CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - APRIL 2011

NOTES:

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)
Note: Students have optional use of the Extended Trial
Balance, which if used, must be included in the answer booklet.

PRO-FORMA STATEMENT OF COMPREHENSIVE INCOME BY NATURE,

STATEMENT OF COMPREHENSIVE INCOME BY FUNCTION
AND STATEMENT OF FINANCIAL POSITION ARE PROVIDED.

TIME ALLOWED:

3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:

During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book. Please read each Question carefully.
Marks for each question are shown. The pass mark required is 50% in total over the whole paper.
Start your answer to each question on a new page.

You are reminded that candidates are expected to pay particular attention to their communication skills
and care must be taken regarding the format and literacy of the solutions. The marking system will take
into account the content of the candidates' answers and the extent to which answers are supported with
relevant legislation, case law or examples where appropriate.
List on the cover of each answer booklet, in the space provided, the number of each question(s)
attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION APRIL 2011

Time allowed 3.5 hours, plus 10 minutes to read the paper.

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

1.

You are required to answer Questions 1, 2 and 3.

Muscle PLC, an Irish listed company, acquired 24 million ordinary shares in Oyster Ltd on 1 January 2010. Details
of the purchase consideration are as follows:
(i)

(ii)
(iii)

A share exchange of two shares in Muscle PLC for three shares in Oyster Ltd. The market price of Muscle
PLCs shares at 1 January 2010 was 2 per share.
A cash payment at the date of acquisition of 10 million.
A cash payment of 12 million payable on 1 January 2012.

Based on Muscle PLCs cost of capital at 1 January 2010, 1 received in 2012 can be taken to have a present
value of 0.80 (taken as 12% cost of capital per annum). Muscle PLC has only recorded the cash payment made
at date of acquisition.
The Draft Statements of Financial Position of the two companies at 31 December 2010 are shown below:

Non-current assets
Property, plant and equipment
Intangibles (note 3)
Investment in Oyster Ltd

Current assets
Inventory
Trade receivables
Bank
Total assets

Muscle PLC

19
24
8

Equity and Liabilities

Equity
Ordinary shares of 1 each
Share premium
Retained earnings

51
348

24
20
12

200
25
25
250

Non-current liabilities
12% loan note

Current liabilities
Trade payables
Taxation
Total Equity and Liabilities

m
242
45
10
297

Page 1

38
348

m
54
10
64

56
120
30
10
5
45

60

18
20

Oyster Ltd

40
21
14

35
120

The following information is relevant:

1.

2.

3.
4.
5.
6.
7.

The profit after tax of Muscle PLC and Oyster Ltd for the year to 31 December 2010 were 10 million and 4
million respectively.
Muscle PLC have a policy of revaluing property to fair value. At the date of acquisition, Oyster Ltds property had
a fair value of 6 million higher than the book value. Additional depreciation of 500,000 needs to be recognised
in the post-acquisition period. The fair value has not been reflected in the Oyster Ltds Statement of Financial
Position.

Included in Oyster Ltds intangibles is a development project with a capitalised cost of 3 million. Muscle PLCs
Directors are of the opinion that this development project, at 31 December 2010, does not meet the criteria set
out in IAS 38 Intangible Assets for recognition as an asset.
Oyster Ltd sold goods to Muscle PLC during the year totalling 4m. One quarter of these goods are still in the
inventory of Muscle PLC at 31 December 2010. Goods are sold at cost plus one third.
A cheque for 2m from Muscle PLC sent to Oyster Ltd before the end of the financial year was not received until
January 2011.

Muscle PLCs policy is to value the non-controlling interest using fair value at the date of acquisition. The market
price of Oyster Ltds shares at the date of acquisition was 1.
12% Present Value Factor:

Year 1 - 0.8929
Year 2 - 0.7972

REQUIREMENT:
(a)

(b)
(c)

Prepare the Consolidated Statement of Financial Position of the Muscle Group as at 31 December 2010.
(19 marks)
Presentation (1 mark)

Explain the treatment of a gain on a bargain purchase under IFRS 3 (revised) Business Combinations.
(4 marks)
Lobster PLC operates in the same market as Muscle PLC and holds the following investments:
(i)

(ii)

6,000 of the 20,000 1 ordinary shares in Shrimp Ltd. These were recently acquired, as the Directors of
Lobster PLC believe that Shrimp Ltd has excellent growth prospects for the future. However, the market in
which Shrimp Ltd operates is very small and specialised and, therefore, Lobster PLC has decided not to
take part in the running of Shrimp Ltd. Lobster PLC intends to hold its shares for a couple of years but not
to influence the board in any way.

8,500 of the 20,000 1 ordinary shares in Prawn Ltd, a manufacturing company with nine Directors on the
Board, five of whom have been appointed by Lobster PLC. 4,000 of the remaining shares are held by Clam
Ltd. Lobster PLC is a major supplier to Clam Ltd and the Board of Directors of Clam Ltd have agreed to
vote with Lobster PLC on all matters concerning Prawn Ltd.

Discuss the nature of each of the above holdings and state the method of accounting that should be used in the
group accounts of Lobster PLC under IAS 27 Consolidated and Separate Financial Statements and IAS 28
Investments in Associates.
(6 marks)
[Total: 30 MARKS]

Page 2

2.

After closing off the ledger accounts for the year ended 31 December 2010, the following balances were extracted
from the nominal ledger of Peter Ltd.
Dr
Cr
000
000
Land at valuation
4,200
Buildings at cost
6,300
Equipment at cost
1,400
Accumulated depreciation at 1 January 2010 on:
Buildings
1,900
Equipment
430
Inventory 1 January 2010
2,100
Investment property valuation at 1 January 2010
10,000
Trade receivables
830
Trade payables
612
Other receivables
64
Income tax
10
Deferred taxation
12
8% loan stock (redeemable 2018)
890
Revenue
14,600
Purchases
4,193
Wages and salaries
90
Administrative expenses
42
Selling and distribution expenses
32
Operating expenses
140
Allowance for doubtful debts
70
Grants
5
Bank
622
Warranties - 1 January 2010
20
Interest paid
18
Investment income
60
Preference share capital -7% irredeemable 1 shares
300
Ordinary share capital
10,000
Revaluation reserve
690
Retained earnings 1 January 2010
452
30,041
30,041

The following notes are relevant:

1.

2.
3.

4.
5.

Buildings are to be depreciated over the next 50 years. At 1 January 2010 they were revalued to 5 million. This
has not been reflected to date in the balances above. Depreciation is to be charged at 30% to administration
expenses and 70% to cost of sales.
Peter Ltd adopts a fair value method for its investment property. Its value at 31 December 2010 has been
assessed by a quantity surveyor at 11m.

Equipment is depreciated at 15% on the reducing balance basis. Depreciation is to be charged to cost of sales.
Included in the above figures is an item of equipment that was disposed of on 1 July 2010 for 20,000 and which
had a cost of 75,000 on 1 January 2008. A government grant was received on its purchase and was being
recognised in the Statement of Comprehensive Income in equal amounts over four years. In accordance with the
terms of the grant, Peter Ltd is to repay 3,000 of the grant on the disposal of the equipment. No record of the
disposal or repayment of part of the grant has been made to date. A full years depreciation is to be charged in
the year of acquisition and none in the year of disposal.

The estimated income tax liability for the year ended 31 December 2010 is 82,000.

The loan stock was issued on 1 July 2010. Interest is payable half-yearly on 30 September and 31 March. The
interest payable on 30 September 2010 was paid on the due date. Accrued interest at 31 December 2010 has
not yet been accounted for.

Page 3

6.
7.
8.
9.
10.
11.

Peter Ltd provides a two year warranty on all its products. The balance on the warranties account represents the
provision for future warranty costs as estimated at 1 January 2010. The balance as at 31 December 2010 should
be increased to 28,000.

Inventories held at 31 December 2010 are valued at a cost of 790,000. This includes 50,000 of Product A
which has been discontinued due to lack of demand. The expected realisable value of Product A is 19,000.
Included within operating expenses is 25,000 that the company spent on exhibiting its product range at a major
trade fair in London in June 2010. No orders have been received as a result of the fair, although the Sales Director
has argued that attendance at this particular fair will generate sales over the next three years.

Peter Ltds revenue includes 1.2m of revenue for credit sales on a sale or return basis at 31 December 2010.
Customers, who had not paid for the goods at the year end, have the right to return goods costing 400,000.
Mark up on cost is 25%. In the past, customers have sometimes returned goods under this type of arrangement.
Peter Ltd is to make an allowance for doubtful debts amounting to 8% of year-end receivables. On 19 January
2011 the company received notification that one of its customers, owing 85,000 at 31 December 2010, had gone
into receivership and would only realise twenty cents per euro on outstanding balances.
Provision has not yet been made for the preference dividend.

REQUIREMENT:
(a)

(b)

Prepare Peter Ltds Statement of Comprehensive Income for the year ended 31 December 2010 and a Statement
of Financial Position as at that date. Your answer should be presented in accordance with IAS1 (revised)
Presentation of Financial Statements. (Notes to the financial statements are not required but you should show
any workings).
(21 marks)
(1 mark presentation)
Explain, and justify, your accounting treatment in relation to items 6, 8 and 9 above.

Page 4

(8 marks)

[Total: 30 MARKS]

3.

The following multiple choice question contains eight sections, each of which is followed by a choice of
answers. Only one of each set of answers is strictly correct.

REQUIREMENT:
Give your answer to each section in the answer sheet provided.
1.

[Total: 20 MARKS]

On 1 January 2009 Star Ltd entered into a finance lease for a machine with a fair value of 140,000. Lease
payments of 40,000 per annum are payable in advance for five years, starting on 1 January 2009. Star Ltd
allocates finance charges on a sum-of-the-digits basis.

According to IAS 17 Leases what is Star Ltds non-current liability in respect of this finance lease as at 31
December 2010?
(a)
(b)
(c)
(d)

2.

96,000
74,000
102,000
62,000

Jonathon Ltds Statement of Comprehensive Income for the year ended 31 December 2010 showed a profit
before tax of 840,000. In early 2011, before the financial statements were authorised for issue, the following
events arose:
(i)

(ii)

(iii)
(iv)

An insurance claim by Jonathon Ltd for 40,000 was agreed on 14 January 2011 for compensation for a
flood in May 2010 which damaged part of the inventory.
The Directors declare a dividend of 15 cents per ordinary share on 9 February 2011. Jonathon Ltd has 2m
ordinary 1 shares in issue.
Inventory valued at 85,000 in the Statement of Financial Position was sold for 60,000.
A customer, with an outstanding balance of 12,000 was declared bankrupt.

In accordance with IAS 10 Events After the Reporting Period, what is Jonathon Ltds profit for 2010 after making
appropriate adjustments for the above events?
(a)
(b)
(c)
(d)

3.

880,000
843,000
855,000
870,000

According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following statements
are correct?
(i)

(ii)
(iii)
(iv)

(a)
(b)
(c)
(d)

A legal claim for compensation filed against the business should be recognised when legal advice states
that there is a high probability of a successful claim.
Provisions should be made for legal obligations only.
A contingent asset should be disclosed as a note, if it is probable that it will arise.
A provision for restructuring assets should not include retraining costs for existing staff.
All statements are correct.
(i), (iii) and (iv) are correct.
(i), (ii) and (iii) are correct.
(i), (ii) and (iv) are correct.

Page 5

4.

Sean Ltd prepares financial statements to 31 December. At 31 December 2009, it had 200,000 8% preference
shares and 800,000 1 ordinary shares in issue.

In 2009 Sean Ltds profit after tax was 300,000, and in 2010 it was 400,000. On 1 July 2010, Sean Ltd issued
200,000 1 ordinary shares at full market price.
Calculate the EPS for 2010 and the corresponding figure for 2009 as per IAS 33 Earnings Per Share.
(a)
(b)
(c)
(d)

5.

2010
42.67 cents
40.00 cents
42.67 cents
38.40 cents

2009
31.5 cents
31.5 cents
35.5 cents
35.5 cents

Marian Ltd prepares financial statements to 28 February each year. There was an overprovision of 125,000 tax
for the year ended 28 February 2009. During the year to 28 February 2010, 750,000 was paid in respect of tax
for 2010. The tax due for the year ended 28 February 2010 is 940,000.
What is the current tax expense that should be shown in the Statement of Comprehensive Income and the current
tax liability to be included in the Statement of Financial Position for the year to 28 February 2010?

6.

(a)
(b)
(c)
(d)

Tax Charge
940,000
815,000
1,065,000
815,000

Liability
65,000
65,000
190,000
190,000

Parkside Ltd sells three different products and you have been provided with the following information at the
companys year end.
Product

Cost price of inventory

Estimated selling price of inventory
Further selling and distribution costs to be incurred to sell

10,000
9,800
1,000

6,000
8,200
600

14,000
14,600
400

In accordance with IAS 2 Inventories, at what amount should inventories be stated in the Statement of Financial
Position at the end of the year?

7.

(a)
(b)
(c)
(d)

28,800
30,600
30,000
29,600

Happy PLC acquired 25% of the shares of Glum Ltd several years ago and this investment has been accounted
for as an associate in Happy PLCs consolidated financial statements. Both Happy PLC and Glum Ltd have an
accounting year end of 31 December. Happy PLC has no other investments in any other associated companies.
Glum Ltds Statement of Comprehensive Income for the year ended 31 December 2010 showed a net profit for
the year of 150,000. Happy PLCs Consolidated Statement of Financial Position at 31 December 2010 recorded
investments in associates of 390,000 (2009 360,000).
In accordance with IAS 7 Statement of Cash Flows, what amount will be recorded as dividends received from
associates in the Statement of Consolidated Cash Flows for year ended 31 December 2010?
(a)
(b)
(c)
(d)

7,500
37,500
120,000
35,500

Page 6

8.

Harpenden Ltd has a current ratio of 0.3. The Managing Director is of the opinion that this is too low and has
instructed the Financial Controller to borrow more short term funds which will increase current liabilities by 50%.
The loan funds are to be lodged to the companys bank account.
What will happen to the current ratio of Harpenden Ltd.?
(a)
(b)
(c)
(d)

It
It
It
It

will
will
will
will

be affected only in the following financial period.

increase.
remain unchanged.
decrease.

Page 7

4.

(1)

(2)

Answer either Question 4 or Question 5

IAS 16 Property, Plant and Equipment and IAS 40 Investment Property deals with the accounting treatment of
tangible non-current assets.
You have recently been appointed as the Financial Accountant of Norfolk PLC, and are currently involved in the
preparation of the financial statements for the year ended 31 October 2010. You have been provided with the
following information in relation to transactions relating to property, plant and equipment which took place during
the year:

New factory premises were completed and ready for occupation on 1 April 2010. Production was not transferred
to the factory until 30 September 2010 due to an industrial dispute arising from a decision by the company to
make some compulsory redundancies. Capital expenditure in relation to the new factory premises is recorded in
the Statement of Financial Position for the year ended 31 October 2009 at 1.4 million (including land of
800,000). The following costs, which also relate to the new factory premises, have been incurred during the year
to 31 October 2010:
Additional construction costs
Professional fees (legal and architects)
General and administrative overheads
Relocation of staff to new factory

On 1 April 2010, new machinery for a highly automated production line became available for use within the
factory. Costs of the new machinery amounted to 620,000 and, in addition, the company also incurred the
following:

Allocated supervisory costs of 9,500.

Installation costs of 50,000 were incurred. These were 10% higher than originally budgeted due to an
unofficial strike action.

(3)

(4)

(5)

000
104
20
55
15

25,000 was incurred in testing the new process. 10,000 of this was incurred in relation to putting on an
open day for customers to view the new machinery.
Fees of 3,000 were paid to Casement Haulage for the cost of transporting the machinery to the factory.

Norfolk PLCs headquarters building was acquired on 1 November 2003 for 2.5 million and depreciated at 4%
per annum. On 1 November 2007, it was revalued to 3 million. Following this revaluation, the company did not
make any reserve transfers for additional depreciation. As a consequence of the recent financial downturn,
professional valuers have advised that as at 31 October 2010, the building was worth 2 million.

Norfolk PLC also has a leasehold property held under a finance lease and leased out under an operating lease.
The carrying value of the property at 1 November 2009 was 2 million and during the year Norfolk PLC spent
300,000 in extending the rented floor capacity of the property. An independent valuer valued the property at
3.2 million on 31 October 2010.

Norfolk PLC uses the straight line method of depreciation, and depreciates buildings at 4% per annum and
machinery at 20%. The company values investment properties using the fair value model.

REQUIREMENT:
(a)

(b)
(c)

Distinguish between the cost model and the revaluation model for the measurement of property, plant and
equipment subsequent to its initial recognition.
(3 marks)

Prepare extracts from the Statement of Financial Position in relation to the above transactions as at 31 October
2010 and draft the note showing movements on property, plant and equipment for the year ending 31 October
2010 (working to the nearest 000).
(14 marks)

Comment briefly on your accounting treatment in relation to item (4) above.

Page 8

(3 marks)

[Total: 20 MARKS]

5.

OR

An important business issue arises when an entity closes or discontinues a part of its overall business activity.
IFRS 5 Non Current Assets Held for Sale and Discontinued Operations provides guidance on the accounting
treatment in such circumstances.

Archway PLC, a company that prepares its financial statements to 31 December each year, manufactures light
fittings which it sells to the European market. The company has three manufacturing plants based in Limerick,
Dublin and Barcelona. Due to increased competition and a change in consumer buying patterns within the
Spanish market, the performance of the Barcelona operation has deteriorated over the last twelve months. At a
Board meeting on 14 December 2010, the Directors of Archway PLC decided, reluctantly, to cease manufacturing
at the Barcelona site and sell the factory. Immediately after the meeting the staff, suppliers and key customers
were notified and an announcement was made to the press. You are employed as the Financial Accountant for
the company and the Managing Director has let it be known that that the Barcelona operations results should be
shown as a discontinued operation in the financial statements for the year ending 31 December 2010. Due to the
declining business performance of the Barcelona site on 1 October 2010, Archway PLC increased production
capacity at its Limerick site. The following are the extracts from Archway PLCs Statement of Comprehensive
Income:

Revenue
Cost of sales
Gross profit/(loss)
Operating expenses
Profit/(loss) before tax

31 December 2010
Dublin Barcelona Limerick
000
000
000
30,000
19,000
4,500
(23,500)
(23,180)
(3,375)
6,500
(4,180)
1,125
(1,800)
(1,100)
(225)
4,700
(5,280)
900

Total
000
53,500
(50,055)
3,445
(3,125)
320

31 December 2009
Total
000
61,000
(51,800)
9,200
(2,400)
6,800

The year ending 2009 figures for the Barcelona operation were: revenue 21.5 million, cost of sales 19 million
and operating expenses of 1.5 million.

REQUIREMENT:

(a)

Explain what is meant by a non-current asset for sale and a discontinued operation.

(c)

Assuming the Barcelona operation is to be treated as a discontinued operation, re-draft the extracts from the
Statement of Comprehensive Income for the year ended 31 December 2010 (including comparatives) in
accordance with the requirements of IFRS 5, and draft a suitable note relating to discontinued operations which
would appear in the notes to the financial statements.
(8 marks)

(b)

(d)

(5 marks)

Explain whether the Managing Directors wish to show the results of the Barcelona operation as a discontinued
operation is justifiable.
(4 marks)

On 1 October 2010 the Directors of Archway PLC decided to sell a machine, used within the Dublin operation and
which was now surplus to requirements. The machine had a cost of 60,000 on 1 January 2008 and was
expected to sell for 25,000. A buyer was found on 20 December 2010 at that price, although the sale was not
completed until after the year end. On 1 October 2010, the machine met the held for sale criteria of IFRS 5. The
company charges depreciation on plant and equipment at 20% on cost.

Explain how the above transaction should be treated in the financial statements for the year ending 31 December
2010.
(3 marks)
[Total: 20 MARKS]

END OF PAPER

Page 9

SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING

Solution 1
(a)

PROFESSIONAL 1 EXAMINATION APRIL 2011

Consolidated statement of financial position of Muscle Group as at 31 December 2010

Assets
Non- current assets
Tangible assets (242+54+6-.5)
Development costs (45+10-3)
Goodwill (3)

Current Assets
Inventory (19+24 - 0.25)
Accounts Receivables (24+20-2)
Bank(8+12+2)

42.75
42
22

Equity and Liabilities

Ordinary share capital (200+16)
Share premium (25+16)
Retained earnings (w5)
Non-controlling interest (w4)

Non-current liabilities
Loan stock
Deferred consideration (9.60+1.1152) (w6)

100.00
10.752

Current Liabilities
Accounts payables (18+21)
Taxation (20+14)
W1

39
34

Group structure
Muscle

Oyster

1 January 2010

80%

Page 10

m
301.50
52.00
10.60
364.10
106.75
470.85

216.00
41.00
24.048
281.048
6.05
287.098
110.752
73
470.85

W2

Net Assets at fair value

At acquisition
m
30
10
1
41

Share capital
Share premium
Retained earnings

Fair value adjustment

Land and buildings
Depreciation
Research and development
Unrealised profit on
inventory
W3

6
(.5)
47

Goodwill on acquisition
Cost of investment
Cash at acquisition
Shares (24/3 * 2)*2
Cash 12 * .80

W5

Fair value of subsidiary net assets

Goodwill

Non-controlling interest at reporting period end

Fair value of non- controlling
Interest
NCI of post acquisition
Profits (47.25 - 47) 20%
Retained earnings
Muscles Plc
Subsidiary
{(47.25 47 }* 80%

Dr

Cr

(0.25)
47.25

10
32
9.6
51.60
6
57.60
47
10.60
6.0

0.05
6.05

0.2

25.20

(1.152)
24.048

Unwinding of Deferred consideration

Consolidated retained earnings 9.6*12%

1.152

Deferred consideration

1.152

Marks are awarded for altenative methods

(b)

(3)

25

Less
Unwinding of Deferred consideration
W6

Non controlling interest 6m*1

W4

At reporting period end

m
30
10
5
45

IFRS 3 (revised) any excess of the consideration transferred plus the value of any non-controlling interest over
the fair value of any net assets acquired should be described as goodwill and recognised as an asset.

A gain on a bargain purchase arises if the fair value of the net assets acquired exceeds the total of the
consideration transferred and the value of any non-controlling interest, i.e. there is negative goodwill.
Page 11

IFRS 3 (revised) is based on the assumption that this usually arises because of errors in the measurement
of the acquirees net assets and or/consideration transferred. So the first action is always to reassess the
identification and measurement of the net assets and the measurement of the consideration transferred,
checking in particular whether the fair values of the net assets acquired correctly reflect future costs arising
in respect of the acquiree.

(c)

If the gain still remains once these reassessments have been made, then it is attributable to a bargain
purchase. The gain must be recognised as part of equity via recognition within profit/loss for the period.
(4 marks)

Lobster PLC holds 30% of the ordinary shares in Shrimp Ltd. Under IAS 28 significant influence is deemed
to exist when a holding reaches 20%; however, this can be rebutted in the light of further evidence. Lobster
takes no part in the decision making of Shrimp Ltd. The holding company is purely held for its investment
potential and the substance of the holding is better reflected as a trade investment. On consolidation, Lobster
PLCs investment would be shown at cost as a non-current asset investment.

Lobster holds 42.5% of the equity shares in Prawn Ltd which carry significant influence, suggesting that
Prawn Ltd is an associate. However, the following indicates that Prawn Ltd is in fact a subsidiary of Lobster
PLC:

Lobster controls the board of Prawn Ltd, appointing five of the board members, and can therefore
control the operating and financial decision making within the company.
Furthermore, Clam Ltd has agreed to vote its 20% alongside Lobster PLC, thus giving Lobster effective
voting control.

In the absence of any evidence to the contrary, Prawn Ltd should be accounted for as a subsidiary and
consolidated using the acquisition method of accounting.
(6 marks)
[Total: 30 Marks]

Page 12

SOLUTION 2

Peter Ltd
Statement of Comprehensive Income for the year ended
31 December 2010

Revenue (14,600-400)
Cost of sales
Gross profit
Operating expenses
Distribution costs
Administrative expenses
Profit from operations
Finance costs
Investment income
Grant
Gain on investment
Loss on disposal of equipment
Profit before taxation
Income tax expense
Profit for the year
Other comprehensive income
Revaluation gain
Total comprehensive income

Peter Ltd
Statement of Financial Position for the year ended 31 December 2010

ASSETS
Non-current assets
Property, plant and equipment (4,200+4,900+778.60)
Investment property
Current assets
Inventories
Trade and other receivables (333+64)
Bank (622-3+20)

000

1,079
397
639

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital
Preference share capital (irredeemable)
Revaluation surplus (690+600)
Retained earnings

10,000
300
1,290
9,741.00

Non-current liabilities
8% loan stock
Deferred tax
Current liabilities
Trade and other payables (612+17.6)
Preference dividend payable
Warranty
Taxation

890
12

629.6
21
28
82

Total equity and liabilities

Page 13

000
14,200
(5,519.40)
8,680.60
(115)
(84)
(72)
8,409.60
(35.60)
60
2
1,000
(34)
9,402
(92)
9,310
600
9,910

000
9,878.60
11,000.00
20,878.60
2,115.00

22,993.60

21,331.00
902.00

760.60

22,993.60

Workings
Allocation of costs
Cost of sales
Admin/Selling
Opening inventory
Purchases
Warranty
Wages and salaries
Trade fair
Bad and doubtful debts (68 -41)
Depreciation:
Buildings W
Equipment
Closing inventory
W1

000
2,100
4,193
8
90
70
137.40
(1,079)
5,519.40
Cost
6,300
600
6,900

Balance
Revaluation

Depreciation charge

6,900

Depreciation on buildings
5,000,000/50=100,000 pa
W2
Equipment
Disposal
916 @ 15%

Cost
1,400,000
(75,000)
1,325,000

Depreciation on disposal
75,000 11,250 = 63,700 9,562.50 = 54,187.50
Accumulated depreciation = 75,000 54,187.50 = 20,812.50
Loss on disposal:
NBV
=
54,187.50
Proceeds =
20,000
34,187.50
W3
Inventory
Plus sale or return*
Less write off

W4
Bad and doubtful debts
Accounts receivable
Less sale or return

Less bad debt

Provision @ 8%

70,000-28,960 =

41,040

137,400

790,000
320,000
31,000
1,079,000 (*would accept 400,000)
830,000
400,000
430,000
68,000 (80 cent per euro)
362,000
28,960

Page 14

Admin
000
42

30
72

Acc. Dep
1,900

1,900
100
2,000

Acc. Dep
430,000
(20,812.50)
409,187.50

Selling &
Distribution
000
32

25
27

84

NBV
5,000

4,900

NBV
916

W3
SCI taxation

Income tax
Under-provision
W4
Interest accrual
8% of 890,000

6 months
Paid

82,000
10,000
92,000

71,200

35,600
18,000

Therefore accrue 17,600 at 31 December 2010.

W6
Retained earnings

Brought forward
Preference dividend
Profit for the year
At 31 December 2010
(b)

000
452
(21)
9,310
9,741

Candidates should describe and justify their accounting treatment.

(21 Marks)
Presentation 1 mark

The warranty provision meets the criteria for recognition as set out in IAS 37:

There is a present obligation

It is probable that a payment will have to be made; and

It is possible to estimate the obligation reliably.

The increase in the warranty of 8,000 should be recognised as an expense in the SCI under cost of sales.

There are no specific accounting rules in relation to the trade fair. However, it is unlikely that the company
could justify doing anything other than writing off the cost because the there is no reason to believe that the
costs will be fully recovered. It would be a different matter if the company had obtained firm orders from the
fair. The 25,000 should be treated as selling and distribution expenses as opposed to cost of sales.

The unsold element of inventory held on a sale or return basis should be excluded from sales and accounts
receivable and recognised as closing inventory. This is in accordance with the prudence and realisation
conventions.
(8 marks)
[Total: 30 Marks]

Page 15

SOLUTION 3

1.
(d)
Year ended
31.12.2009
31.12. 2010
31.12.2011
31.12.2012
31.12.2013
SOTD:

B/F
140,000
124,000
102,000
74,000
40,000

4+3+2+1= 10

Payment
(40,000)
(40,000)
(40,000)
(40,000)
(40,000)

Capital
100,000
84,000
62,000
34,000
---

Interest
24,000
18,000
12,000
6,000
---

C/F
124,000
102,000
74,000
40,000
---

40,000* 5= 200,000-140,000= 60,000 interest.

2009 : 4/10 * 60,000=24,000

2010: 3/10*60,000= 18,000
2.

3.
4.

(b)
840,000 25,000 + 40,000 12,000 = 843,000

(b)
incorrect as provisions for constructive obligations are also required.

(c)
Profit
Preference dividend
Shares
Opening balance
Issued
200,000* 6/12
EPS

5.
6.
7.

2009
300,000
(16,000)
284,000

100,000
900,000

--800,000

800,000

384,000
900,000
42.67 cents

800,000

(d)
Tax charge:
Liability:
940,000 750,000=190,000

284,000
800,000
35.5 cents
940,000 - 125,000 = 815,000

(a)
(a)

000
Bal b/d
IS (150 x 25%)
8.

2010
400,000
(16,000)
384,000

Investments in Associates
360
37.5
397.5

Dividends from associates (bal)

Bal c/d

000
7.5
390
397.5

(b)
Increase if current liabilities are 100 and current assets 30 then an increase of 50% in current liabilities
will increase the current ratio to 0.53 (80/150).

Page 16

SOLUTION 4
(a) Under cost model, an item of PPE is carried at cost (i.e. initial cost plus subsequent expenditure) less
accumulated depreciation.
Under the revaluation model (fair value model), an item of PPE is carried at revalued amount, being fair value
less accumulated depreciation.

(b)

The choice of model is an Accounting Policy choice, which must be applied across an entire class of PPE.
(3 marks)
Financial Statement Extracts
Statement of financial position as at 31 October 2010
000
Non current assets
Property, plant and equipment (see note)
4,110
Investment property
3,200

Equity
Revaluation surplus (900 -640)

260

Notes to the financial statements

Property plant and equipment

Cost/valuation
At 1 November 2009
Additions (W2 & W3)
Revaluation loss (W1)
At 31 October 2010
Depreciation
At 1 November 2009
Charge for year (W4)
Revaluation loss
At 31 October 2010

Head
office
000

Plant and
equipment
000

Assets in the course

of construction/factory
premises
000

Total
000

3,000
(1,000)
2,000

683
683

1,400
124
1,524

4,400
807
(1,000)
4,207

240
120
(360)
-

80
80

17
17

240
217
(360)
97

2,000
2,760

603
-

1,507
1,400

4.110
4,160

Carrying amount
At 31 October 2010
At 1 November 2009

Workings

W1
Head office revaluation

Original cost
Depreciation (4 years at 4%)
Carrying value 1 November 2007
Revaluation gain
Revalued amount 1 November 2007
Depreciation (2 years at 4%)
Balance at 1 November 2009
Depreciation (4%)
Revaluation loss

000
2,500
(400)
2,100
900
3,000
(240)
2,760
(120)
(640)
2,000
Page 17

W2
Construction costs
Professional fees

000
104
20
124

W3
Additions to plant and equipment
Invoice costs
Labour- installation (50,000 x 100/110)
Testing costs
Transport costs

620
45
15
3
683

W4
Depreciation
Head office (W1)
New factory (1,524 - 800) x 4% x 7/12)
Plant and equipment (683 x 20% x 7/12)
(c)

120
17
80
(14 marks)

This property is an investment property under IAS 40 and should be included within the SFP at its fair value
of 3.2 million. The gain of 900,000 should be recognised within the SCI for the year ending 31 October
2010.
(3 marks)
[Total: 20 Marks]

Page 18

SOLUTION 5
(a) IFRS 5 Non Current Assets Held for Sale and Discontinued Operations defines non current assets held for
sale as those assets (or a group of assets) whose carrying amounts will be recovered principally through a
sale transaction rather than through continuing use. For this to be the case the assets must be available for
immediate sale and sale must be highly probable (e.g. completed within next 12 months).

A discontinued operation is a component of an entity that has either been disposed of, or is classified as held
for re-sale and
(i)
(ii)
(iii)

(b)

(c)

Represents a separate major line of business or geographical area of operations

Is part of a single co-ordinated plan to dispose of such
or is a subsidiary acquired exclusively for sale.

IFRS 5 says that a component of an entity must have operations and cash flows that can be clearly
distinguished from the rest of the entity and will in all probability be cash generating unit whilst held for use.
This definition also means that a discontinued operation will also fall to be treated as a disposal group as
defined in IFRS 5.
(5 marks)

Timing of the board meeting and consequent actions and notifications is within the accounting period ended
31 December 2010. Notification of suppliers and the press is indicative that a sale will be highly probable and
the directors are committed to a plan to sell assets and are actively locating a buyer. From the financial
information provided in the question it appears that Barcelonas operations and cash flows can be clearly
distinguished from its other operations. The assets of the Barcelona operation appear to meet the definition
of non current assets held for sale. The major issue is a separate geographical area of operations, and it is
clear that the Barcelona operation meets this criteria. So the closure does meet the definition of a discontinued
business.
(4 marks)
Archway plc statement of comprehensive income year ended
31 December 2010
000

Continuing operations
Revenue
Cost of sales
Gross profit
Operating expenses
Profit/(loss) from continuing operations
Discontinued operations
Profit/(loss) from discontinued operations
Profit for the period

(d)

34,500
(26,875)
7,625
(2,025)
5,600

39,500
(32,800)
6,700
(900)
5,800

19,000
(23,180)
(4,180)
(1,100)
(5,280)

21,500
(19,000)
2,500
(1,500)
1,000

(5,280)
320

Analysis of discontinued operations

Revenue
Cost of sales
Gross profit (loss)
Operating expenses
Profit/(loss) from discontinued operations

31 December 2009
000

1,000
6,800

(9 marks)

Work out depreciation for year and include at carrying value under non-current assets held for sale in the
statement of financial position. No gain/loss to be included in current year.
(2 marks)
[Total: 20 Marks]

Page 19