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Paper F7 (International) Financial Reporting
Tuition Mock Examination December 2011 Question Paper
ALL FIVE questions are compulsory and MUST be attempted. Time Allowed 15 minutes 3 hours Reading and planning Writing
s t ud yi nt e r a c t i ve . No part of this publication may be reproduced. or g . 2 ww w.© The Accountancy College Ltd. recording or otherwise. or transmitted. mechanical. in any form or by any means. photocopying. stored in a retrieval system. electronic. October 2010 All rights reserved. without the prior written permission of The Accountancy College Ltd.
100 320.550 26. The relevant statements of financial position as at that date are given below.310 138.800 The following information is also relevant.Question 1 As newly appointed chief accountant of Polly.500 9. On 30 September 2010 half of these goods remain unsold. Abby had a retained earnings credit balance of $16 million at this time.040 117.470 Current assets Inventories Trade receivables Cash 24. (e) An impairment test conducted as at 30 September 2010 indicated that $7. or g 3 . (d) The fair values of Sally and Abby were not materially different from their book values at the time of acquisition.750 52.610 50.010 83.650 75. Sally sells goods at a mark up of 25%.040 Current liabilities Trade payables 33.750 320. it is your responsibility to prepare a group statement of financial position as at 30 September 2010 .470 Investments 146.250 35.750 14.000 137.760 135.800 Equity Share capital .2m of the recognised goodwill relating to the investment in Sally should be eliminated.660 138.330 135. s t ud y i nt e r a c t i v e .000 87.500 76.410 18.960 27. (c) On 31 October 2009. No impairment losses were necessary for the investment in Abby. The items were acquired by Sally on 1 April 2008 and are being depreciated over their useful life of five years. No adjustment has been made by Sally for either of the above items.410 36. Polly Sally Abby $’000 $’000 $’000 Non-current assets Property. (b) During March 2010 Sally sold goods to Polly for $12 million.000 61. All of these inventories had been sold by 30 September 2010.100 136. ww w.360 19.$1 ordinary shares Retained earnings 150.000 87.750 52. Polly acquired 25 million of Abby Limited’s $1 ordinary shares at a cost of $57 million. (ii) Items of plant and equipment belonging to Sally have a fair value of $5 million in excess of book value.000 17. At 31 March 2008 Sally had a credit balance on its retained earnings of $9 million.100 100. plant and equipment 98.750 2.000 – – 244. (a) Polly acquired 60 million of the ordinary $1 shares of Sally Limited on 31 March 2008 at a cost of $89 million.650 287. with the following exceptions: (i) Sally held inventories with a fair value which was $2 million greater than book value.000 17.
Write a memo to her explaining the main advantages. or g . s t ud yi nt e r a c t i ve .(f) It is group policy to value non-controlling interests at fair value at date of acquisition. (20 marks) (b) Your managing director has asked for an explanation of why it is necessary to invest staff time in preparing a set of consolidated financial statements as well as those of the individual companies of the group. The directors valued the non-controlling interests at acquisition at $20m. (5 marks) (Total = 25 marks) 4 ww w. Required (a) Prepare a consolidated statement of financial position for the Polly group as at 30 September 2010.
000 Plant on lease to customer at cost (note (ii)) 56.000 Accumulated depreciation 1 October 2009 – buildings 60. (ii) On 1 October 2009 Philpotts purchased an item of plant for $56 million which it leased to a customer on the same date. The total contract price has been agreed at $125 million and Philpotts expects the total contract cost to be $75 million.000 –––––––– –––––––– The following notes are relevant: (i) The building had an estimated life of 40 years when it was acquired and is being depreciated on a straight-line basis. The plant is expected to have a nil residual value at the end of the four years.000 Trade receivables 48. Depreciation of buildings and plant and equipment is charged to cost of sales.500 Purchases 78.000 Deferred tax (note (v)) 17.000 Rental income from plant (note (ii)) 16. s t ud y i nt e r a c t i v e .500 Interim dividend 8. The percentage of completion is determined by the proportion of the contract costs to date compared to the total estimated contract costs. or g 5 . (iii) The construction contract balance represents costs incurred to date of $35 million less progress billings received of $30 million on a two year construction contract that commenced on 1 October 2003.000 Loan interest paid 1.000 Admin expenses 29.500 Bank 12. Other inventory at 30 September 2010 amounted to $38·5 million at cost ww w. The company policy is to accrue for profit on uncompleted contracts by applying the percentage of completion to the total estimated profit.000 841.500 Construction contract balance (note (iii)) 5.000 Accumulated of depreciation 1 October 20 – plant and equipment 44. At 30 September 2010. $5 million of the $35 million costs incurred to date related to unused inventory of materials on site.Question 2 The following trial balance relates to Philpotts.000 Research and development expenditure (note (iv)) 40.500 Trade payables 45. other than the leased plant. is depreciated at 12·5% per annum using the reducing balance basis. a publicly listed company. The lease period is four years with annual rentals of $16 million in advance. at 30 September 2010: $000 $000 Ordinary share capital 200. Plant and equipment.000 Plant and equipment at cost (note (i)) 124.000 Revenue 246.000 Retained profits at 1 October 2009 162.000 –––––––– –––––––– 841. Philpotts has been advised that this is a finance lease with an interest rate of 10% per annum.000 Inventory – 1 October 2009 35.000 6% Loan note (issued in 2007) 50.500 Land and buildings at cost (land element $163 million (note (i))) 403.
(14 marks) Note: A Statement of Changes in Equity is NOT required. or g . (v) The directors have estimated the provision for income tax for the year to 30 September 2010 at $22 million.(iv) The research and development expenditure is made up of $25 million of research. The directors are confident of the success of this project which is likely to be completed in March 2011. s t ud yi nt e r a c t i ve . (25 marks) 6 ww w. the remainder being development expenditure. and (11 marks) (b) A Statement of financial position as at 30 September 2010 in accordance with International Financial Reporting Standards. Required: Prepare for Philpotts: (a) An income statement for the year to 30 September 2010. The deferred tax provision at 30 September 2010 is to be adjusted to a credit balance of $14 million. Disclosure notes are ONLY required for the leased plant in item (ii) above.
or g 7 . s t ud y i nt e r a c t i v e .deferred tax Net Profit for the year (200) 190 ____ 30 September 2010 $000 $000 2.QUESTION 3 JAMMING The following information relates to the draft financial statements of Jamming for the year to 30 September 2010 together with the comparative figures for the year to 31 March 2009: Income statement for the year to: Sales revenue Cost of sales Gross profit Research and development costs Property rentals Selling and distribution costs Administration Profit on sale of property Interest expense Taxation – on income .500 (1.400 (1.800) _____ 700 (620) ____ 340 50 (70) ____ 320 (10) ____ 310 (260) ____ 440 nil (80) ____ 360 (120) (30) ____ (150) ____ 210 ww w.440) _____ 960 (300) (40) (155) (125) ____ (80) nil (95) (85) ____ 31 March 2009 $000 $000 2.
plant and equipment Goodwill Development costs 30 September 2010 $000 $000 950 200 nil ___ 31 March 2009 $000 $000 1. The convertible loan note was issued on 1 April 2009 at par and will be redeemed at par or exchanged for equity shares on the basis of one equity share for each $1 nominal value of the loan note in 2014 at the option of the holders. s t ud yi nt e r a c t i ve .Statement of financial position as at: Non-current assets: Property.130 _____ 3.270 _____ 3. or g . Assume an income tax rate of 30%.170 630 _____ 2.000 _____ Total equity and liabilities Note: All dividends were paid or proposed prior to their relevant year-end.250 200 280 ___ 200 _____ 1.000 _____ Total assets Equity and liabilities Share capital and reserves: Equity shares of $1 each Reserves: Retained earnings Less dividends 2. 8 ww w.000 _____ 1.000 _____ 600 410 (150) ___ 180 (80) ___ 600 260 ___ 860 100 ___ 700 Non-current liabilities 8% Convertible loan note 12% Debenture Deferred tax Provision for plant renovation Current liabilities Accounts payable Dividends Taxation Operating overdraft 400 nil 110 nil ___ 330 90 210 nil ___ 510 nil 500 300 370 ____ 620 60 115 335 ____ 1.730 Current assets: Inventory Accounts receivable Bank 450 190 210 ___ 850 _____ 800 470 nil ______ 1.150 480 ____ 1.
Due to over-capacity in the industry the directors of Jamming negotiated a contract for an external company to manufacture one of its products that had previously been manufactured internally.The share price of Jamming fell considerably in June 2009 in reaction to adverse press comment concerning the operating performance and financial position of the company as revealed by the publication of the company’s consolidated financial statements for the year ended 31 March 2009. s t ud y i nt e r a c t i v e . but due to the sale of the furnaces. the provision was no longer required and was released to cost of sales. plant and equipment (there have been no acquisitions of non-current assets in the year to 30 September 2010) (v) poor control of accounts receivable (vi) inefficient inventory holding (vii) long payment period for trade payables (viii) poor liquid ratios (ix) Statement of financial position gearing (debt/equity) too high. The sale of the property was not related to the outsourcing decision. Required: (a) Appraise the performance of Jamming for the year to 30 September 2010 in the specific areas ((i) to (ix) above) where its performance was criticised by the press in the previous year. This project was abandoned when the furnaces were sold. Jamming had been providing for this on an annual basis. The main performance areas criticised were: (i) a gross profit ratio below that of the market sector (ii) a lack of expenditure on research and development (iii) a disappointing EPS (iv) low utilisation of the property. Jamming had also been engaged in a research and development project to revise the design of this type of furnace in order to avoid the expensive re-lining costs. or g 9 . These furnaces had required major renovation consisting of re-lining them with new material every five years. This allowed Jamming to dispose of some inefficient furnaces that were included in plant. (16 marks) Note: your answer should include an appendix of ratios (for both years) relevant to each of the nine areas criticised. (6 marks) (Total: 25 marks) (b) (c) ww w. In order to address these problems Jamming commissioned consultants to recommend possible strategic actions with a view to improving the income statement and Statement of financial position The Board acted quickly on many of the consultants’ recommendations and is pleased with the overall position revealed by the consolidated financial statements for the year to 30 September 2010. (3 marks) Describe the problems inherent in the use of ratio analysis to assess the performance of companies. Briefly discuss whether the company’s actions are likely to gain favour with stock market analysts.
A recent review of its value in use based on its forecast future cash flows was estimated at $500. based on depreciated historical cost. (b) (3 marks) (c) Giza is preparing its financial statements to 31 March 2002. The estimated selling price of this asset is only $250. with associated selling expenses of $5.000. The franchise agreement contains a ‘sell back’ clause. Since this review was undertaken there has been a dramatic increase in interest rates that has significantly increased the cost of capital used by Giza to discount the future cash flows of the plant.000.000 Franchise costs Fixtures and fittings Coffee machine Other net assets 30.000. In the past there has been little guidance in this area with the result that impairment losses were not recognised on a consistent or timely basis or were not recognised at all. is $400. Fixtures and fittings have an estimated realisable value of $105 million. or g .Question 4 Giza It is generally recognised in practice that non-current assets should not be carried in a Statement of financial position at values that are greater than they are ‘worth’.000 ––––––– 210. (5 marks) Give examples of circumstances that may indicate that a company’s assets may have become impaired. An impairment review at 31 March 2002 has estimated that the value of “Coffee to go” as a going concern is only $150 million. (3 marks) Giza owns a company called “Coffee to go”.000 50. which allows “Coffee to go” to relinquish the franchise and gain a repayment of $25 million from the franchisor.000. Extracts from Giza’s consolidated Statement of financial position relating to “Coffee to go” are: $000 Goodwill 20.000 100. IAS 36 Impairment of Assets was issued in June 1998 on this topic.000 10. Its carrying value. Required: (a) Define an impairment loss and how it arises including when companies should carry out a review for impairment of assets. s t ud yi nt e r a c t i ve . (4 marks) 10 ww w. The following situations have been identified by an impairment review team: Giza has an item of earth-moving plant.000 ––––––– The coffee machine has developed a fault and can no longer be used it has no scrap value at all. which is hired out to companies on short-term contracts.
(5 marks) ww w. (5 marks) The terms under which Charmers sells its holidays are that a 10% deposit is required on booking and the balance of the holiday must be paid six weeks before the travel date. From the beginning of November 2009. Charmers has made it a condition of booking that all customers must have holiday cancellation insurance and as a result it is unlikely that the outstanding balance of any holidays will be unpaid due to cancellation. the directors are proposing to change to recognising revenue (and related estimated costs) at the date when a booking is made. with numerical illustrations where possible. (Total 15 marks) Question 5 Charmers Ltd (a) Describe the circumstances in which an entity may change its accounting policies and how a change should be applied. In previous years Charmers has recognised revenue (and profit) from the sale of its holidays at the date the holiday is actually taken. Required: (b) Comment on whether Charmers’s proposal to change the timing of its recognition of its revenue is acceptable and whether this would be a change of accounting policy.Required Explain. how the information above would affect the preparation of Giza’s consolidated financial statements to 31 March 2002. s t ud y i nt e r a c t i v e . The directors also feel that this change will help to negate the adverse effect of comparison with last year’s results (year ended 31 October 2009) which were better than the current year’s. or g 11 . In preparing its financial statements to 31 October 2010.
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