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ACCA
PAPER F7
FINANCIAL REPORTING
(INTERNATIONAL)
JUNE 2012
(i)
No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this publication can be accepted by the author, editor or publisher.
This training material has been published and prepared by Accountancy Tuition Centre (International Holdings)
Limited
16 Elmtree Road
Teddington
TW11 8ST
United Kingdom.
(ii)
Page
Answer
1
2
3
4
1001
1003
1005
1007
18
22
17
26
6
6
6
6
7
7
7
8
1009
1010
1011
1012
1013
1014
1015
1016
6
8
8
5
16
12
20
8
8
9
10
11
1016
1018
1020
1022
15
12
14
20
11
11
1023
1025
12
8
12
1025
20
13
1027
25
14
15
1030
1033
14
15
15
16
17
1035
1037
1038
15
9
20
18
19
1039
1040
8
13
FINANCIAL STATEMENTS
1
2
3
4
Oscar
Mercury
Sulphur
Cayman
ACCOUNTING CONCEPTS
5
6
7
8
9
10
11
12
Adjustments
Sponger
Fam
Stoat (ACCA D99)
Jenson
XYZ
Snow
Intellectual Individuals
Rovers (ACCA J97)
Lamond (ACCA D00)
INVENTORY (IAS 2)
26
27
Allrights Inc
Sampi (ACCA J98)
(iii)
Page
Answer
20
1041
William
12
Earley
Accounting treatment
20
21
1043
1044
13
12
22
23
24
24
25
1045
1046
1047
1048
1048
15
26
28
29
31
32
33
34
35
36
37
38
39
40
1049
1053
1055
1057
1059
1061
1063
1065
1067
1069
1071
1073
1074
19
12
12
12
12
10
15
10
10
13
10
10
16
41
1076
15
41
42
1078
1081
20
20
44
45
46
1083
1085
1088
20
18
10
47
1089
14
Shep (I)
Shep (II)
Shep (III)
Shep (IV)
Broken dreams
GROUP ACCOUNTS
36
37
38
39
40
41
42
43
44
45
46
47
48
Consolidations
Honey
Hatton
Haggis
Hammer
Hut
Hat
Humphrey
High
Happy
Haley
Hamish
Hydrogen
Period of inflation
Standard
Fallen
Witton Way
Rapido
Not-for-profit
(iv)
Administrative expenses
Share capital (ordinary shares of $1 fully paid)
Receivables
Bank overdraft
Income tax (overprovision in 2011)
Provision for pollution costs
Distribution costs
Listed financial asset investments
Investment income
Plant and machinery: Cost
Accumulated depreciation (at 31 March 2012)
Retained earnings (at 1 April 2011)
Purchases
Inventory (at 1 April 2011)
Trade payables
Sales revenue
Interim dividend paid
$000
600
470
80
25
180
420
560
75
750
220
180
960
140
260
2,010
120
3,630
3,630
Additional information
(1)
(2)
The following items are already included in the balances listed in the above trial balance:
Distribution
costs
$000
27
20
Administrative
expenses
$000
5
15
30
45
(3)
(4)
The income tax charge based on the profits for the year is estimated to be $74,000.
(5)
(6)
(7)
(8)
The market value of the listed financial asset investments, which are classed as fair value
through profit or loss as at 31 March 2012 was $580,000. There were no purchases or sales
of such investments during the year.
Required:
Insofar as the information permits, prepare the companys statement of profit or loss for the year
to 31 March 2011 and a statement of financial position as at that date in accordance with IAS 1.
(18 marks)
Cr
$000
500
250
180
70
450
300
900
135
1,020
370
900
600
25
2,030
205
3,000
240
50
110
25
_____
500
_____
5,930
5,930
(ii)
Plant is to be depreciated at 20% per year using the reducing balance method and included in
distribution costs.
(iii)
(iv)
(v)
(vi)
Interest on the loan notes has not been paid during the year.
(vii)
During June, a bonus (or scrip) issue of two for five was made to ordinary shareholders. This
has not been entered into the books. The bonus shares do not rank for dividend for the
current financial year.
(viii)
(8 marks)
(5 marks)
(9 marks)
Revenue
Purchases
Returns (inwards)
Delivery vehicles (carrying amount)
Factory plant and equipment (carrying amount)
Land and buildings (carrying amount)
Factory overheads
Administrative expenses
Rent received
Investments (unlisted)
Investment income
Inventory at 1 July 2011
Trade receivables
Trade payables
Distribution costs
Cash in hand
Bank overdraft
Ordinary shares ($1 each)
Retained earnings at 1 July 2011
The following transactions and events occurred on 30 June 2012, after the above balances had been
extracted:
(1)
(2)
(3)
Sulphur received an electricity bill for $1,240 relating to the factory for the three months to
30 June 2012. The bill was paid in July 2012.
(4)
(5)
The companys land and buildings were valued by a chartered surveyor at $390,000 and the
new value is to be included in the statement of financial position.
(6)
Depreciation was provided on the reducing balance basis at the following annual rates:
Delivery vehicles
Factory plant and equipment
20%
10%
(7)
Bonus shares were issued on the basis of one for every two held on 29 June 2012.
(8)
Income tax for the financial year ended 30 June 2012 was estimated at $38,100.
a statement of total comprehensive income using the cost of sales (i.e. function of
expense) method;
(7 marks)
(ii)
(3 marks)
(iii)
(7 marks)
7,400
4,140
695
540
730
120
5,250
4,000
1,065
6,400
$000
1,240
2,060
1,120
40
7,000
______
2,000
1,500
1,570
1,000
______
23,935
23,935
(2)
Inventory at 30 September 2011 amounted to $780,000 at cost before adjusting for the
following:
(i)
Items which had cost $40,000 and which would normally sell for $60,000 were
found to be faulty. $10,000 needs to be spent on these items in order to sell them
for $45,000.
(ii)
Goods sent to a customer on a sale or return basis have been omitted from inventory
and included as sales in September 2011. The cost of these items was $8,000 and
they were included in revenue at $12,000. The goods were returned by the
customer in October 2011.
2% per year
20% per year
80% of the depreciation is to be charged to cost of sales and 10% to each of distribution costs
and administrative expenses.
(3)
(4)
95
35
Prepayments
$000
60
30
(5)
During the year 4 million ordinary shares were issued at 75 cents each. The directors of
Cayman declared an interim dividend of 2 cents per share in September 2011. No dividends
were paid during the year.
(6)
Required:
Prepare for Cayman for the year ended 30 September 2011:
(i)
(ii)
(iii)
(10 marks)
(10 marks)
(6 marks)
State the main purpose of the Conceptual Framework for Financial Reporting (The
Framework) adopted by the International Accounting Standards Board (IASB).
(4 marks)
(b)
(c)
(2 marks)
(8 marks)
Question 8 REGULATORY FRAMEWORK
Required:
Briefly explain what a regulatory framework is and discuss the reasons why there is a need for a
regulatory framework in financial reporting.
(5 marks)
(4 marks)
(4 marks)
(4 marks)
(4 marks)
(16 marks)
Question 10 IASB
Required:
(a)
State the objectives of the International Accounting Standards Board (IASB). (4 marks)
(b)
Explain how the IASB approaches the task of producing a standard, with particular
reference to the way in which comment or feedback from interested parties is obtained.
(8 marks)
(12 marks)
Question 11 OBJECTIVES
The objective of financial statements is to provide information about financial position, performance
and changes in financial position of an entity that is useful to a wide range of users in making economic
decisions.
Required:
(a)
State five potential users of company published financial statements, briefly explaining
for each one their likely information needs from those statements.
(10 marks)
(b)
Briefly discuss whether you think that the company published financial statements,
prepared in accordance with IFRS, achieve the objective stated above, giving your
reasons.
Include in your answer two ways in which you think the quality of the information disclosed
in financial statements could be improved.
(10 marks)
(20 marks)
(b)
Explain TWO ways in which the IASBs Conceptual Framework for Financial Reporting
and the requirements of accounting standards aid the comparability of financial
information.
(4 marks)
(8 marks)
Question 13 ADJUSTMENTS
Adjustments manufactures items for use in engineering products. You note that amongst its many
tangible non-current assets it has the following:
(a)
A lathe was purchased on 1 January 2005 for $150,000. The plant had an estimated useful
life of twelve years, residual value of nil. Depreciation is charged on the straight line basis.
On 1 January 2011, when the assets carrying amount is $75,000, the directors decide that the
assets total useful life is only ten years.
(b)
A grinder was purchased on 1 January 2008 for $100,000. The plant had an estimated useful
life of ten years and a residual value of Nil. Depreciation is charged on the straight line basis.
On 1 January 2011, when the assets carrying amount is $70,000, the directors decide that it
would be more appropriate to depreciate this asset using the sum of digits approach. The
remaining useful life is unchanged.
(c)
The company purchased a fifty year lease some years ago for $1,000,000. This was being
depreciated over its life on a straight line basis. On 1 January 2011, when the carrying
amount is $480,000 and twenty-four years of the lease are remaining, the asset is revalued to
$1,500,000. This revised value is being incorporated into the accounts.
Required:
As the companys financial accountant, prepare a memorandum for the attention of the board
explaining the effects of these changes on the depreciation charge and indicating what additional
disclosures need to be made in the accounts for the year to 31 December 2011.
(15 marks)
Sponger has received three grants of $10,000 each in the current year relating to on-going
research and development projects. One grant relates to the Cuckoo project which involves
research into the effect of various chemicals on the pitch of the human voice. No constructive
conclusions have been reached yet.
The second relates to the development of a new type of hairspray which is expected to be
extremely popular. Commercial production will commence in 2013 and large profits are
foreseen. The third relates to the purchase of high powered microscopes.
(b)
In 2010 Spongers premises were entirely isolated from the outside world for four months due
to the renovation of roads by the local council. All production was lost in that period. Mr
Tislid has been assured by the councils officers that a $25,000 compensation grant will be
paid on submission of the relevant triplicate form. Mr Tislid had not yet filled in the form by
31 December 2011.
(c)
Sponger entered into an agreement with the government that, in exchange for a grant of
$60,000, it will provide vocational experience tours around its factory, for twelve young
criminals per month over a five year period starting on 1 January 2011. The grant was to be
paid on the date Sponger purchased a minibus (useful life three years) to take the inmates to
the factory and back. The bus was bought and the grant received on 1 January 2011.
The grant becomes repayable on a pro rata basis for every monthly visit not fulfilled. During
2011 five visits did not take place due to the pressure of work and this pattern is expected to
be repeated over the next four years.
No repayments have yet been made.
2,994
Land
Buildings
Plant and machinery
Fixtures and fittings
Assets under construction
Depreciation
$000
80
458
140
678
Carrying amount
$000
500
320
1,155
250
91
2,316
Further costs of $53,000 are incurred on buildings being constructed by the company. A
building costing $100,000 is completed during the year.
(2)
A deposit of $20,000 is paid for a new computer system which is undelivered at the year end.
(3)
(4)
Additions to fixtures, excluding the deposit on the new computer system, are $40,000.
(5)
$000
277
41
Depreciation
brought forward
$000
195
31
Proceeds
$000
86
2
(6)
Land and buildings were revalued at 1 January 2011 to $1,500,000, of which land is worth
$900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on
the basis of existing use value on the open market.
(7)
The useful economic life of the buildings is unchanged. The buildings were purchased ten
years before the revaluation.
(8)
Depreciation is provided on all assets in use at the year end at the following rates:
Buildings
Plant
Fixtures
Required:
Show the disclosure under IAS 16 in relation to non-current assets in the notes to the published
accounts for the year ended 31 December 2011.
(14 marks)
10
The purpose of depreciation and the factors affecting the assessment of useful life
according to IAS 16 Property, Plant and Equipment.
(7 marks)
(b)
Three items of evidence obtainable from inside or outside the company, to check
whether the companys depreciation rates are in fact likely to be too low.
(3 marks)
(c)
The disclosures, if any, which would be required in the financial statements if the
company decided to change its depreciation methods.
(4 marks)
(d)
On 10 December 2011, Hughes sold inventory with a production cost of $30 million to the
Wodwo Bank for $36 million cash. Hughes has a call option (an option to repurchase) on the
goods exercisable on 10 January 2012 at a price of $37.8 million. The Wodwo Bank has a
put option (an option to resell to the seller) exercisable on 10 February 2012 at a price of
$39.7 million.
Required:
Discuss how the transaction should be accounted for in the accounts of Hughes at 31
December 2011.
(4 marks)
11
Custom Cars customises standard sports cars purchased from a major manufacturer, Sigma,
by fitting extras (spoilers, skirts, tinted windows, etc) at its workshop premises. It sells them
from its showroom on the same site, which it owns. During the year, the showroom was
renovated and enlarged by means of an extension to the existing building. Sigma contributed
many of the interior fitments, such as display stands for the cars, free of charge and also made
a cash payment toward the total costs.
Required:
Discuss whether or not the extension and fittings should be shown in the statement of
financial position of Custom Cars.
(4 marks)
(8 marks)
Question 19 PERSEUS
The list of account balances of Perseus, a limited liability company, contains the following items at 31
December 2011:
Dr
Cr
$
$
Opening inventory
3,850,000
Accounts receivable ledger balances
2,980,000
1,970
Accounts payable ledger balances
14,300
1,210,400
Prepayments
770,000
Cash at bank A
940,000
Overdraft at bank B
360,000
The closing inventory amounted to $4,190,000, before allowing for the adjustments required by items
(2) and (3) below.
In the course of preparing the financial statements at 31 December 2011, the need for a number of
adjustments emerged, as detailed below:
(1)
The opening inventory was found to have been overstated by $418,000 as a result of errors in
calculations of values in the inventory sheets.
(2)
Some items included in closing inventory at cost of $16,000 were found to be defective and
were sold after the end of the reporting period for $10,400. Selling costs amounted to $600.
(3)
Goods with a sales value of $88,000 were in the hands of customers at 31 December 2011 on
a sale or return basis. The goods had been treated as sold in the records and the full sales
value of $88,000 had been included in trade receivables. After the end of the reporting
period, the goods were returned in good condition. The cost of the goods was $66,000.
(4)
(5)
An allowance for doubtful debts is to be set up for 5% of the accounts receivable total.
(6)
The manager of the main selling outlet of Perseus is entitled, from 1 January 2011, to a
commission of 2% of the companys profit after charging that commission. The profit
amounted to $1,101,600 before including the commission, and after adjusting for items (1) to
(5) above. The manager has already received $25,000 on account of the commission due
during the year ended 31 December 2011.
12
(b)
(i)
Explain how adjustment should be made for the error in the opening
inventory, according to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. (Assume that it constitutes a material error.)
(ii)
Show how the final figures for current assets should be presented in the statement of
financial position at 31 December 2011.
(14 marks)
(20 marks)
Question 20 JENSON
The timing of revenue (income) recognition has long been an area of debate and inconsistency in
accounting. Industry practice in relation to revenue recognition varies widely; the following are
examples of different points in the operating cycle of businesses that revenue and profit can be
recognised:
In the past the critical event approach has been used to determine the timing of revenue recognition.
The International Accounting Standards Board in its Conceptual Framework for Financial Reporting
(Framework) has defined the elements of financial statements, and it uses these to determine when a
gain or loss occurs.
Required:
(a)
Explain what is meant by the critical event in relation to revenue recognition and
discuss the criteria used in the Framework for determining when a gain or loss arises.
(5 marks)
(b)
For each of the stages of the operating cycle identified above, explain why it may be an
appropriate point to recognise revenue and, where possible, give a practical example of
an industry where it occurs.
(12 marks)
(c)
Jenson has entered into the following transactions/agreements in the year to 31 March 2012:
(i)
Goods, which had cost of $20,000, were sold to Wholesaler for $35,000 on 1 June
2011. Jenson has an option to repurchase the goods from Wholesaler at any time
within the next two years. The repurchase price will be $35,000 plus interest
charged at 12% per year from the date of sale to the date of repurchase. It is
expected that Jenson will repurchase the goods.
13
Jenson owns the rights to a fast food franchise. On 1 April 2011 it sold the right to
open a new outlet to Mr Cody. The franchise is for five years. Jenson received an
initial fee of $50,000 for the first year and will receive $5,000 per year thereafter.
Jenson has continuing service obligations on its franchise for advertising and
product development that amount to approximately $8,000 per year per franchised
outlet. A reasonable profit margin on rendering the continuing services is deemed
to be 20% of revenues received.
(iii)
Required:
Describe how Jenson should treat each of the above examples in its financial statements
in the year to 31 March 2012.
(8 marks)
(25 marks)
Question 21 XYZ
A lessor, ABC, leases an asset, which it purchased for $4,400, to XYZ under a finance lease. It
estimates that its residual value after five years will be $400 and after seven years will be zero.
The lease is for five years at a rental of $600 per half year in advance, with an option of two more years
at nominal rental. The lease commences on 1 January 2011. The directors of XYZ consider that the
asset has a useful life of seven years. The finance charge is to be allocated using the sum of digits
(rule of 78) method. Title to the asset will pass to XYZ at the end of seven years if the option is
exercised. It is likely that it will be.
Required:
(a)
Show the relevant extracts from the accounts of XYZ at the year-end 31 December 2011.
(9 marks)
(b)
Show the allocation of the finance charge for XYZ using the actuarial before tax method
(using the interest rate implicit in the lease). Compare this with the sum of the digits
allocation in (a) above.
(5 marks)
The rate of interest implicit in the lease is 7.68% per half year.
(14 marks)
14
Snowplough
To lease a snowplough for 3 years from Ice. The machine had cost Ice $35,000.
A deposit of $2,000 was payable on 1 January 2011 followed by 6 half yearly instalments of
$6,500 payable in arrears, commencing on 30 June 2011. Finance charges are to be allocated
on a sum of digits basis.
(b)
Snow machine
To lease a snow machine for 5 years from Slush. The snow machine cost Slush $150,000 and
is estimated to have a useful life of 5 years.
Snow has agreed to make 5 annual instalments of $35,000, payable in advance, commencing
on 1 January 2011.
The interest rate implicit in the lease is 8.36%.
Required:
Show the relevant extracts from the accounts of Snow for year ended 31 December 2011.
(15 marks)
Question 23 INTELLECTUAL INDIVIDUALS
Intellectual Individuals is a company involved in a wide range of activities. At 31 December 2011 it
provided you with details of the following projects:
Project Rico
This is the idea of the companys flamboyant chairman, Bobby Bobov. The aim is to try and convert
lead into gold. During the year expenditure of $332,000 has been incurred on trying to set up such a
process, with no success to date.
Project Mounsey
The company has for the last few years been trying to devise a miniature radio transmitter for golf balls.
This will enable golfers to locate their balls when they are mis-hit into the rough. The company had no
success until the end of 2008, when a breakthrough was made, although costs of $120,000 had been
incurred to that date. The product went on sale at the end of 2010 after a further $200,000 expenditure
had been incurred on cosmetic changes. The advertising budget is $100,000 a year for the three years
commencing 1 January 2011. The product has achieved spectacular sales and profits. The company
anticipates sales continuing for between five and fifteen more years from the end of the current year.
15
Write a memorandum to the chairman justifying the accounting treatment which the
company should have adopted for each of the projects assuming that the prime aim is to
match revenues to costs.
(8 marks)
(b)
Disclose the note to the financial statements in respect of research development. (An
accounting policy note is not required.)
(7 marks)
(15 marks)
(b)
Provision/Contingent liability
An ex-director of the company has commenced an action against the company claiming
substantial damages for wrongful dismissal. The company lawyers have advised that the exdirector is unlikely to succeed with his claim. The lawyers potential liabilities are:
legal costs (to be incurred whether the claim is successful or not)
settlement of claim if successful
$000
50
500
____
550
Project B
Project C
$85,000
$170,000
All expenditure on Project C meets the criteria for capitalisation in IAS 38.
Project D
$80,000
Required:
(a)
(b)
Calculate the amounts which should appear in the companys statement of profit or loss
and statement of financial position for research and development for the year ended 30
June 2012.
(7 marks)
(c)
Prepare the notes which IAS 38 requires in the financial statements for the year giving
supporting figures for the items in the statement of profit or loss and statement of
financial position.
(7 marks)
(20 marks)
17
Stevie Striver
Charlie Chatty
Gordon Gloome
(managing)
(sales)
(production)
$
38
5
8
2
For 1,000 radio sets, the other overhead costs are $14,000 made up as follows:
Salary and space costs of executive responsible for production planning
General office administration
Selling and distribution costs, including a fixed $4 per set commission
payable to salesmen
$
4,000
2,500
7,500
The advertised selling price of the model has recently been reduced to $60 because of intensive
competition.
The three directors have expressed the following views on the most appropriate method of valuing the
companys closing inventories:
(1)
Stevie Striver
A most prudent approach is necessary, particularly as the company has a cash flow problem
which means that the amount locked up in inventory should be kept as low as possible. I
propose a valuation of $43 per set.
(2)
Charlie Chatty
All the functions of the company are directed towards the production and sale of a good
finished product and therefore I think each set should be valued at the total cost involved,
including the other overhead costs.
(3)
Gordon Gloome
$47 per set, because thats what the production cost would have been if wed been more
efficient and kept in line with budgets.
Required:
Draft, for inclusion in a report, your opinions on the views expressed by each director, stating the
principles involved.
(8 marks)
18
IAS 2 Inventories requires inventories of raw materials and finished goods to be valued in
financial statements at the lower of cost and of net realisable value.
Required:
(b)
(i)
(ii)
Sampi is a manufacturer of garden furniture. The company has consistently used FIFO (first
in, first out) in valuing inventory, but it is interested to know the effect on its inventory
valuation of using weighted average cost instead of FIFO
At 28 February 2012 the company had inventory of 4,000 standard plastic tables, and has
computed its value on each side of the two bases as:
Basis
FIFO
Weighted average
Unit
cost
$
16
13
Total
value
$
64,000
52,000
During March 2012 the movements on the inventory of tables were as follows:
Received from factory:
Date
8 March
22 March
Revenue:
12 March
18 March
24 March
28 March
Number
of units
3,800
6,000
Production
cost per
unit
$
15
18
Number of
units
5,000
2,000
3,000
2,000
19
2008
$000
2,750
7,750
3,000
2009
$000
3,000
7,750
5,000
2010
$000
4,200
1,550
11,000
2011
$000
1,150
12,500
Required:
Show how the above would be disclosed in the statement of profit or loss and statement of
financial position of William for each of the four years ended 31 December 2011.
(12 marks)
Question 29 EARLEY
Earley is finalising its accounts for the year ended 31 December 2011. The following events have
arisen since the year end and the financial director has asked you to comment on the final accounts:
(a)
(b)
On 15 March 2011 Earley sold its former head office building, Whitley Wood, for $2.7
million. At the year end the building was unoccupied and carried at a value of $3.1 million.
(c)
Inventories at the year end included $650,000 of a new electric tricycle, the Opasney. In
January 2012 the European Union declared the tricycle to be unsafe and prohibited it from
sale. An alternative market, in Bongolia, is being investigated, although the current price is
expected to be cost less 30%.
(d)
Stingy, a subsidiary in Outer Sonning, was nationalised in February 2012. The Outer
Sonning authorities have refused to pay any compensation. The net assets of Stingy have
been valued at $200,000 at the year end.
(e)
Freak floods caused $150,000 damage to the Southcote branch of Earley in January 2012.
The branch was fully insured.
(f)
On 1 April 2012 Earley announced a 1 for 1 rights issue aiming to raise $15 million.
Required:
Explain how you would respond to the matters listed above.
(13 marks)
20
At the year end there was a debit balance in the books of a company for $15,000, representing
an estimate of the amount receivable from an insurance company for an accident claim. In
February 2012, before the directors had agreed the final draft of the published accounts,
correspondence with lawyers indicated that $18,600 might be payable on certain conditions.
(b)
A company has an item of equipment which cost $400,000 in 2008 and was expected to last
for ten years. At the beginning of the financial year 2011 the carrying amount was $280,000.
It is now thought that the company will soon cease to make the product for which the
equipment was specifically purchased. Its recoverable amount is only $80,000 at 31
December 2011.
(c)
On 30 November a company entered into a legal action defending a claim for supplying faulty
machinery. The companys solicitors advise that there is a 20% probability that the claim will
succeed. The amount of the claim is $500,000.
(d)
An item has been produced at a manufacturing cost of $1,800 against a customers order at an
agreed price of $2,300. The item was in inventory at the year end awaiting delivery
instructions. In January 2012 the customer was declared bankrupt and the most reasonable
course of action seems to be to make a modification to the unit, costing approximately $300,
which is expected to make it marketable with other customers at a price of about $1,900.
(e)
At 31 December a company has a total potential liability of $1,000,400 for warranty work on
contracts. Past experience shows that 10% of this cost is likely to be incurred, that 30% may
be incurred but that the remaining 60% is highly unlikely to be incurred.
Required:
For each of the above situations outline the accounting treatment you would recommend and give
the reasoning of principles involved. The accounting treatment should refer to entries in the
books and/or the year-end financial statements as appropriate.
(12 marks)
21
Transactions are only deductible for tax purposes when they are booked, i.e. double entered
into statutory accounting records. This means that there is often little difference between
accounting profit under local GAAP and the taxable profit. However, it is common practice
for large companies to maintain a parallel set of records and accounts for reporting according
to IFRS rules. These are notably different to the rules in the domestic tax code and as a result
the accounting profit under IFRS can be very different from the taxable profit.
The tax code allows for the general application of the accounting principles of prudence and
accruals, but it does state the following;
Tax allowable depreciation is computed according to rules set out in the tax code.
Allowance for doubtful debts are only deductible under very strict and limited
circumstances.
The government operates a system of incentive through the tax system known as Investment
Relief. Under this system a company is able to claim a proportion of the costs of qualifying
fixed assets, as being deductible, in excess of the normal depreciation rates which would
result from adoption of IFRSs.
The tax code defines finance leases but the criteria in the code are stricter than those in IAS
17 with the result that a company may well account for a lease as a finance lease when it is
deemed an operating lease for tax purposes. The tax treatment for operating leases is to
expense the rentals on an accruals basis.
$
48,000
12,000
Calculate the corporate income tax liability for the year ended 31 December 2011.
(b)
(c)
Prepare a note showing the movement on the deferred tax account and thus calculate
the deferred tax charge for the year ended 31 December 2011
(d)
Prepare the note which shows the compilation of the tax expense for the year ended 31
December 2011.
22
Capital transactions
Depreciation charged
Tax allowances
(b)
$
14,000
16,000
Interest payable
On 1 April 2012 the company issued $25,000 of 8% convertible loan stock. Interest is paid in
arrears on 30 September and 31 March.
(c)
Interest receivable
On 1 April Shep purchased debentures having a nominal value of $4,000. Interest at 15% per
year is receivable on 30 September and 31 March. The investment is regarded as a financial
asset valued at amortised cost.
(d)
(e)
Fine
During the period Shep has paid a fine of $6,000. The fine is not tax deductible.
(f)
Further information
The accounting profit before tax for the year was $125,000.
Required:
(a)
Calculate the corporate income tax liability for the year ended 31 December 2012.
(b)
(c)
Prepare a note showing the movement on the deferred tax account and thus calculate
the deferred tax charge for the year ended 31 December 2012.
23
(b)
(c)
Development costs
During 2013 Shep has capitalised development expenditure of $17,800 in accordance with the
provisions of IAS 38
(d)
Further information
(e)
$
175,000
18,500
24,700
Shep paid for a large office party during 2013 to celebrate a successful first two years of the
business. This cost $20,000. This expenditure is not tax deductible.
Required:
(a)
Calculate the corporate income tax liability for the year ended 31 December 2013.
(b)
(c)
Prepare a note showing the movement on the deferred tax account and thus calculate
the deferred tax charge for the year ended 31 December 2013.
Calculate the corporate income tax liability for the year ended 31 December 2013.
(b)
(c)
Prepare a note showing the movement on the deferred tax account and thus calculate
the deferred tax charge for the year ended 31 December 2013.
24
(b)
Freehold properties were revalued from $240,000 to $300,000 in the period. The company
has no intention of disposing of the properties.
(c)
The remaining non-current assets comprised plant and machinery. On 1 July 2011 this
amounted to
Tax written down value
Carrying amount
$
500,000
1,300,000
During the year to 30 June 2012 depreciation amounted to $260,000 and capital allowances of
$175,000 were claimed.
(d)
The company entered into a five year lease on 1 July 2011 for an item of plant with a useful
economic life of ten years. The lease rentals (which have all been paid on time to date) were
to be as follows:
Initial payment (1 July 2011)
Rentals (30 June 2012, 2013, 2014, 2015, 2016)
(e)
$
110,000
50,000 per rental
Broken Dreams now realises that a programme of research and development is essential to set
itself apart from its competition, and has adopted a policy of deferring development
expenditure. In the current year (the first year in which deferrals have occurred) expenditure
of $80,000 was deferred.
Required:
Prepare the note to the statement of financial position at 30 June 2012 for deferred taxation on
the basis of IAS 12 Income Taxes.
(15 marks)
25
Investment in S
Sundry net assets
P
$
65,000
115,000
180,000
S
$
55,000
55,000
140,000
40,000
180,000
30,000
25,000
55,000
P acquired the whole of the issued share capital of S for $65,000 on 31 December 2010.
Required:
Prepare the consolidated statement of financial position at 31 December 2010. (3 marks)
(b)
Investment in S
Sundry net assets
P
$
65,000
129,000
194,000
S
$
62,000
62,000
140,000
54,000
194,000
30,000
32,000
62,000
26
Investment in S
Sundry net assets
P
$
52,000
115,000
167,000
S
$
55,000
55,000
127,000
40,000
167,000
30,000
25,000
55,000
Required:
Prepare the consolidated statement of financial position at 31 December 2010. (4 marks)
(d)
Investment in S
Sundry net assets
P
$
52,000
129,000
181,000
S
$
62,000
62,000
127,000
54,000
181,000
30,000
32,000
62,000
(ii)
27
Honey
$
Sugar
$
27,000
2,000
29,000
25,000
54,000
12,500
12,500
12,000
24,500
20,000
6,000
9,000
35,000
12,000
7,000
54,000
3,000
14,000
17,000
7,500
24,500
Honey acquired its shares in Sugar more than five years ago when the balance on the retained earnings
was $nil. There was no goodwill arising on acquisition.
Statements of profit or loss for the year ended 30 June 2012
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Interest payable and similar charges
Profit before taxation
Tax
Profit for the financial year
Extract from the statement of changes in equity:
Retained earnings brought forward
Profit for the financial year
Retained earnings carried forward
28
Honey
$
24,000
(9,000)
15,000
(2,300)
(1,500)
11,200
(1,200)
10,000
(3,000)
7,000
Sugar
$
30,000
(11,000)
19,000
(1,300)
(2,700)
15,000
15,000
(5,000)
10,000
2,000
7,000
9,000
4,000
10,000
14,000
$
157,000
70,000
73,200
82,100
14,700
8,000
178,000
405,000
250,000
32,000
282,000
123,000
405,000
29
$
82,000
Current assets
Inventory
Trade receivables
Cash at bank and in hand
35,200
46,900
25,150
107,250
189,250
50,000
6,250
15,000
40,000
111,250
20,000
50,000
8,000
58,000
189,250
Notes
(1)
Hatton acquired 40,000 shares in Slap on 1 January 2010 for a cost of $58,000 when the
balances on Slaps reserves were
$
Share premium account
6,250
Revaluation surplus
Retained earnings
10,000
Hatton also acquired $12,000 of Slaps debentures at par on the same date.
(2)
(3)
Required:
Prepare the consolidated statement of financial position as at 31 December 2011 of Hatton.
(12 marks)
30
Haggis
$
Stovies
$
33,000
12,500
20,000
4,500
50,000
16,000
36,000
10,000
5,000
6,000
21,000
4,000
13,000
17,000
20,000
9,000
9,000
50,000
10,000
36,000
On 1 January 2009 Haggis acquired 3,000 shares in Stovies. At that date the balance on Stovies
retained earnings was $8,000. Non-controlling interest are valued at fair value, the fair value of the noncontrolling interest on acquisition was $3,800. Goodwill has been impaired by $1,000 since acquisition.
Required:
Prepare the consolidated statement of financial position of Haggis as at 31 December 2011.
(12 marks)
31
Current assets
Inventory
Trade receivables
Investments
Current account Hammer
Cash at bank
18,000
12,000
62,700
21,100
2,500
3,200
10,000
3,000
254,700 100,000
120,000
60,000
18,000
23,000
16,000
40,000
8,000
16,000
5,000
35,000
11,000
2,700
254,700 100,000
On 31 December 2010, Hammer acquired 48,000 shares in Sickle for $54,000 cash.
(2)
The inventory of Hammer includes $4,000 goods from Sickle invoiced to Hammer at cost
plus 25%.
(3)
A cheque for $500 from Hammer to Sickle, sent before 31 December 2011, was not received
by the latter company until January 2012.
(4)
Non-controlling interest is valued at the proportionate amount of the identifiable net assets.
(5)
There has been no movement in the revaluation surplus of either company since the beginning
of the year.
Required:
Prepare the consolidated statement of financial position of Hammer and its subsidiary Sickle as
at 31 December 2011. Any gain on a bargain purchase is to be treated in accordance with IFRS 3.
(12 marks)
32
660,000
statements of
Shed
$
72,000
80,000
74,400
84,000
8,000
318,400
Hut
$
$1 ordinary share capital
Retained earnings
Plant depreciation at 31 December 2011
Payables
Shed
$
400,000 160,000
160,000 112,000
48,000
22,400
52,000
24,000
660,000 318,400
(2)
In fixing the bid price for the shares of Shed, Hut valued the land at $90,000. All Sheds
plant was acquired since 1 July 2010.
(3)
The inventory of Shed includes goods purchased from Hut for $16,000. Hut invoiced those
goods at cost plus 25%.
(4)
Non-controlling interest is valued at the proportionate share of the identifiable net assets on
acquisition; it is not credited with its share of goodwill. Goodwill has been impaired by
$27,760 since the acquisition occurred.
Required:
Prepare the consolidated statement of financial position of Hut as at 31 December 2011.
(10 marks)
33
Assets
Non-current assets
Tangible assets
Investments: Shares in group undertaking
Current assets
Hat
$
Shoe
$
227,000
103,000
330,000
170,000
170,000
270,000
600,000
186,000
356,000
200,000
25,000
150,000
375,000
90,000
9,000
80,000
179,000
225,000
600,000
40,000
137,000
356,000
During the year to 30 June 2012 Hat transferred a tangible asset to Shoe for $50,000. The asset
originally cost $100,000 three years ago (in the year to 30 June 2009) and had a useful economic life of
five years.
Shoes depreciation policy is 25% per year based on cost. Both companies charge a full years
depreciation in the year of acquisition and none in the year of disposal.
Non-controlling interest is valued at the proportionate share of the subsidiarys identifiable net assets; it
is not credited with its share of goodwill.
Required:
Prepare the consolidated statement of financial position of Hat and its subsidiary as at 30 June
2012. The value of goodwill at the 30 June 2012 is $2,520.
(15 marks)
34
Gross profit
500
160
Distribution costs
(60)
(50)
Administration costs
(65)
(55)
Operating profit
375
55
Investment income
20
5
Interest
(25)
(6)
Humphrey acquired 80% of Stanley many years ago, when the reserves of that company were
$5,000.
(2)
Total intra-group sales in the year amounted to $100,000, Humphrey selling to Stanley.
(3)
At the year end the statement of financial position of Stanley included inventory purchased
from Humphrey. Humphrey had taken a profit of $2,000 on this inventory.
(4)
(5)
Goodwill of $10,000 has been fully written off prior to the current period.
Required:
Prepare a consolidated statement of profit or loss for the year ended 30 September 2011.
(10 marks)
35
(219,350)
(146,700)
55,150
34,550
Bank deposit interest
Profit before tax
Income tax
Profit after tax
Retained earnings brought forward
Profit for year
Retained earnings carried forward
250
55,400
(29,000)
26,400
100
34,650
(15,100)
19,550
28,000
26,400
54,400
17,250
19,550
36,800
The inventory of High at 31 March 2012 includes goods purchased from Speed at a profit
to that company of $700. Total intra-group sales for the year amounted to $37,500.
(2)
In October 2011 High sold plant, with a carrying value of $7,000, to Speed for $10,000.
Depreciation has been provided by Speed at 10% on the cost of $10,000 (with a full years
charge in the year of acquisition and none in the year of sale) in line with group policy.
(3)
(4)
Required:
Prepare the consolidated statement of profit or loss for the year ended 31 March 2012.
Ignore goodwill.
(10 marks)
36
Sleepy
$
303,600
(143,800)
159,800
(71,200)
88,600
2,800
91,400
(46,200)
45,200
217,700
(102,200)
115,500
(51,300)
64,200
1,200
65,400
(32,600)
32,800
79,300
45,200
124,500
38,650
32,800
71,450
On 30 November 2011 Happy acquired 75% of the issued ordinary capital of Sleepy.
Profits of both companies are deemed to accrue evenly over the year.
Required:
(a)
Prepare the consolidated statement of profit or loss for the year ended 31 March 2012.
Ignore goodwill.
(10 marks)
(b)
Explain why only four months of Sleepys results are included in the consolidated
statement of profit or loss.
(3 marks)
(13 marks)
37
Assets
Non-current assets
Tangible assets
Investments at cost
Current assets
Haley
$000
Socrates
$000
Aristotle
$000
300
75
30
100
160
345
750
160
260
80
240
250
400
100
750
30
180
50
260
60
100
80
240
The reserves of Socrates and Aristotle when the investments were acquired were $70,000 and $30,000
respectively. Assume the investments were acquired ten years ago and that goodwill has been fully
written off.
Required:
Prepare the consolidated statement of financial position as at 31 December 2011. Notes are not
required.
(10 marks)
38
Revenue
Operating expenses
Operating profit
Dividends received
Income tax
Profit after taxation
Extract from the statement of changes in equity:
Dividends paid
Hamish
$000
12,614
(11,318)
1,296
171
1,467
(621)
846
500
Shug
$000
6,160
(5,524)
636
636
(275)
361
120
Angus
$000
8,640
(7,614)
1,026
1,026
(432)
594
250
Included in the inventory of Shug at 30 June 2012 was $50,000 for goods purchased from Hamish in
May 2012 which the latter company had invoiced at cost plus 25%. These were the only goods sold by
Hamish to Shug but it did make sales of $180,000 to Angus during the year. None of these goods
remained in Anguss inventory at the year end.
Required:
Prepare a consolidated statement of profit or loss for Hamish for the year ended 30 June 2012.
There was no impairment of goodwill during the year. Notes are not required.
(10 marks)
39
Sodium
$
Assets
Non-current assets
Tangible assets
697,210
Investments:
160,000 shares in Sodium 562,000
80,000 shares in Aluminium 184,000
495,165
385,717
101,274
349,400
648,010
388,619
320,540
95,010
982,156
2,425,366
648,010
1,443,210
Current assets
Inventory
Trade receivables
Cash at bank and in hand
Aluminium
$
349,400
286,925
251,065
80,331
804,169
1,452,179
600,000
200,000
1,050,000
850,000
1,650,000 1,050,000
618,321
967,721
200,000
478,000
678,000
400,000
150,000
100,000
375,366
2,425,366
252,179
1,452,179
189,721
967,721
Hydrogen purchased the shares in Sodium on 13 October 2006 when the balance on retained
earnings was $500,000.
(2)
The shares in Aluminium were acquired on 11 May 2006 when retained earnings stood at
$242,000.
Included in the inventory figure for Aluminium is inventory valued at $20,000 which had
been purchased from Hydrogen at cost plus 25%.
(3)
(4)
Non-controlling interest is valued at the proportionate share of the identifiable net assets
acquired; it is not credited with its share of goodwill. Goodwill in respect of the acquisition
of Sodium has been impaired by $1,500 since the acquisition.
The recoverable amount of the investment in Aluminium exceeds its carrying value and
therefore there is no impairment to account for.
(5)
40
Included in the current liabilities figure of Hydrogen is $18,000 payable to Aluminium, the
amount receivable being recorded in the receivables figure of Aluminium.
Required:
Explain briefly the limitations of historical cost accounting in periods of inflation with reference
to each of the items listed above.
(15 marks)
Question 50 STANDARD
The summarised statements of financial position of Standard at 31 December 2010 and 2011 are as
follows:
2011
2010
$
$
Issued share capital
150,000
100,000
Share premium
35,000
15,000
Retained earnings
41,000
14,000
Non-current loans
30,000
70,000
Payables
63,000
41,500
Bank overdraft
14,000
Tax payable
33,000
21,500
Depreciation
Plant and machinery
54,000
45,000
Fixtures and fittings
15,000
13,000
421,000
334,000
2011
$
130,000
151,000
29,000
51,000
44,000
4,600
11,400
421,000
2010
$
110,000
120,000
24,000
37,000
42,800
200
334,000
41
7,500
5,000
(b)
A machine tool which had cost $8,000 (in respect of which $6,000 depreciation had been
provided) was sold for $3,000, and fixtures which had cost $5,000 (in respect of which
depreciation of $2,000 had been provided) were sold for $1,000. Profits and losses on those
transactions had been dealt with through the statement of profit or loss.
(c)
(d)
The premium paid on redemption of the non-current loan was $2,000, which has been written
off to the statement of profit or loss.
(e)
Interest received during the year was $450. Interest charged in the statement of profit or loss
for the year was $6,400. Accrued interest of $440 is included in payables at 31 December
2010 (nil at 31 December 2011).
(f)
Required:
Prepare a statement of cash flows for the year ended 31 December 2011, together with notes as
required by IAS 7 Statement of Cash flows.
(20 marks)
Question 51 FALLEN
Fallen has prepared the following rough draft accounts for the year ended 31 December 2011:
Statement of profit or loss
Revenue
Cost of sales
Gross profit
Distribution costs
Administration expenses
Interest payable
Operating profit before tax
Taxation (35%) including deferred tax
Profit after tax
Extract from the statement of changes in equity
Dividends
42
$000
11,563
(5,502)
6,061
(402)
(882)
(152)
4,625
(1,531)
3,094
700
2011
$000
6,600
5,040
2,406
2,880
2,586
19,512
2010
$000
5,700
3,780
2,208
1,986
1,992
576
16,242
31 December
2011
$000
2,280
2,112
9,108
202
1,240
1,202
1,416
222
1,730
19,512
2010
$000
1,800
1,800
6,714
138
1,800
1,016
936
2,038
16,242
(2)
Plant and equipment with a written down value of $276,000 was sold for $168,000. New
plant was purchased for $2,500,000.
(3)
Required:
Prepare the statement of cash flows and supporting notes in accordance with IAS 7 Statement of
Cash Flows for Fallen for 2011.
(20 marks)
43
2011
$000
7,650
(5,800)
1,850
(150)
(50)
1,650
(600)
1,050
300
2012
$000
11,500
(9,430)
2,070
(170)
(350)
1,550
(550)
1,000
300
2011
$000
2012
$000
10,050
11,350
1,500
1,200
900
3,600
13,650
2,450
3,800
50
6,300
17,650
5,900
5,000
10,900
350
2,400
13,650
5,900
5,700
11,600
3,350
2,700
17,650
Additional information
During the year to 30 April 2012 the company tried to stimulate sales by reducing the selling price of
its products and by offering more generous credit terms to its customers.
44
Calculate six accounting ratios, specifying the basis of your calculations, for each of the
two years to 30 April 2011 and 2012 which will enable you to examine the companys
progress during 2012.
(9 marks)
(b)
From the information available to you, including the ratios calculated in part (a) of the
question, comment upon the companys results for the year to 30 April 2012 under the
heads of profitability, liquidity and efficiency.
(11 marks)
(20 marks)
Question 53 RAPIDO
You are an independent financial advisor and have been given the following details relating to Rapido:
Summary statements of financial position
Assets
Non-current assets
Tangible assets
Current assets
Inventory
Trade receivables
Cash and bank balances
Total assets
Equity and liabilities
Capital and reserves
Equity shares
Share premium account
Retained earnings
Non-current liabilities
Secured loans
Current liabilities
Trade and other payables
Bank overdraft
31 December
2010
2011
Actual Budget
$000
$000
2011
Actual
$000
957
1,530
1,620
205
305
175
685
1,642
290
720
1,010
2,540
325
810
1,135
2,755
800
200
280
1,280
800
200
420
1,420
800
200
460
1,460
175
187
362
1,642
(360)
505
255
760
2,540
(360)
545
390
935
2,755
45
Revenue
Cost of sales
Gross profit
Administration and distribution
Operating profit
Interest payable
Taxation
31 December
2010
2011
Actual Budget
$000
$000
2,560
4,500
(1,700) (3,150)
860
1,350
(655)
(880)
205
470
(20)
205
450
(86)
(202)
119
248
82
108
2011
Actual
$000
5,110
(3,580)
1,530
(1,084)
446
(35)
411
(182)
229
49
The opening inventory figure was $135,000 2010 actual and $210,000 2011 budget.
Required:
Using the above information and appropriate ratios, prepare a report for the board of directors
of Rapido assessing the profitability, liquidity and solvency of the company and briefly suggesting
the necessary action to be taken.
(18 marks)
Question 54 NOT FOR PROFIT
Not-for-profit (NFP) organisations share many characteristics with those organisations whose main aim
is to generate profits. NFPs include government bodies, museums and charities.
Required:
(a)
Explain the main aims of an NFP and those of a profit orientated entity.
(5 marks)
(b)
Discuss the different approaches that may be required when assessing the performance
of an NFP organisation.
(5 marks)
(10 marks)
46
52,000
2011
$
85,400
(3,500)
(31,600)
8,900
(3,900)
55,300
Capital structure
$
Ordinary shares of 50 cents
100,000
Required:
Earnings per share for the year ended 31 December 2011 (with comparative).
(b)
(2 marks)
Bonus issues
Consolidated statements of profit or loss as in part (a). Capital structure as in part (a), except
that a bonus issue (stock dividend) was made on 1 February 2011 of 1 new bonus share for
every 4 shares already held.
Required:
Earnings per share for the year ended 31 December 2011 (with comparative).
(c)
(2 marks)
P
$63,000
S
$20,000
Year 2010
P
$50,000
Required:
Earnings per share for the year ended 31 December 2011 (with comparative).
(2 marks)
47
Rights issue
Profit after tax
Year ended 31 December 2010
Year ended 31 December 2011
$40,000
$50,000
(3 marks)
$40,000
$50,000
Options
Shares in issue
$100,000 ordinary 25 cent shares
Options have been granted to directors and certain senior executives. These give the right to
subscribe for ordinary shares between 2014 and 2016 at 80 cents per share. Options were
available in respect of 50,000 shares during the year ended 31 December 2011.
The average fair value of one ordinary share during the year was $1.00 per share.
Profit after tax for 2011 was $50,000.
Required:
Basic and diluted earnings per share for the year ended 31 December 2011.
(2 marks)
(14 marks)
48
2,010
(1,596)
414
95
509
(49)
460
Notes
(2)
(1)
(3)
$000
530
580
Notes
(4)
(5)
1,110
Current assets
Inventory
Receivables
150
470
620
1,730
600
520
(8)
1,120
196
(7)
414
1,730
(6)
1001
(2)
32
45
(3)
75
20
Income tax
$000
Income tax based on the profits for the year at a rate of 33%
Over provision for tax in the previous year
(4)
74
(25)
49
188
32
220
At 31 March 2012
(5)
750
530
Investments
$000
The financial asset investments are classed as Fair Value though profit or loss,
their fair value at 31 March 2012 was $580,000. The gain in value of $20,000
has been credited to profit or loss.
(6)
Current liabilities
$000
Trade payables
Income tax
Bank overdraft
1002
260
74
80
414
180
16
196
At 31 March 2012
(8)
Authorised
$000
Issued
$000
1,000
600
Answer 2 MERCURY
(a)
$000
$000
3,000
450
2,030
_____
2,480
(500)
_____
Cost of sales
1,980
_____
Gross profit
1,020
Distribution costs
(240 + (20% (1,020 370)) + 30)
Administrative expenses (205 + (5% 900))
Other expenses (50+ 5 (W1))
Profit before interest and tax
Finance costs
Loan note interest (10% 500)
Preference dividend (7% 500)
400
250
55
___
315
50
35
(85)
___
230
55
___
175
___
1003
(c)
Share
premium
$000
250
100
180
(100)
Retained
earnings
$000
70
______
_____
175
(25)
_____
350
80
220
Total
$000
500
175
(25)
_____
650
$000
300
900
1,020
_____
Accumulated
depreciation
$000
2,220
_____
Current assets
Inventory
Trade receivables (600 30)
Bank
180
500
___
680
___
500
570
110
_____
Total assets
Net book
value
$000
300
720
520
_____
1,540
1,180
_____
2,720
_____
350
80
220
_____
650
Non-current liabilities
10% Loan notes
7% Preferred shares of $1
Current liabilities
Trade payables
Income tax
Accrued expenses (50 + 30)
Dividends
Total equity and liabilities
1004
500
500
900
55
80
35
_____
1,070
_____
2,720
_____
$000
30
(25)
__
5
___
Answer 3 SULPHUR
(i)
Statement of total comprehensive income for the year ended 30 June 2012
Profit or loss
$
Revenue (530,650 1,880)
Cost of sales (W1)
528,770
(363,960)
_______
* Gross profit
Other operating income (1,500 + 12,000)
164,810
13,500
_______
178,310
(48,126)
(18,710)
_______
111,474
(38,100)
______
73,374
40,000
______
113,374
150,000
Revaluation
surplus
$
Total
$
310,030
113,374
_______
423,404
_______
75,000
_______
______
160,030
73,374
(75,000)
_______
225,000
_______
40,000
______
158,404
_______
40,000
Retained
earnings
$
1005
$
390,000
15,384
21,600
_______
426,984
30,000
Investments
* Current assets
Inventories
Trade receivables ($15,690 $460)
Cash
29,170
15,230
410
______
* Total assets
44,810
_______
501,794
225,000
40,000
158,404
_______
423,404
* Current liabilities
Trade payables ($34,700 $700)
Accrued expenses
Bank overdraft ($4,820 + $690 $460)
Income tax
34,000
1,240
5,050
38,100
______
78,390
_______
501,794
WORKING
(1)
Cost analysis
Cost of sales
$
Opening inventory
24,680
Purchases
298,400
Discount received
(10)
Closing inventory
(29,170)
Factory overheads (66,420 + 1,240) 67,660
Per trial balance
Depreciation (as calculated in (a))
2,400
_______
363,960
_______
1006
Distribution
$
Administrative
$
44,280
3,846
______
18,710
______
48,126
______
18,710
______
7,388
(5,140)
_____
* Gross profit
* Distribution costs (W2)
* Administrative expenses (W2)
2,248
(711)
(871)
____
666
(120)
___
546
(250)
___
296
WORKINGS
(1)
Cost of sales
$000
Opening inventory
Production costs
Depreciation 80% ([2% $4m] + [20% $6.4m])
Less: Closing inventory (780k 5k + 8k)
695
4,140
1,088
(783)
_____
5,140
(2)
Cost classification
Distribution
$000
Per list of balances
Prepayments
Accrued expenses
Depreciation
buildings (10% 2% $4m)
plant and equipment (10% 20% $6.4m)
Admin
$000
540
(60)
95
730
(30)
35
8
128
___
8
128
___
711
871
1007
$000
*ASSETS
*Non-current assets
Property, plant and equipment (W3)
11,735
*Current assets
Inventory (W1)
Trade receivables (2,060 12)
Prepayments (60 + 30)
783
2,048
90
___
*Total assets
2,921
______
14,656
7,000
2,000
1,250
1,836
______
12,086
*Non-current liabilities
Interest bearing borrowings/12% Loan (2018)
*Current liabilities
Trade payables
Operating overdraft
Accrued expenses (95 + 35)
Interim dividend (14m 2c)
1,000
1,120
40
130
280
___
1,570
______
14,656
Share
premium
$000
1008
Revaluation
surplus
$000
Retained
earnings
$000
1,500
(250)
1,570
546
(280)
_____
_____
9,070
296
(280)
3,000
______
1,250
1,836
12,086
Total
$000
5,000
2,855
3,880
______
11,735
Answer 5 NETTE
The Conceptual Framework for Financial Reporting provides a conceptual underpinning for the
International Financial Reporting Standards (IFRS). The framework is in the process of being updated
by the IASB and as at 2011 it is a mixture of the old framework document plus two new chapters that
have been issued by the IASB as a replacement for sections of the old framework.
IFRS are based on the Framework and its aim is to provide a framework for the formulation of
accounting standards. If accounting issues arise which are not covered by accounting standards then the
Framework can provide a basis for the resolution of such issues. The Framework deals with several
areas:
The Framework adopts an approach which builds corporate reporting around the definitions of assets
and liabilities and the criteria for recognising and measuring them in the statement of financial position.
This approach views accounting in a different way to most companies. The notion that the
measurement and recognition of assets and liabilities is the starting point for the determination of the
profit of the business does not sit easily with most practising accountants who see the transactions of
the company as the basis for accounting. The Framework provides a useful basis for discussion and is
an aid to academic thought. However, it seems to ignore the many legal and business roles that
financial statements play. In many jurisdictions, the financial statements form the basis of dividend
payments, the starting point for the assessment of taxation, and often the basis for executive
remuneration. A statement of financial position, fair value system which the IASB seems to favour
would have a major impact on the above elements, and would not currently fit the practice of
accounting. Very few companies fit this practice of accounting. Very few companies take into account
the principles embodied in the Framework unless those principles themselves are embodied in an
accounting standard. Some International Financial Reporting Standards are inconsistent with the
Framework primarily because they were issued earlier than the Framework. The Framework is a useful
basis for financial reporting but a fundamental change in the current basis of financial reporting will be
required for it to have any practical application. The IASB seems intent on ensuring that this change
will take place.
1009
the requirements and guidance in Standards and Interpretations dealing with similar and
related issues; and
the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the framework.
Answer 6 LIMITATIONS
The following list includes some of the limitations of financial statements:
Nowadays, financial statements prepared under a financial reporting framework (e.g. IFRS)
contain very complex and detailed information. Most users will not be able to fully
understand what the financial statements are trying to communicate. For example, accounting
for financial instruments encompasses detailed rules, which even accountants may struggle to
understand.
The values used in financial statements are mixed in nature. Some transactions and balances
are accounted for at historic cost whilst others are incorporated at fair value. Without detailed
knowledge of how these figures have been determined, their meaning can be difficult to
construe.
The financial statements are mainly historic in nature and summarise what has happened, not
what is going to happen. They cannot be used to make predictions about the future.
Many items are excluded from the financial statements. For example, many internallygenerated intangible assets (e.g. a brand name) can never be recognised in the statement of
financial position of the reporting entity. The only way in which such assets can be
recognised is if the entity is acquired, but even then they are recognised only in the
consolidated statement of financial position of the acquiring company.
Management may be very creative in how information is presented in the financial statements.
Much of the information which is required to be disclosed is subjective in nature and
management may interpret the accounting requirements to portray information in a particular
light. Enron is the classic example of management being creative and, in doing so, the
financial statements not showing a realistic picture.
How the financial market perceives an entity cannot be recognised in the financial statements.
The market value of a company is very different to the carrying value presented in the
financial statements because market value reflects, for example, shareholders expectations of
future returns.
It can be quite difficult to judge at what point revenue should be recognised. When complex
contractual agreements are made between parties it may also be difficult to specify an
appropriate amount of revenue to be included. Therefore the statement of comprehensive
income may be inadequate in reflecting the amount of profit made in a period.
1010
Financial statements are drawn up at a specified point in time. A cut-off therefore has to be
established to be able to prepare the financial statements. The point of cut-off could be in the
middle of a very detailed or complex transaction or related transactions which again the
financial statements may not be able to reflect fully.
From the end of the reporting period to when the statements are authorised for publication is
usually a minimum of three months. A lot can happen in that three-month period, so the
statements become out of date very quickly.
Many transactions take place between related parties. Although certain disclosures should be
made regarding related party transactions it is still difficult for the financial statements to fully
reflect the impact of these transactions.
(b)
Main purpose
To provide those who are interested in the work of the IASB with information about
its approach to the formulation of standards.
1 per point to
max 4
Status
1
___
max 2
___
1011
Underlying assumption
Going concern
1
1
1
___
max 2
___
8
___
1012
Entity concept
In accounting, it is necessary to define the boundaries of the entity concerned. In the case of a
limited liability company, only transactions of that company must be included. There must be
no confusion between the transactions of the company and the transactions of its owners and
managers.
If the entity concept is not followed, the profit, financial position and cash flow may all be
distorted to the point where they become meaningless.
A limited liability company is therefore a separate entity which can sue and be sued in its own
name.
(b)
(c)
Materiality
Information is material if its omission from, or misstatement in, the financial statements could
influence the economic decisions of users. Materiality cannot always be measured in
monetary or percentage terms, but a commonly used measure is 5% of normal pre-tax profit.
Above that level, for example, the transaction would need to be disclosed in the financial
statements.
Materiality is not solely related to the size of a transaction; it would also be necessary to
consider the nature of the transaction and the fact that the nature would give rise to an item
being treated as material and require disclosure.
If the materiality concept is not followed, financial statements could become confused by the
inclusion of unnecessary detail of trivial matters, or could be rendered misleading by the
exclusion of reference to important matters.
(d)
1013
(b)
Objectives
Producing an IFRS
The Steering Committee identifies and reviews all the accounting issues associated
with the topic. These will include:
After receiving comments from the Board, the Steering Committee prepares and
publishes a Draft Statement of Principles. Comments are invited from all interested
parties during an exposure period, usually between four and six months.
The Steering Committee prepares a draft Exposure Draft for approval by the Board.
After revision, and with the approval of at least 9 members of the board, the
Exposure Draft is published. Comments are invited from all interested parties
during an exposure period, usually six months.
The Steering Committee reviews the comments and prepares a draft IFRS for
review by the Board. After revision, and with the approval of at least 9 members of
the board, the IFRS is published.
During the process, the Board may decide to issue a Discussion Paper for comment, or to
issue more than one Exposure Draft.
1014
Users
Information needs
(1)
(2)
(3)
(b)
Employees
Lenders
asset values.
(4)
(5)
Customers
Achieving objectives
Users of financial statements are interested in three main areas in their use of company
financial statements:
profitability;
solvency/liquidity;
the risk of the operation.
1015
Answer 12 COMPARABILITY
(a)
Aid to comparability
The IASBs Framework and the requirements of accounting standards aid comparability by:
requiring businesses to treat similar items in the same way in each period and from
one period to the next (unless a change is required to comply with accounting
standards or to ensure that a more appropriate presentation of events or transactions
is provided).
Answer 13 ADJUSTMENTS
Internal memorandum
To
From
Date
Re
Adjustments to depreciation
At the board meeting on 1 January 2011 it was decided to modify the depreciation charge on a
number of assets of the company. Set out below is the effect that these modifications will have on
the accounts for the year to 31 December 2011.
(a)
Lathe
The lathe was purchased in 2005 and was originally being written off over an estimated
useful life of 12 years. As at 1 January 2011 six of the years have elapsed with a further
six years remaining. It was decided that the machine will now only be usable for a further
four years.
1016
Grinder
The grinder was purchased in 2008 and was originally being depreciated on a straight line
basis. It has now been decided to depreciate this on the sum of digits basis.
IAS 16 requires that depreciation methods be reviewed annually and if there is a significant
change in the expected pattern of economic benefits, the method should be changed.
Depreciation adjustments should be made in current and future periods. This change might
be appropriate if, for instance, usage of the machine is greater in the early years of an
assets life when it is still new and consequently it is appropriate to have a higher
depreciation charge.
If the change is implemented, I propose that the unamortised cost (the carrying amount) of
the asset should be written off over the remaining useful life commencing with the period
in which the change is made. The depreciation charge for the remaining life of the asset
will therefore be as follows:
Year
2011
2012
2013
2014
2015
2016
2017
7 (7 + 1)
No of digits
7
6
5
4
3
2
1
28
7/28 $70,000
6/28 $70,000
Depreciation
$
17,500
15,000
12,500
10,000
7,500
5,000
2,500
70,000
Disclosure will need to be made in the accounts of the details of the change, including the
effect on the charge in the year.
(c)
Leasehold land
The revaluation model in IAS 16 allows groups of assets to be subsequently valued at a
revalued amount, which will normally be its fair value.
Where any item of property plant or equipment is revalued, the entire class to which the
asset belongs should be revalued. Revaluations must be kept up to date. Where there are
volatile movements in fair value, the revaluation should be performed annually. Where
there are no such movements, revaluations every three to five years may be appropriate.
1017
restated proportionately with the change in the gross carrying amount so that
the carrying amount after the revaluation equals the revalued amount (e.g.
where revaluations are made to depreciated replacement cost using indices)
(ii)
eliminated against the gross carrying amount of the assets and the net amount
restated to the revalued amount of the asset (e.g. where buildings are revalued
to their market value).
IAS 16 requires that the subsequent charge for depreciation should be based on the
revalued amount. The annual depreciation will therefore be $62,500 (i.e. $1,500,000
divided by the 24 years of remaining life).
There will then be a difference between the revalued depreciation charge and the historical
depreciation charge.
The resulting excess depreciation may be dealt with by a movement in reserves (i.e. by
transferring from the revaluation surplus to retained earnings a figure equal to the
depreciation charged on the revaluation surplus each year).
Additional disclosures required under IAS 16 include the following:
(i)
the basis used to revalue the assets (e.g. market value based on existing use)
(ii)
(iii)
(iv)
(v)
the carrying amount of each class of property plant and equipment that would
have been included at historical cost
(vi)
the revaluation surplus, indicating movements for the period and any
restrictions on the distribution of the balance to shareholders (many countries
prohibit the distribution of revaluation surpluses to shareholders as they are
unrealised profits).
Answer 14 SPONGER
MEMORANDUM
To
From
Date
1018
(b)
set up as deferred income and recognised in profit or loss over the useful life of
the asset (to match the depreciation charge), or
deducted from the carrying amount of the asset in the statement of financial
position (i.e. being recognised over the useful life of the asset by means of a
reduced depreciation charge).
Compensation grant
IAS 20 states that grants receivable as compensation for expenses or losses already
incurred should be recognised as income when they become receivable. They cannot be
taken back to prior periods, as their receipt does not constitute correction of a prior period
error or a change in accounting policy. Disclosure may be appropriate.
However, in order to apply the prudence concept, the standard requires grants not to be
recognised until conditions for receipt have been satisfied and receipt is reasonably
assured.
In this situation the conditions for receipt, namely filling out the triplicate form, have not
been fully satisfied and therefore the grant should not be recognised in the accounts at 31
December 2011.
1019
General accounting
This grant relates not to specific expenditure but to a non-financial objective.
The terms of the grant suggest that it is effectively earned at a rate of $1,000
per visit, and therefore it should be credited to income at that rate. In the year
to 31 December 2011 the credit will be $7,000. Amounts to be recognised in
future periods will be carried forward as deferred income.
The grant is not spread over the life of the bus as it does not specifically
contribute to its cost.
(ii)
Repayments
A repayment of $5,000 is due relating to unfulfilled visits in the current year
and should be provided for. However, as this is expected to recur in each of the
next four years, provision also needs to be made in total for repayments relating
to 20 further unfulfilled visits.
A contingent liability should be disclosed relating to the potential repayment of
the grant relevant to the visits in future periods which are expected to take
place.
(iii)
$
7,000
21,000
25,000
Property, plant and equipment is stated at historical cost less depreciation, or at valuation.
(b)
Depreciation is provided on all assets, except land, and is calculated to write down the cost
or valuation over the estimated useful life of the asset.
The principal rates are as follows:
Buildings
Plant and machinery
Fixtures and fittings
1020
Cost/valuation
Cost at 1 January 2011
Revaluation adjustment
Additions
Reclassifications
Disposals
Cost at 31 December 2011
2011 valuation
Depreciation
At 1 January 2011
Revaluation adjustment
Provisions for year (W2)
Disposals
At 31 December 2011
Carrying amount
At 31 December 2011
At 31 December 2010
Land
Plant
Fixtures, Payments on
and
and
fittings, account and
buildings machinery tools and assets in the
equipment course of
construction
$000
$000
$000
$000
900
1,613
600
154
100
(277)
100
1,490
1,500
$000
91
2,994
600
73 (W1) 267
(100)
(318)
64
2,043
1,500
140
70
(31)
179
1,583
929
210
64
2,786
820
1,155
250
91
2,316
80
(80)
17
17
458
298
(195)
561
390
40
(41)
389
Total
678
(80)
385
(226)
757
Land and buildings have been revalued during the year by Messrs Jackson & Co on the basis of an
existing use value on the open market.
The corresponding historical cost information is as follows:
Land and buildings
$000
Cost
Brought forward
Reclassification
Carried forward
Depreciation
Brought forward
Provided in year
Carried forward
Carrying amount
900
100
1,000
80
10
90
910
1021
(2)
$000
53
20
73
$000
600
17
+ (100 2%)
Depreciation on buildings
40
2% straight line depreciation is equivalent to a 50-year life.
The buildings are 10 years old at valuation and therefore have 40 years remaining.
298
70
Answer 16 STOAT
To:
Directors of Stoat
From:
Financial adviser
You asked me to explain certain aspects of the accounting regulations governing depreciation and noncurrent asset valuations, and I have set out the information you need below.
(a)
The purpose of depreciation is to spread the cost of a non-current asset with a life of several
years as fairly as possible over the periods expected to benefit from its use.
The factors affecting the assessment of the useful life of an asset are:
(b)
expected usage;
expected physical wear and tear;
technological obsolescence;
legal or similar limits on the use of the asset, such as the expiry dates of related
leases.
[Three from]
1022
(d)
IAS 16 Property, Plant and Equipment allows the revaluation of non-current assets other
than goodwill if a policy of revaluation is adopted.
IAS 16 requires that if any asset of a class is revalued, all assets of that class must be
revalued. Once revaluation is adopted, values must be kept up to date.
Any change in value will be recognised in equity as a revaluation surplus, after being
included in other comprehensive income. Any surplus, or loss, cannot be reclassified when
the asset is disposed, although a reserve transfer can be made from the revaluation surplus
to retained earnings.
There are extensive disclosure requirements, including the basis of valuation, whether an
independent valuer was involved and the date and amounts of valuations.
Answer 17 SUBSTANCE OVER FORM
Preparing accounts on a substance over form basis means that they should reflect the commercial
effect of transactions rather than their legal form.
The arguments for and against this treatment are discussed below.
Framework
The IASBs Conceptual Framework for Financial Reporting notes that financial statements are
frequently described as showing a true and fair view (as in the UK), or as presenting fairly the
financial position (as in the US).
Many other countries adopt similar requirements for financial statements, particularly in Europe
where the requirements of directives state that all member states financial statements should give a
true and fair view. This is, for example, translated as donner une image fidele in France. Some
countries interpret this as meaning in accordance with their own legislation, particularly in Germany,
but generally speaking, legislatures and accounting standard setters increasingly recognise an
overriding notion of truth and fairness.
One of the fundamental qualitative characteristics required by the Framework is that of Faithful
Representation. To faithfully represent a transaction the entity must reflect the economic reality
(substance) rather than its legal form, if there is a difference. It gives the example of an entity
disposing of an asset in such a way that the documentation purports to pass legal ownership to a third
party, but where agreements exist to ensure that the entity continues to enjoy the future economic
benefits embodied in the assets. In such circumstances the reporting of a sale would not represent
faithfully the transaction entered into.
1023
IAS 17 Leases requires that finance leases be capitalised in the statement of financial position where
certain conditions are met. In such cases the legal form of the transaction is that the lessor retains the
legal title to the assets. The economic substance of the transaction however is that the lessee is the
true owner of the asset as the lease transfers substantially all the risks and rewards incident to the
ownership of the asset. The lessee therefore includes it in its financial statements. Not to do so would
distort gearing ratios.
IFRS 10 Consolidated Financial Statements requires that group accounts be prepared to show
information about the group as that of a single entity, without regard for the legal boundaries of the
separate legal entities.
IAS 32 Financial Instruments: Presentation recognises that some financial instruments take the legal
form of equity, but are liabilities in substances and requires that classification of an instrument is
made on the basis of an assessment of its substance when it is first recognised.
IAS 1 Presentation of Financial Statements states the importance of prudence, substance over form
and materiality in the selection and application of accounting policies and the preparation of
financial statements.
Other areas where the principle applies include the factoring of receivables and the sale and
repurchase of inventories. Factored debts are sold to a third party in exchange for a proportion of
the carrying amount of the debt. Such agreements vary considerably in their nature and some leave
the entity with most of the risks associated with the collection of the receivables. In such
circumstances it may be appropriate to keep the receivables on the face of the statement of financial
position and recognise the cash received from the factor as a liability, rather than accounting for the
transaction as a sale of the receivable.
Consistency, comparability and subjectivity
Another argument put forward against the use of substance over form is that it introduces yet more
subjectivity into accounts (the judgment of the true substance). It is argued that if transactions were
accounted for on a legal basis, there would be greater certainty and objectivity in the preparation of
accounts and hence more comparability.
It may be true that the certainty of legal form would increase, but this does not mean the
comparability. In fact most accountants would say that it is the substance over form principle which
is designed to increase comparability by making transactions of a similar nature treated in similar
ways.
It may introduce another element of subjectivity, but accounts preparation inevitably does involve
many judgmental decisions. It is these judgments that make accounts fair as well as true, and hence
duly comparable.
Accounting or extra disclosure
A further argument against the proposal is that it may not be essential to account on the basis of
substance over form, but merely to provide additional disclosure.
The argument here rests on whether any amount of disclosure can compensate for a transaction
which is fundamentally misleadingly treated in the accounts. If additional disclosure is not so much
addition as contradictory to the accounting treatment, then surely the result is confusing the user and
hence still misleading and not true and fair.
1024
Broadly speaking, the Anglo-Saxon world regards economic substance as being more important than
legal form. This is at least in part due to the historical separation of fiscal and financial accounting.
Countries with civil, as opposed to common law legal traditions place more emphasis on the fiscal
correctness of financial statements. With increasing globalisation of capital markets the trend, at the
moment seems to be away from legal form, and towards economic substance. However, the inherent
uncertainties in the notion of economic substance mean that there is an ever increasing volume of
accounting standards on what exactly is meant by substance as it is very easily abused.
Answer 18 HUGHES AND CUSTOM CARS
(a)
Hughes
The Conceptual Framework for Financial Reporting states that financial statements should
show the economic substance of transactions over their legal form.
Hughes has entered into a sale and repurchase agreement with the Wodwo Bank. Hughes
has received $36 million now. If Hughes exercises its call option after one month, it will
repurchase the inventory at a premium of $1.8 million which represents a finance charge of
5% for the month. If the Wodwo Bank exercises its put option after two months, Hughes
will repurchase the inventory at a premium of $3.7 million which represents a finance
charge of 5% for each of the two months.
It is highly likely that one or other of the options will be exercised. Taking the transactions
as a whole, the commercial substance is that of a short-term loan secured on the inventory.
The inventory should remain in inventory at $30 million at year end. $36 million should
be shown in current liabilities. The interest payable to 31 December 2011 of $1.2 million
($1.8m 21/31) should be charged to profit or loss and added to the liability in the
statement of financial position.
(b)
Custom Cars
Unless Sigmas cash contribution is very substantial (say 80% as opposed to 20% of the
expenditure incurred by Custom Cars), there should be no doubt that Custom Cars owns
the extension (and has the risks and rewards of ownership).
The fittings supplied free of charge by Sigma could be excluded from the statement of
financial position on the grounds that they are not owned by Custom Cars. Also their
economic benefit is primarily to Sigma in promoting Sigmas product.
Answer 19 PERSEUS
(a)
Adjustments to be made
(i)
For inventory
1025
(b)
(ii)
The amount of the correction for the current period and for each prior period
presented.
The fact that comparative information has been restated or that it is impracticable to
do so.
Current assets
$
4,249,800
2,674,300
773,400
940,000
Inventory (W1)
Trade receivables (W2)
Prepayments
Cash at bank
WORKINGS
(1)
Inventory
$
As originally taken
(i)
(ii)
16,000
9,800
$
4,190,000
(6,200)
66,000
_________
4,249,800
_________
(2)
Trade receivables
As originally stated
Accounts receivable ledger
Less:
Goods on sale or return
Less:
2,980,000
88,000
_________
2,892,000
92,000
_________
2,800,000
140,000
_________
2,660,000
14,300
_________
2,674,300
_________
1026
Prepayments
$
As originally stated
Payments on account
Less: Commission due
2/102 $1,101,600
$
770,000
25,000
21,600
______
3,400
_______
773,400
_______
Answer 20 JENSON
(a)
Critical event
it is probable that any future economic benefit associated with the item will flow to
the entity; and
(ii)
the item has a cost or value that can be measured with reliability.
1027
For most industries this event is a routine occurrence that could not be considered as critical.
However where this is a very difficult task, perhaps due the rarity or scarcity of materials,
then it may be critical. A rare practical example of this is in the extraction of precious metals
e.g. gold mining. Because gold is a valuable and readily marketable commodity the real
difficulty in deriving income from it is obtaining it, so this is the critical event. A logical
progression of this point would be to say that any industry whose products are normally sold
on a commodities market could consider the obtaining of the product to be the critical event.
Such industries may include, for example, growing coffee beans.
During the manufacture or production of goods:
Again for most industries this is not the critical event. Normally there would be far too many
uncertainties remaining in the operating cycle. For example the manufacturing process could
be flawed and therefore not produce saleable goods. Even if the goods are manufactured
properly, it does not necessarily mean someone will buy them. It could be argued that where
there is a firm order for the goods this would overcome some of the uncertainties, but it would
still be imprudent to recognise firm orders as sales. There are however some industries where,
due to a long production period, revenues are recognised during the production or
manufacturing period. The most common example of this is the percentage of completion
method of profit recognition for construction contracts under IAS 11 Construction
Contracts. Where companies adopt this approach to revenue (and profit) recognition it is
generally referred to as the accretion approach.
Delivery/acceptance of the goods:
For the vast majority of businesses this is the point at which revenue is recognised, and it
usually coincides with the transfer of the legal title to the goods and represents the point of
full performance. Although there may be some uncertainties beyond this point (for example,
the goods may prove to be faulty or the customer may not be able to pay for them), these can
usually be quantified and provided for with reasonable accuracy based on past experience.
When a condition has been satisfied after the goods have been delivered:
The most common occurrence of this type of sale is where the customer has the right to return
goods and not incur a liability for them. In most cases the condition is the passage of time
(e.g. goods may be returned within three months of delivery), but it may also occur in relation
to some other event such as their subsequent resale to another party. Traditionally with this
type of sale, its recognition is delayed until the condition has been met, however one could
argue that the substance of these transactions should be considered. Although a customer may
have the right to return goods, if it can be demonstrated that in practice this never actually
occurs, then recognising the sale before the expiry of the return period could be justified.
Another example of this type of condition is where the terms of a sale of say an item of
equipment required the seller to install and test the equipment. If this involves significant
expense or risk then recognition of this type of sale would be deferred until completion of the
installation.
1028
For most (credit) sales the risk of non-payment is relatively low. Revenue recognition would
only be delayed to the point of receipt of cash if its collection was perceived to be particularly
difficult or risky. Revenues (and profits) from high risk credit sale agreements may be
examples of this. Another possibility is sales made to risky overseas countries/customers,
particularly if they are in non-convertible currencies or the country has strict exchange
controls.
Expiry of guarantees/warranties:
This serves as a reminder that not all the risks and associated costs are resolved when cash is
received. For some products such costs can be significant (e.g. with the supply of new motor
vehicles or rectification work on construction contracts); however it is normally possible to
reliably estimate these costs and provide for them at the time of the sale. It would be
unrealistic, and may cause distortions, if revenues were not recognised until such obligations
had elapsed.
(c)
Transactions
(i)
Although this agreement may be worded as a sale, and even if the title to the goods
passes to Wholesaler, it seems clear that this is not a sale it is a secured loan.
Therefore Jenson should not treat the income from Wholesaler as revenue, but
instead as a loan in its statement of financial position. The goods should continue to
be recognised as inventory, and accrued interest of $3,150 ($35,000 12% 9/12)
should be provided for against profit or loss.
(ii)
It appears that the on-going fees after the first initial payment are insufficient to
cover Jensons servicing cost and provide a reasonable profit.
In these
circumstances IAS 18 Revenue requires part of the initial fee of $50,000 to be
deferred and recognised in future periods as the servicing costs are incurred. As
there is a requirement to earn a (reasonable) profit of 20% on revenues, with ongoing servicing costs of $8,000, revenues of $10,000 would need to be recognised
in the next four years. The actual fees receivable are $5,000; therefore Jenson will
have to defer $20,000 ($5,000 four years) of the initial fee. Thus in the year to 31
March 2012 Jenson would recognise $30,000 ($50,000 $20,000) of the initial
franchise fee.
(iii)
Sales (6 240,000/24)
Cost of sales (6 192,000/24)
Profit
$
60,000
(48,000)
12,000
1029
The problem with the above approach is that the deferred income does not seem to fit the
definition of liability in the Framework and IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. A liability is defined as an obligation of an entity to transfer economic
benefits as a result of past transactions or events. The Framework effectively says that a
statement of financial position comprises only of assets, liabilities and equity. Deferred
income does not satisfy the definition of any of the elements. The liability of Jenson is to
produce and deliver the next 18 publications. The cost of this liability is $144,000 ($192,000
18/24). Thus adopting the balance sheet approach to revenue recognition advocated in the
Framework would mean recognising only $144,000 as a liability on the statement of financial
position instead of $180,000 as deferred income under the accruals approach. The balance
sheet approach would mean that Jenson would recognise all of the profit on the publications
on receipt of the subscriptions. Many commentators have criticised the Framework for its lack
of prudence in reporting profit and being contrary to existing accounting practice and, in
some cases IFRS.
A similar argument to the above could be applied to the deferred franchise fees in (ii) above.
Answer 21 XYZ
(a)
Cost
At 1 January 2011
Additions
At 31 December 2011
Accumulated depreciation
At 1 January 2011
Charge for the year
At 31 December 2011
Carrying amount
At 31 December 2011
At 1 January 2011
1030
x
4,400
4,400
x
629
629
3,771
Amounts payable:
$
Within one to five years ($600 8 $284)
Less future finance charges
4,516
996
3,520
Accruals
$
Finance leases ($667 + $284)
951
Profit or loss
Profit is stated after charging
$
Finance charges
Depreciation $4,400 7
(b)
604 (W2)
629
Table
Period ended
30 June 2011
31 December 2011
30 June 2012
31 December 2012
30 June 2013
31 December 2013
30 June 2014
31 December 2014
30 June 2015
31 December 2015
Amount
borrowed
$
4,400
4,092
3,760
3,403
3,018
2,604
2,158
1,677
1,160
600
Repaid
$
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)
(600)
Amount due
at period end
$
4,092
3,760
3,403
3,018
2,604
2,158
1,677
1,160
600
Comparison
Period
1
2
3
4
5
6
7
8
9
10
1,600
1,600
1031
WORKINGS
(1)
$
6,000
(4,400)
1,600
Digits
30 June 2011
31 December 2011
9
8
9/45 $1,600
8/45 $1,600
30 June 2012
31 December 2012
30 June 2013
31 December 2013
30 June 2014
31 December 2014
30 June 2015
31 December 2015
7
6
5
4
3
2
1
7/45 $1,600
6/45 $1,600
5/45 $1,600
4/45 $1,600
3/45 $1,600
2/45 $1,600
1/45 $1,600
n ( n + 1)
9(9 + 1)
=
2
2
45
1,600
(3)
Finance charge
$
320
284
604
249
213
178
142
107
71
36
Lease obligation
Period ended
Amount
borrowed
Repaid
$
4,400
4,120
3,804
3,453
$
(600)
(600)
(600)
(600)
30 June 2011
31 December 2011
30 June 2012
31 December 2012
$
3,800
3,520
3,204
2,853
$
320
284
249
213
Amount
due at
period end
$
4,120
3,804
3,453
3,066
$3,804
Interest
$284
Capital
$3,520
During 2011
$667
1032
End 2011
$2,853
$
12,757
41,667
At 31 December 2011
Accumulated depreciation
At 1 January 2011
35,000 150,000
Charge for year $
+
5
3
At 31 December 2011
Carrying amount
At 31 December 2011
At 1 January 2011
Plant and
machinery
$
185,000
185,000
41,667
41,667
143,333
Amounts payable:
Within one to five years
Less future finance charges
$
166,000 ($6,500 4 + $35,000 4)
18,243 ($2,857 + $15,386 *)
147,757
Finance leases
$
46,000 ($11,000 + $35,000)
1033
WORKINGS
(1)
Snowplough
(a)
$
2,000
39,000
(35,000)
6,000
Deposit
MLP (6 $6,500)
Fair value of asset
Finance charge
(b)
Digits
30 Jun 2011
31 Dec 2011
30 Jun 2012
31 Dec 2012
30 Jun 2013
6
21
5
21
4
21
3
21
2
Finance
charge
$
$6,000
1,714
$6,000
1,429
$6,000
1,143
$6,000
857
$6,000
571
$6,000
286
21
31 Dec 2013
1
21
21
6,000
n(n + 1)
6( 7 )
= 21
=
2
2
(c)
Period
ended
30 Jun 2011
31 Dec 2011
30 Jun 2012
31 Dec 2012
1034
Capital
O/S at start
$
33,000
28,214
23,143
17,786
Interest
$
1,714
1,429
1,143
857
$23,143
Interest
Capital
$23,143
During 2011
$11,000
(2)
End 2011
$12,143
Snow machine
Amount Repayment Capital
O/s at start
O/S at start
$
$
$
150,000
(35,000)
115,000
124,614
(35,000)
89,614
Period
Ended
31 Dec 2011
31 Dec 2012
Interest
at 8.36%
$
9,614
7,492
Amount
O/S at end
$
124,614
97,106
$124,614
Capital
$115,000
During 2011
$25,386
Interest
$9,614
End 2011
$89,614
Memorandum
To
From
Date
Subject
I would advise you of the means by which the accounting department is dealing with
current research projects.
(i)
Project Rico
This research falls within the IAS 38 Intangible Assets definition of research as
being original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge. The work being performed is
experimental in nature, and to date there are not indications that it will be
successful. It would thus be imprudent to capitalise such expenditure, and
accordingly it should be written off in the year incurred.
1035
(ii)
Project Mounsey
Project Wellington
The costs incurred refining Project Wellington have been capitalised since
Department S discovered its extra properties. These costs should have been
prudently amortised over a period of five years. IAS 38 requires that capitalised
development costs be reviewed for impairment if any factors occur that may
lead to the asset being impaired.
The recent legislation changes mean that the carrying value of the development
costs capitalised should be written off immediately as they are no longer
recoverable.
If, however, the proposed legislation is not approved by Parliament, then the
provision for write-down in value can be written back.
(b)
Intangible assets
Deferred
development
costs
$
Cost
1 Jan 2011 and 31 Dec 2011
1036
600,000
$
Amortisation
1 Jan 2011 (2
200,000
400,000
) + (3
)
5
5
For year
Provision for diminution in value
40,000
160,000
520,000
At 31 Dec 2011
(10)
320,000
280,000
80,000
$
Research and development
Costs incurred in year
Development costs amortised
$
332,000
200,000
532,000
The companys policy as regards research and development is contrary to the requirements of
IAS 38. All research expenditure should be written off to profit or loss as it is incurred. The
only exception is capital expenditure on research facilities.
All development expenditure should also be written off immediately unless the criteria in
IAS 38 can be demonstrated:
technical feasibility;
confidence that the product will make a profit if it is sold, or will be useful if for
internal purposes;
measurable expenditure.
If all of these conditions are met the company must capitalise the development costs, to be
written off systematically in the periods during which the product is used or sold. As the
substantial program has only been begun this year all these conditions may have still to be
met. Even if the conditions for capitalisation are met it is too soon to amortise the costs
(before there is a product to use of sell).
In order to capitalise any costs as development Rover must have a costing system that
distinguishes development expenditure from research.
1037
Provision/Contingent liability
Conditions to be met
The technical feasibility of completing the project so that it will be available for use
or sale.
The intention to complete the project and use or sell the result.
The availability of adequate technical, financial and other resources to use or sell
the product.
The ability to measure the expenditure attributable to the project reliability during
its development.
Tutorial note: These points are broadly worded as they appear in IAS 38. Answers using
the candidates own words to express them are obviously acceptable.
(b)
Amounts to appear
Statement of Statement of
Profit or loss financial
position
$
$
Project A
Amortisation
Statement of financial position
Project B
Expenditure written off
Project C
Development expenditure to date
Project D
Research expenditure
1038
40,000
80,000
230,000
255,000
80,000
_______
_______
350,000
_______
335,000
_______
Disclosure requirements
(i)
$
135,000
215,000
_______
350,000
_______
(ii)
$
380,000
225,000
_______
605,000
(40,000)
(230,000)
_______
335,000
_______
Answer 26 ALLRIGHTS
Directors views on inventory valuation
Striver. A prudent approach is necessary, but the concept of accruals is also important. It is not
acceptable to undervalue inventories. Valuing inventories at low figures will not of itself help cash
flow although, as profit will be reduced, the outgoings for bonuses, taxation and dividends may also
be reduced.
Chatty. It is not acceptable to include selling costs or costs not related to production in the cost
calculation.
Gloome. Budgeted cost is not acceptable.
Opinion
Inventories should be valued at the lower of cost and net realisable value under IAS 2 Inventories.
Cost means all costs of purchase, of conversions and other costs incurred in bringing inventories to
their present location and condition. They include a systematic allocation of fixed and variable
production overheads including depreciation and maintenence of factory buildings and the cost of
factory management and administration. The allocation of these overheads must however be based
on the normal capacity of production facilities such that the value of inventories is not increased as a
result of inefficiencies.
In this case, Gloom indicates that there may have been some inefficiencies and these should be noted
carefully before any final decision is made.
1039
$
38
5
8
4
55
Net realisable value means the selling price to be obtained on sale in the normal course of business
less any costs inevitably incurred on sale (i.e. $60 less royalty $2 and commission $4 = $54).
Inventories therefore should be valued at $54.
Answer 27 SAMPI (IAS 2)
(a)
IAS 2 treatment
(i)
(1)
Unit cost
Inventory is priced at the actual amount paid for each individual item of inventory
held
(2)
(3)
Average cost
Inventory is priced at the moving weighted average price at which each inventory
line was purchased during the accounting period, or brought forward from the
previous period.
All three of these methods are acceptable under IAS 2 because they are either the
actual cost of the inventory (method 1) or a reasonably close approximation to that
actual cost (methods 2 and 3).
(ii)
The cost of the inventory of finished goods would normally be arrived at by taking the labour
and materials consumed in manufacturing the items plus an allocation of overheads. The
overhead allocation should be based on the normal level of production and should exclude
selling expenses and general management expenses.
1040
Weighted
Total value
average
of closing
cost
inventory
$
$
13.00
15.00
Opening inventory
8 March
4,000
3,800
_____
Balance
12 March
7,800
(5,000)
_____
13.97
2,800
(2,000)
_____
13.97
18 March
22 March
800
6,000
_____
13.97
18.00
6,800
(3,000)
_____
17.53
24 March
3,800
(2,000)
_____
17.53
28 March
1,800
_____
17.53
31,554
_____
Revenue(W3)
Cost of sales
Gross profit /(loss) (W1)
393
(1,893) 1,933
967
1041
as at 31 December
2009
2010
$000
$000
2011
$000
1,968
5,272
2,117
3,143
4,250
10,383
12,500
143
Nil
Nil
Nil
Nil
750
617
Nil
WORKINGS
(1)
Expected profit
2008
$000
Contract price
12,000
Less Costs to date (2,750) (2,750+3,000)
Est. future costs (7,750)
1,500
Allocate on
costs basis
393
(loss in full)
(see W3 for fraction)
Less prior periods
393
(2)
2009
$000
12,000
(5,750) (5,750+4,200)
(7,750)
(1,500)
2010
2011
$000
$000
12,000
12,500
(9,950)(9,950+1,150) (11,100)
(1,550)
500
1,400
(1,500)
433
(393)
(1,893)
1,500
1,933
1,400
(433)
967
Disclosure workings
2008
2,750
393
3,143
2009
2010
2011
5,750
9,950 11,100
(1500)
433
1,400
4,250 10,383 12,500
Billings
1042
Revenue
2,750
(2,750+7,750)
2009
$000
2010
$000
5,750
(5,750+7,750)
9,950
(9,950+1,550)
11,000
11,000
26%
12,000
43%
12,000
3,143
5,111
10,383
12,500
(3,143)
1,968
(5,111)
5,272
(10,383)
2,117
3,143
86%
12,000
2011
$000
100%
Actual (12,500)
Answer 29 EARLEY
(a)
IAS 10 Events After the Reporting Period states that assets and liabilities should be
adjusted for events occurring after the end of the reporting period that provide additional
evidence relating to conditions existing at the end of the reporting period. It specifically
includes the example of bad debts, where evidence of bankruptcy of a debtor occurs after
the year end.
In this case, Nedengy appears to have recovered part of the debt and as such only $200,000
needs to be provided. It may be argued that the receivership has occurred as a result of
events occurring after the end of the reporting period, as a result of a change in legislation
for example, but this is unlikely.
IAS 18 Revenue states that when uncertainty arises about the collectability of an amount
already included in revenue, the amount should be recognised as an expense.
(b)
It is likely that the fall in the value of the property will fit the IAS 10 definition of
adjusting events noted in (a) above, unless, again, it can be argued that the decline in the
property market occurred after the year-end.
IAS 36 Impairment of assets and IAS 16 Property, Plant and Equipment require that the
carrying amount of property, plant and equipment should be reviewed periodically in order
to assess whether the recoverable amount has fallen below the carrying amount. Where it
has, the property, plant and equipment should be written down to the recoverable amount,
through the statement of comprehensive income as an expense, or within the other
comprehensive income section, if the asset had previously been revalued upwards and a
surplus still exists for that asset.
(c)
IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable
value. Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale.
1043
Unless Earley was making a significant margin on the tricycles, it is likely that the
reduction in selling price of 30% will necessitate a write- down to net realisable value,
especially considering the transportation costs to Bongolia which must be included. If the
Bongolia option is unlikely to proceed, it may be necessary to write the tricycles down to
scrap value.
(d)
Under IAS 10, the nationalisation is likely to be regarded as a non-adjusting event that
merely requires disclosure in the financial statements. IAS 27 Separate Financial
Statements, requires that an investment in a entity should be accounted for as an
investment (under IFRS 9: Financial Instruments) from the date that it ceases to fall within
the definition of a subsidiary and does not become an associate. It seems here that Earley
has neither control nor significant influence, nor even an investment as the assets have
been in fact, expropriated. The loss of the investment should be accounted for in the year
in which it occurred, but disclosed in the current year.
If the loss of the subsidiary results in Earley no longer being a going concern, then the
event becomes an adjusting event.
(e) & (f) Both of the events described are non-adjusting event which should be disclosed, but not
adjusted for in the current year financial statements.
Answer 30 ACCOUNTING TREATMENTS
(a)
IAS 37 Provisions contingent liabilities and contingent assets states that contingent gains
should not be recognised as income in the financial statements. The company has a debit
balance already in its books which indicates that it must be reasonably certain that at least
part of the claim will be paid. This element of the claim then is probably not a contingency
at all. The remaining part (the difference between the $15,000 and the $18,600) is, and
should be disclosed and not accrued.
(b)
IAS 16 Property, Plant and Equipment requires that the carrying amount of property, plant
and equipment should be reviewed periodically in order to assess whether the recoverable
amount has fallen below the carrying amount. Where it has, the property, plant and
equipment should be written down to the recoverable amount through the profit or loss as
an expense. It may be the case that the amounts involved are so significant as to warrant
separate disclosure under IAS 1 Presentation of Financial Statements.
(c)
IAS 37 states that contingent liabilities should not be recognised. Though a provision
should be made for amounts where the company has an obligation to pay them.
The question in this case is whether or there is an obligating event within the meaning of
IAS 37. On balance it seems inappropriate to recognise a provision in respect of this
amount but the possible liability should be disclosed as a contingent liability.
(i)
(ii)
(iii)
(d)
IAS 2 Inventories requires that inventories be stated at the lower on cost and net realisable
value. Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the sale.
In this case, cost is $1,800 and net realisable value is $1,600
1044
The company should set up a provision for $100,040 (i.e. should accrue for the 10%
probable liability). It should disclose the possible liability under contingent liabilities.
The disclosure is as noted in (c) except that the financial effect is $300,120 (30%
$1,000,400). The balance should be ignored as it is a remote contingent liability.
Tutorial note:
In (c) above it is not appropriate to provide for 20% receivable $500,000 (i.e. $100,000). This
would only be appropriate where the event is recurring many times over.
In (e) it is appropriate to use the percentages provided, as warranty work is provided for.
Answer 31 SHEP (I)
(a)
$
Profit per accounts
Add Depreciation
Less tax allowance
Taxable profits
Tax payable @ 30%
(b)
121,000
11,000
132,000
(15,000)
117,000
35,100
$
Tax base
Carrying amount (60,000 11,000)
Temporary difference
Deferred tax provision required @ 30%
(c)
45,000
49,000
(4,000)
(1,200)
$
Balance b/f
Profit or loss (balancing figure)
Balance c/f
(d)
1,200
1,200
Tax note
$
35,100
1,200
36,300
1045
$
Profit per accounts
Add Depreciation
Interest payable
Provision
Fine
125,000
14,000
500
1,200
6,000
146,700
(16,000)
(150)
130,550
39,165
Tangible assets
Carrying amount (49bf 14)
Tax base (45bf 16)
Interest payable (25,000 8% 3/12)
Interest receivable (4,000 15% 3/12)
Provision
Tax
base
$
Temporary
difference
$
29,000
29,000
6,000
(500)
150
(1,200)
4,450
35,000
(500)
150
(1,200)
33,450
1,335
$
Balance b/f
Profit or loss (balancing figure)
Balance c/f
1046
1,200
135
1,335
$
Profit per accounts
Add Depreciation
Interest payable (note)
Provision
Entertainment
175,000
18,500
1,500
20,000
215,000
(24,700)
(17,800)
172,500
51,750
Tangible assets
Carrying amount (35bf 18.5)
Tax base (29bf 24.7)
Interest payable
Interest receivable
Provision
Development expenditure
Tax
base
$
Temporary
difference
$
4,300
4,300
12,200
(500)
150
(2,700)
17,800
26,950
$8,085
16,500
(500)
150
(2,700)
17,800
31,250
$
Balance b/f
Profit or loss (balancing figure)
Balance c/f
1,335
6,750
8,085
Note
There is no adjustment to profit for the interest paid and the interest receivable.
Consider the interest payable. The tax authority will disallow the closing accrual but will allow last
years accrual (that has been paid in this year) as a deduction. These amounts are equal so there is no
net effect.
Similar comments can be made about the interest receivable.
1047
(b)
172,500
48,300
(c)
26,950
7,546
$
Balance b/f
Adjustment due to change in rate
1,335
(89)
1,246
6,300
7,546
$
Deferred taxation
Relating to
Tangible assets
Other temporary differences
(b)
235,950
55,440
291,380
Shareholders equity
$
Share capital
Revaluation surplus
Provision for deferred tax (60 @ 33%)
1048
60,000
(19,800)
______
40,200
WORKINGS
(1)
(2)
715,000
88,000
80,000
883,000
291,390
Operating lease
$
At 30 June 2012
Profit or loss charge to date
Rentals paid to date
72,000
160,000
88,000
Temporary difference
Answer 36 CONSOLIDATIONS
(a)
$
10,000
170,000
180,000
Goodwill
Sundry net assets (115,000 + 55,000)
Equity capital
Retained earnings
(1)
140,000
40,000
180,000
Net assets
S
Share capital
Retained earnings
Reporting
date
$
30,000
25,000
55,000
Acquisition
$
30,000
25,000
55,000
Postacquisition
$
1049
Goodwill
$
65,000
Cost of shares
Net assets acquired
S (100% 55,000) (W1)
(b)
(55,000)
10,000
$
6,000
191,000
197,000
Equity capital
Retained earnings
(1)
140,000
57,000
197,000
Net assets
S
Share capital
Retained earnings
(2)
1050
Acquisition
$
30,000
25,000
55,000
Postacquisition
$
7,000
Goodwill
Cost of shares
Net assets acquired
S (100% 55,000) (W1)
(3)
Reporting
date
$
30,000
32,000
62,000
Retained earnings
P
S (100% 7,000 (W2))
Goodwill impaired
S
$
65,000
(55,000)
10,000
$
54,000
7,000
(4,000)
57,000
$
8,000
170,000
178,000
Goodwill
Sundry net assets (115,000 + 55,000)
Equity capital
Retained earnings
127,000
40,000
167,000
11,000
178,000
Non-controlling interest
(1)
Net assets
S
Share capital
Retained earnings
(2)
Acquisition
$
30,000
25,000
55,000
Postacquisition
$
Goodwill
Cost of shares
Net assets acquired
S (80% 55,000) (W1)
(3)
Reporting
date
$
30,000
25,000
55,000
Non-controlling interest
S (20% 55,000 (W1))
S
$
52,000
(44,000)
8,000
$
11,000
1051
(i)
$
4,800
191,000
195,800
Equity capital
Retained earnings
127,000
56,400
183,400
12,400
195,800
Non-controlling interest
(1)
Net assets of S
Share capital
Retained earnings
(2)
Reporting
date
$
30,000
32,000
62,000
Acquisition
$
30,000
25,000
55,000
Postacquisition
$
7,000
Goodwill
Cost of shares
Net assets acquired
S (80% 55,000) (W1)
$
52,000
(44,000)
8,000
(3)
Non-controlling interest
S (20% 62,000 (W1))
$
12,400
(4)
Retained earnings
P
S (80% 7,000 (W2))
Goodwill impaired
$
54,000
5,600
(3,200)
56,400
1052
(1)
Goodwill
Cost of shares
Fair value of non-controlling interest (6,000 $2.15)
Net assets acquired (100%)
$
52,000
12,900
(55,000)
9,900
(2)
Non-controlling interest
Fair value on acquisition
Share of post-acquisition profits (7,000 20%)
Share of goodwill impairment (3,200 20%)
$
12,900
1,400
(640)
13,660
(4)
Retained earnings
P
S (80% 7,000 (W2))
Goodwill impaired (3,200 80%)
$
54,000
5,600
(2,560)
57,040
Answer 37 HONEY
Consolidated statement of financial position as at 30 June 2012
Assets
Non-current assets
Tangible assets (27,000 + 12,500)
$
39,500
37,000
76,500
20,000
6,000
18,333
44,333
5,667
50,000
12,000
14,500
76,500
1053
$
54,000
(20,000)
34,000
(3,600)
(4,200)
26,200
(1,200)
25,000
(8,000)
17,000
1054
3,333
13,667
17,000
4,666
13,667
18,333
$
Assets
Non-current assets
Tangible assets
Goodwill (5,000 2,500)
Current assets
Inventories
Trade receivables
Cash at bank and in hand
239,000
2,500
108,400
129,000
39,850
241,500
277,250
518,750
250,000
12,000
53,500
315,500
22,250
337,750
8,000
173,000
518,750
WORKINGS
(1)
Group structure
Hatton
80%
Slap
1055
6,250
6,250
15,000
15,000
40,000 10,000
30,000
111,250 66,250
Share capital
Share premium
Revaluation surplus
Retained earnings
(3)
Goodwill
$
58,000
(53,000)
5,000
Cost of shares
Net assets acquired (80% 66,250) (W2)
Half of the goodwill has been impaired, therefore half remains at 31 December 2011.
(4)
(5)
Retained earnings
Hatton
Slap (80% 30,000 (W2))
Goodwill impaired
(6)
$
32,000
24,000
(2,500)
53,500
Revaluation surplus
1056
22,250
$12,000
$
Assets
Non-current assets
Tangible assets (33,000 + 20,000)
Intangible assets goodwill
53,000
3,300
56,300
20,500
76,800
10,000
5,000
9,000
24,000
4,800
28,800
29,000
19,000
76,800
WORKINGS
(1)
Group structure
Haggis
75%
Stovies
(2)
Share capital
Retained earnings
Reporting
date
$
4,000
13,000
17,000
Acquisition
$
4,000
8,000
12,000
Post
acquisition
$
5,000
1057
Goodwill
Cost of shares
Fair value of non-controlling interest on acquisition
Less
Fair value of net assets acquired (W2)
$
12,500
3,800
(12,000)
4,300
Goodwill of $1,000 has been impaired since the acquisition occurred, therefore $3,300
remains and is included in the consolidated statement of financial position. Of the
impairment loss 75% ($750) will be charged to retained earnings and 25% (250) will be
charged to non-controlling interest.
(4)
(5)
Non-controlling interest
Fair value on acquisition
Share of post-acquisition profits (5,000 25%)
Goodwill impaired (W3)
Retained earnings
Haggis
Stovies (75% 5,000 (W2))
Less: Goodwill (W3)
1058
3,800
1,250
(250)
4,800
$
6,000
3,750
(750)
9,000
$
Assets
Non-current assets
Tangible assets
Current assets
Inventory
Receivables
Investments
Cash at bank and in hand
$
168,200
29,200
83,800
2,500
13,500
129,000
297,200
Current liabilities
120,000
18,000
23,000
72,560
233,560
17,640
251,200
46,000
297,200
1059
WORKINGS
(1)
Group structure
Hammer
80%
Sickle
(2)
Share capital
Revaluation surplus
Retained earnings
Per Q (8,000 + 5,000)
Provision for unrealised profit
(3)
Acquisition Post
acquisition
$
$
60,000 60,000
16,000 16,000
13,000
8,000
(800)
88,200 84,000
5,000
(800)
Goodwill (negative)
Cost of shares
Less
Net assets acquired (80% 84,000 (W2))
$
54,000
(67,200)
(13,200)
(5)
Non-controlling interest
Share of net assets (20% 88,200 (W2))
Retained earnings
1060
$17,640
$
56,000
3,360
13,200
72,560
$
Assets
Non-current assets
Tangible
Land (80,000 + 72,000 + 18,000 (W2))
Plant at cost (120,000 + 80,000)
Accumulated depreciation (48,000 + 22,400)
170,000
200,000
(70,400)
129,600
41,640
341,240
Intangible goodwill
Current assets
Inventory (112,000 + 74,400 3,200 (W6))
Receivables (104,000 + 84,000)
Bank (41,000 + 8,000)
183,200
188,000
49,000
420,200
761,440
400,000
227,440
627,440
58,000
685,440
76,000
761,440
WORKINGS
(1)
Group structure
Hut
128
160
= 80% ords
Shed
1061
Share capital
Fair value adjustment on non-current assets
(90,000 72,000)
Retained earnings
(3)
18,000
112,000
290,000
18,000
(11,000) 123,000
167,000
Goodwill
Cost of shares
Less
Net assets acquired (80% 167,000 (W2))
$
203,000
(133,600)
69,400
Goodwill to the extent of $27,760 has been impaired since acquisition; therefore $41,640 will be
included in the consolidated statement of financial position.
(4)
(5)
Non-controlling interest
Share of net assets (20% 290,000 (W2))
Retained earnings
Hut
Less
Goodwill (W3)
Provision for unrealised profit (W6)
(6)
$
160,000
(27,760)
(3,200)
129,040
98,400
227,440
Unrealised profits
SP
Cost
GP
1062
$58,000
%
$
125
16,000
(100) (12,800)
25
3,200
$
Assets
Non-current assets
Tangible assets (227 + 170 17.5 (W6))
Intangible assets goodwill
379,500
2,520
382,020
456,000
838,020
200,000
25,000
147,420
372,420
71,600
444,020
32,000
362,000
838,020
WORKINGS
(1)
Group structure
Hat
60%
Shoe
1063
(3)
Goodwill
Shares in Shoe
Ordinary
Net assets acquired
Ordinary shareholders (60% 149,000) (W2)
$
95,000
(89,400)
5,600
Goodwill is valued at $2,520 at the end of the reporting period, therefore $3,080 has been
impaired since acquisition.
(4)
Non-controlling interest
Retained earnings
Hat
Less
1064
$
71,600
$
150,000
(10,000)
140,000
18,000
(3,080)
(7,500)
147,420
Hats books:
$
Remove profit on disposal
Proceeds
carrying amount
Dr
Profit or loss
Cr
Non-current assets
Shoes books:
Adjust depreciation
Is
Should be
Dr
Profit or loss
Cr Non-current assets
50,000
(40,000)
10,000
10,000
10,000
12,500
20,000
7,500
7,500
7,500
Answer 43 HUMPHREY
Consolidated statement of profit or loss for the year ended 30 September 2011
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Investment income
Interest
Profit before tax
Taxation
Profit for the year
Non-controlling interest (W3)
Shareholders of parent
$000
1,400
(742)
658
(110)
(120)
428
9
(31)
406
(184)
222
6
216
222
1065
100
216
(100)
216
Group structure
Humphrey
80%
Stanley
(2)
Revenue
Cost of sales per Q
Provision for unrealised profit
Distribution
Administration
Investment income (20 16)
Interest payable
Tax
Profit after tax
(3)
(742)
(60)
(50)
(110)
(65)
(55)
(120)
4
5
9
(25)
(6)
(31)
(160)
(24)
(184)
30
Non-controlling interest
Humphrey
Stanley (80% (30 5))
Goodwill impaired
1066
$000
6
$000
90
20
(10)
100
Inter-company dividend
$000
20
16
Answer 44 HIGH
Consolidated statement of profit or loss for year ended 31 March 2012
Revenue
Cost of sales
Gross profit
Distribution costs
Administration costs
Operating profit
Investment income
Profit before tax
Taxation
Profit after tax
Attributable to:
Non-controlling interest (W3)
Shareholders of P
$
414,750
(178,900)
235,850
(110,200)
(39,350)
86,300
350
86,650
(44,100)
42,550
3,830
38,720
42,550
38,600
38,720
77,320
WORKINGS
(1)
Group structure
High
80% ords
Speed
1067
Consolidation schedule
High Speed Adjustment Consolidated
$
$
$
$
274,500 181,250 (37,500)
(3,500) 414,750
Sales revenue
Cost of sales
Per Q
(126,480) (86,520) 37,500
Inventory provision for unrealised profit
(700)
Non-current asset provision for unrealised profit
(3,000)
300
Depreciation (10% 3,000)
Distribution
Administration
Investment income interest
Tax
(67,315) (42,885)
(25,555) (17,295)
250
100
(29,000) (15,100)
19,150
Non-controlling interest
$
19,150
(178,900)
(110,200)
3,500 (39,350)
350
(44,100)
%
20%
$
3,830
$
28,000
10,600
38,600
High
Speed (80% (17,250 4,000))
Tutorial note:
Alternative calculation for profit after tax of Speed (W2):
Per question
Inventory provision for unrealised profit
Depreciation adjustment
1068
$
19,550
(700)
300
19,150
Consolidated statement of profit or loss for the year ended 31 March 2012
Revenue
Cost of sales
Gross profit
Operating costs
Operating profit
Investment income
Profit before tax
Income tax
Profit after tax
Attributable to:
Non-controlling interest (W3)
Shareholders of P
Profit
Extract from statement of changes in equity:
Retained earnings at 1 April 2011
Retained profit for the year
Retained earnings at 31 March 2012
(b)
$
376,167
(177,867)
198,300
(88,300)
110,000
3,200
113,200
(57,067)
56,133
2,733
53,400
56,133
79,300
53,400
132,700
Time apportionment
The results of a subsidiary are included in the consolidated accounts from the date control
is achieved.
Happy acquired 75% of the issued ordinary capital of Sleepy on 30 November 2011. This
is the date on which control passed and hence the date from which the results of Sleepy
should be reflected in the consolidated statement of profit or loss.
All reserves earned by Sleepy in the four months since that date are post-acquisition
reserves.
The remaining previous eight months profit from 1 April 2011 to 30 November 2011 are
all pre-acquisition reserves and will be included in the calculation of goodwill on
consolidation.
1069
WORKINGS
(1)
Group structure
Happy
4
12
in )
Sleepy
(2)
Consolidation schedule
Happy
$
Sales revenue
Cost of sales
Operating costs
Investment income
Tax
303,600
72,567
(143,800) (34,067)
(71,200) (17,100)
2,800
400
(46,200) (10,867)
10,933
376,167
(177,867)
(88,300)
3,200
(57,067)
Non-controlling interest
25% 10,933
2,733
Tutorial note:
Alternative calculation for profit after tax of Sleepy (W1)
Per question 32,800
4
12
$10,933
1070
$000
Assets
Non-current assets
Tangible assets
Interest in associated undertaking
$000
400
48
448
505
953
Current assets
Total assets
Equity and liabilities
Capital and reserves
Called up share capital $1 ordinary shares
Retained earnings (note 2)
250
469
719
84
803
Non-controlling interest
Non-current liabilities
150
953
Group structure
Haley
60%
30%
Aristotle
Socrates
1071
Net assets
Socrates
Share capital
Retained earnings
Reporting
date
$000
30
180
210
Acquisition
$000
30
70
100
Reporting
date
$000
60
100
160
Acquisition
$000
60
30
90
Postacquisition
$000
110
Aristotle
Share capital
Retained earnings
(3)
Post
acquisition
$000
70
Goodwill
Cost of investment
Share of net assets acquired (60% 100 (W2))/(30% 90 (W2))
Socrates
$000
75
(60)
15
Aristotle
$000
30
(27)
Non-controlling interest
Retained earnings
Haley
Socrates (60% 110 (W2))
Aristotle (30% 70 (W2))
Goodwill (15 + 3)
(6)
$000
84
$000
400
66
21
(18)
469
Investment in associate
$000
48
All goodwill in respect of Aristotle has been impaired; therefore the value of investment in the
associate is based upon the net assets of the associate at the end of the reporting period.
1072
$000
15,131
(13,580)
1,551
178
(736)
993
Revenue
Cost of sales and expenses
Operating profit before tax
Share of income from associated company
Tax
Profit after tax
Attributable to:
Non-controlling interest (W3)
Shareholders of P
30
963
993
500
WORKINGS
(1)
Group structure
Hamish
80%
30%
Angus
Shug
(2)
Consolidation schedule
Hamish
Shug
5
12
Sales revenue
Cost of sales
per Q
provision for unrealised profit
(50
25
$000
12,614
(11,318) (2,302)
(10)
(621)
125
$000
2,567
30%
$000
$000
(50)
$000
15,131
50
(13,580)
(115)
150
178
(736)
1073
Non-controlling interest
$000
30
Profit retained by
$000
346
Hamish
Shug (80% ((
361) 120))
24
12
370
(10)
103
463
Less
Unrealised intra-group profit
Angus (30% 344)
Answer 48 HYDROGEN
Consolidated statement of financial position as at 30 September 2011
$
Assets
Non-current assets
Tangible assets (697,210 + 648,010)
Goodwill (W3)
Interest in associate (W5)
1,345,220
500
276,800
1,622,520
Current assets
Inventory (495,165 + 388,619)
Receivables (385,717 + 320,540 )
Cash at bank and in hand (101,274 + 95,010)
Total assets
883,784
706,257
196,284
1,786,325
3,408,845
$
$
1074
600,000
1,421,300
2,021,300
210,000
2,231,300
550,000
627,545
3,408,845
WORKINGS
(1)
Group structure
Hydrogen
80%
Sodium
(2)
40%
Aluminium
Net assets
Sodium
Reporting
date
$
$
200,000
850,000
1,050,000
Post
Acquisition
acquisition
$
$
$
200,000
500,000 350,000
700,000
Aluminium
Share capital
Retained earnings
Unrealised profit
(3)
Reporting
date
Acquisition
$
$
$
200,000 200,000
478,000 242,000
(4,000)
674,000 442,000
Post
acquisition
$
236,000
(4,000)
Goodwill
Sodium
Cost of shares
Share of net assets acquired (80% 700,000) (W2)
$
562,000
(560,000)
2,000
Aluminium
Cost of shares
Share of net assets acquired (40% 442,000) (W2)
$
184,000
(176,800)
7,200
1075
Non-controlling interest
$210,000
Investment in associate
$
184,000
92,800
276,800
$
1,050,000
(1,500)
280,000
92,800
1,421,300
Cost of investment
Aluminium post-acquisition (40% 232,000 (W2))
(6)
Retained earnings
Hydrogen
Goodwill written off Sodium
Sodium (80% 350,000 (W2))
Aluminium (40% 232,000 (W2))
Inventories undervalued
Inventory is stated at historical cost (or net realisable value if lower). Historical cost is
normally below the current value in times of general inflation.
The major weakness of historical cost is the effect of charging the historical cost of
inventory against sales. Cost of sales will be lower than if current values had been
charged, leading to higher profits and higher dividend payments. There may be
insufficient funds to purchase replacement inventory, the price of which will equate to
current value of inventory.
(b)
Depreciation understated
Net monetary assets are monetary assets less monetary liabilities. The term monetary
refers to all liabilities of a business repayable in money and those assets which are stated in
historical cost accounts at the amount of money expected to be received (e.g. receivables
are stated at sales value less allowances for irrecoverable debts).
In a time of inflation gains can arise on monetary liabilities and losses on monetary assets.
For example, loans to or from a company are monetary items. A loan made to a company
may produce a gain to the company as, although the amount originally borrowed will be
repaid at its face value, its purchasing power will have been reduced.
1076
The person lending the money to the company will have charged interest to cover:
(i)
(ii)
The interest cost will thus be charged against profits of the company, but also there should
be a gain recorded in the statement of profit or loss(that of eventually having to repay
only the same monetary amount).
(d)
Values for inventory and non-current assets are stated at historical cost (i.e. below their
current value). Many would argue that a statement of financial position should record not
only the assets in the possession of a company at the end of the reporting period but also
their current worth. To show the amount at which the company originally bought the asset
is not useful information and would never be used for decision-making purposes.
(e)
1077
$
56,500
20,000
(450)
8,400
84,450
(14,000)
(1,200)
21,940
91,190
(6,840)
(10,500)
73,850
(4,600)
(69,000)
4,000
450
(69,150)
70,000
(42,000)
(7,500)
20,500
25,200
(13,800)
11,400
Cash payments of $69,000 were made to purchase property, plant and equipment
1078
Cash and cash equivalents consist of cash on hand and balances with banks.
2011
$
11,400
11,400
Cash at bank
Bank overdraft
2010
Change in
year
$
$
200
11,200
(14,000)
14,000
(13,800)
25,200
WORKINGS
(1)
Balance b/d
Additions
(2)
$
120,000
39,000
159,000
Disposals account
Balance c/d
$
8,000
151,000
159,000
Balance b/d
Additions
$
24,000
10,000
34,000
Disposals account
Balance c/d
$
5,000
29,000
34,000
$
20,000
39,000
10,000
69,000
(3)
Disposals account
Balance c/d
$
6,000
54,000
60,000
Balance b/d
Charge for year
$
45,000
15,000
60,000
1079
Disposals account
Balance c/d
(5)
$
2,000
15,000
17,000
Balance b/d
Charge for year
Plant cost
Fittings cost
$
8,000
5,000
Plant depreciation
Fittings depreciation
Cash proceeds
Plant
Fittings
Depreciation underprovided
(bal fig)
13,000
(6)
$
6,000
2,000
3,000
1,000
1,000
13,000
Tax account
(7)
$
13,000
4,000
17,000
$
10,500
33,000
43,500
Balance b/f
Profit of loss
$
21,500
22,000
43,500
34,500
Dividends
(7,500)
Balance c/f
41,000
1080
$
4,625
1,472
152
6,249
186
(894)
(594)
480
5,427
(152)
(1,775)
3,500
(198)
(3,800)
168
(3,830)
792
(560)
(700)
(468)
(798)
576
(222)
Cash payments of $3,800 were made to purchase property, plant and equipment.
1081
Cash and cash equivalents consist of cash on hand and balances with banks.
2011
2010
$000
(222)
(222)
$000
576
576
Change in
year
$000
576
(222)
(798)
WORKINGS
(1)
Brought forward
Additions
(2)
$000
5,700
1,300
7,000
Plant (net)
Brought forward
Additions
$000
3,780
2,500
Disposals
Depreciation (to balance)
Carried forward
6,280
(3)
$000
276
964
5,040
6,280
Disposals
Plant
$000
276
Cash
Loss on sale (to balance)
276
(5)
$000
168
108
276
Taxation
$000
1,775
202
1,730
$000
Brought forward
Deferred tax
Current tax
P&L account
3,707
1082
$000
400
6,600
7,000
138
2,038
1,531
3,707
Share capital
$000
Carried forward
(7)
2,280
2,280
Brought forward
Cash (to balance)
$000
1,800
480
2,280
Share premium
Carried forward
$000
2,112
Brought forward
Cash (to balance)
2,112
(8)
$000
1,800
312
2,112
Non-current loan
$000
560
1,240
1,800
$000
1,800
Brought forward
1,800
Accounting ratios
2011
2012
1,850
100
7,650
2,070
100
11,500
= 24.2%
= 18.0%
Profitability
Gross profit : Sales
Gross profit
100
Sales
= 12.7%
1083
3,600
2,400
6,300
2,700
= 1.5 :1
= 2.3 : 1
3,600 1,500
2,400
6,300 2,450
2,700
= 0.9 : 1
= 1.4 : 1
1,200
365
7,650
3,800
365
11,500
= 57 days
= 121 days
5,800
1,500
= 3.9 times per year
9,430
2,450
= 3.8 times per year
Acid test
Efficiency
Trade receivables collection period
Trade receivables
365
Credit sales
Inventory turnover
Cost of sales
Year - end inventory
(b)
The trading profitability to sales has significantly decreased from 24% to 18%.
Profitability to capital employed has also decreased from 15% to 12.7%. The decline in
the first ratio is not surprising given the reduction in selling prices. Sales have
significantly increased a growth of 50%:
11,500 - 7,650
7,650
The overall effect is an actual increase in gross profitability from $1,850,000 to
$2,070,000. However, loan interest has eliminated this favourable result. Presumably the
additional finance was raised for the sales expansion, to date, therefore, the expansion
policy has not been successful but the additional finance may not be invested efficiently as
yet. A more favourable result may be forthcoming next year.
1084
Efficiency
There has been no change in the inventory turnover ratio. This may be a sign of
inefficiency as, if the company is selling the same range of goods as before, the inventory
turnover ratio should increase if sales volume has been increased due to lower prices. The
receivables collection period, however, has been greatly extended from 57 days to 121
days. 57 days was a long period in the first place, and it may be that the more generous
credit terms are being abused by customers.
Payables have not increased in line with the expansion of sales volume (and the purchases
volume), thus increasing the pressure on funding working capital.
Answer 53 RAPIDO
To
From
Date
Directors, Rapido
AN Advisor
(a)
Introduction
This report intends to conclude on the profitability, liquidity, and solvency of Rapido and
to suggest any necessary action. The report has been based on statements of
comprehensive income for 2011 and 2010 together with 2011 budgets.
(b)
(c)
The company has achieved expansion in the current year, and has improved
profitability, although below that budgeted.
To improve the liquidity and solvency position the company needs to raise
further long-term finance and reduce overdrafts.
Trading performance
(i)
Overall
The company aimed for, and has achieved, a large increase in both
operations level and profitability.
1085
(iii)
(d)
(e)
1086
Margins
Asset utilisation
Liquidity
The liquidity position was budgeted to decrease in the year, but the position is
slightly worse than anticipated.
The main reason is the level of the overdraft which is rather higher than
budgeted.
The liquidity position has also been worsened by substantial extra credit being
allowed to customers.
The poor liquidity position has resulted in a low dividend being paid in spite of
good profits.
Gearing
A large amount of the debt is short-term, which does not help the long-term
stability of the company and should be replaced by further raising of long-term
capital.
The extra capital should be debt due to the low level of dividend cover, and also
because of increased tangible assets available as security.
Net profit %
Operating profit
Revenue
Asset turnover
Revenue
Net operating assets
Gross profit
Gross profit
Revenue
2011
Actual
205
1,280 + 187
470
1,420 + 255 + 360
446
1,460 + 390 + 360
= 14%
= 23%
= 20%
205
2,560
470
4,500
446
5,110
= 8%
= 10.4%
= 8.7%
2,560
1,280 + 187
4,50
1,420 + 255 + 360
5,110
1,460 + 390 + 360
= 1.75
= 2.21
= 2.31
860
2,560
= 33.6%
1,350
4,500
= 30%
1,530
5,110
= 30%
187
1,280 + 187
255 + 360
1,420 + 255 + 360
= 12.7%
= 30.2%
= 34%
720
760
810
935
= 1.33
= 0.95
= 0.87
305
365
2,560
720
365
4,500
810
365
5,110
= 43
= 58
= 58
1,700
(135 + 205)
3,150
(210 + 290)
3,580
(205 + 325)
= 10
= 12.6
= 13.5
Solvency
Gearing
(3)
2011
Budget
Profitability
ROCE
Operating profit
Net operating assets
(2)
2010
390 + 360
1,460 + 390 + 360
Liquidity
Quick ratio
Working capital
Receivables days
Receivables
365
Sales
Inventory turnover
Cost of sales
Inventory
1087
Main aims
A profit-orientated entity will have a primary aim of increasing the wealth of its owners. The
best way of increasing this wealth is to be profitable and thereby increase the entitys share
price and also distribute the profits to the owners by way of a dividend payment. In fulfilling
this primary aim the entity will also have to consider other stakeholders of the entity,
employees, the local environment and government bodies to name a few. The considerations
of these other stakeholders may well have an impact on the entitys primary aim, employees
will want a satisfactory return for the labour they provide and governments will want a share
of the entitys profits by way of taxation. So as well as maximising profits an entity will have
to consider, maybe as secondary objectives, the other stakeholders that have a say in the
business. An entity will make profits by selling its goods or services to its customers and
thereby earn revenues.
An NFP does not have the primary objective of making profits; the main objective of an NFP
will be to provide a service for the community it serves. A government body is responsible
for providing a policing service in the local community; a museum will have one of its
primary objectives to educate the people by allowing them to see the various exhibits. There
are no specific owners of an NFP, so there is no need to make profits; that is not to say that an
NFP can continually make losses. An NFP must work within a given budget and must
recognise if it exceeds that budget there will be consequences to the future income and costs.
Income for an NFP may be in the form of government funding or donations from sponsors or
by asking the public to make a contribution to the running costs of the organisation.
(b)
Assessing performance
1088
(i)
Efficiency is measured by considering what inputs have been used to generate the
respective output, and managers should be trying to minimise the level of inputs to
perform the task.
(ii)
Effectiveness considers whether the objectives and targets have been met.
Management must give clear objectives to the workforce so that those objectives can
be seen and attained.
(iii)
Economy is considered by looking at the cost of the resources consumed against the
value of the output delivered. Economy is very much linked to the efficiency of the
task.
An NFP must ensure that it can meet any obligations that it may have and so liquidity is just
as important for an NFP as it is for a profit orientated entity. If an NFP has borrowed monies
then it must be in a situation that will allow it to repay those funds on the due date. Cash is
possible more important for an NFP than profit, so an assessment of the cash flow statement
of an NFP will be extremely important when considering its performance. Considerations
will include, have cash inflows met budgeted expectations, have funds been used for the
correct purpose.
For both types of entities it is very important to assess performance so that if the entity is not
performing as expected then steps can be taken to ensure that in the future the entity is able to
meet its objectives, whether they be making a profit or providing a service.
Answer 55 EARNINGS PER SHARE
(a)
Basic EPS
Earnings
Number of shares
$100,000
$0.50
EPS
(b)
2010
$
52,000
2011
$
55,300
200,000
200,000
26.0c
27.7c
Bonus issue
26.0c
200,000
250,000
20.8c
Restated 26c
Current EPS
Earnings (as above)
No of shares
EPS
$55,300
250,000
22.1c
1089
Takeover
2010
$
50,000
50,000
50,000
200,000
Earnings
S post-acquisition only 3/12 $20,000
Less Non-controlling interest 10% $5,000
No of shares
Weighted average (200,000 9/12) + (400,000 3/12)
EPS
(d)
25c
250,000
27c
Rights issue
(i)
(ii)
Cents
1,740c
TERP =
5
1,440
300
1,740
348c
EPS
Comparative
$40,000
Original
200,000
348c
Restated 20c
360c
Current
Earnings
Date
1 January
1 October
EPS
1090
2011
$
63,000
5,000
68,000
(500)
67,500
20.0c
19.3c
$50,000
No
Rights
Weighted
average
250,000 3/12
= 155,172
$50,000
217,672
Time
= 62,500
217,672
23.0c
Earnings
Basic
Add Interest on debentures
Less Tax at 33%
8,000
(2,640)
Diluted
No of shares
Basic
Convertible debentures
EPS
Basic
Diluted
(f)
$100,000 140
2010
$
2011
$
40,000
50,000
5,360
45,360
5,360
55,360
400,000
140,000
540,000
400,000
140,000
540,000
10.0c
12.5c
8.4c
10.3c
2011
$
Diluted Options
Earnings
Basic and diluted
EPS
Basic (50,000/400,000)
Diluted (50,000/410,000)
50,000
12.5c
12.19c
50,000
(40,000)
10,000
400,000
410,000
1091
1092
Accounting
Project Management
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