presentation
Opening provision
Utilised in year
Income statement charge
Closing provision
Faulty goods narrative
Compensation claim narrative
Rectification costs narrative
Onerous contract narrative
Restructuring narrative
Contingent asset note
Total available
Maximum
1 mark each calculation
Maximum
1
4
1
1
1
1
1
1
15
3
15
3
18
167

(a)
Notes to the financial statements as at 31 December 20X0 (extracts)

(1) Provisions for liabilities
Provision
re faulty
goods
CU'000
At 1 January 20X0
Utilised in the year
Income statement
charge (bal fig)
At 31 December
20X0 (W)
Provision
for
compensation
claim
CU'000
Provision
for
rectification
costs
CU'000
Provision
for
onerous
contract
CU'000
Provision
for
restructuring
CU'000
Total
CU'00
0
1,000
(800)
1,300
9,000
1180
126
3,300
13,906
1,500
9,000
180
126
3,300
14,106
1,000
(800)
The provision in respect of faulty goods relates to the supply of faulty electrical transformer units
during 20X0. The provision is based on the level of claims anticipated to succeed, based on legal
advice.
The compensation claim provision is in respect of a claim made by a customer for damages as a
result of a faulty mechanical transformer unit supplied by the company. It represents the present
value of the amount at which the company's legal advisors believe the claim is likely to be settled.
The provision for rectification costs is in respect of the company's operations to extract metal
ore in Didland. Withington Ltd has a five year operating licence issued by the Didland
government and has estimated that the cost of cleaning up the extracted ore hole will be
CU400,000 at the end of those five years. A provision of CU80,000 is to be made each year. In
addition, the cost of removing infrastructure from the site in five years' time will be CU100,000.
The provision for the onerous contract is in respect of a two-year fixed-price contract which
Withington Ltd entered into on 1 July 20X0. Due to unforeseen cost increases and production
problems, a loss on this contract is now anticipated. The provision is based on the amount of this
loss up to the end of the contract, which is less than the compensation which would be payable
in the event of the contract not being fulfilled.
During the year Withington Ltd announced and commenced a restructuring of its Chuckholder
division. Details of the restructuring have been fully communicated to those affected. The cost of
the restructuring, which began on 1 September 20X0, is estimated at CU3.3 million.
(2) Contingent assets
A counter-claim in respect of the compensation claim provided for above has been made against
the supplier of parts for the affected transformer. Legal advice is that this claim is likely to
succeed and should amount to around 40% of the total damages (CU3.6 million).
(b) Depreciation charge for 20X0
Electric machine ((200,000 40,000) 20 years)
Lining (40,000 4 years)
Infrastructure ((200,000 + 100,000) 5 years))
CU
8,000
10,000
60,000
WORKING
Closing provisions
Provision re faulty goods (75% 2,000 CU1,000)
Provision for rectification costs (400,000 5 years + 100,000)
Onerous contract (18 months 1,000 per month CU7)
Restructuring (1,000,000 + 2,300,000)
168
CU
1,500,000
180,000
126,000
3,300,000
ANSWER BANK
Tutorial notes
(1) Installation of new machine
The proposed treatment of building up a replacement provision does not fall within the BAS 37
definition of a provision, as it is not a legal or constructive obligation at the balance sheet date. No
obligation to replace the lining exists independent of the company's future actions, because the
company could sell the asset before the replacement became necessary.
(2) Onerous contract
A provision for this should be recognised at the lower of the cost of fulfilling the contract and the
compensation payable for not fulfilling it. At 31 December 20X0 the contract has a further 18 months
to run, so the cost of fulfilling it is CU126,000 (18 months 1,000 per month CU7). This is the
amount of the provision to be made, as it is lower than the CU2m cost of not fulfilling the contract.
(3) Restructuring of the Chuckholder division
The Chuckholder division programme of restructuring meets the BAS 37 requirements for recognition
the announcements and implementation before the year end means the company is demonstrably
committed.
However, the only provisions which should be made are those for the direct expenditure necessarily
entailed in the reorganisation and not associated with ongoing activities. Redundancy costs and lease
terminations match this definition, but the other expenditures listed will benefit ongoing operations
and do not qualify for recognition in 20X0.
19
Islay Ltd
Marking guide
Marks
Balance sheet
Intangibles
Share capital
Revaluation reserve
Retained earnings
Intangibles note
Opening cost
Additions
Opening impairment/amortisation
Charge for year
SOCIE
Headings
Revaluation
Transfer
Profit
Brought forward balances
Total available
Maximum
1
2
11
11
169

Consolidated balance sheet as at 31 May 20X9 (extracts)
CU
Non-current assets
Intangibles
Called up share capital
Revaluation reserve
Retained earnings
976,000
5,000,000
540,000
676,000
6,216,000
Disclosure note for intangibles

Non-current assets intangibles
Cost
At 1 June 20X8
Additions
At 31 May 20X9
Impairment/amortisation
At 1 June 20X8
Charge for the year
At 31 May 20X9
Carrying amount
At 31 May 20X9
At 31 May 20X8
Goodwill
(W1)
CU
730,000
260,000
990,000
Patent
rights
CU
70,000
70,000
Total
CU
800,000
260,000
1,060,000
20,000
50,000
70,000
7,000
7,000
14,000
27,000
57,000
84,000
920,000
710,000
56,000
63,000
976,000
773,000
Consolidated statement of changes in equity attributable to equity holders of Islay Ltd

for the year ended 31 May 20X9
Ordinary
share
capital
CU
Revaluation of non-current assets
Transfer between reserves re
depreciation on revaluations
Profit for the period (W5)
for the period
Balance brought forward (W6)
Revaluation
reserve
CU
Retained
earnings
CU
Total
CU
600,000
600,000
(60,000)
540,000
60,000
60,000
118,500
600,000
118,500
5,000,000
5,000,000
540,000
540,000
178,500
497,500
676,000
718,500
5,497,500
6,216,000
Savalight
(W2)
CU
80,000
(20,000)
60,000
Green
Goods
(W3)
CU
650,000
(50,000)
600,000
Smart IT
Ltd
(W4)
CU
260,000
260,000
WORKINGS
(1) Goodwill
Goodwill
Impairment b/f
Impairment in the year
C/f
170
Total
CU
990,000
(20,000)
(50,000)
920,000
ANSWER BANK
(2) Savalight
CU
580,000
(500,000)
80,000
(20,000)
60,000
Cost
Less Net assets acquired at fair value
Goodwill
Impairment at 1 June 20X8
Carrying amount b/f and c/f
(3) Green Goods

CU
Cost
Less Net assets acquired at fair value
Existing goodwill
Goodwill carrying amount b/f
Impairment in the year
Carrying amount c/f
CU
1,800,000
1,300,000
(150,000)
(1,150,000)
650,000
(50,000)
600,000
(4) Smart IT
Cost
Less Net assets acquired at fair value (1,200,000 70%)
Goodwill carrying amount c/f
CU
1,100,000
(840,000)
260,000
(5) Revised profit for the year

Original profit for the year
Less Goodwill impairment in the year (W1)
Patent amortisation in the year (70,000 10)
CU
175,500
(50,000)
(7,000)
118,500
(6) Retained earnings b/f

Original retained profit b/f (700,000 175,500)
Less Goodwill impairment b/f (W1)
Patent amortisation b/f (70,000 10)
CU
524,500
(20,000)
(7,000)
497,500
171
20
Greenstones Ltd
Marking guide
Marks
(a)
(b)
(c)
(a)
Explanation of relevance
Explanation of reliability
Explanation of conflict
Example
Total available
Maximum
Explanation of criteria for carry forward
Evaluation against reliability
Evaluation against relevance
BAS 38 approach to conflict
Total available
Maximum
Income statement
Revenue
Balance sheet
PPE
Intangibles
SOCIE
Prior year errors
Operating profit note
R&D write-offs
Amortisation
Impairment
Presentation
Total available
Maximum
1
1
3
2
1
1
1
5
3
1
2
1
1
1
11
10
17
Relevance and reliability

Information is relevant if it influences the economic decisions of users. Information is reliable if it is
free from error or bias, complete and portrays events in a way that reflects their reality.
The potential for conflict between relevance and reliability arises because economic decisions can only
be made in relation to future events, so forward-looking information is very relevant to users of
financial statements. But much forward-looking information is of very limited reliability, because it
relates to what might happen, but might not.
A classic example of the possible conflict is how to reflect in financial statements a substantial claim for
damages lodged against an entity. Many different estimates can be made of the outcome of such a
claim; which should be recognised in the statements, and when? Relevance argues for early
recognition, reliability for recognition only when it would not present a potentially misleading picture
of the position of the entity.
(b) Evaluation of treatment of development expenditure against relevance and reliability

Under BAS 38 development expenditure should be recognised as an asset, but only where it meets a
number of stringent conditions. These relate to the technical feasibility of the project, how the
probable future economic benefits will be generated and the availability of resources to complete the
development. It must also be possible to measure the development expenditure reliably.
172
ANSWER BANK
The most reliable information would be provided if the costs are recognised in the income statement
as they are incurred (indeed this is the approach to be taken to research expenditure and to
development expenditure where the recognition criteria are not met).
However, this does not provide relevant information where benefits from the expenditure will flow
into the entity over several accounting periods. However, the reliability of this more relevant
information can be seriously compromised where there are uncertainties surrounding the future
outcome of the project.
Hence, BAS 38 adopts the relevance approach but only where the information backing up that
approach is reliable, i.e. there is sufficient certainty surrounding the viability/profitability of the project.
(c)
Extracts from the financial statements for the year ended 31 December 20X8
Income statement
CU
93,800
(257,150)
Revenue (67,000 (W1) 140%)

Cost of sales (W1)
Balance sheet
CU
Non-current assets
Intangibles (W2)
140,000
477,850

CU
At the beginning of the year
As previously reported
Prior year errors (160,000 + 470,000)
Restated
Retained
earnings
CU
X
(630,000)
X
Note to the financial statements

Operating profit is stated after charging
Research and development expenditure written off (W1)
Amortisation of development expenditure (W2)
Impairment of property, plant and equipment (W3)
CU
147,000
25,150
85,000
WORKINGS
(1) Cost of sales
Project Alpha write off (22,000 + 45,000)
Project Beta write off (15,000 + 65,000)
Project Gamma amortisation (W2)
Impairment (W3)
CU
67,000
80,000
147,000
25,150
85,000
257,150
173

(2)
Intangible assets
CU
Cost
Gamma costs from 1 April 20X7 to 31 December 20X7 correctly capitalised
(650,000 470,000)
Gamma costs in year (98,000 + 75,000)
Depreciation on specialised equipment used from 1 April 20X7 to
30 September 20X8 (18/60 CU500,000)
180,000
173,000
Accumulated amortisation (503,000 0.25 )

5
(25,150)
150,000
503,000
477,850
(3) Impairment of specialised equipment

CU
225,000
(140,000)
85,000
Carrying amount at 1 October 20X8 (500,000 27/60)

Recoverable amount
Tutorial note
Research and development costs written off or amortised in the year and the impairment of the specialised
equipment have all been charged to cost of sales. Other classifications would also be marked as correct.
21
Okehampton Ltd
Marking guide
Marks
(a)
(b)
(c)
174
Carrying amounts
Revaluation reserve
Total available
Maximum
Depreciation
Impairment losses
Total available
Maximum
Income statement amounts
Revaluation reserve
Total available
Maximum
4
5
9
9
2
2
4
2
2
4
4
17
ANSWER BANK
(a)
Balances at 31 December 20X6

George House
Carrying amount as non-current asset at 30 June 20X6 (300,000 (6,000 50%))
Fair value at 30 June 20X6
Increase in revaluation surplus
Carrying amount at 31 December 20X6 (320,000 9,000 costs to sell)
Elizabeth House
Fair value at 30 June 20X6
Decrease in revaluation surplus charged to revaluation reserve as balance re this
asset is sufficient (50,000 2,000 excess deprecation, per below)
Carrying amount at 31 December 20X6 (360,000 8,000 costs to sell)
Axford plant
Fair value less costs to sell at 30 June 20X6 (140,000 9,000)
Impairment loss to income statement
Carrying amount at 31 December 20X6
Waterman plant
Fair value less costs to sell at 30 June 20X6 (620,000 15,000)
No change to carrying amount
Carrying amount at 31 December 20X6
Revaluation reserve
Balance at 1 January 20X6
Transfer to retained earnings of excess of depreciation over that calculated on
historical cost for 6 months to 30 June 20X6:
George House (6,000 4,000) 50%
Elizabeth House (12,000 8,000) 50%
Revaluation surplus/(deficit) at 30 June 20X6:
George House (as above)
Elizabeth House (as above)
Balance at 31 December 20X6
CU
297,000
320,000
23,000
311,000
394,000
360,000
(34,000)
352,000
190,000
131,000
(59,000)
131,000
555,000
605,000
555,000
370,000
(1,000)
(2,000)
23,000
(34,000)
356,000
(b) Income statement for year ended 31 December 20X6

Depreciation ((6,000 + 12,000 + 20,000 + 90,000) 50%)
Impairment loss
(9,000 + 8,000 costs to sell re land and buildings and 59,000 re Axford)
(c)
CU
(64,000)
(76,000)
Income statement and revaluation reserve in 20X7

Income statement
Profit on sale of non-current assets held for sale
George House (350,000 311,000)
Elizabeth House (310,000 352,000)
Axford plant (120,000 131,000)
Waterman plant (635,000 555,000)
Revaluation reserve
Balance at 1 January 20X7
Transfer to retained earnings of surpluses re assets now disposed of
George House (100,000 1,000 + 23,000)
Elizabeth House (50,000 2,000 34,000)
Balance at 31 December 20X7
CU
39,000
(42,000)
(11,000)
80,000
66,000
356,000
(122,000)
(14,000)
220,000
175
22
Banchory Ltd
Marking guide
Marks
(a)
(b)
(c)
(a)
Contingent asset note

Warranties narrative note
Warranties movement note
Total available
Maximum
Contingent asset
Legal costs
Provision (2)
Provision (3)
Goodwill impairment
Profit on factory
Impairment loss on factory on classification as held for sale
Additional depreciation on machine
Total available
Maximum
Headings
Revaluation
Revaluation on classification as held for sale
Transfers
Presentation
Total available
Maximum
1
1
1
4
4
1
1
1
6
6
1
3
2
1
1
9
8
18
Notes to the financial statements

Contingent asset
The company is currently involved in litigation with one of its suppliers under product liability for a
claim of CU500,000. Legal costs, currently CU40,000, may also be reimbursed. The legal costs have
been accrued for at the year end and recognised as an expense in the income statement.
Warranties provision
The amount of CU200,000 relates to a new provision against claims made on a warranty offered by
the company on its products. It relates to claims on products sold in the last two months of the year.
It is expected that most of the expenditure will be incurred in the next financial year.
CU
Movement during year
Balance as at 1 May 20W9
Increase during the year
Balance as at 30 April 20X0 (2/6 6,000,000 10%)
176
200,000
200,000
ANSWER BANK
(b) Revised consolidated profit before tax

CU
2,665,000
(500,000)
(40,000)
(200,000)
(12,500)
(1,800,000)
(50,000)
(60,000)
300,000
100,000
402,500
Per question
Less Contingent asset (1)
Legal costs (1)
Provision (2)
Impairment of goodwill (4) (W4)
Profit on sale of factory unit (3,100,000 1,300,000) (5)
Impairment loss on asset reclassified as held for sale (5)
'Additional' depreciation on machine (6) (W1)
Add back Provision (3)
Add profit on sale of held for sale asset (3,100,000 3,000,000)
(c)
Consolidated statement of changes in equity for the year ended 30 April 20X0
Ordinary
share capital
CU

Revaluation of non-current assets
Revaluation on classification as
held for sale
(3,050,000 2,100,000)
Transfer between reserves (W2)
for the period
Issue of share capital (W3)
Share
premium
CU
Revaluation
reserve
CU
500,000
Retained
earnings
CU
Total
CU
500,000
200,000
200,000
(200,000)
(200,000)
950,000
(1,755,000)
(305,000)
1,755,000
1,755,000
402,500
950,000
1,450,000
402,500
200,000
550,000
2,000,000
2,750,000
(200,000)
412,500
450,000
662,500
(305,000)
800,000
495,000
2,157,500
3,672,000
5,829,500
1,852,500
962,500
6,922,000
9,737,000
WORKINGS
(1) Depreciation on machine
CU
300,000
(360,000)
(60,000)
Charge per draft income statement (1/6 1,800,000)

Charge needed ( 1,440,000)
Adjustment
(2) Transfer between reserves
CU
Extra depreciation re revalued asset since date of revaluation
(500,000 50 6/12)
Balance re revalued asset sold in the year (800,000 + 950,000)
5,000
1,750,000
1,755,000
(3) Share issues
B/f
Bonus issue (2,000,000 10)
Rights issue (2,200,000 4)
Ordinary
shares
CU
2,000,000
200,000
2,200,000
550,000
2,750,000
CU0.75
Share
premium
CU
450,000
(200,000)
250,000
412,500
662,500
177

(4) Goodwill impairment write down
CU
962,500
(950,000)
12,500
Cost of acquisition (550,000 + 412,500) (W3)

Less Fair value
Tutorial note
The fact that the carrying amount of property at the date of sale is based on cost means that a
measurement adjustment under BFRS 5 at the time of the decision to sell would only have been made if fair
value less costs to sell had been below the then carrying amount. With the ultimate selling price so much in
excess of cost, it was unlikely that any such adjustment would have been necessary. This is the reason why
the question did not contain any information about values at the time the decision to sell was made.
23
Banff Ltd
Marking guide
Marks
(a)
(b)
178
Balance sheet
Owned plant
Leased plant
Inventories
Provision
Current deferred income
Non-current deferred income
Income statement
Revenue
Cost of sales
Loss on termination
Finance cost
Presentation
Total available
Maximum
Income statement amount
Balance sheet amount
Total available
Maximum
4
1
1
2
1
1
3
2
1
22
21
1
1
2
2
23
ANSWER BANK
(a)
Extracts from the financial statements

Balance sheet as at 30 April 20X1
CU
Non-current assets
Plant and machinery (W1)
195,000
Plant and machinery held under finance leases (780,000 780,000 )

6
Current assets
Inventories (W4)
650,000
250,000
2,250,000
X
Non-current assets held for sale (W5)

Current liabilities
Provision for closure costs (250,000 + 100,000)
Deferred income (500,000 150%)
781,250
150,000
350,000
750,000
Deferred income (750,000 2)
553,333
1,500,000
Income statement for the year ended 30 April 20X1

CU
3,800,000
(1,750,000)
(350,000)
(23,333)
Revenue (1,750,000 (W3) + 2,050,000 (W4))

Cost of sales (W4)
Loss on termination of operations
Finance cost
(b) Six-year lease as an operating lease
Income statement: Operating lease rentals (850,000 6) = CU142,000
Balance sheet: Accrual (142,000 100,000) = CU42,000
WORKINGS
(1) Specialised plant carrying amount
CU
Materials
Labour costs
Factory staff
Less Abnormal costs (should be expensed in the year)
Factory supervision incremental costs
Professional fees
Installation costs
Less Depreciation of component re overhauls (80,000 4)
Depreciation of remainder (230,000 80,000) 10)
100,000
(20,000)
CU
100,000
80,000
15,000
22,000
13,000
230,000
(20,000)
(15,000)
195,000
179

(2) Finance lease
CU
850,000
(780,000)
70,000
Total payments (100,000 + (5 150,000))

Less Fair value of asset
Finance charge
5 (5 1)
Sum of digits allocation =
= 15 (lease is payable in advance)
2
Year
20X1
20X2
B/f
CU
780,000
703,333
Payment
CU
(100,000)
(150,000)
Capital
CU
680,000
553,333
Interest
CU
23,333 (5/15 70,000)
18,667 (4/15 70,000)
C/f
CU
703,333
572,000
Total liability at 30 April 20X1

CU703,333
Non-current liability
CU553,333
Current liability ()
CU150,000
(3) Hardware revenue

CU
4,000,000
(3,000,000)
1,000,000
Total revenue
Support service (500,000 x 150% x 4 years)
Attributable to hardware
Support services pa (500,000 x 150%)
Hardware
750,000
1,000,000
1,750,000
(4) Software revenue and costs

CU
3,000,000
(2,600,000)
400,000
Estimated profit on contract

Price
Costs estimated (200,000 + 2,000,000 + 400,000)
To date
CU
2,250,000
(1,950,000)
300,000
Revenue (75% x 3,000,000)

Costs ()
Profit (75% x 400,000)
20X0
CU
200,000
(200,000)
20X1
CU
2,050,000
(1,750,000)
300,000
CU
2,200,000
(1,950,000)
250,000
Inventories
Costs incurred to date (200,000 + 2,000,000)
Recognised in income statement
(5) Held for sale asset

Lower of:
Carrying amount at classification (1,000,000 6
Fair value less costs to sell (900,000 97%)
180
CU
1
8 )
781,250
873,000
ANSWER BANK
24
Skinner Ltd
Marking guide
Marks
(a)
(b)
(c)
Cost
Brought forward
Revaluation
Additions
Depreciation
Brought forward
Revaluation
Charge
Notes
Valuation
Leased assets
Presentation
Total available
Maximum
Current liabilities
Analysis of gross lease payments
Finance cost
Financing activities
Operating activities
Presentation
Total available
Maximum
Cost
NRV
Total available
Maximum
5
1
1
10
10
1
1
2
1
6
2
1
4
3
19
(a) Notes to the financial statements as at 30 June 20X3 (extracts)

Cost or valuation
At 1 July 20X2
Revaluation
Additions (W3)
At 30 June 20X3
Depreciation
At 1 July 20X2
Revaluation
Charge for the year (W1)
At 30 June 20X3
Carrying amount
At 30 June 20X3
At 30 June 20X2
Freehold land
and buildings
CU
Plant and
machinery
CU
Total
CU
1,620,000
740,000
2,360,000
1,278,000
849,900
2,127,900
2,898,000
740,000
849,900
4,487,900
148,800
(148,800)
20,000
20,000
2,340,000
1,471,200
539,600
210,788
750,388
1,377,512
738,400
688,400
(148,800)
230,788
770,388
3,717,512
2,209,600
181

The freehold land and buildings were valued for the purposes of the 20X3 financial statements at open
market valuation. This valuation was made by . . The historical cost of the land and
buildings was CU1,620,000 and the related depreciation is CU161,200.
Of the total carrying amount of plant and machinery of CU1,377,512, CU367,412 (419,900 52,488
(W1)) relates to assets held under finance leases.
(b) Finance lease
Balance sheet as at 30 June 20X3 (extracts)
Current liabilities
CU
46,205
CU
329,690
Notes to the financial statements as at 30 June 20X3 (extracts)

Analysis of finance leases gross basis
Gross lease payments due within
One year
Two to five years (65,000 4)
Over five years (65,000 2)
Less Finance charges allocated to future periods
((65,000 8) 419,900 20,995) or ()
CU
65,000
260,000
130,000
455,000
(79,105)
375,895
Income statement for the year ended 30 June 20X3 (extracts)

Finance cost (W2)
CU
20,995
Cash flow statement for the year ended 30 June 20X3 (extracts)
Finance costs paid
Payment of finance lease liabilities (65,000 20,995)
(c)
(44,005)
Closing inventory
Cost
Variable cost
Share of overheads (0.60 + 0.40 + 1.40)
Net realisable value
Selling price
Less Selling, marketing and distribution costs (1.20 + 0.40)
Value at lower of cost and net realisable value (4,000 CU28.40)
182
CU
(20,995)
CU
26.00
2.40
28.40
32.00
(1.60)
30.40
CU
113,600
ANSWER BANK
WORKINGS
(1) Depreciation charge
Buildings
CU
2,360,000
(1,600,000)
760,000
Valuation
Land element
Buildings
Years
50
Original useful life

Elapsed ( 148,800 50)
620,000
Remaining useful life
(12)
38
760,000
Depreciation charge =
= CU20,000 per annum
38 years
Plant and machinery
CU
1,278,000
(150,000)
1,128,000
@ 10%
Cost at 1 July 20X2

Less Revised useful life asset
Asset with revised useful life
Depreciation charge = Carrying amount = 150,000 80%
Revised useful life
5 years
Depreciation
CU
112,800
24,000
Additions 430,000 10% for 6 months

Leased asset
21,500
Depreciation charge = 419,900

8 years
52,488
210,788
(2) Leased grinding machine

PV of MLP = CU419,900
Representing
419,900
100 = 93% of the fair value of the asset
450,000
Year ended
B/f
CU
419,900
375,895
30 June 20X3
30 June 20X4
Interest @ 5%
CU
20,995
18,795
Payment
CU
(65,000)
(65,000)
Capital c/f
CU
375,895
329,690
Total
CU375,895
Capital > 1 year
CU329,690
(3) Additions
Plant and machinery purchases
Leased machine
Capital < 1 year

CU46,205 ()
CU
430,000
419,900
849,900
183
25
Rosetta Ltd
Marking guide
Marks
(a)
(b)
(a)
Cost
Brought forward
Additions
Amortisation/impairment
Brought forward
Charge
Presentation
Total available
Maximum
Revised pre-tax profit
Adjustments re depreciation
Adjustments re goodwill
Adjustments re development costs
Total available
Maximum
2
1
7
4
2
4
1
11
11
17
Notes to the financial statements for the year ended 31 December 20X2 (extracts)
Intangibles
Cost
At 1 January 20X2
Additions
At 31 December 20X2
At 1 January 20X2
Charge for year
At 31 December 20X2
Carrying amount
At 31 December 20X2
At 31 December 20X1
Development
costs
CU
Goodwill
CU
Total
CU
2,100,000
4,800,000
6,900,000
(W2)
757,500 (W3)
757,500
2,100,000
5,557,500
7,657,500
300,000
900,000
1,200,000
(W2)
10,521 (W3)
10,521
300,000
910,521
1,210,521
5,700,000
1,800,000
746,979
6,446,979
1,800,000
(b) Revised pre-tax profit

Per draft financial statements
Depreciation adjustments (1) (150,000 + 44,444) (W1)
Acquisition (2)(i)
Goodwill amortisation added back (6,000,000 20 years)
Provision for reorganisation added back to goodwill
Capitalised development costs (2)(ii)
Amortisation added back (2,880,000 1/72)
Employment costs (1,800,000 60%)
Staff training costs
Depreciation of computer equipment not capitalised (W3)
Revaluation gain reversed
Correct amortisation of development costs (W3)
Goodwill impairments in year (W2)
184
CU
17,000,000
(194,444)
300,000
(1,200,000)
40,000
(1,080,000)
(480,000)
(100,000)
(3,160,000)
(10,521)
(900,000)
10,215,035
ANSWER BANK

CU
35,000,000
1,400,000
36,400,000
As incorrectly restated
Add back Depreciation adjustment (600,000 + 800,000) (W1)
WORKINGS
(1) Depreciation charges
Carrying amount at 1 January 20X2
Cost
Acc depn
15% 12,000,000
Equipment
CU
12,000,000
Property
CU
40,000,000
(1,800,000)
40,000,000 2 years
25
(3,200,000)
Depreciation charge for year ( 4 / 18)

Treatment per draft accounts
10,200,000
36,800,000
2,550,000
2,044,444
Dr
CU
Cr
CU
Equipment
Statement of changes in equity ( 12,000,000 1,800,000)
5
12,000,000
Income statement (
)
5
Acc depn
Property
(( 40,000,000 2 years) 3,200,000)
20
Income statement ( 40,000,000 )
20
Acc depn
600,000
2,400,000
3,000,000
800,000
2,000,000
2,800,000
Additional charge needed 150,000 + 44,444
(2) Goodwill arising in year and impairments of goodwill

As calculated
Less Reorganisation provision
Recoverable amount
Impairment
Impairment re b/f goodwill
Total impairments in year
CU
6,000,000
(1,200,000)
4,800,000
(4,100,000)
700,000
200,000
900,000
185
(3) Development costs

CU
Employment costs after 31 August 20X2
(40% 1,800,000)
Amortisation of IT hardware * from 31 August 20X2
to 30 November 20X2 (600,000 3/48)
720,000
37,500
757,500
10,521
Amortisation in year ( 1/72)

* should have been capitalised within PPE. Additional depreciation not capitalised
as intangible = 600,000 8/48 (Feb to Aug plus December)
100,000
Tutorial note
In the draft financial statements the excess reorganisation provision of CU400,000 has been correctly
released to the income statement but the original provision set up of CU1.2 million was not charged. Once
the adjustment of CU1.2 million has been actioned (Dr Income statement, Cr Goodwill) the income
statement will have borne the true post-acquisition cost of CU0.8 million.
26
Arran Ltd
Marking guide
Marks
(a)
(b)
(c)
186
Cost of sales
Profit on disposal
Tax charge
Total available
Maximum
PPE calculation
Operating profit note
Events after the balance sheet date note
Total available
Maximum
Cost of sales
Profit on disposal
Tax charge
Total available
Maximum
2
4
3
2
12
12
1
1
3
3
2
2
2
1
7
6
21
ANSWER BANK
(a)
Calculation of amounts for the consolidated income statement for the year ended 31 May
20X1
(i)
Cost of sales
CU
7,400,000
Arran Ltd
Jura Ltd
Per question
Impairment of PPE (500,000 390,000)
Islay Ltd (2,700,000 8/12)
(ii)
Profit on disposal of Islay Ltd

Sales proceeds
Less Share of net assets at disposal
Net assets at 1 June 20X0
Profit to 31 January 20X1 (8/12 570,000)
4,500,000
110,000
1,800,000
13,810,000
CU
1,700,000
380,000
2,080,000
CU
2,500,000
80%
Less Carrying amount of goodwill at disposal (W3)
(1,664,000)
(384,000)
452,000
(iii) Share of profits of associates

Share of profit after tax ((1,960,000 6/12) (100,000 - 70,000) 30%)
Less Share of PURP (60,000 (W2) 30%)
CU
285,000
(18,000)
267,000
(iv) Tax charge

CU
450,000
400,000
160,000
1,010,000
Arran Ltd
Jura Ltd
Islay Ltd (240 8/12)
(b) Calculation of property, plant and equipment for the consolidated balance sheet as at
31 May 20X1
Arran Ltd
Jura Ltd (3,400,000 110,000 (a))
CU
5,500,000
3,290,000
8,790,000
Notes to the financial statements for the year ended 31 May 20X1 (extracts)
(1) Operating profit is stated after charging
Impairment of property, plant and equipment
CU
110,000
(2) Events after the balance sheet date

On 1 July 20X1 there was a serious fire at one of the companys processing units. This fire
destroyed plant included in the consolidated balance sheet at a carrying amount of CU1 million.
Only 50% of this amount is expected to be recoverable from the companys insurers and hence a
loss of CU500,000 is anticipated in the current year.
187

(c)
Rationale for treatment

Cost of sales
This should reflect the cost of goods sold outside the group, comprising parent and entities controlled
by the parent, i.e. its subsidiaries.
Applying the single entity concept, the only amounts to be included are those for the period during
which the parent controls the subsidiaries.
Associates are not controlled by the investor (the investor only has significant influence over the
investee), so nothing is included for them in cost of sales and no adjustment is required.
Profit on disposal of Islay Ltd
This should be based on the groups investment in Islay Ltd, not only the parent companys investment.
This is a better reflection of profit/loss on disposal achieved by management, as it is based on original
cost plus post acquisition profits.
Any unimpaired goodwill arising on acquisition should be derecognised, as this part of the cost of
acquiring the investment can no longer be carried as an asset.
Share of profits of associates (Millport Ltd)
The level of investment in Millport Ltd is one of 'significant influence', so mere inclusion of dividend
income would not reflect profit to the group shareholders and the return achieved by management.
Equity accounting has been used: this shows the group share of after-tax profits from the associate
(irrespective of whether or not a dividend is declared) for the post-acquisition period.
As Arran Ltd holds inventory on which Millport Ltd made a profit, its share of the unrealised amount
must be excluded from its share of Millport Ltd's profit for the year.
Tax charge
This should be based on the whole groups individual company charges.
It only includes tax on subsidiaries held up to the date of disposal or from acquisition to balance sheet
date as appropriate as profits earned up to these dates are included.
WORKINGS
(1) Group structure
Arran Ltd
75%
80%
30%
Jura Ltd
(2) PURP
SP
Cost
GP
188
Islay Ltd
Disposed of
31 Jan 20X1
Millport Ltd
8/12 incl
Acquired
1 Dec 20X0
6/12 incl
%
1331/3
(100)
331/3
CU
240,000
(180,000)
60,000
( 480)
ANSWER BANK
(3) Goodwill in respect of Islay Ltd

CU
1,600,000
(1,120,000)
480,000
(96,000)
384,000
Cost of investment
Less Share of net assets acquired (80% 1,400)
Goodwill
Impairment prior to start of year
Goodwill at disposal date
27
Elie Ltd
Marking guide
Marks
(a)
(b)
(a)
Cost of investment
Fair value of net assets acquired
Impairment
Total available
Maximum
Presentation
Impairment recognised against revaluation reserve
Transfer of excess depreciation
Share issues
Total available
4
2
6
6
1
3
1
2
1
10
16
Goodwill calculation
CU
Cost of investment
Shares (200,000 CU17)
Professional fees
Contingent share element (24,000 CU17)
Deferred cash consideration
Less

Carrying amount
Unrecognised asset the legal claim
Fair value adjustments
Goodwill
Less Goodwill impaired to date
Goodwill for the consolidated balance sheet
CU
3,400,000
90,000
408,000
92,000
3,990,000
3,000,000
200,000
1,000,000
4,200,000
80%
(3,360,000)
630,000
(70,000)
560,000
189
(b)
Statement of changes in equity for the year ended 30 June 20X2 (extract)
Ordinary
share
capital
CU
Impairment of
non-current asset
previously revalued (W3)
Transfer between
reserves (45,000
2,000 (W2))
Total recognised income
and expense for the period
Issue of share capital (W1)
Attributable to the Equity Holders of Elie Ltd

Preference
share capital
Share
Revaluation
(irredeemable)
premium
reserve
CU
CU
CU
(38,000)
(43,000)
200,000
200,000
1,000,000
1,200,000
200,000
200,000
200,000
3,240,000
3,240,000
500,000
3,740,000
(81,000)
(81,000)
250,000
169,000
WORKINGS
(1) Share issues
B/f
Acquisition of Monans Ltd
Ordinary
shares
CU
1,000,000
200,000
Irredeemable preference shares

1,200,000
Irredeemable
preference shares
CU
200,000
200,000
(2) Revaluation surplus on impaired asset

Cost on 1 July 20W8
Depreciation to 30 June 20X0 @ 10% 2
Revalued on 1 July 20X0
Surplus
Transfer to retained earnings y/e 30 June 20X1
Depreciation based on revalued amount (10% 120,000)
Depreciation based on cost (10% 100,000)
In revaluation reserve on 1 July 20X1
(3) Impairment of asset
Revalued amount on 1 July 20X0
Depreciation to 30 June 20X1 @ 10%
Recoverable amount at 30 June 20X2
Charge to revaluation reserve (W2)
Charge to income statement
190
Share
premium
CU
(
CU16)
( 20p)
CU
3,200,000
40,000
3,240,000
CU
100,000
(20,000)
80,000
120,000
40,000
12,000
(10,000)
(2,000)
38,000
CU
120,000
(12,000)
108,000
(50,000)
(38,000)
20,000
ANSWER BANK
28
Wester Ross Ltd

Marking guide
Marks
(a)
(b)
(c)
(a)
Goodwill
Retained earnings
Total available
Maximum
Cash flow extracts
Acquisition
Dividends from associates
Dividends paid
Note
Narrative
Minority interest
Current liabilities
All other amounts (not totals or sub-totals)
Total available
Maximum
Purpose
Key concepts
Discussion of single entity concept
Discussion of substance over form
Total available
Maximum
4
2
5
11
11
1
1
1
1
1
1
3
9
9
2
1
1
1
5
5
25
Calculation of balance sheet amounts at 31 October 20X0

(i)
Goodwill arising on Ullapool Ltd

Cost of acquisition ((2,000 CU7) + 7,000)
Less Fair value of net assets acquired
Revaluation reserve
General reserve
Retained earnings
To inventory (42 30)
Re contingent liability
75%
CU'000
21,000
12,000
1,500
3,500
2,000
12
(98)
18,914
(14,185)
6,815
Goodwill
Less Impairment to date
Goodwill for consolidated balance sheet
(ii)
CU'000
(810)
6,005
Cost
Share of post acquisition change in net assets (30% (1,900 900))
CU'000
2,000
300
2,300
(276)
2,024
191

(iii) Retained earnings
Wester Ross Ltd
Less Provision for uncollectible trade receivables
Ullapool Ltd (363,000 (W1) 75%)
Glenelg Ltd (ii)
Less Goodwill impairment to date (276 + 810)
CU'000
3,000
(400)
2,600
272
300
(1,086)
2,086
(b) Consolidated cash flow statement for the year ended 31 October 20X0 (extracts)
Acquisition of Ullapool Ltd net of cash acquired (Note 1)
Dividends received from associate (W3)
CU'000
(6,700)
90

Dividends paid (W3)
(4,000)
Notes to the cash flow statement

(1) Acquisition of subsidiary
During the period the group acquired 75% of the ordinary share capital of Ullapool Ltd. The fair
value of assets acquired and liabilities assumed were as follows.
Goodwill ((a) (i))

Inventories (2,000 + 12 ((a) (i)))
Cash
Current liabilities (1,000 + 98)
Minority interest (18,914 (a) (i) 25%)
Total purchase price
Less Non cash consideration
Cash consideration
Less Cash acquired
Cash flow on acquisition
(c)
CU'000
6,815
17,000
2,012
1,500
300
(800)
(1,098)
(4,729)
21,000
(14,000)
7,000
(300)
6,700
Group accounts
Purpose
The purpose of group financial statements is to provide comprehensive information to investors on a
company which uses resources to invest in other companies.
Group financial statements give information to users on the abilities of management to produce an
acceptable return on the capital employed.
Specific rules on consolidations contained in BAS 27 Consolidated and Separate Financial Statements
result in only the profits of subsidiaries earned in the post acquisition period being reported in the
consolidated income statement.
Managers are therefore held accountable for their performance after acquisition and not on the profits
'bought in'.
192
ANSWER BANK
Concepts underlying their preparation

The two key concepts underlying the preparation of group financial statements are
The single entity concept, and
The principle of substance over form.
In order that users are better informed, the group financial statements are presented for the group as
a single economic unit.
Therefore all the resources at the groups disposal and the return on those resources can be seen in
one set of financial statements.
Without this users would be presented with various sets of individual company financial statements
based on the legal form that each company is a separate legal entity.
The preparation of group financial statements under the single entity concept underlines the
application of 'substance over form', which is a fundamental principle in the preparation of financial
statements.
This ignores the fact that the group is not a legal unit.
The 'single entity' concept means that all effects of intra-group trading are eliminated, so that only the
results of trading with entities outside the group are shown; this provides a more meaningful basis for
assessing managements performance.
WORKINGS
(1) Post-acquisition retained earnings of Ullapool Ltd
CU'000
2,600
(12)
(225)
(2,000)
363
Per individual company balance sheet

Less Reduction in profit re inventories
NCA PURP (W2)
Pre-acquisition profits
(2) PURP in non-current asset transfer

CU'000
Carrying amount at 30 April 20X0
Cost
Less Accumulated depreciation (5 years 10%)
Carrying amount
Disposal proceeds
Unrealised profit
Less Effect of excess depreciation
Normal depreciation (CU1m 10)
New depreciation (CU750 5 years remaining)
For half a year
Net effect adjust against retained earnings of seller (Ullapool Ltd)
CU'000
1,000
(500)
500
750
250
100
150
(50)
(25)
225
(3) Dividends
Wester Ross Ltd paid ordinary (10p 40,000,000)
Glenelg Ltd paid to Wester Ross Ltd ordinary (20p 1,500,000 30%)
CU'000
4,000
90
193
29
Shadowlands Ltd
Marking guide
Marks
(a)
(b)
(c)
(a)
Profit before tax

Depreciation charge
Profit on disposal of associate
All other adjustments (1 mark each)
Total available
Maximum
Total finance charge calculation
Sum of digits calculation
Lease payments table
Disclosure
Total available
Maximum
Individual accounts
Group accounts
Proceeds
Share of net assets
Goodwill
Total available
Maximum
3
7
1
1
1
4
1
2
5
5
15
Note reconciling profit before tax to cash generated from operations

CU
3,680,000
60,000
(200,000)
356,000
(351,440)
110,100
(22,700)
(3,800)
3,628,160
Profit before tax (4,400,000 + 40,000 10,000 (b) 750,000)

Finance cost (50,000 + 10,000 (b))
Investment income (950,000 750,000)
Depreciation charge
Profit on disposal of associate (c)
Decrease in trade and other payables (182,300 178,500)
(b) Finance lease

CU
10,000
120,000
(105,000)
25,000
Deposit
Instalments (4 CU30,000)
Fair value of asset
Finance charge
SOD =
n (n 1)
45
=
= 10
2
2
Year ended
31 December 20X7
31 December 20X8
194
B/f
CU
105,000
75,000
Interest
CU
4
10,000 ( /10 25,000)
3
7,500 ( /10 25,000)
Payment
CU
(40,000)
(30,000)
C/f
CU
75,000
52,500
ANSWER BANK
(c)
Disclosed as
Current liabilities
Finance lease liability (75,000 52,500)
CU
22,500
Finance lease liability
52,500
Disposal of Bacardi Ltd

In the individual accounts of Shadowlands Ltd
CU
Cost
Less Impairments to date of sale
Carrying amount at disposal
Proceeds
Profit on disposal
In the group accounts
300,000
(20,000)
280,000
750,000
470,000
CU
Proceeds
Less Share of net assets to date of sale
Share capital
Retained earnings (650,300 ( 110,200))
CU
750,000
500,000
595,200
1,095,200
30%
Less Goodwill not yet impaired

Original cost
Less Share of net assets acquired
(30% (500,000 + 200,000))
Less Impaired to date
300,000
(210,000)
90,000
(20,000)
(70,000)
351,440
Profit on disposal
30
(328,560)
Scribo Ltd
Marking guide
Marks
(a)
(b)
Magazine subscriptions
Magazines sold via newsagents
Book sales
Total available
Maximum
Cost
Brought forward
Additions
Brought forward
Charge for year
Presentation
Total available
Maximum
2
1
3
3
1
1
4
4
7
195

(a)
Calculation of revenue
CU
96,607
757,900
3,450,800
4,305,307
Magazine subscriptions (W1)

Magazines sold via newsagents (W2)
Book sales
(b) Intangible assets movements note
Goodwill
Cost
At 1 July 20X5
Additions
At 30 June 20X6
Accumulated
amortisation/impairment
At 1 July 20X5
Charge for year
(120,000 5)
At 30 June 20X6
Carrying amount
At 30 June 20X6
At 1 July 20X5
Publishing
titles
CU
Technical
know-how
CU
Customer
lists
CU
450,000
100,000
550,000
120,000
45,000
165,000
300,000
300,000
30,000
30,000
870,000
175,000
1,045,000
120,000
12,000
90,000
222,000
50,000
170,000
24,000
36,000
30,000
120,000
104,000
326,000
380,000
330,000
129,000
108,000
180,000
210,000
30,000
719,000
648,000
CU
Total
CU
WORKINGS
(1) Magazine subscriptions revenue
Pre March (50% CU356,700 4/12)
March (25% CU356,700 3/12)
April (25% CU356,700 2/12)
CU
59,450
22,294
14,863
96,607
(2) Magazines on sale or return revenue

Total
Less June returns (10,500 CU3)
196
CU
789,400
(31,500)
757,900
ANSWER BANK
31
Hemmingway Ltd
Marking guide
Marks
(a)
(b)
CBS
PPE
Intangibles/goodwill
Investment
Inventories
Share capital
Revaluation reserve
Retained earnings
Minority interest
Borrowings
Other workings
Group structure (W1)
Net assets (W2)
PPE PURP (W8)
Presentation
Total available
Maximum
Carried at cost plus share of post-acquisition profits
Increase consolidated earnings by share of post-acquisition profits
less impairments
Equity method used where significant influence
Do not add assets and liabilities to those of parent as no control
No minority interest
Total available
Maximum
1
1
1
1
2
2
1
15
1
15
3
3
18
197

(a)
Consolidated balance sheet at 30 June 20X4

CU'000
ASSETS
Non-current assets
(6,720 + 820 + (200 80 (W2)) 12 (W8))
Intangibles (W3)
Investments
CU'000
7,648
814
1,200
9,662
Current assets
Inventories (360 + 170 5 (W5) + 25 (W7))
Trade and other receivables (370 + 230)
Cash and cash equivalents (15 + 10)
550
600
25
Total assets
Attributable to equity holders of Hemmingway Ltd
Minority interest (W4)
Equity
Borrowings (3,200 + 50)
Current liabilities
Trade and other payables (670 + 270)
1,175
10,837
5,000
209
1,193
6,402
245
6,647
3,250
940
10,837
WORKINGS
(1) Group structure
Hemmingway Ltd
75%
Steinbeck Ltd
(2) Net assets
Steinbeck Ltd
Revaluation reserve
Share capital
Retained earnings
Fair value adjustment
Depn thereon (40% 200)
198
At balance
sheet date
CU'000
40
Acquisition
CU'000
28
Post acq
CU'000
12
600
220
200
(80)
940
600
140
200
940
80
(80)
980
968
12
ANSWER BANK
(3) Intangibles goodwill

Cost of investment
Less Share of net assets acquired (75% 968 (W2))
CU'000
1,540
(726)
814
(4) Minority interest

CU'000
245
25% 980 (W2)

Hemmingway Ltd
Inventory PURP (25 25/125)
PPE PURP (W8)
CU'000
1,210
(5)
(12)
1,193
(6) Revaluation reserve

Hemmingway Ltd
Steinbeck Ltd (75% 12 (W2))
CU'000
200
9
209
(7) Inter-company balances

Hemmingway Ltd receivable
Inventory in transit
Steinbeck Ltd payable
CU'000
75
(25)
50
(8) PPE PURP

Carrying amount after transfer (96 (96 25%))
Carrying amount without transfer (100 (100 20% 2))
CU'000
72
(60)
12
(b) Innes Ltd as an associate

If Innes Ltd became an associate of Hemmingway Ltd, then the investment would be carried in the
consolidated balance sheet at its equity method valuation which would be
Cost of the investment, plus

Share of post acquisition change in Innes Ltd's net assets.
Hemmingway Ltd's consolidated retained earnings would be increased by Hemmingway Ltd's share of
the post acquisition profits retained by Innes Ltd, less any impairment to the investment.
This equity method of accounting is used where a parent company has significant influence over an
associate.
The individual assets and liabilities are not added to those of the parent company as there is no
control over them.
There is no 'minority interest' as only the parent company's share of the net assets is included in the
consolidated balance sheet, unlike a subsidiary where 100% of the assets and liabilities are included
even though the ownership may be less than 100%.
199
32
Highland Ltd
Marking guide
Marks
(a)
(b)
(a)
CBS
PPE
Intangibles/goodwill
Inventories
Trade receivables
Share capital
Share premium
Retained earnings
Minority interest
Borrowings
Trade payables
Dividends payable
Other workings
Net assets (W2)
Presentation
Total available
Maximum
Purpose
Comprehensive information
Ability of management to produce acceptable return
Only post-acquisition profits allowed
Therefore managers assessed on only post-acquisition performance
Concepts
Single entity and explanation of how accounts would differ without this
Explanation of calculation of intra-group items
Substance over form and explanation
Total available
Maximum
6
1
18
18
2
1
1
7
6
24

ASSETS
Non-current assets
Property, plant and equipment (3,560 + 2,800 + 200 6 (W2))
Intangibles (W3)
Current assets
Inventories (1,150 + 550 80 (W6) + (100 70 (W2)))
Trade receivables (1,500 + 800)
Total assets
200
1
1
1
CU'000
CU'000
6,554
602
7,156
1,650
2,300
150
4,100
11,256
ANSWER BANK

Attributable to equity holders of Highland Ltd
Equity
Borrowings (1,100 + 110)
Current liabilities
Trade payables (700 + 240)
Dividends payable (W7)
CU'000
CU'000
3,500
700
3,838
8,038
898
8,936
1,210
940
170
1,110
11,256
(b) Group accounts

Purpose
The purpose of group financial statements is to provide comprehensive information to investors on a
company which uses resources to invest in other companies.
Group financial statements give information to users on the abilities of management to produce an
acceptable return on the capital employed.
Specific rules on consolidations contained in BAS 27 Consolidated and Separate Financial Statements
result in only the profits of subsidiaries earned in the post acquisition period being reported in the
consolidated income statement.
Managers are therefore held accountable for their performance after acquisition and not on the profits
'bought in'.
Concepts underlying their preparation
The two key concepts underlying the preparation of group financial statements are
The single entity concept, and

The principle of substance over form.
In order that users are better informed, the group financial statements are presented for the group as
a single economic unit.
Therefore all the resources at the group's disposal and the return on those resources can be seen in
one set of financial statements.
Without this users would be presented with various sets of individual company financial statements
based on the legal form that each company is a separate legal entity.
The preparation of group financial statements under the single entity concept underlines the
application of 'substance over form', which is a fundamental principle in the preparation of financial
statements.
This ignores the fact that the group is not a legal unit.
The 'single entity' concept means that all effects of intra-group trading are eliminated, so that only the
results of trading with entities outside the group are shown; this provides a more meaningful basis for
assessing management's performance.
201

WORKINGS
(1) Group structure
Highland Ltd
75%
Lowland Ltd
(2)
Net assets of Lowland Ltd
Share capital
Share premium
Fair value adjustment on property
Fair value adjustment on inventory
(400 300)
Retained earnings
Less Additional depreciation on
property (200 4% 9/12)
Inventory disposed of (70% 100)
Balance
sheet date
CU'000
CU'000
900
170
200
2,300
100
2,224
3,594
100
1,720
3,090
504
504
Goodwill on acquisition of Lowland Ltd

CU'000
2,940
(2,318)
622
(20)
602
Cost of investment
Less Share of net assets acquired (75% 3,090 (W2))
Impairment to date
Balance c/f
(4)
Minority interest
CU'000
898
Share of net assets (3,594 (W2) 25%)

(5)
Retained earnings
CU'000
3,500
60
378
(80)
(20)
3,838
Highland Ltd
Add Dividend from Lowland Ltd (80 75%)
Lowland Ltd (504 (W2) 75%)
Less PURP (W6)
Goodwill impairment to date
(6)
PURP
SP (800 )
Cost
GP
202
Post acq
CU'000
(6)
(70)
(1,500 + 220 (W8))
(3)
Acquisition
CU'000
900
170
200
%
125
(100)
25
CU'000
400
(320)
80
ANSWER BANK
(7) Dividends
Highland Ltd
Lowland Ltd minority interest (80 25%)
CU'000
150
20
170
(8) Pre/post acquisition profits

Retained profit for the year (2,300 1,500)
Add back Dividend
Total profits for the year
Pre-acquisition (3/12 880)
Post-acquisition ((9/12 880) 80)
33
CU'000
800
80
880
220
580
800
Ullapool Ltd
Marking guide
Marks
CBS
PPE
Inventories
Trade receivables
Share capital
Share premium
Retained earnings
Minority interest
Trade payables
Other workings
Net assets (W2)
Presentation
Total available
Maximum
1
1
1
1
1
3
1
15
14
203

Consolidated balance sheet as at 31 October 20X7
CU'000
ASSETS
Non-current assets
Property, plant and equipment (6,500 + 2,900 + 290)
Investments in associates (W7)
CU'000
9,690
649
10,339
Current assets
Inventories (900 + 830 17 (W6))
Trade receivables (430 + 350 20)
Cash and cash equivalents (330 + 120 + 20)
1,713
760
470
2,943
13,282
Total assets
Share premium
Attributable to the equity holders of Ullapool Ltd
Equity
Current liabilities
Trade payables (2,800 + 650)
4,750
1,250
2,685
8,685
1,147
9,832
3,450
13,282
WORKINGS
(1) Group structure
Ullapool Ltd
70%
Kyle Ltd
30%
Portree Ltd
(2) Net assets

Kyle Ltd
Share capital
Retained earnings
Per question
PURP (W6)
FV adj inventory
FV adj land
Portree Ltd
Share capital
Retained earnings
204
Balance sheet date

CU'000
CU'000
1,700
Acquisition
CU'000
CU'000
1,700
1,850
(17)
Post acq
CU'000
1,250
32
1,833
290
3,823
1,282
290
3,272
Balance
sheet date
CU'000
800
1,200
2,000
Acquisition
CU'000
800
1,000
1,800
551
Post
acq
CU'000
200
ANSWER BANK
(3) Goodwill Kyle Ltd

CU'000
2,250
(2,290)
(40)
Cost of investment as recorded (2,840 590)

Discount on acquisition

CU'000
1,147
Kyle Ltd (30% 3,823 (W2))

CU'000
2,200
386
60
(1)
40
2,685
Ullapool Ltd
Kyle Ltd (70% 551 (W2))
Portree Ltd (30% 200 (W2))
Add Discount on acquisition (W3)
(6) PURP
%
150
(100)
50
SP
Cost
GP
CU'000
51
(34)
17
(7) Investments in associates

Cost
Share of post acquisition change in net assets (30% 200 (W2))
CU'000
590
60
650
(1)
649
Tutorial note
In accordance with BFRS 3 the staff costs re acquisition should be included in cost of investment only if
directly attributable to the acquisition. As the staff would have been paid irrespective of whether the
acquisition was made, the cost is recognised in profit or loss.
205
34
Law Ltd
Marking guide
Marks
CBS
PPE
Intangibles
Inventories
Preference
Retained earnings
Minority interest
Dividends payable
Other workings
Net assets (W2)
Presentation
Total available
Maximum
2
2
1
1
3
1
18
17
Consolidated balance sheet as at 31 August 20X1

CU'000
ASSETS
Non-current assets
Property, plant and equipment (7,500 + 6,000 80 (W6))
Intangibles (100 + 50 + 463 (W3))
Current assets
Inventories (1,000 + 500)
Trade and other receivables (1,100 + 450 + 20 (W5))
13,420
613
1,248
15,281
1,500
1,570
250
Total assets
Preference share capital
Attributable to the equity holders of Law Ltd
Equity
Current liabilities
Trade and other payables (700 + 720)
Dividends payable (700 + 180 126 (W5))
206
CU'000
3,320
18,601
10,000
2,000
2,606
14,606
1,821
16,427
1,420
754
2,174
18,601
ANSWER BANK
WORKINGS
(1) Group structure
Law Ltd
40%
70%
Newtyle Ltd
Balgay Ltd
(2) Net assets

Balgay Ltd
Share capital
Revaluation reserve
Per question
FV adjs
Goodwill
NCA PURP (W6)
Balance sheet date

CU'000
CU'000
6,000
500
Acquisition
CU'000
CU'000
6,000
500
(280)
600
(70)
(80)
(70)
Newtyle Ltd
Share capital
Retained earnings
(430)
6,070
1,000
1,820
2,820
(3) Goodwill
Balgay Ltd
Cost of investment
Less Share of net assets acquired (70% 7,030) (W2))
Balance c/f
(4) Minority interest Balgay Ltd
Share of net assets (30% 6,070 (W2))
Law Ltd
Dividends receivable
Balgay Ltd (180 70%)
Newtyle Ltd (50 40%)
Balgay Ltd (70% 960 (W2))
Newtyle Ltd (40% 920 (W2))
Less Goodwill impairment to date (116 + 120)
Post acq
CU'000
530
7,030
(960)
1,000
900
1,900
920
CU'000
5,500
(4,921)
579
(116)
463
CU'000
1,821
CU'000
3,000
126
20
(672)
368
(236)
2,606
207
(6) NCA PURP

Carrying amount after transfer (400 4/5)
Carrying amount as if transfer never occurred (300 600 )
10
(7) Investments in associates

Cost
Share of post acquisition change in net assets (40% 920 (W2))
35
CU'000
320
(240)
80
CU'000
1,000
368
1,368
(120)
1,248
Heeley Ltd
Marking guide
Marks
CBS
PPE
Intangibles
Investment in associates
Inventories
Share capital
Retained earnings
Minority interest
Borrowings
Taxation
Other workings
Net assets (W2)
Presentation
Total available
Maximum
208
1
1
2
1
3
1
17
16
ANSWER BANK

CU'000
ASSETS
Non-current assets
Property, plant and equipment (5,200 + 4,000 + 1,000)
Intangibles (W3)
CU'000
10,200
1,200
10,480
21,880
Current assets
Inventories (2,300 + 1,600 150 (W6))
Trade and other receivables (4,800 + 2,400)
Cash and cash equivalents (1,100 + 300 + 200 (W7))
3,750
7,200
1,600
12,550
34,430
Total assets
Attributable to the equity holders of Heeley Ltd
Equity
Borrowings
Current liabilities
Trade and other payables (3,700 + 1,500)
Taxation (2,300 + 500)
20,000
2,430
22,430
2,000
24,430
2,000
5,200
2,800
8,000
34,430
WORKINGS
(1) Group structure
Heeley Ltd
60%
Sothall Ltd
40%
Aughton Ltd
209

(2) Net assets
Balance
sheet date
CU'000
5,000
(1,000)
1,000
5,000
Sothall Ltd
Share capital
Retained earnings
FV adj land
Aughton Ltd
Share capital
Retained earnings
Uninvoiced sales
Balance sheet date

CU'000
CU'000
6,000
5,000
200
5,200
11,200
Acquisition
CU'000
5,000
4,000
1,000
10,000
At acquisition
CU'000
CU'000
6,000
500*
500
6,500
Post
acq
CU'000
(5,000)
Post acq
CU'000
4,700
* The retained earnings of Aughton Ltd at the date of acquisition are the unadjusted retained earnings
at the year end less nine months' profit for the year on a pro rata basis (5,000 (9/12 x 6,000)).
(3) Goodwill
Sothall Ltd
Cost of investment (3,000 CU3)
CU'000
9,000
(6,000)
3,000
(1,800)
1,200
Impairment to date (300 + 800 + 700)

Balance c/f
(4) Minority interest Sothall Ltd

CU'000
2,000

CU'000
6,500
(150)
500
6,850
(3,000)
1,880
(3,300)
2,430
Heeley Ltd
Less PURP (W6)
Add Professional fees (W8)
Sothall Ltd (60% 5,000 loss (W2))
Aughton Ltd (40% 4,700 (W2))
Less Goodwill impairment to date (1,800 (W3) + 1,500)
(6) PURP
SP (1,000 )
Cost
GP
210
%
100
(80)
20
CU'000
750
(600)
150
ANSWER BANK
(7)
Cash in transit
The cash in transit needs recording in the consolidated financial statements, and the inter-company
balances need eliminating.
Dr Amount due to Heeley Ltd
Dr Cash
Cr Amount due from Sothall Ltd
CU'000
300
200
CU'000
500
(8) Professional fees

CU'000
500
Dr Investment in Aughton Ltd

Cr Retained earnings
CU'000
500
(9) Investments in associates Aughton Ltd

CU'000
9,600
500
10,100
1,880
11,980
(1,500)
10,480
Cost (2,400 CU4)

Professional fees (W8)
Share of post acquisition change in net assets (40% 4,700 (W2))
36
Harris Ltd
Marking guide
Marks
(a)
(b)
CBS
PPE
Intangibles
Investment in associates
Inventories
Trade receivables
Share capital
Retained earnings
Minority interest
Debentures
Trade payables
Dividends payable
Other workings
Net assets (W2)
Presentation
Total available
Maximum
Significant influence presumed at 20%, so 15% not usually associated
Only if exercised significant influence
Via mark each
Majority/substantial holding of remaining 85% would not preclude
significant influence
Total available
Maximum
1
1
2
1
2
1
16
1
15
(max 2)
4
4
19
211

(a)
Consolidated balance sheet at 31 December 20X5

ASSETS
Non-current assets
Property, plant and equipment (20,200 + 15,100 + 1,000)
Intangibles (W3)
CU'000
36,300
6,775
4,125
47,200
Current assets
Inventories (3,500 + 2,700 120 (W6))
Trade receivables (2,300 + 1,600)
Other receivables (W5)
6,080
3,900
200
500
57,880

Attributable to the equity holders of Harris Ltd
Equity
Debentures (6,000 + 1,000)
Current liabilities
Trade payables (3,200 + 1,200)
Dividends payable (25% 200)
35,000
6,885
41,885
4,545
46,430
7,000
4,400
50
57,880
(b) Associate at shareholding of 15%

Significant influence is presumed to exist if Harris Ltd holds 20% or more of the shares in Auskerry
Ltd, so a 15% holding would not normally give rise to an associated company.
However, Auskerry Ltd would be an associate of Harris Ltd if Harris Ltd exercised significant influence
over Auskerry Ltd. In spite of only a 15% holding, significant influence could exist if Harris Ltd
Has representation on Auskerry Ltd's board of directors
Participates in Auskerry Ltd's policy-making decisions
Has material transactions with Auskerry Ltd
Interchanges managerial personnel with Auskerry Ltd
Provides essential technical information
A majority or substantial ownership of the remaining 85% shares in Auskerry Ltd would not
necessarily preclude Auskerry Ltd from being an associate.
WORKINGS
(1) Group structure
Harris Ltd
75%
Scalpay Ltd
212
30%
Auskerry Ltd
ANSWER BANK
(2) Net assets Scalpay Ltd
Share capital
Retained earnings
PURP (W6)
Fair value adj re land
Fair value adj contingent liability
Balance sheet
date
CU'000
15,000
2,300
(120)
1,000
18,180
Acquisition
Post acq
CU'000
15,000
1,800
1,000
(300)
17,500
CU'000
500
(120)
300
680
(3) Goodwill Scalpay Ltd

CU'000
20,000
(13,125)
6,875
(100)
6,775
Cost of investment
(4) Minority interest Scalpay Ltd

CU'000
4,545

CU'000
6,000
150
80
200
6,430
510
45
(100)
6,885
Harris Ltd
Add Dividends receivable from Scalpay Ltd (75% 200)
Professional fees
Contingent asset
Scalpay Ltd (75% 680 (W2))
Auskerry Ltd (30% 150 (W7))
Less Goodwill impairment to date
(6) PURP
%
125
(100)
25
SP (800 )
Cost
GP
CU'000
600
(480)
120
(7) Investments in associates Auskerry Ltd

Cost of investment
Professional fees
Share of post acquisition profits (3/12 600 = 150 30%)
CU'000
4,000
80
4,080
45
4,125
213
37
Lowland Ltd
Marking guide
Marks
CIS
Revenue
Cost of sales
Operating expenses
Finance cost
Investment income
Tax
Minority interest
Presentation
CSCE
Profit for period
Dividends
Arising on acquisition
Brought forward
Presentation
Other workings
Freehold PURP (W4)
Depreciation adjustment (W5)
Interest on loan stock (W6)
Total available
Maximum
1
1
3
1
2
1
1
1
2
3
1
2
1
1
23
22
Consolidated income statement for the year ended 31 March 20X8

Revenue (W2)
Cost of sales (W2)
Gross profit
Net operating expenses (W2)
Finance cost (W2)
Investment income (W2)
Profit before tax
Profit after tax
Attributable to equity holders of Lowland Ltd ()
214
CU'000
8,970
(6,240)
2,730
(1,816)
(50)
140
1,004
(350)
654
680
(26)
654
ANSWER BANK
Consolidated statement of changes in equity for the year ended 31 March 20X8 (extract)
Retained
earnings
CU'000
680
(200)
480
452
932
Profit/(loss) for the period

Interim dividends on ordinary shares (50 20%)
Arising on acquisition of subsidiary (W9)
Balance brought forward (W7 and W8)
Minority
interest
CU'000
(26)
(10)
(36)
613
808
1,385
WORKINGS
(1) Group structure
Lowland Ltd
80%
65% 4/12 (30 November 20X7)
Aviemore Ltd
Buchan Ltd
(2) Consolidation schedule
Revenue
C of S
Op expenses
Per question
PURP (W4)
Depn adj (W5)
Impairment of GW (180 + 102)
Finance cost (W6)
Inv income
Per question (230 (80% 50))
Accrued loan stock interest
(W6)
Tax
PAT/(loss)
Lowland
Ltd
CU'000
5,000
(3,000)
(1,000)
Aviemore
Ltd
CU'000
3,000
(2,300)
(500)
(64)
Buchan
Ltd 4/12
CU'000
970
(940)
(50)
(50)
(70)
190
105
70
(85)
(70)
(50)
36
(95)
Consol
CU'000
8,970
(6,240)
85
(5)
(282)
(300)
Adj
CU'000
(1,816)
(50)
140
(350)

Aviemore Ltd (20% 36 (W2))
Buchan Ltd (35% (95) (W2))
CU'000
7
(33)
(26)
Tutorial note
A share of the loss for the year in Buchan Ltd can be allocated to the minority only because overall Buchan
Ltd has net assets. If Buchan Ltd were to have net liabilities overall, the minority could only be allocated
their share of those net liabilities if they were to have a binding obligation to make an additional investment
over the losses, and are able to do so.
215

(4) PURP on freehold property Aviemore Ltd
(i)
Profit on sale
Proceeds
Less Carrying amount of land and property
at disposal
Land
Property
Cost
Less
(ii)
CU'000
Accum depn ( 800 10 yrs)

50
CU'000
CU'000
800
100
800
(160)
Depreciation adjustment
Annual depreciation
Without transfer (800 50)
Actual depreciation with transfer ((800 300) 40)
640
(740)
60
16
(12)
4
64
(5) Depreciation adjustment Buchan Ltd

CU'000
(500 350) 4
/12
Fair value adjustment
10 years
(6) Interest on loan stock
Loan of CU2.1m with interest @ 10%

Annual interest
Split Pre-acq 8/12
Post-acq 4/12
Lowland Ltd has accounted for six months only = CU105,000 (6/12 210,000)
Adjustment
(i)
Include CU105,000 in Lowland Ltd
(ii)
Remove CU70,000 as post-acq intra-group transaction
CU'000
210,000
140,000
70,000

Lowland Ltd
Aviemore Ltd (80% (240 200))
Buchan Ltd
Impairment of goodwill
CU'000
1,500
32
(1,080)
452
(8) Minority interest b/f Aviemore Ltd

Share capital
Retained earnings b/f
Net assets b/f
20%
216
CU'000
3,800
240
4,040
808
ANSWER BANK
(9) Minority interest arising on acquisition of subsidiary Buchan Ltd

Share capital
Retained earnings at 1 April 20X7
Loss to date of acquisition (400 580)
CU'000
CU'000
1,200
580
(180)
Fair value adjustment (500 350)

35%
400
150
1,750
613
Tutorial note
It would be possible to accrue two months' loan stock interest for Lowland Ltd (CU35,000) for preacquisition interest, instead of per W6.
38
Vanguard Ltd
Marking guide
Marks
(a)
(b)
CIS
Revenue
Cost of sales
Operating expenses
Finance cost
Investment income
Share of profits of associates
Tax
Minority interest
Presentation
CSCE
Profit for period
Dividends
Brought forward
Presentation
Other workings
PURP (W4)
Intangible amortisation (W5)
Total available
Maximum
Cost of acquisition
Share of fair value of net assets acquired
Accumulated impairment losses
Total available
Maximum
1
2
1
1
1
2
1
17
16
2
18
217

(a)

CU
600,052
(428,734)
171,318
(113,417)
57,901
(3,801)
9,636
1,950
65,686
(22,735)
42,951
Revenue (W2)
Cost of sales (W2)
Gross profit
Net operating expenses (W2)
Finance cost (W2)
Share of profit of associates (W6)
Profit before tax
Profit for period
36,673
6,278
42,951
Attributable to equity holders of Vanguard Ltd ()

Consolidated statement of changes in equity for the year ended 31 March 20X4 (extract)
Retained
earnings
CU
36,673
(9,000)
27,673
667,657
695,330

Balance carried forward (W9)
(b) Carrying amount of goodwill re Formidable Ltd
Cost of acquisition
Less Share of fair value of net assets acquired (75% (485,000 + 15,000))
Less Accumulated impairment losses (12,000 + 4,000)
Goodwill in consolidated balance sheet
WORKINGS
(1) Group structure
Vanguard Ltd
75%
Formidable Ltd
218
45%
Albion Ltd
CU
415,000
(375,000)
40,000
(16,000)
24,000
ANSWER BANK
Revenue
C of S
Per question
PURP (W4)
Amortisation of intangibles (W5)
Op expenses
Per question
Impairment loss (current year)
Finance cost
Tax
Vanguard
Ltd
CU
346,932
Formidable
Ltd
CU
289,028
Adj
CU
(35,908)
(261,023)
(550)
(202,319)
35,908
(53,811)
(4,000)
(2,301)
6,394
(15,753)
(55,606)
PAT
(750)
Consol
CU
600,052
(428,734)
(113,417)
(3,801)
9,636
(22,735)
(1,500)
3,242
(6,982)
25,113

CU
6,278
Formidable Ltd (25% 25,113 (W2))

(4) PURP
%
125
(100)
25
SP
Cost
GP
Opening
inventories
CU
5,600
(4,480)
1,120
Closing
inventories
CU
8,350
(6,680)
1,670
Movement
CU
550
(5) Intangible amortisation

Intangible FV adjustment
Amortisation b/f (15,000 3/20)
Amortisation in current year (15,000 1/20)
Intangible c/f
CU
15,000
(2,250)
12,750
(750)
12,000
(6) Share of profit of associates

Share of profit after tax (45% 7,110)
Less Current year impairment loss
CU
3,200
(1,250)
1,950

Vanguard Ltd
Formidable Ltd (75% (327,530 150,000 2,250 (W5)))
Albion Ltd (45% (25,850 3,500))
Less Impairment losses
PURP on opening inventories (W4)
CU
539,260
131,460
10,057
(12,000)
(1,120)
667,657
(8) Non-group investment income in Vanguard Ltd

Total per income statement
Less From Formidable Ltd (20,500 75%)
From Albion Ltd (5,500 45%)
CU
24,244
(15,375)
(2,475)
6,394
219

(9) Proof of retained earnings c/f (for tutorial purposes only)
CU
568,548
134,920
10,782
(17,250)
(1,670)
695,330
Vanguard Ltd
Formidable Ltd (75% (332,893 150,000 3,000 (W5)))
Albion Ltd (45% (27,460 3,500))
Less Goodwill impairment to date (12,000 + 4,000 + 1,250)
PURP on closing inventories (W4)
39
Heaton Ltd
Marking guide
Marks
(a)
(b)
(c)
(a)
Revenue
Cost of sales
Expenses
Finance cost
Share of profit of associates
Tax
Minority interest
Presentation
Total available
Maximum
Profit for period
Dividends
Brought forward
Total available
Maximum
Consolidation as if single entity
Represents substance not legal form
Substance is that shareholders invest in subsidiaries via parent
therefore interested in whole group
Total available
Maximum
1
4
5
5
1
1
1
3
2
15

Revenue (W2)
Cost of sales (W2)
Gross profit
Expenses (W2)
Finance cost (W2)
Share of profits of associates (W5)
Profit before tax
Profit for period
Attributable to equity holders of Heaton Ltd ()
220
1
3
1
9
CU'000
35,900
(27,510)
8,390
(3,570)
4,820
(270)
115
4,665
(1,880)
2,785
2,539
246
2,785
ANSWER BANK
(b) Statement of changes in equity for the year ended 31 March 20X4 (extract)
Retained
earnings
CU'000
2,539
(1,000)
1,539
5,130
6,669
Profit for the period (part (a))

Dividends (400 20%)
Balance brought forward (W6 and W7)
Balance carried forward (W9) and (20% 8,430 (W8))
(c)
Minority
interest
CU'000
246
(80)
166
1,520
1,686
The single entity concept

Group financial statements consolidate the results and net assets of group members to present the
financial statements as if the group were a single economic entity.
This represents the economic substance of the group and contrasts with the legal form, where each
company is a separate legal entity.
However, in substance, the shareholders of the parent company are investing in the subsidiaries
through their investment in the parent company, and as such are interested in the financial
performance and position of all members of the group.
WORKINGS
(1) Group structure
Heaton Ltd
80%
30% (6/12 incl)
Sharston Ltd
Ardwick Ltd
Revenue
Adjustment re Ardwick Ltd's inventory (2,000 50% 30%)
Cost of sales
Per question
Adjustment re Ardwick Ltd's inventory (300 100/125)
Depn adj (W4)
Subsid goodwill impairment current year
Expenses
Finance cost
Tax
Share of profit after tax (20% 1,230 (W2))
Heaton
Ltd
CU'000
23,700
(300)
Sharston
Ltd
CU'000
12,500
(17,580)
240
(9,770)
(300)
(2,870)
(220)
(1,230)
Consol
CU'000
35,900
(100)
(700)
(50)
(650)
1,230
(27,510)
(3,570)
(270)
(1,880)
CU'000
246
221

(4) Depreciation adjustment
The fair value adjustment needs to be depreciated. The uplift is CU500,000 so the depreciation is
CU100,000 per annum. At the start of the year the accumulated depreciation is CU100,000 (500,000
1/5) and it will be CU200,000 (500,000 2/5) at the end of the year.
(5) Share of profits of associates
CU'000
135
(20)
115
Share of profit after tax (6/12 900 30%)

CU'000
4,250
1,180
(300)
5,130
Heaton Ltd
Sharston Ltd (80% (2,200 100 (W4) 625)
Impairment of goodwill b/f
(7) Minority interest b/f

CU'000
5,000
2,200
400
7,600
Share capital
Retained earnings
Fair value adjustment (W4)
Net assets
20%
1,520
(8) Net assets

Balance
sheet date
CU'000
Sharston Ltd
Share capital
Retained earnings per question
Fair value adj (W4)
Ardwick Ltd
Share capital
Retained earnings per question
Acquisition
CU'000
Post acq
CU'000
5,000
3,130
300
8,430
5,000
625
500
6,125
2,505
(200)
2,305
4,000
2,350
6,350
4,000
1,900
5,900
450
450
The retained earnings of Ardwick Ltd at the date of acquisition are the retained earnings at the year
end less six months' profit for the year on a pro-rata basis (2,350 (6/12 900)).
Heaton Ltd (5,370 300 + 240)
Sharston Ltd (80% 2,305 (W8))
Ardwick Ltd (30% 450 (W8))
Impairment of goodwill (300 + 300 + 20)
222
CU'000
5,310
1,844
135
(620)
6,669
ANSWER BANK
40
Jerome Ltd
Marking guide
Marks
(a)
(b)
(c)
(a)
Revenue
Cost of sales
Distribution cost
Finance cost
Investment income
Share of profit of associates
Tax
Minority interest
Presentation
Total available
Maximum
Profit for period
Dividends
Brought forward
Presentation
Total available
Maximum
Cost of investment
Share of post acquisition change in net assets
Impairment to date
Total available
Maximum
2
1
1
1
10
2
2
17
Consolidated income statement for the year ended 31 December 20X7

Revenue (W2)
Cost of sales (W2)
Gross profit
Finance cost (W2)
Profit before tax
Profit for period
Attributable to equity holders of Jerome Ltd ()
CU'000
5,768
(3,215)
2,553
(305)
(337)
1,911
(55)
85
21
1,962
(490)
1,472
1,372
100
1,472
223

(b) Consolidated statement of changes in equity for the year ended 31 December 20X7
(extract)
Retained
earnings
CU'000
1,372
(200)
1,172
14,701
15,873
Profit for the period (from (a))

Balance carried forward (W10)
(c)
Carrying amount of investment in Harris Ltd in consolidated balance sheet at

31 December 20X7
CU'000
4,000
52
4,052
(31)
4,021
Cost of investment
Share of post acquisition change in net assets (W5)
WORKINGS
(1) Group structure
Jerome plc
400
400
= 80%
= 80%
500
500
George Ltd
40
6
= 40% on 1 July 20X7 /12 incl
100
Harris Ltd
Revenue
C of S
Distribution costs
Per question
Depn adj on NCA (W4)
Finance cost
Tax
PAT
Jerome
Ltd
CU'000
3,268
(1,840)
(115)
George
Ltd
CU'000
2,500
(1,375)
(190)
(93)
(245)
1
(15)
(50)
95
(315)
(175)
501
Adj
CU'000
10 (W7)
(10)(W7)
Consol
CU'000
5,768
(3,215)
(305)
(337)
(55)
85
(490)

George Ltd (501 (W2) 20%)
224
CU'000
100
ANSWER BANK
(4) Depreciation adjustment to non-current asset transferred

Depreciation without transfer (30 10)
Depreciation with transfer (28 7)
Excess depreciation in year to be eliminated
CU'000
4
1
Carrying amount at 31 December 20X6 without transfer (30 6/10)

Carrying amount at 31 December 20X6 with transfer (28 6/7)
18
24
(6)
Carrying amount at 31 December 20X7 without transfer (30 5/10)

Carrying amount at 31 December 20X7 with transfer (28 5/7)
15
20
(5)
(5) Share of profits of associates Harris Ltd

Share of profit after tax (260 x /12 40%)
6
CU'000
52
(31)
21
(6) Investment income Jerome Ltd

Per question
Less Dividends received from George Ltd (300 80%)
CU'000
335
(240)
95
(7) Intra group investment income/finance cost

Loan to George Ltd (100 10%)
CU'000
10

Jerome Ltd
George Ltd (80% (12,520 775 (W9) 6 (W4)))
CU'000
5,310
9,391
14,701
(9) Retained earnings on acquisition George Ltd

CU'000
1,820
(400)
(800)
620
Cost of investment
Less Share capital (80% 500)
Goodwill
80% of retained earnings
100
/80
775

Jerome Ltd
George Ltd (80% (12,720 775 (W9) 5 (W4)))
Harris Ltd (W5)
CU'000
6,300
9,552
21
15,873
225
41
Hardmead Ltd
Marking guide
Marks
(a)
(b)
(c)
(a)
Revenue
Cost of sales
Operating expenses
Tax
Loss from discontinued operations
Minority interest
Profit split
Presentation
Total available
Maximum
Profit for period
Dividends
Eliminated on disposal
Brought forward
Presentation
Total available
Maximum
Mark each point per answer
Total available
Maximum
1
1
5
14
2
2
23
Consolidated income statement for the year ended 30 September 20X5

Revenue (W2)
Cost of sales (W2)
Gross profit
Profit before tax
Profit for period from continuing operations
Loss for the period from discontinued operations (160 (W4) 446 (W6))
Attributable to
Equity holders of Hardmead Ltd ()
226
1
5
1
5
1
1
15
CU'000
17,360
(15,640)
1,720
(850)
870
(460)
410
(286)
124
50
74
124
ANSWER BANK
(b) Consolidated statement of changes in equity for the year ended 30 September 20X5
(extracts)
Retained
earnings
CU'000
50
(600)
(550)
2,090
1,540

Dividends on ordinary shares (100 20%)
Eliminated on disposal of subsidiary (W12)
Balance brought forward (W9 & W11)
Balance carried forward (W10 & W13)
(c)
Minority
interest
CU'000
74
(20)
(2,064)
(2,010)
3,490
1,480
Underlying principles re disposal
The concept of control is an example of the substance over form concept. The subsidiary is
consolidated whilst it is under the control of the parent.
Therefore 100% of the results of Stratford Ltd are consolidated until the date on which control is
relinquished.
40% of the results for the first six months are acknowledged as belonging to the minority interest
which is consistent with the concept of ownership.
The loss on disposal is based upon the net assets of Stratford Ltd at the date of disposal.
The loss on disposal includes any unimpaired goodwill, since this asset is also disposed of even
though it is not recognised in Stratford Ltd's own balance sheet.
WORKINGS
(1) Group structure
Hardmead Ltd
80%
Stony Ltd
60% Disposed of 31 March 20X5 (6/12 incl)

Stratford Ltd
(2) Consolidation schedule for continuing operations
Revenue
Cost of sales
Per question
Inventory NRV adj (W8)
PURP (W7)
Fair value adj (200/4)
Operating expenses
Per question
Impairment loss
Tax
PAT
Hardmead
Ltd
CU'000
10,040
(8,760)
(90)
Stony
Ltd
CU'000
7,500
(6,900)
Adjs
CU'000
(180)
180
Total
CU'000
17,360
(15,640)
(20)
(50)
(400)
(30)
(400)
(420)
(850)
(60)
50
(460)

Stony Ltd (20% 50 (W2))
Stratford Ltd (40% 160 (W4))
CU'000
10
64
74
227

(4) Profit for Stratford Ltd for year to disposal
CU'000
160
PAT = 320 6/12 =

(5) Goodwill Stratford Ltd
CU'000
Cost of investment
Less Share of fair value of net assets acquired
Share capital
Retained earnings
CU'000
4,000
3,000
3,000
6,000 60%
Goodwill
Impairment brought forward
Goodwill at date of disposal
(3,600)
400
(50)
350
(6) Group loss on disposal of Stratford Ltd

CU'000
Sales proceeds
Share capital
Retained earnings (2,000 + 160 (W4))
CU'000
3,000
3,000
2,160
5,160 60%

Loss on disposal
(3,096)
(96)
(350)
(446)
(7) PURP
SP
Cost
GP
%
150
(100)
50
(8) Inventory NRV adjustment

Contract (2 70)
Remainder ((5 2) (120 30))
Current carrying amount (5 100)
Provision needed
(9) Consolidated retained earnings brought forward
Hardmead Ltd per question
Stony Ltd (80% (6,400 6,000 + 200 150))
Stratford Ltd (60% (2,000 3,000))
Impairment (120 + 50)
CU'000
(180 1/3) 60
(40)
20
CU'000
140
270
410
500
90
CU'000
2,500
360
(600)
(170)
2,090
(10) Consolidated retained earnings carried forward (for tutorial purposes only)
Hardmead Ltd per question
NRV adjustment (W8)
Loss on investment (4,000 3,000)
Stony Ltd (80% (6,420 6,000 + 200 200 20))
Impairment (120 + 30)
228
CU'000
2,460
(90)
(1,000)
320
(150)
1,540
ANSWER BANK
(11) Minority interest brought forward

CU'000
1,490
2,000
3,490
Stony Ltd ((1,000 + 6,400 + 200 150) 20%)

Stratford Ltd ((3,000 + 2,000) 40%)
(12) Minority interest eliminated on disposal of Stratford Ltd
CU'000
2,000
64
2,064
Brought forward (W11)

MI in profit of year (W3)
(13) Minority interest carried forward (for tutorial purposes only) Stony Ltd
CU'000
1,490
10
(20)
1,480
Brought forward (W11)

In year (W3)
Less Dividends to MI in year
42
Tain Ltd
Marking guide
Marks
CIS
Revenue
Cost of sales
Operating expenses
Tax
Profit from discontinued operations
Minority interest
Profit split
Presentation
Group structure
CSCE
Profit for period
Dividends
Brought forward
Presentation
Total available
Maximum
1
2
5
1
19
18
229

Consolidated income statement for the year ended 31 October 20X9
CU'000
Revenue (W2)
Cost of sales (W2)
Gross profit
Profit before tax
Tax (W2)
Profit for the period from discontinued operations (620 (W4) + 526 (W6))
Attributable to equity holders of Tain Ltd (balancing figure)
14,800
(10,470)
4,330
(2,400)
71
2,001
(600)
1,401
1,146
2,547
2,196
351
2,547
Consolidated statement of changes in equity for the year ended 31 October 20X9 (extract)
Ordinary
share
capital
CU'000
5,000
5,000

Dividends
WORKINGS
(1) Group structure
Tain Ltd
55%
75%
Banchory Ltd
Disposed of 31
October 20X9
( 1212 incl)
230
Domoch Ltd
30%
Nairn Ltd
Acq 1 May 20X9
( 612 incl)
Retained
earnings
CU'000
2,196
(700)
1,496
2,488
3,984
Total
CU'000
2,196
(700)
1,496
7,488
8,984
ANSWER BANK

Tain
Ltd
CU'000
10,600
Revenue
Cost of sales
Per Q
PURP (W7)
Operating expenses
Tax
PAT
(7,400)
(1,700)
(460)
Dornoch
Ltd
CU'000
4,700
Adj
CU'000
(500)
(3,520)
(50)
(700)
(140)
290
500
Consol
CU'000
14,800
(10,470)
(2,400)
(600)

CU'000
72
279
351
Dornoch Ltd (25% 290 (W2))

Banchory Ltd (45% 620 (W4))
(4) Profit of Banchory Ltd for year to disposal
CU'000
620
PAT = 620 12/12

(5) Goodwill
Banchory Ltd
Cost of investment
Less Share of fair value of net assets acquired
Share capital
Retained earnings
Revaluation reserve
CU'000
CU'000
2,500
2,000
1,600
300
3,900 55%
(2,145)
355
(142)
213
Goodwill
Goodwill at date of disposal
(6) Group profit on disposal of Banchory Ltd
Sales proceeds
Share capital
Revaluation reserve
Retained earnings (2,000 + 620)
CU'000
CU'000
3,500
2,000
400
2,620
5,020 55%
(2,761)
739
(213)
526

Profit on disposal
(7) PURP
%
1331/3
(100)
331/3
SP
Cost
GP
CU'000
200
(150)
50

Tain Ltd
Banchory Ltd ((2,000 1,600) 55%)
Dornoch Ltd ((152 80) 75%)
Less Goodwill impairment to date (Banchory Ltd)
CU'000
2,356
220
54
(142)
2,488
231

(9) Share of profits of associates
Share of profit after tax (30% 600 6/12)
Less Impairment loss
43
CU'000
90
(19)
71
Glencoe Ltd
Marking guide
Marks
CIS
Revenue
Cost of sales
Operating expenses
Profit on sale of interest in subsidiary
Tax
Profit from discontinued operations
Minority interest
Presentation
Group structure
CBS
PPE
Current assets
Share capital
Retained earnings
Minority interest
Current liabilities
Presentation
Total available
Maximum
232
1
2
4
1
1
1
18
17
ANSWER BANK
Consolidated income statement for the year ended 31 August 20Y0

Revenue (W2)
Cost of sales (W2)
Gross profit
Operating profit
Profit on sale of interest in subsidiary (W9)
Profit before tax
CU'000
61,000
(39,000)
22,000
(12,200)
9,800
1,220
11,020
(3,100)
7,920
Profit for the period from discontinued operations
(2,625 (W3) + 1,516 (W4))
4,141
12,061
11,236
825
12,061
Attributable to equity holders of Glencoe Ltd ()

Balance sheet as at 31 August 20Y0
ASSETS
Non-current assets
Property, plant and equipment (29,500 + 3,500)
Current assets (36,000 + 5,900)
Total assets
CU'000
33,000
41,900
74,900

Attributable to the equity holders of Glencoe Ltd
Equity
Current liabilities (10,000 + 4,000 + 200)
35,000
23,620
58,620
2,080
60,700
14,200
74,900
WORKINGS
(1) Group structure
Glencoe Ltd
(15% sold 31 August 20Y0) 75% 60%
Rannoch Ltd
80% Sold 1 June 20Y0 (9/12 incl)
Leven Ltd
233

Revenue
C of S
Op expenses per question
omitted invoices
Tax
PAT
Glencoe
Ltd
CU'000
50,000
(32,000)
(10,000)
(2,500)
Rannoch
Ltd
CU'000
11,000
(7,000)
(2,000)
(200)
(600)
1,200
Consol
CU'000
61,000
(39,000)
(12,200)
(3,100)
(3) Profit of Leven Ltd for year to disposal

CU'000
2,625
PAT= 3,500 9/12

(4) Group profit on disposal of Leven Ltd
CU'000
Sales proceeds
Less Share of net assets at date of disposal
At 1 September 20X9 (16,000 3,500)
Add Profit to 1 June 20Y0 (W3)
12,500
2,625
15,125 80%

Profit on disposal
CU'000
14,000
(12,100)
1,900
(384)
1,516
(5) Goodwill on acquisition

Rannoch Ltd
Cost
Less Net assets acquired (4,000 75%)
CU'000
3,000
(3,000)
Leven Ltd
Cost of investment
Less Share of fair value of net assets acquired (11,700 80%)
CU'000
10,000
(9,360)
640
(256)
384
(6) Minority interest income statement

Leven Ltd (20% 2,625 (W3))
Rannoch Ltd (25% 1,200 (W2))
CU'000
525
300
825
(7) Consolidated retained earnings

Glencoe Ltd
Profits on disposal omitted in error ((14,000 10,000) + (2,000 (15/75 3,000)))
Rannoch Ltd (60% (1,400 200))
234
CU'000
17,500
5,400
720
23,620
ANSWER BANK
(8) Minority interest balance sheet

CU'000
2,080
Rannoch Ltd ((5,400 200) 40%)
(9) Group profit on partial disposal of Rannoch Ltd

CU'000
2,000
(780)
1,220
Sales proceeds
Less Share of net assets at date of disposal disposed of ((5,400 200) 15%)
Profit on disposal
44
Herdings Ltd
Marking guide
Marks
(a)
(b)
(c)
Sales proceeds
Share of net assets disposed of
Goodwill disposed of
Total available
Maximum
CBS
PPE
Intangibles
Inventories
Trade receivables
Retained earnings
Minority interest
Bank debt
Trade payables
Taxation
Provisions
Dividends payable
Other workings
Net assets (W2)
Presentation
Total available
Maximum
Explanation of significant influence
Impact of third party holding 60%
Conclusion
Total available
Maximum
1
2
1
1
4
1
19
1
1
18
2
23
235

(a)
Group profit on disposal of shares in Sandygate Ltd

Sales proceeds
Less Share of net assets disposed of at date of disposal
Net assets at 31 March 20X3
Fair value adjustment (2,000 8/10)
Add back Dividend
Less Profit for 6 months (3,000 6/12)
Less
CU'000
18,200
1,600
200
(1,500)
18,500
10%
Carrying amount of goodwill on disposal relating to shares disposed of (W3)
CU'000
3,500
(1,850)
1,650
(600)
1,050
(b) Consolidated balance sheet as at 31 March 20X3

CU'000
ASSETS
Non-current assets
Property, plant and equipment (13,100 + 16,400 + 1,600 (W7))
Intangibles (W3)
Current assets
Inventories (8,100 + 5,230 150 (W6))
Trade receivables (6,850 + 4,950)
Cash and cash equivalents (3,750 + 150)
31,100
4,200
6,600
41,900
13,180
11,800
3,900
28,880
70,780
Total assets
Attributable to equity holders of Herdings Ltd
Equity
7% secured bank debt (26,000 + 2,000)
Current liabilities
Trade payables (5,560 + 5,450)
Taxation (1,700 + 880)
Provisions
Dividends payable (300 + (200 140)(W5))
(c)
CU'000
12,000
10,865
22,865
5,865
28,730
28,000
11,010
2,580
100
360
14,050
70,780
Classification of investment in Abbeydale Ltd

The key issue in defining an associate in BAS 28 Investments in Associates is whether an investor has
significant influence over the investee. Significant influence is the power to participate in the financial
and operating policy decisions of the investee but is not control over those policies. If the investor
holds 20% or more of the voting power, it is presumed that it does have significant influence.
The third party owning 60% appears to have control and has the power to govern the financial and
operating policies of Abbeydale Ltd. If one party has control and can govern those policies, it is
reasonable to question whether another investor could ever have significant influence.
However, BAS 28 states that this does not necessarily preclude another investor from having
significant influence. The 20% test is not definitive, and the investor should consider other evidence
such as board representation.
236
ANSWER BANK
WORKINGS
(1) Group structure
Herdings Ltd
8,000
80%
10,000
7,000
70%
10,000
30% =
Sandygate Ltd
1,500
on 1 October 20X2 (6/12 incl)
5,000
Abbeydale Ltd
(2) Net assets

Balance sheet date
CU'000
CU'000
10,000
Sandygate Ltd
Share capital
Retained earnings
Per question
PURP (W6)
Depreciation adjustment (W7)
Acquisition
CU'000
10,000
Post acq
CU'000
8,200
(150)
(400)

PPE (W7)
Contingent liability
7,650
5,000
2,650
2,000
(100)
19,550
2,000
(100)
16,900
2,650
Abbeydale Ltd
Share capital
Retained earnings
5,000
5,000
9,000
7,000 *
2,000
14,000
12,000
2,000
* The retained earnings of Abbeydale Ltd at the date of acquisition are the retained earnings as at the
year end less six months' profit for the year on a pro-rata basis (i.e. 9,000,000 (6/12 4,000,000)).
(3) Goodwill Sandygate Ltd
Cost of original investment (8,000 CU2.50)
Less Share of fair value of net assets acquired (80% 16,900 (W2))
Impairment to 31 March 20X2
Balance at disposal
Less Disposed of (1/8)
Balance c/f
CU'000
20,000
(13,520)
6,480
(1,680)
4,800
(600)
4,200
(4) Minority interest Sandygate Ltd

CU'000
5,865

Herdings Ltd
Add Dividend not recorded (70% 200)
Sandygate Ltd (70% 2,650 (W2))
Abbeydale Ltd (30% 2,000 (W2))
Less Goodwill impairment to date on shares retained (1,680 7/8)
CU'000
9,740
140
9,880
1,855
600
(1,470)
10,865
237

(6) PURP
SP (3,300 )
Cost
GP
%
110
(100)
10
CU'000
1,650
(1,500)
150
(7) Fair value adjustment PPE

At acquisition the PPE needs revaluing upwards by CU2,000,000. The additional depreciation to date
will be for two years.
CU'000
400
1,600
Accumulated depreciation = 2/10 2,000,000

Net adjustment to PPE
(8)
CU'000
6,000
600
6,600
Cost
Share of post acquisition change in net assets (30% 2,000 (W2))
45
Camden Ltd
Marking guide
Marks
(a)
(b)
(c)
238
CIS
Revenue
Cost of sales and expenses
Profit on sale of interest in subsidiary
Tax
Minority interest
Split of profit
Presentation
Group structure
CSCE
Profit for period
Dividends
Added on acquisition
Eliminated on disposal
Brought forward
Presentation
Total available
Maximum
Cost
Share of post-acquisition change in net assets
Total available
Maximum
Intra group trading
Unrealised profit in inventories
Total available
Maximum
1
3
4
1
1
1
1
1
2
1
1
23
1
2
22
1
2
1
2
7
6
30
ANSWER BANK
(a)
Consolidated income statement for the year ended 30 September 20X5

CU'000
240,955
(215,668)
229
560
26,076
(9,030)
17,046
Revenue (W2)
Cost of sales and expenses (W2)
Profit on sale of interest in subsidiary (W10)
Share of profits of associate (W7)
Profit before tax
14,413
2,633
17,046
Attributable to equity holders of Camden Ltd ()

Consolidated statement of changes in equity for the year ended 30 September 20X5
(extracts)
Net profit for the period

Interim dividends on ordinary shares (W5)
Added on acquisition of subsidiary (W6)
Eliminated on disposal of subsidiary (W8)
Balance brought forward (11,820 + (60% (8,210 450))) (W8)
Retained
earnings
CU'000
14,413
(2,820)
11,593
16,476
28,069
Minority
interest
CU'000
2,633
(1,078)
2,080
(5,141)
(1,506)
3,884
2,378
(b) Carrying amount of Tufnell Ltd in consolidated balance sheet as at 30 September 20X5
Cost (3,000 30/60)
Share of post acquisition change in net assets (30% (8,210 + 7,470 2,460 450))
(c)
CU'000
1,500
3,831
5,331
Explanation of accounting treatment

(i)
(ii)
As Camden Ltd acquired 72% of Kentish Ltd on 1 March 20X5, it is on this date that
Camden Ltd gains control, and from this date that 100% of Kentish Ltd's costs and revenues
should be taken into the consolidated income statement, as Camden Ltd controls the
whole of Kentish Ltd.
Therefore the consolidated income statement includes seven months of the results of
Kentish Ltd.
28% of Kentish Ltd is later appropriated to the minority interest because this is the
proportion not owned by Camden Ltd.
The dividend income from subsidiaries in Camden Ltd's own income statement should be
ignored on consolidation and 'replaced' with the results of the subsidiaries line-by-line.
This is because under the single entity concept Camden Ltd controls the subsidiaries and
therefore controls the entire results made, not just those distributed as dividends.
As the results should be brought in, the intra-group dividends received should be
eliminated, to avoid double counting.
239

(iii) Intra-group trading
Any trade between members of the group should be eliminated on consolidation.
This is because under the single entity concept a group cannot sell to/buy from itself;
therefore the sales by Camden Ltd to both subsidiaries must be cancelled by eliminating the
sale in the books of Camden Ltd and the purchases in the books of the subsidiaries.
(iv) Unrealised profits in inventories
Under the single entity concept, no sale of goods has been made until they are sold outside
the group.
Prior to that time, any profit created by intra-group transactions should not be recognised.
Inventories should be valued at the lower of cost and net realisable value to the group in
this case the price paid by Camden Ltd, i.e. CU192,000 (240,000 80%).
By eliminating the unrealised profit, the closing inventories in the income statement (within
cost of sales) are reduced to their cost to the group.
WORKINGS
(1) Group structure
Camden Ltd
(Acq 1 March 20X5 7/12 incl) 72%
Kentish Ltd
60% 30% (on 30 June 20X5 9/12 incl)
Tufnell Ltd

Camden
Ltd
Revenue
C of S and expenses
Per Q
Divs received from
Kentish Ltd (72% 336)
Tufnell Ltd (60% 2,460)
PURP (W3)
Tax
PAT
CU'000
Kentish
Ltd
7
/12
CU'000
Tufnell
Ltd
9
/12
CU'000
151,360
18,900
71,280
(134,904)
(16,771)
(62,812)
(729)
1,400
(2,865)
5,603
(242)
(1,476)
(48)
(5,436)
Adj
Consol
CU'000
(240)
(345)
CU'000
240,955
240
345
(215,668)
(9,030)
(3) PURP
SP
Cost
GP
240
%
100
(80)
20
CU'000
240
(192)
48
ANSWER BANK
(4) Minority interest in profit for the year

CU'000
392
2,241
2,633
Kentish Ltd (28% 1,400 (W2))

Tufnell Ltd (40% 5,603 (W2))
Cost
(5) Dividends to minority

CU'000
94
984
1,078
Kentish Ltd (28% 336)

Tufnell Ltd (40% 2,460)
(6) Minority interest added on acquisition

CU'000
2,080
Kentish Ltd (28% (1,000 + 5,430 + (5/12 2,400))
(7) Share of profits of associate

CU'000
560
Share of profit after tax (30% 7,470 3/12)

(8) Minority interest eliminated on disposal
CU'000
3,884
2,241
(984)
5,141
MI brought forward (40% (8,210 + 1,500))

MI for year (W4)
Less Dividend paid to MI (W5)
(9) Minority interest carried forward (for tutorial purposes only)

CU'000
2,378
Kentish Ltd (28% (1,000 + 5,430 + 2,400 336)
(10) Group profit on part disposal of Tufnell Ltd

CU'000
Sales proceeds
Less Share of net assets disposed of at date of disposal
Net assets at 1 October 20X4 (1,500 + 8,210)
Profit to 30 June 20X5 (7,470 9/12)
Dividends paid
Less Carrying amount of goodwill on disposal relating to shares
Cost
Share of fair value of net assets acquired (60% (1,500 + 450))
Original goodwill
Now disposed of 30/60
9,710
5,603
(2,460)
12,853 30%
CU'000
5,000
(3,856)
1,144
3,000
(1,170)
1,830
(915)
229
241
46
Gallant Ltd
Marking guide
Marks
Cash flow statement

Interest paid
Income tax paid
Purchase of PPE
Dividends from associates
Payment of finance lease liabilities
Dividends paid to MI
Dividends paid
Presentation
Reconciliation
Each item mark (max 4)
Total available
Maximum
1
3
1
2
1
1
1
4
18
17
Consolidated cash flow statement for the year ended 31 December 20X7
CU
Cash generated from operations (see Note)
Interest paid
Dividends received from associates (W1)
Proceeds from issue of ordinary share capital (W8)
Payment of finance lease liabilities (100,000 75,000)
Dividends paid to minority interests (W4)
Dividends paid (W7)
242
CU
2,464,800
(75,000)
(370,000)
2,019,800
(2,360,700)
800,000
228,700
(1,332,000)
850,000
(25,000)
(949,100)
(553,200)
(677,300)
10,500
20,200
30,700
ANSWER BANK

Profit before tax
Share of profits from associates
Finance charge
Depreciation charge
Impairment losses (540,500 420,000)
Profit on disposal of property, plant and equipment (800,000 760,500)
Increase in trade and other payables (768,500 639,500)
CU
1,384,700
(345,600)
75,000
970,600
120,500
(39,500)
194,600
(24,500)
129,000
2,464,800
WORKINGS
(1)
INVESTMENTS IN ASSOCIATES
B/d
Share of profits (IS)
(2)
CU
1,678,900
345,600
2,024,500
Cash ()
C/d
CU
228,700
1,795,800
2,024,500
INCOME TAX
Cash ()
C/d
(3)
CU
370,000
410,000
780,000
B/d
IS
CU
360,000
420,000
780,000
RETAINED EARNINGS
Dividends
C/d
(4)
CU
653,200
1,357,800
2,011,000
B/d
IS
CU
1,393,100
617,900
2,011,000
MINORITY INTEREST
Cash ()
C/d
(5)
CU
949,100
2,345,900
3,295,000
B/d
IS
CU
2,948,200
346,800
3,295,000
PPE
B/d
Leased assets
(376,000 + 124,000 + 25,000)
Additions ()
Revaluation (W6)
CU
7,078,400
525,000
2,360,700
163,200
10,127,300
Disposals
IS Depn charges
C/d
CU
760,500
970,600
8,396,200
10,127,300
243

(6)
REVALUATION RESERVE
CU
C/d
(7)
400,000
400,000
CU
236,800
163,200
400,000
B/d
PPE ()
DIVIDENDS (GALLANT LTD)

Cash ()
C/d
(8)
CU
553,200
500,000
1,053,200
CU
400,000
653,200
1,053,200
B/d
SCE (W3)

CU
CU
4,450,000
800,000
850,000
6,100,000
B/d (2,400,000 + 2,050,000)

Bonus issue
C/d (4,000,000 + 1,300,000)
47
800,000
5,300,000
6,100,000
Bonus Issue (2,400,000 3)

Cash ()
Slick Ltd
Marking guide
Marks
Cash flow statement

Interest paid
Income tax paid
Acquisition of subsidiary
Purchase of PPE
Dividends paid
Presentation
Reconciliation
Inventories
Each other item
Note re acquisition of sub
Each item other than totals mark (max 5)
Total available
Maximum
244
1
2
1
1
1
1
1
2
5
22
20
ANSWER BANK
Consolidated cash flow statement for the year ended 30 June 20X7
Cash generated from operations (Note (1))
Interest paid
Acquisition of subsidiary Kay Ltd net of cash acquired (Note (2))
Proceeds from issue of ordinary share capital (W2)
Dividends paid (W5)
Net decrease in cash and cash equivalents
CU'000
CU'000
413
(25)
(79)
309
(89)
(722)
420
(391)
275
(207)
(11)
57
(25)
35
10

(1) Reconciliation of loss before tax to cash generated from operations
Loss before tax
Finance charge
Depreciation charge
Amortisation charge (130 115)
Loss on disposal of property, plant and equipment (500 420)
Decrease in inventories (670 590 130)
Decrease in trade and other receivables (520 610 200)
Decrease in trade and other payables (521 489 100)
CU'000
(636)
25
657
15
80
50
290
(68)
413
(2) Acquisition of subsidiary

During the year the group acquired subsidiary Kay Ltd. The fair value of the assets acquired and
liabilities assumed were as follows.
Property, plant and equipment (500 + 100)
Inventories
Taxation
Goodwill
Total purchase price
Less Cash and cash equivalents of Kay Ltd
Non-cash consideration shares issued (500 CU1.25)
Cash flow on acquisition net of cash acquired
CU'000
600
130
200
50
(100)
(50)
(166)
664
100
764
(50)
(625)
89
245

WORKINGS
(1)
PPE
B/d
On acq of sub (500 + 100)
Additions ()
(2)
CU'000
1,980
600
722
3,302
CU'000
657
500
2,145
3,302

CU'000
C/d (1,500 + 700)
(3)
2,200
2,200
B/d (800 + 500)

Acq of sub
Cash ()
CU'000
1,300
625
275
2,200
MINORITY INTEREST
CU'000
Dividends to MI ()
C/d
(4)
207
341
548
B/d
Acq of sub ((880 + 100 150) 20%)
IS
CU'000
352
166
30
548
INCOME TAX
CU'000
Cash ()
C/d
(5)
79
131
210
B/d
IS
Acq of sub
CU'000
140
20
50
210
RETAINED EARNINGS
Dividends ()
IS
C/d
246
IS Depn
Disposals
C/d
CU'000
11
686
367
1,064
B/d
CU'000
1,064
1,064
ANSWER BANK
48
Senorita Ltd
Marking guide
Marks
Cash flow statement

Income tax paid
Disposal of subsidiary
Purchase of PPE
Dividends paid
Opening cash
Closing cash
Presentation
Reconciliation
Profit before tax
Depreciation charge
Profit on disposal
Inventories
Note re disposal of sub
Each item other than totals mark (max 4)
Total available
Maximum
1
2
1
1
1
2
1
1
4
19
18
Consolidated cash flow statement for the year ended 31 December 20X5
CU'000
Cash generated from operations (Note (1))
Disposal of subsidiary Amigo Ltd net of cash disposed of (Note (2))
Proceeds from issue of ordinary share capital ((1,000 + 600) (800 + 300))
Dividends paid (W2)
CU'000
442
(108)
334
488
(1,350)
600
(262)
500
(367)
(125)
8
80
(35)
45
247

(1) Reconciliation of profit before tax to cash generated from operations
Profit before tax (950 + 45)
Depreciation charge
Profit on disposal of property, plant and equipment (600 231 (W4))
Increase in inventories (570 490 + 120)
Increase in trade and other receivables (420 310 + 145)
Increase in trade and other payables (221 339 + 132)
CU'000
995
257
(369)
(200)
(255)
14
442
(2) Disposal of subsidiary

During the year the group disposed of subsidiary Amigo Ltd. The book value of the assets and
liabilities disposed of were as follows.
CU'000
450
120
145
12
(132)
(15)
(145)
435
65
500
(12)
488

Inventories
Taxation
Minority interest (580 25%)
Profit on disposal
Total sales proceeds
Less Cash and cash equivalents of Amigo Ltd
Cash flow on disposal net of cash disposed of
WORKINGS
(1)
INCOME TAX
On disposal
Cash ()
C/d
(2)
CU'000
15
108
167
290
CU'000
150
140
290
RETAINED EARNINGS
Dividends paid ()
C/d
(3)
CU'000
125
1,664
1,789
B/d
IS
CU'000
1,019
770
1,789
MINORITY INTEREST
Dividends paid ()
Disposal (Note (2))
C/d (740 + 100)
CU'000
367
145
840
1,352
(4)
B/d (1,052 + 150)

IS
CU'000
1,202
150
1,352
PPE
B/d
Additions
CU'000
3,045
1,350
4,395
248
B/d
IS (130 + 10)
Disposal of sub
Disposals ()
IS Depn charge
C/d
CU'000
450
231
257
3,457
4,395
ANSWER BANK
49

1
Consistency contributes to comparability.
The Framework cites two underlying assumptions that the accounts have been prepared on an
accrual basis (accrual basis of accounting) and that the business is expected to continue in
operation for the foreseeable future (going concern).
The four principal qualitative characteristics are relevance, reliability, comparability and
understandability.
The income statement measures financial performance, the balance sheet measures financial
position and the cash flow statement measures financial adaptability.
An asset is 'a resource controlled by the entity as a result of past events and from which
economic benefits are expected to flow to the entity'. An item might meet the definition of an
asset (3) but can only be recognised if both (1) and (3) are true. Rights to future economic
benefits do not need to be legally enforceable (a lessee does not have legal ownership of a
finance lease but it is still recognised as an asset).
A liability is 'a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits'. The
amount of the liability need not be certain (e.g. a provision). The obligation need not be legally
enforceable (it may be a constructive obligation). Settlement of the obligation must involve an
outflow of economic resources, but not necessarily cash.
The qualitative characteristic of relevance is dependent on materiality and predictive and

confirmatory values. Completeness and faithful representation are characteristics of the
qualitative characteristic of reliability not relevance. Comparability is a separate qualitative
characteristic.
The IASB issue IFRS although the IASCF guide their work programme.
Historic cost accounting measures capital in money terms which does not necessarily maintain
either the real financial capital or the operating capacity of the business.
10
Accrual basis (210,000 50/100) 22,000 = CU83,000

Cash accounting basis ((100,000 + 80,000) 50/100)) 20,000 = CU70,000
11
Historic cost accounting is based on a system of money financial capital maintenance, hence profit
under that system is CU100,000. A system of real financial capital maintenance adjusts for general
price changes (i.e. the CU100,000 is reduced by an allowance for the 5% general price changes,
giving profit of CU95,000). A system of physical capital maintenance adjusts for specific price
changes (i.e. the CU100,000 is reduced by an allowance for the 10% specific price changes, giving
profit of CU90,000).
12
Break-up basis = 14,000 + 7,500 + 1,000 5,000 = CU17,500

Cash accounting basis = 20,000 + 1,000 = CU21,000
13
Users need to be able to compare financial statements through time and across different entities.
Hence the disclosure of corresponding information and accounting policies will assist in this.
Neutrality is relevant to the characteristic of reliability. Materiality is relevant to the
characteristic of relevance.
14
The substance of the arrangement is that of a loan secured on the building. A portion of the
interest of CU200,000 (CU600,000 - CU400,000) should be charged in each of the four years so
that by the repurchase date the loan account stands at CU600,000.
15
GAAP stands for 'generally accepted accounting practice'.

249

16
50
The elements of the financial statements are assets, liabilities, equity, income and expenses.
Assets, liabilities and equity are directly related to the measurement of financial position. Income
and expenses are directly related to the measurement of profit.

1
Inappropriate accounting policies cannot be rectified by disclosure of the policies used or by the
inclusion of explanatory material. Companies must prepare their financial statements (except for
the cash flow statement) on the accrual basis.
All of the items listed will be reflected in the statement of changes in equity.
Revenue and finance cost must be disclosed on the face of the income statement whichever
format is used. Depreciation will appear on the face of an income statement where expenses are
classified by nature but would be subsumed within other categories (cost of sales, administrative
expenses, distribution cost) where expenses are classified by function. Closing inventory appears
on the face of the balance sheet but will be subsumed within cost of sales or changes in
inventories in the income statement.
This is the most commonly seen form of the income statement, which includes cost of sales and
distribution costs. The other three items are all used where expenses are classified by nature.
700,000 + 400,000 250,000 = CU850,000
B
CU'000
2,000
1,100
600
750
4,450
Brought forward
Revaluation (1,500 (2,000 1,600))
Share issue (500 + 100)
Profit
Carried forward
The dividend was not declared until after the year end so does not reduce equity this year.
7
51
The inventory is expected to be realised within the normal operating cycle of 18 months
therefore is classified as current. Because Finstock Ltd builds houses, the house is inventory as
opposed to property and hence, since it will be realised within the normal operating cycle, is
classified as current. According to BAS 1, marketable securities are classified as current if they
are expected to be realised within 12 months of the balance sheet date. This is not the case here
so the securities are classified as non-current.
BAS 2 Inventories
1
Only two cost formulas are allowed by BAS 2: FIFO and WAC (Weighted Average Cost)
therefore (1) and (2) are incorrect and (3) is correct. (4) is correct although if inventories do
not have a similar nature different cost formulas may be used.
Carriage outwards on goods delivered to customers will be relevant to the calculation of NRV,
but not cost. BAS 2 specifies that abnormal costs should not be carried forward in inventory.
Raw materials (CU100,000 10,000)

Direct labour (CU50,000 10,000)
Variable overheads (CU40,000 10,000)
Fixed overheads (CU120,000 12,000)
4
250
Cost per widget

CU
10
5
4
10
29
1,000 widgets = CU29,000
BAS 2 applies to all inventories except work-in-progress under construction contracts, financial
instruments (e.g. shares, bonds) and biological assets.
ANSWER BANK
5
Costs applicable to normal levels of production = 100,000 + 50,000 + 40,000 + (120,000 2/3)
= 270,000
Closing inventory 1,000/10,000 270,000 = CU27,000
Charged to IS in year (270,000 27,000) + (120,000 1/3) = CU283,000
A
Revenue ((10,000 3,000) CU45)
Costs
Closing inventory at NRV* (3,000 CU29)
Net profit
CU
315,000
(352,500)
87,000
49,500
*Cost per unit = 312,500/10,000 = CU31.25 therefore NRV of CU29 (35 6) is lower
7
C
Raw materials (7,000 CU20)
Work in progress at NRV (2,500 ((35 80%) 2 2.50))
Finished goods at NRV (1,000 ((35 80%) 2))
52
CU
140,000
58,750
26,000
224,750
BAS 7 Cash Flow Statements (single company only)

1
B
Issue of shares (7,000 CU2)
Repay long-term borrowings
Net cash flow from financing activities
CU
14,000
(4,100)
9,900
Increase in cash in hand (1,100 1,000)

Increase in cash at bank (21,932 + 41,627)
Net increase
CU
100
63,559
63,659
Profit before tax (30,000 25,000)

Increase in inventories and trade receivables (55,000 48,000)
Decrease in trade payables (20,000 14,000)
Depreciation charge (10,000 8,000)
Cash used in operations
CU
5,000
(7,000)
(6,000)
2,000
(6,000)
Tax and dividends appear below profit before tax and hence do not appear in the reconciliation.
Depreciation and an increase in a provision are charged before arriving at profit before tax and
hence are adjusted for in the reconciliation.
251

5
C
DIVIDENDS PAYABLE
CU
40,000
30,000
Cash ()
C/d Final for 20X3
B/d Final for 20X2

Income statement
Interim for 20X3
Final for 20X3
70,000
6
CU
25,000
15,000
30,000
70,000
B
PROPERTY, PLANT AND EQUIPMENT NBV
B/d
Cash ()
CU
330,000
75,000
405,000
Depn
Disposals (W)
C/d
CU
90,000
45,000
270,000
405,000
WORKING
DISPOSALS
Income statement
NBV ()
7
CU
15,000
45,000
60,000
Cash
CU
60,000
60,000
Only the fresh issue of ordinary shares generates cash = 200,000 CU1.20 = CU240,000
The redeemable preference shares are classified as borrowings so the CU110,000 received will
be classified as proceeds from issue of borrowing, not proceeds from issue of equity share
capital.
The reconciliation starts with profit before tax so tax does not appear within it. Income taxes
paid were CU10,500.
WORKING
INCOME TAX PAID
Cash ()
C/d
10
CU
10,500
15,500
26,000
B/d
Income statement
Issue of non-current interest-bearing borrowings of (30,000 25,000) CU5,000 shown as an

inflow under financing activities. Interest paid of (700 + 600 500) CU800 shown as an outflow
under operating activities. The finance cost of CU600 is added back to profit before tax in the
reconciliation.
Profit before tax

Depreciation charge
Increase in trade receivables
Increase in trade payables
252
CU
10,000
16,000
26,000
CU
52,000
21,600
(15,500)
14,600
72,700
ANSWER BANK
11
C
SHARE CAPITAL
CU
C/d
50,000
50,000
CU
40,000
4,000
6,000
50,000
B/d
Bonus issue (40,000 10)
Cash ()
SHARE PREMIUM
CU
4,000
27,500
31,500
Bonus issue
C/d
CU
25,200
6,300
31,500
B/d
Cash ()
Therefore, total cash received for shares (6,000 + 6,300)

12
13
12,300
It would not feature in the statement at all, but would appear in the reconciliation note.
PROPERTY, PLANT AND EQUIPMENT NBV

B/d
Revaluation (31,000 16,500)
Additions ()
14
CU
225,600
14,500
91,500
331,600
Disposals (40,000 10,100)

C/d
CU
29,900
301,700
331,600
B
Profit before tax
Increase in prepayments (2,550 2,300)
Decrease in accruals* (1,670 1,560)
Deduct
CU
X
(250)
(110)
(360)
* other than accrued interest which is adjusted for in arriving at interest paid.
15
Investing activities
Sale of property, plant and equipment
CU
10,000
(109,000)
(99,000)
Financing activities
Share issue (100,000 CU1.20)
Repay loan
16
17
CU
120,000
(25,000)
95,000
CU6,500 will be shown as purchase of PPE (an investing outflow), CU4,250 (the capital element
of the finance lease repayment) will be shown as a financing outflow, and the interest of CU750
will be shown as an operating outflow.
Cash receipts from customers (850,000 + 125,500 135,400)

Cash paid to suppliers and employees (610,500 + 45,500 35,700)
Interest paid
CU
840,100
(620,300)
(500)
219,300
253
53
BAS 8 Accounting Policies, Changes in Accounting Estimates and

Errors
1
A is not a change of accounting policy (the accounting policy is still to carry property under the
valuation model as opposed to under the cost model), B is a change of accounting estimate, D is
specifically mentioned in IAS 8 as not constituting a change of accounting policy.
Material errors are treated in the same way as changes of accounting policy, by the application of
retrospective restatement.
BAS 8 requires that a change in accounting policy is accounted for by retrospective application.
Only capitalisation of borrowing costs represents a change of accounting policy.
Both changes in accounting policies and the correction of material prior period errors are dealt
with retrospectively. Changes in accounting estimates are dealt with prospectively.
Profit for the year = 45,000 2,000 = CU43,000

Retained earnings brought forward = 350,000 5,000 = CU345,000
Plant at NBV = 250,000 30,000 5,000 2,000 = CU213,000
54
55
254
(1) is a change in accounting estimate. (2) is not a change in accounting policy, but a change in
classification. This is covered by BAS 1 which requires that comparative amounts are also
reclassified and certain disclosures given.
BAS 10 Events After the Balance Sheet Date

1
Adjusting events are reflected in the financial statements, therefore there is no specific
requirement to disclose such events.
CU1,800,000 CU116,000 CU20,000 = CU1,664,000
The fire (D) had not taken place at the balance sheet date. Although notice of the customer
ceasing to trade (A) was not received until 31 March 20X5, the customer would have been in
difficulties at the balance sheet date and hence the debt was irrecoverable at that date. Although
evidence of the inventorys NRV at below cost was not available until April, NRV is assumed to
have fallen by the balance sheet date. The legal action (B) was ongoing at the balance sheet date,
and the courts decision on 27 April showed the amount to be provided.
Only dividends declared before the year end are recognised as liabilities. The claim in respect of
storm damage was in negotiation at the year end so that storm must have occurred by the
balance sheet date hence this is an adjusting event and the uninsured amount of CU75,000
should be recognised as a liability.
In A, the decision to sell was not made until after the year end therefore this is a non-adjusting
event. In B and C, the liquation/bankruptcy would have occurred by the year end; it was just that
Gawain Ltd did not know of it until after the year end. In that it had occurred by the year end
both matters are adjusting. In D, the fire took place before the year end so is an adjusting event.

1
780,000 + 117,000 + 30,000 + 28,000 + 18,000 + 100,000 = CU1,073,000
None of these statements is correct. The purpose of the provision for depreciation is to spread
the cost less residual value of an asset over its useful life ((1) and (3)). When an asset is revalued,
depreciation on the whole (revalued) amount is charged to the income statement. Depreciation
on the surplus may be debited to the revaluation reserve but only as a reserve transfer from
retained earnings (2). A change in depreciation method constitutes a change in accounting
estimate, not policy per BAS 8 (4).
ANSWER BANK
3
C
Original purchase price
Depreciation for 20X1 ((50,000 5,000) 5)
Depreciation for 20X2
Upgrade 31 December 20X2
NBV at end of 20X2
Depreciation for 20X3 ((47,000 5,000) 5)
NBV 1 January 20X4
Disposal proceeds
Loss on disposal
D
Depreciation based on original cost (16,000 25%)
Depreciation based on revalued amount (12,000 2)
Decrease in profit
CU
48,000
(24,000)
24,000
30,000
6,000
(2,000)
4,000
*Historic cost depreciation charge (24,000 3)

Depreciation charge on revalued amount (30,000 3)
Excess depreciation
8,000
(10,000)
2,000
Year ended 30 June 20X5 on revaluation (1.3m 1m)

Year ended 30 June 20X6 on disposal (1.4m 1.3m)
CU
300,000
100,000
A
Revalued on 1 January 20X5 to
Accumulated depreciation to 31 December 20X5 (600,000 6)
NBV on 1 January 20X6
Sale proceeds
Profit on disposal
CU
4,000
6,000
2,000
Only asset 1001 has a balance in respect of it in the revaluation reserve. Since its revaluation loss
of CU2,500 is less than its balance on the revaluation reserve of CU3,000 the whole of this loss
can be charged to the revaluation reserve. The losses on the other two (CU3,000 and CU1,500)
must be charged to the income statement.
Cost
Depreciation to 30 June 20X9 (48,000 25% 2)
Carrying amount at revaluation
Revaluation
Revaluation reserve
Excess depreciation charged to revaluation reserve
in y/e 30 June 20Y0*
Revaluation reserve at 30 June 20Y0
CU
50,000
(9,000)
(9,000)
15,000
47,000
(8,400)
38,600
(7,000)
31,600
CU
600,000
(100,000)
500,000
700,000
200,000
BAS 16 states that where there is an exchange of items of PPE such that there is no cash price,
cost should be measured at fair value. Here, instead of paying cash, Sparrow Ltd has given up an
asset with a fair value of CU1 million, in order to acquire the building previously owned by
Turner Ltd. Hence this building should be recorded in Sparrow Ltds books at that amount.
255

10
56
This is true for initial revaluations upwards. For a subsequent revaluation upwards which
reverses a previous revaluation loss which was recognised in the income statement this will not
necessarily hold true. Re A, whole classes of assets must be carried under either the revaluation
model or the cost model it is not permissible to revalue just those assets where carrying
amounts and market values are materially different. Re B, assets must be revalued with sufficient
regularity such that carrying amounts never differ materially from fair values. Although BAS 16
mentions five years, longer could be justified if fair value movements are small and slow. Re D,
the fair value of land and buildings is based on market values, which will take into account
alternative uses.
BAS 17 Leases
1
Assets held under finance leases are recorded at their fair value (here, the cash price) and
depreciated over the shorter of the lease term and the assets useful life. Here, the lease term is
six years (the primary period plus the secondary period, since this is expected to be taken up)
and the useful life is five years.
Year ended
31 Dec 20X4
31 Dec 20X5
B/f
CU
2,050
1,730
Payment
CU
(500)
(500)
Capital
CU
1,550
1,230
Interest
CU
(4/10) 180
(3/10) 135
C/f
CU
1,730
1,365
Borrowing over four periods (since paying in advance)

Therefore SOTD = (4 5) 2 = 10
Total interest = (5 500) 2,050 = CU450
3
Borrowing over ten quarters (since paying in arrears)

CU
6,000
26,000
(24,000)
8,000
Deposit
Instalments (10 CU2,600)
Cash price
Total interest
Allocated to 4th repayment = 7/55 CU8,000 = CU1,018
5
D
Year ended
31 Dec 20X4
31 Dec 20X5
B/f
CU
2,050
1,700
Interest
CU
(5/15) 150
(4/15) 120
Payment
CU
(500)
(500)
C/f
CU
1,700
1,320
Borrowing over five periods (since paying in arrears)

Total interest = (5 500) 2,050 = CU450
256
There is no period-end liability for an operating lease, only for a finance lease.
Although this will usually lead to leases of land being treated as operating leases and leases of
buildings being treated as finance leases this will not always be the case.
ANSWER BANK
8
C
Cash paid (60,000 + 30,000)
Income statement charge ((60,000 + (3 30,000)) 3))
Prepayment
57
CU
90,000
(50,000)
40,000
The underlying concept of the treatment of leases is substance over form. This is a consequence
of the requirement to present transactions faithfully, part of the qualitative characteristic of
reliability.
10
CU24,000 (the cash price less the deposit) is owed on 1 January 20X7. This is subject to interest
at 12% for 20X7, as no further payment is made until the last day of 20X7. Therefore CU24,000
12% = CU2,880.
BAS 18 Revenue
1
Because the risk and rewards of ownership have not yet passed (the goods are unsold at the year
end) revenue should not be recognised. Hence the CU20,000 selling price should be removed
from revenue and trade receivables and the CU15,000 cost added in to closing inventories (and
hence be removed from cost of sales).
Inventories = 110,000 + 15,000 = CU125,000
Trade receivables = 190,000 20,000 = CU170,000
B
Total contract price
Less: After-sales support (500,000 5 years 130%)
Revenue for year re supply of software
Revenue for year re after-sales support (500,000 130%)
CUm
5.00
(3.25)
1.75
0.65
2.4
C
Supply of hardware
One year of after-sales support at additional fixed fee
(1m 4 years)
CUm
3.00
0.25
3.25
Once a sale has been made, the revenue should be measured at the fair value of the
consideration receivable, i.e. CU290,000.
For the rendering of services, BAS 18 requires that revenue is recognised by reference to the
stage of completion of the contract (provided revenue, stage of completion and costs can be
measured reliably and it is probable that economic benefits will flow to the seller). We are told
that all figures are reliable and that the contract is expected to make a profit hence economic
benefits will flow to the seller. Therefore 40% of the revenue is recognised this year.
Where costs cannot be measured reliably in respect of a contract for the rendering of services
(see answer 5 above) and the outcome of the contract is uncertain, revenue should be restricted
to the extent of the costs which are recoverable.
BAS 18 requires revenue from artistic performances to be recognised when the event takes place
(Appendix para 15). Since the June production was delayed until July only Mays proportion of the
season ticket (1/5 CU100) should be recognised by 30 June 20X6.
257
58
59

1
Redeemable preference shares are classified as liabilities. Dividends on these shares are shown as
finance cost in the income statement, not as dividends in the statement of changes in equity.
Irredeemable preference shares are classified as equity. Dividends on these shares are reflected
in the statement of changes in equity.
(1) is a financial liability, (2) and (4) are financial assets, (3) is neither and (5) could be either,
depending on which companys financial statements are being considered.

1
They are all true. (3) is true because an asset is impaired if its recoverable amount is less than its
carrying amount. Recoverable amount is the higher of fair value less costs to sell and value in
use so if fair value less costs to sell already exceeds the carrying amount there is no need to
estimate value in use.
Recoverable amount is the higher of fair value less costs to sell (CU18,000) and value in use
(CU22,000).
C
Cost
Depreciation:
Year ended 31 March 20X3 @ 25%
Recoverable amount
Impairment loss
(25,000)
75,000
(18,750)
56,250
(14,063)
42,187
(10,547)
31,640
(22,000)
9,640
Recoverable amount is the higher of fair value less costs to sell and value in use i.e. CU450,000.
The impairment loss is therefore CU250,000 (700,000 450,000). Since there is CU200,000
(700,000 500,000) in the revaluation reserve in respect of this land, then CU200,000 of the
impairment loss can be set against the revaluation reserve, with the remaining CU50,000 charged
to the income statement.
Carrying amount at revaluation

Depreciation to 31 December 20X6 (80,000 3/8)
Carrying amount on 31 December 20X6
Revalued to
Impairment loss
Charged to revaluation reserve (see below)
Charged to income statement ()
Cost 1 January 20X2
Depreciation to 31 December 20X3 (50,000 2/10)
Carrying amount on 31 December 20X3
Revalued to
To revaluation reserve on 31 December 20X3
Annual transfer of excess depreciation
Depreciation based on revalued amount (see above)
Depreciation based on historic cost (50,000 3/10)
Balance on revaluation reserve on 31 December 20X6
258
CU
100,000
CU
80,000
(30,000)
50,000
(20,000)
30,000
25,000
5,000
30,000
50,000
(10,000)
40,000
80,000
40,000
(30,000)
15,000
25,000
ANSWER BANK
6
60
61
In addition to intangible assets with indefinite useful lives and goodwill acquired in a business
combination, which must be tested for impairment annually, other assets are only required to be
tested for impairment if there are indications of a possible impairment (such as a fall in market
values or evidence of physical damage).
BAS 37 Provisions, Contingent Liabilities and Contingent Assets

1
BAS 37 excludes retraining and relocation of continuing staff from restructuring provisions.
All three criteria must be present.
(1) is not correct if it is probable and the amount can be estimated reliably, then it must be
provided for.
In (1) as the board decision had not been communicated by the year end there is assumed to be
no legal or constructive obligation therefore no provision should be made. In (2) as refunds have
been made in the past to all customers there is a valid expectation from customers that the
refunds will be made therefore the amount should be provided for. In (3) there is no present
obligation to carry out the refurbishment therefore no provision should be made.
Since it is probable (i.e. 'more likely than not') that the claim will be paid out a provision should
be made for the claim against Airedale Ltd. The claim Airedale Ltd has made against a third party
is a contingent asset. Contingent assets are only ever disclosed, and only then if it is probable that
the asset will be recovered, as is the case here.
As refunds have been made in the past there is a valid expectation from customers that the
refunds will be made, creating a constructive (as opposed to a legal) obligation. Therefore Wally
Ltd must provide for customer refunds. Regarding A there is no obligating event (see answer 7)
as the training has not been carried out, therefore no provision should be made. B is a contingent
asset as opposed to a contingent liability or a provision. Regarding D since Wally Ltd is unlikely
to lose the case, disclosure should be made as a contingent liability, as opposed to a provision
being made.
A provision is recognised under BAS 37, inter alia, where the entity has a present obligation as a
result of a past event. At 31 December 20X5 there is no obligating event as neither the refit nor
the fitting of the safety equipment has been carried out therefore no provision is needed for
either.
Since it is probable (i.e. 'more likely than not') that the claim against Charlotte Ltd will succeed a
provision should be made. Counter-claims should be recognised as separate assets but only
where reimbursement is virtually certain. Here reimbursement is only 'probable' so the claim
against George Ltd should be disclosed, but not recognised as an asset.

1
(1) False negative goodwill is recognised immediately in profit or loss, not shown on the
balance sheet. (2) False positive goodwill is capitalised and then subject to impairment reviews
there is no alternative treatment. (3) and (4) False and true neither internally generated
goodwill nor internally developed brands can be capitalised.
Development costs
Depreciation on equipment used for development (100,000 5)
3
CU
300,000
20,000
320,000
Regarding A costs are capitalised throughout the development phase then amortised once
development is complete. Regarding B this says that the project will at least break even if it
was to make a loss, the costs could not be carried forward.
259
62
260
C is given as an example of research activities in BAS 38 (para 56 (c)). Research costs are written
off as incurred. A is given as an example of development activities in BAS 38 (para 59 (a)) and
may therefore be carried forward if certain conditions (para 57) are met. B the cost of the
patent, including these legal costs, will be capitalised as a separately acquired intangible. D
recoverable costs will be an asset in their own right (a receivable from the customer).
(1) Whilst there is a choice to measure all intangibles after initial recognition at cost or fair value,
in order for fair value to be used it must be possible to measure fair values reliably with
reference to an active market. This is unlikely to be possible for most (unique) intangibles.
Also for one intangible to be revalued, the whole class of intangibles must be revalued. (2)
Revaluations must be carried out with sufficient regularity to ensure that the carrying amount
does not differ from the fair value. This is not necessarily annually.
(1) is given as an example of research activities in BAS 38 (para 56 (b)). Research costs are
written off as incurred. (2) is an acquired intangible and will therefore automatically meet BAS
38s recognition criteria. Although (3) is not a separable intangible it arises from legal rights and is
therefore identifiable and may be recognised provided its cost can be measured reliably (and it
can, at CU50,000). Therefore a total of CU110,000 is recognised (CU60,000 plus CU50,000).
(1) can be capitalised as the BAS 38 para 57 criteria appear to be met. (2) cannot be capitalised as
BAS 38 prohibits the recognition of internally generated brands. Regarding (3) although
goodwill acquired on a business combination is recognised under BFRS 3 Business Combinations as
an intangible asset, per BAS 38 any goodwill recorded in the acquirees books cannot be
recognised. Therefore only CU50,000 (1) is recognised.
For an asset to be recognised as an intangible asset in accordance with BAS 38 it must be

identifiable (1). Identifiable means the asset is either separable or arises from contractual or
other legal rights therefore (2) is not correct. Once an asset had met the identifiability test it is
only recognised if it is probable (not just 'possible' per (4)) that future benefits from the asset
will flow to the entity and the cost of the asset must be able to be measured reliably (3).
Having been initially recognised at cost, the entity then has a choice of the cost model or the
revaluation model for each class of intangibles. A is false intangible assets with indefinite useful
lives are not amortised but reviewed for impairment annually. B is false residual values are
assumed to be zero unless a third party is committed to buying the asset at the end of its useful
life or there is an active market for that type of asset (which would be unusual for an intangible).
C is false intangible assets must meet the basic definition of an asset, which includes the fact
that the asset must be under the control of the entity. Employees skills are not controlled by the
entity as the employees could decide to leave.
BFRS 5 Non-current Assets Held for Sale and Discontinued Operations

1
A discontinued operation is one that has either been disposed of in the period, or is held for sale.
A held for sale asset is one where the sale has been committed or is expected to be complete
within one year from the date of classification. This division does not qualify as held for sale in
20X4 as it is not expected to be sold until early 20X6. It will therefore not be disclosed as
discontinued until 20X5.
BFRS 5 para 33. Additional disclosures are required by way of note.
BFRS 5 para 33. Although the disclosures described in C are required they may be given on the
face of the cash flow statement, or by way of note.
Since the decision to sell was made by the year end and the sale is expected to be completed
within 12 months the retail division will be classified as a discontinued operation. Until the noncurrent assets of the division are finally disposed of, they are shown in the balance sheet,
separately from all other assets, as non-current assets held for sale (usually immediately
underneath the sub-total for current assets). This will be the case at 30 June 20X7. These assets,
which were classified as non-current assets prior to their division being classified as held for sale
are not reclassified as held for sale in any prior periods.
ANSWER BANK
5
Both meet the definition of a component as they have both been reported separately. The
closure of Division A does not represent the discontinuance of a separate major line of business
as its operations have been moved to another division. Division B does represent this type of
discontinuance as its operations have been outsourced.
Since the sale was completed within one year of classification this is a discontinued operation in
the year ended 31 December 20X7. The original loss of CU100,000 will be increased by a
provision for the redundancy costs in accordance with BAS 37.
Once the division is classified as held for sale any non-current assets are reclassified as noncurrent assets held for sale and depreciation on them ceases.
Carrying amount on 1 November 20X0
Depreciation up to classification as held for sale (30,000 1% 11)
On classification as held for sale an asset held under the cost model is measured at the lower of
its carrying amount and its fair value less costs to sell. On ultimate disposal any difference
between carrying amount and disposal proceeds is treated as a loss or gain under BAS 16.
Carrying amount on classification as held for sale
Fair value less costs to sell (30,000 500)
Impairment loss
Profit on sale (32,000 29,500)
CU
40,000
(29,500)
10,500
2,500
D
Cost
Depreciation to 31 December 20X8 (800,000 50 12)
Carrying amount on classification as held for sale
Fair value less costs to sell (600,000 10,000)
Impairment loss
Loss on sale (590,000 580,000)
10
CU
15,000
(3,300)
11,700
CU
800,000
(192,000)
608,000
(590,000)
18,000
10,000
Assets held under the revaluation model are revalued to fair value immediately prior to
classification as held for sale. Costs to sell are immediately recognised in the income statement as
an impairment loss.
Immediately before classification as held for sale:
Carrying amount
Revaluation
Credit to revaluation reserve
CUm
1.5
1.7
0.2
On classification as held for sale:

Costs to sell recognised in income statement
CU20,000
Sale is in the year ended 31 December 20X8 so final profit of CU100,000 (1.8m 1.7m) will be
recognised in the income statement then and the balance in the revaluation reserve in respect of
this asset transferred to retained earnings.
261

11
B
Cost
Depreciation to 31 December 20X5 (200,000 25%)
Carrying amount on revaluation
Revalued to
Original balance on revaluation reserve
Carrying amount on revaluation on 1 January 20X6
Depreciation for 20X6 @ 25%
Depreciation for 20X7 @ 25%
Carrying amount immediately before classification as held for sale
CU
200,000
(50,000)
150,000
280,000
130,000
280,000
(70,000)
210,000
(52,500)
157,500
Immediately prior to classification as held for sale the asset will be revalued to its fair value of
CU80,000, and this fall in value of CU77,500 will be debited to the revaluation reserve. The
remaining CU52,500 in the revaluation reserve will be transferred out to retained earnings on
sale. The classification as held for sale at below carrying amount brings forward the debit to the
revaluation reserve.
On classification as held for sale the costs to sell of CU5,000 are recognised in the income
statement.
262
ANSWER BANK
63

1
B
Falcon Ltd
Kestrel Ltd (80% (15 10))
Less: Impairment of goodwill *
Cost of investment
Less: Fair value of net assets acquired (80% 20)
*Goodwill
2
CUm
58
4
(8)
54
CUm
24
(16)
8
C
CU'000
Ordinary shares
Retained profit for the 9 months ended 30 September 20X1 (9/12 40)
328
20
348
Group share ( 80%)

Add Goodwill
Cost of investment
3
A
Xanthe Ltd
QED Ltd
Inventories in transit
Less: PURP ((20 + 10) 30%))
CU'000
160
90
10
(9)
251
C
Dividends payable by parent (Xiao Ltd)
Dividends payable to minority
Yacht Ltd (20% 30,000)
Zebra Ltd (25% 20,000)
300
80
30
410
CU
60,000
6,000
5,000
71,000
D
Consolidated balance sheet
Less Woolf Ltd
Add back PURP (5,000 80%)
Group share of Stephen Ltd
Therefore, retained earnings of Stephen Ltd = 100/80 CU32,000
CU
230,000
(202,000)
4,000
32,000
CU40,000
263

6
B
Cost of investment
Group share of post-acquisition retained earnings (30% 5)
A
Cost of investment
Group share of post-acquisition retained earnings (40% (220 30))
Less: PURP (40% 10 25%)
10
11
CU'000
1,875
50
1,925
The unrealised profit is CU5,000 and the inventories are still held by Aster Ltd. Therefore the
adjustment must be to Cr consolidated inventories. However as Flower Ltd is an associate the
amount is only the group share of the unrealised profit i.e. 30% 5,000 = CU1,500.
Consolidated retained earnings per question

Less: Group share of depreciation of fair value adjustment ((120 5) 75%)
Goodwill per question
Less: Group share of fair value adjustment (120 75%)
CU'000
60
76
(1)
135
After the disposal, Geranium Ltd retains a 15% holding in Rose Ltd. This is treated as a simple
non-current asset investment and valued at the date of disposal using the equity method.
Net assets (15% (5,000 + 6,500 + 6/12 2,000))
Goodwill remaining (1/4 (5,000 60% 8,000))
12
CUm
12.0
1.5
13.5
CU'000
400
(18)
382
200
(90)
110
The redeemable preference shares are debt, not equity, so do not feature in the calculation of
minority interest.
Minority interest = 700,000 30% = CU210,000
13
B
Cost of investment
Group share of post-acquisition retained earnings (30% 8,000)
Less: Goodwill impairment to date (40% 2,000)
Cost of investment
Less: Fair value of net assets acquired (30% 40,000)
Goodwill
264
CU
14,000
2,400
(800)
15,600
CU
14,000
(12,000)
2,000
ANSWER BANK
14
B
Mandy Ltd
Len Ltd (96,000 (96,000 24,000))
Less: Goodwill impairment (48,000 20%)
Cost of investment
Less: Fair value of net assets acquired
Goodwill
64
CU
244,800
24,000
(9,600)
259,200
CU
144,000
(96,000)
48,000
Consolidated statements of financial performance

1
The provision for unrealised profit is CU5,000 (30,000 20/120). Since the seller was the
subsidiary, the profit is eliminated against the subsidiary's profits, meaning that both the group
and the minority interest will bear their share.
Pumpkin Ltd
Squash Ltd
Less: Intra-group sales
Add: PURP (8,000 5,000)
B
Sale proceeds
Less: Share of net assets at disposal (80% 3,310)
Less: Carrying amount of goodwill at date of disposal
(2,360 (80% 2,240) 100)
C
Sale proceeds
Less: Share of net assets at disposal (45% 12,500)
((5,000 (60% 8,000)) 3/4)
Profit on disposal
B
Pre-disposal (3/12 576,000 10%)
Post-disposal (9/12 576,000 40%)
B
Revenue (769,000 + (9/12 600,000) 7,000)
Cost of sales (568,500 + (9/12 420,000) 7,000 + 2,000)
Gross profit
CU
100,000
80,000
(8,000)
3,000
175,000
CU'000
3,600
(2,648)
(468)
484
CU'000
6,500
(5,625)
(150)
725
CU'000
14,400
172,800
187,200
CU
1,212,000
(878,500)
333,500
265

7
A
Share of associate's profits (30% 120,000 6/12)
Sales proceeds
Less: Share of net assets at disposal (30% 1,200,000)
(450,000 (30% 1,000,000))
Profit on disposal of associate
11
CU
30,000
4,500
34,500
CU
490,000
98,000
B
Alayna Ltd paid to group shareholders
Ellen Ltd paid to minority interest (200,000 25%)
CU
500,000
50,000
550,000
Subsidiary Ltd
Less: PURP (15,000 20/120 )
CU'000
55,000
(1,250)
53,750
10,750
MI share ( 20%)
65
(150,000)
90,000
An adjustment representing the increase in the minority interest on the decrease in holding must
be made. This will be the increase in the minority interest in the net assets of Pip Ltd at disposal.
Net assets at disposal (400,000 + (9/12 120,000))
increase in minority interest % (was 20% now 40% therefore 20%)
10
600,000
(360,000)
C
Minority interest at start of year (10% 300,000)
Minority interest in profits of year (10% 60,000 9/12)
CU
18,000

1
B
MINORITY INTEREST
CUm
266
Dividends to MI ()
2.7
C/d
6.0
8.7
B/d
IS
Revaluation
Acquisition of sub (6.4 25%)
CUm
3.6
2.0
1.5
1.6
8.7
ANSWER BANK
C
CU'000
635
69
704
B/d
IS (230 30%)
Dividends from associates ()

C/d
CU'000
4
700
704
Transactions between associates and the group are not cancelled on consolidation, hence the
repayment of the advance of CU30,000 will appear in the consolidated cash flow statement. The
cash from sale of the plant will be reflected in the associate's own cash flow statement, but not in
the consolidated cash flow statement all that is shown in the consolidated cash flow statement
is dividends received by the parent from associates (100,000 20p 40% = CU8,000).
The net cash effect of the disposal is shown (i.e. CU2 million cash proceeds less the CU20,000
cash and cash equivalents disposed of = CU1,980,000).
The net cash effect of the acquisition is shown. This will usually be the cash consideration less
the cash and cash equivalents acquired. However, in this case, Dougal Ltd has acquired Lucy Ltd's
overdraft so the net cash effect is the cash consideration of CU400,000 plus the overdraft of
CU40,000 = CU440,000.
The cash outflow will be in respect of cash paid for purchases of PPE. In calculating this figure
the PPE acquired under finance leases and the PPE acquired with the subsidiary need to be
excluded. The former because the purchase was not for cash, the latter because any cash effect
will have already been included in the consolidated cash flow statement as part of the figure for
acquisition of subsidiary. The cash from the disposals of CU38,000 will be shown as a cash inflow
the two are not netted off.
PROPERTY, PLANT AND EQUIPMENT
B/d
Finance leases
On acquisition of subsidiary
Cash additions ()
CU
257,900
40,000
35,000
413,000
745,900
Disposals
IS - Depreciation
C/d
Increase in receivables (340 235 90)
15
Decrease in payables (275 135 165)
25
CU
32,000
135,000
578,900
745,900
Cash received from the sale of CU460,000 will be shown as an investing inflow, along with any
dividends received from the associate which in this case were CU225,600 (see working below).
B/d
IS (30% 350,000)
CU
120,600
105,000
225,600
Dividends from associates ()

C/d
CU
225,600
225,600
267
66

1
Ulysses Ltd is not consolidated. The civil war means that Sarah Ltd is no longer able to exercise
control over Ulysses Ltd; consequently the definition of a subsidiary is not met. Dissimilar
activities are not grounds for exclusion and hence Wally Ltd is consolidated.
Consul Ltd cannot exercise significant influence over Warrior Ltd because it is controlled by
another company and, with a 75% holding, that company can do most things, including passing
special resolutions, without paying much attention to Consul Ltd. Consul Ltd has the largest
shareholding in Admiral Ltd and a board seat, so will be able to exercise significant influence over
Admiral Ltd. Sultan Ltd is not so clear cut. However, it is likely that both the other entity and
Consul Ltd have significant influence over Sultan Ltd.
Per BFRS 3 goodwill acquired in a business combination should be reviewed for impairment
annually.
Statement (1) Untrue there is a presumption that Lyle Ltd would be an associate of Kyle Ltd
at a holding or 20% or over, but this is rebuttable (for example if another party held, say, 70% of
the shares whilst Kyle Ltd only held 30%).
Statement (2) True if Kyle Ltd controls Lyle Ltd then Lyle Ltd will be a subsidiary not an
associate.
Statement (3) True there is no elimination of balances for an associate as the associate is not
part of the group.
B
CU
2,880,000
7,200,000
400,000
10,480,000
Cash (80% 3,000,000 CU1.20)

Shares (80% 3,000,000 2 CU1.50)
Acquisition fees
In accordance with BFRS 3, restructuring provisions can only be included in the goodwill
calculation if there is an existing liability for the restructuring in accordance with BAS 37
Provisions, Contingent Liabilities and Contingent Assets. In this case Jerry Ltd has no such existing
liability and therefore the provision is excluded.
Cost of investment
Less: Share of fair value of net assets acquired
Carrying amount of net assets
Fair value adjustment to PPE
Contingent liability
Group share 80%
Goodwill
CA in Bangladesh (We believe in sharing...)

268
CU
1,350,000
100,000
(200,000)
1,250,000
CU
1,450,000
(1,000,000)
450,000
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