CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - AUGUST 2010

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.)
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 AUGUST 2010

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.

Clock PLC prepares its financial statements to 30 June each year. On 1 July 2008, Clock PLC purchased 75%
of the issued share capital of Mouse Ltd by issuing two shares in Clock PLC for every four shares in Mouse Ltd.
The market value of Clock PLCs shares at 1 July 2008 was 4 per share. At the date of acquisition, Mouse Ltd
had 10 million 1 ordinary shares and retained earnings of 9 million.
On 1 January 2009, Clock PLC acquired 30% of the shares of Tick Ltd for 3 each. Tick Ltds issued share capital
at 1 January 2009 was 4 million 1 ordinary shares.

The draft Statements of Comprehensive Income for the three companies for the year ended 30 June 2009 are as
follows:
Clock PLC
Mouse Ltd
Tick Ltd
000s
000s
000s
Revenue
Cost of sales
Gross profit
Other income
Operating expenses
Operating profit
Interest payable and similar charges
Profit on ordinary activities
Taxation
Profit on ordinary activities after taxation

32,600
(18,400)
14,200
3,100
(6,400)
10,900
(1,800)
9,100
(2,100)
7,000

18,200
(11,400)
6,800
1,800
(2,100)
6,500
(1,400)
5,100
(1,800)
3,300

6,000
(2,800)
3,200
200
(1,400)
2,000
(600)
1,400
(300)
1,100

The following information is relevant:

1.
The fair value of the net assets of Mouse Ltd at the date of acquisition was equal to their carrying value
with the exception of land. The land had a fair value of 1m below its carrying value and this has not
changed since the date of acquisition.
2.

3.
4.
5.
6.

At 30 June 2009, the fair value of Mouse Ltds specialist plant and equipment was 600,000 in excess of
its carrying value. The remaining useful life of these assets is four years and Mouse Ltd has not reflected
this fair value in its financial statements.

Sales by Clock PLC to Mouse Ltd, in the year to 30 June 2009, amounted to 3.2 million. Clock PLC made
a profit of cost plus a third on all sales. Mouse Ltds year-end inventory includes 1.2 million in relation to
purchases from Clock PLC.

Included in Mouse Ltds operating expenses is an amount of 500,000 in respect of management charges
invoiced and included in revenue by Clock PLC.

Clock PLCs policy is to value the non-controlling interest at fair value at the date of acquisition. At the date
of acquisition, the goodwill attributable to the non-controlling interest was 200,000.

All profits and losses are deemed to accrue evenly throughout the year.
Page 1

REQUIREMENTS:
(a)

Calculate the goodwill arising on the acquisition of Mouse Ltd.

(c)

IAS28, Investments in Associates, deals with the accounting treatment of associated entities.

(b)

(4 marks)

Prepare a consolidated Statement of Comprehensive Income for the Clock group for the year ended 30 June 2009.
(19 marks)
Presentation (1 mark )

Explain the meaning of the following terms:

(i)

(ii)

Significant influence.

(3 marks)

Equity method of accounting.

(3 marks)

[Total: 30 marks]

Page 2

2.

Splash PLC has a number of subsidiaries, one of which, Muck Ltd was acquired during the year ended 31
December 2009.
The draft consolidated financial statements for the year ended 31 December 2009 are as follows:

Consolidated Statement of Comprehensive Income of Splash PLC for the year ended 31 December 2009
Profit from operations
Interest

000
1,210
(100)
1,110
240
1,350
(482)
868
(104)
764

Share of profits of associates

Profit before taxation
Taxation
Non-controlling interest
Group profit

Statements of Financial Position are as follows:

Assets
Non-current assets
Property, plant and equipment
Intangibles
Investment in associates
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets

Equity and liabilities

1 ordinary shares
Share premium
Retained earnings

Non controlling interest

Non-current liabilities
Long term loans

Current liabilities
Trade payables
Taxation
Total Equity and Liabilities

Additional information:
1.

2.

Splash PLC
consolidated
at 31/12/2009
at 31/12/2008
000
000

Muck Ltd
at acquisition
000

4,730
350
520
5,600

2,610
310
500
3,420

610
610

740
390
40
6,770

610
350
85
4,465

150
85
20
865

1,400
300
1,615
3,315
580
3,895

1,900

1,000
200
865
2,065
610
2,675

1,100

500
100
80
680
680

520
455
6,770

480
210
4,465

75
110
865

Splash PLC issued 400,000 1 ordinary shares at a premium of 25 cent and paid a cash consideration of 197,500
to acquire 75% of Muck Ltd. At the date of acquisition, Muck Ltds assets and liabilities were recorded at their fair
value with the exception of some plant which had a fair value of 90,000 in excess of its carrying value. Goodwill
on acquisition was 120,000.

The property, plant and equipment during the year to 31 December 2009 shows plant with a carrying value of
800,000 which was sold for 680,000. Total depreciation for the year was 782,000.
Page 3

REQUIREMENTS:
(a)

(b)

Prepare a consolidated statement of cash flows in accordance with IAS 7 Statement of Cash Flows for the year
ended 31 December 2009.
(21 marks)
Presentation (1 mark)
The Managing Director of Splash PLC has asked you to draft a memorandum, briefly explaining the following:
(i)

(ii)
(iii)

3.

Why it is important to remove unrealised profits arising from transactions between companies in a group?
(3 marks)

Whether it is possible for a business to make losses year after year but still increase its bank balance?
(3 marks)

The difference between the direct method and indirect methods of calculating the net cash flow from
operating activities.
(2 marks)
[Total: 30 Marks]

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.

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

[Total: 20 Marks]

1.

At what amount does IAS 17 Leases require a leasee to capitalise a finance lease?

2.

Margo Ltd purchased a specialist piece of equipment on 1 March 2003 for 800,000. The equipment has a useful
life of 8 years with an expected residual value of 220,000. On 1 March 2007, the equipment was revalued to its
fair value of 650,000 with no revision to its remaining useful life. On 1 March 2008 the equipment was sold for
750,000.

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

The assets fair value.

The cash price of the asset.
The minimum lease payments less the residual value of the asset.
The lower of the assets fair value and the present value of the minimum lease payments.

In accordance with IAS 16 Property, Plant and Equipment, what was the profit on disposal to be included in Margo
Ltds statement of comprehensive income for the year ended 28 February 2009?

3.

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

240,000
262,500
207,500
100,000

The records of Helen PLC for the year ended 31 December 2009 are as follows:

Property, plant and equipment at 31 December 2008

Sale proceeds
Profit on sale of property, plant and equipment
Depreciation charged on property, plant and equipment
Property, plant and equipment at 31 December 2009

622,000
106,000
19,000
210,000
540,000

In accordance with IAS 7 Statement of Cash Flows, what amount for purchase of property, plant and equipment
would be included in the statement of cash flows for the year ended 31 December 2009?

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

147,000
234,000
215,000
98,000
Page 4

4.

According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, which of the following would
qualify as a change in accounting estimate?
(i)
(ii)
(iii)
(iv)

5.

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

Provision for obsolescence of inventory

Correction necessitated by a material error
A change as a result of adoption of a new International Accounting Standard
A change in the useful life of a non-current asset.
All the above
(ii) and (iii)
(i) and (ii)
(i) and (iv)

During the current accounting period Ryan PLC incurred the following costs:
(i)
(ii)
iii)
(iv)

8,000 legal costs in connection with registering a patent

14,000 on commissioning a research report on future product design
80,000 on acquiring a brand name
60,000 on developing a brand internally

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

148,000
154,000
88,000
82,000

Under IAS 38 Intangible Assets what amount can be recognised as intangible assets?

6.

Block Ltd is a large construction company based in Cork. Details of a two year government building contract, at
the year ended 31 January 2010, are as follows:
000s
3,000
1,400
1,200
1,000
800

Final contract price

Cost of work completed to date
Value of work certified to date
Progress payments invoiced and received to date
Estimated cost to completion

It is company policy that profit is to be recognised by Block Ltd, on its contracts in accordance with IAS11
Construction Contracts using the value of work certified (as a percentage of contract value) to estimate the
percentage completion of each contract.

How much profit should be recognised in the statement of comprehensive income in relation to the above contract
for the year ended 31 January 2010?

7.

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

480,000
190,000
800,000
320,000

Texet PLC has commissioned a new piece of equipment to be constructed at a cost of 640,000. It is expected
that the work will commence on 1 October 2010 and be completed by the year ended 31 May 2011. The cost will
be met from the companys existing borrowings which are as follows:

Loan A of 500,000 with an interest rate of 6%

Loan B of 900,000 with an interest rate of 4%
Loan C of 600,000 with an interest rate of 8%

Calculate the amount of borrowing costs that Texet PLC can capitalise, for the year ended 31 May 2011, as per
IAS 23 Borrowing Costs

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

38,400
36,480
30,400
24,320

Page 5

8.

Nectar PLC has a balance of 800,000 on its retained earnings at 1 July 2009. During the year ended 30 June
2010 the company:

Revalued property with a cost of 2 million and accumulated depreciation of 1.2 million, to 2.5 million. No
annual transfers between reserves are to be made.
Issued shares at a premium of 100,000
Made a profit for the year of 500,000

In addition, an interim dividend of 300,000 was paid during the year ended 30 June 2010.

In accordance with IAS1, (revised) Presentation of Financial Statements, what is the closing balance on retained
earnings in Nectar PLCs statement of changes in equity for the year ended 30 June 2010?
(a)
(b)
(c)
(d)

4.

1.

1,400,000
1,700,000
1,300,000
1,000,000

Answer either question 4 or 5

IAS16 Property, Plant and Equipment and IAS40 Investment Property outlines the accounting treatment of tangible
non-current assets.

Hegarty PLC is a Limerick based computer manufacturer and during the year ended 31 October 2009 the following
transactions in relation to property, plant and equipment took place.
On 1 April 2009, a new machine was purchased by Hegarty PLC in order to improve productivity. The cost of the
machine was 600,000, but the company also incurred the following:
Delivery costs
Labour installation costs (Note i)
Management and supervision costs (allocated from head office)
Material costs used for the installation -inclusive of 223 recoverable VAT.
Cost of testing of new machine (Note ii)
Maintenance service contract costs per annum
Proceeds from sale of by-products produced as a result of the testing process
Notes:
(i)

(ii)

2.

3.

4,000
15,000
10,000
1,500
3,000
400
(100)

These were 20% higher than budgeted due to an industrial dispute at the time of installation.

Included in the testing costs of the machine was 150 in connection with a quarterly diagnostic check of
machinery.

Plant and equipment are depreciated at 25% straight line. The cost of plant and equipment at 1 November 2008
amounted to 300,000 and the accumulated depreciation was 180,000 at that date.

Hegarty PLCs head office building was originally acquired on 1 November 2003 for 2m, and is depreciated at
4% per annum straight line. On 1 November 2007, it was revalued to 2.5m. Due to the recent downturn in
commercial property prices, valuers acting for the company have advised that the valuation on 31 October 2009
should be 2m.

On 1 November 2008, Hegarty PLC purchased a property in Ennis, Co. Clare costing 500,000 for its investment
potential. The amount attributable to land was negligible, and the buildings are expected to have a useful life of 40
years. Local property indices indicate that property prices in this area have gone against the downward national
trend, and that the fair value of the property has increased during the year to 31 October 2009.

Page 6

REQUIREMENTS:
(a)

(b)
(c)

5.
(a)
(b)
(c)

In relation to the machinery and head office building, draft the non-current asset note showing the movements on
property, plant and equipment for the year to 31 October 2009.
(12 marks)
Define the term Investment Property and explain why it may not be appropriate to charge depreciation in relation
to such a property.
(4 marks)

Assuming that Hegarty PLC adopts a fair value policy for the property in Ennis, explain how the property would be
presented in the financial statements for the year to 31 October 2009, if the property has risen in value by 5%
during the year. (Disclosure notes are not required).
(4 marks)
[Total: 20 marks]

OR

IAS37 and IAS10 provides guidance on the accounting treatment of Provisions, Contingent Liabilities and
Contingent Assets and Events After the Reporting Period.

In accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets, define a contingent asset and
explain how they should be treated in the financial statements.
(4 marks)
In accordance with IAS10 Events After the Reporting Period, distinguish between an adjusting event and a nonadjusting event.
(4 marks)

You have been approached by the Financial Controller of Severn PLC. You have been asked to provide some
advice in relation to the companys draft financial statements for the year ended 31 March 2010. You should assume
that the Directors had agreed to sign the companys financial statements on 2 June 2010.
1.

At a board meeting of Severn PLC in March 2010, a decision was taken in principle to dispose of a subsidiary
company, Trent Ltd. This investment was valued in the statement of financial position of Severn PLC, at 31
March 2010, at 1,500,000. On 25 April, the management of Trent Ltd decided to buy the company for
2,200,000.

2.

Five hundred customers are bringing an action against Severn PLC for the supply of faulty goods. Severn
PLCs solicitors have confirmed that in their opinion, 20% of the claims are defendable at no cost. The
average level of damages per successful claim is estimated at 2,000. A similar provision, amounting to
600,000 was in place at 31 March 2009, and was disclosed in the statement of financial position at that
date. 400,000 was paid out for such claims during the year ended 31 March 2010.

3.
4.
5.

On 28 April 2010, 150,000 was paid to John Waldon as compensation for his removal as HR Director. Mr.
Waldon had been dismissed by a majority vote at a board meeting in March 2010. The reasons for his
dismissal were in relation to professional misconduct.

Severn PLC has renewed the unlimited guarantee given in respect of the bank overdraft of a company in
which it holds significant investment. The companys overdraft amounted to 450,000 at 31 March 2010 and
it has net assets of 1.5 million.

Materials used in the production of one of the companys key products were included in year-end inventory
at a cost of 105,000. In May 2010, the auditors indicated that the materials could have been purchased
for 60,000 in April 2010, due to a fall in world commodity prices.

REQUIREMENTS:

You are required to prepare a memorandum to the Board of Directors of Severn PLC in which you explain how each of
the above items should be reflected in the companys financial statements for the year ended 31 March 2010.
(You may assume that each of the items is material).
(12 marks)
END OF PAPER
Page 7

[Total: 20 marks]

SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING

SOLUTION 1
(a)

PROFESSIONAL 1 EXAMINATION AUGUST 2010

Consideration
10m * 75% * 2/4 * 4
Less
Shares
Retained earnings
Fair value adjustment

000s

10,000
9,000
(1,000)
18,000 * 75%

Goodwill attributable to parent

Goodwill attributable to non controlling interest
Full goodwill

(b)

15,000

13,500
1,500
200

1,700

(4 marks)

Clock group
Consolidated statement of comprehensive income for the year ended 30 June 2009

Revenue W1
Cost of sales W2
Gross profit
Other income 3,100+1,800
Operating expenses W3
Operating profit
Income from associates W4
Interest payable and similar charges 1,800+1,400
Profit on ordinary activities before taxation
Taxation 2,100+1,800

Profit for the period

Other Comprehensive Income
Revaluation gain
Total Comprehensive Income

000s
47,100
(26,900)
20,200
4,900
(8,000)
17,100
165
(3,200)
14,065
(3,900)
10,165
600
10,765

Attributable to:
Owners of the parent
Non controlling interest W5

9,340
825
10,165

Attributable to:
Owners of the parent
Non controlling interest W6

9,790
975
10,765
Page 9

W1

000s

Revenue
Clock
Mouse

32,600
18,200
50,800
(500)
(3,200)
47,100

Less management charges

Less intra group sales
W2

W3

W4

W5

W6

000s

Cost of sales
Clock
Mouse
Less:
Intra group sales
Plus:
URP on inventories (1.2m/133.3*33.3)

18,400
11,400

(3,200)

300
26,900

000s

Operating expenses
Clock
Mouse
Less management charges

6,400
2,100
(500)
8,000

000s

Income from associates

Profit after taxation 1,100 * 6/12 * 30%

165

000s

Non controlling interest

Profit
3,300*25%

3,300
825

000s
825

Non controlling interest Profit (w5)

NCI in subsidiarys other
Comprehensive income (600*25%)

150
975

(19 marks)
Presentation 1 mark

Page 10

(c)

Defined as power to participate in the financial and operating policy decisions of investee but not control
over these policies.

Significant influence is highlighted in IAS28 as a situation where the investor holds, directly or indirectly
through subsidiaries, 20% or more of the voting power of the investee and that if such a situation exists
significant influence will be presumed.

Significant influence can be evidenced by:

o
Representation on the board of directors or equivalent,
o
Participation in policy making processes
o
Material transactions between investor and investee
o
Provision of essential technical information

Equity accounting is a method of accounting that brings an associate investment into the parent
companys financial statements initially at cost. The carrying amount of the investment is then adjusted
in each period for the group share of profit of the associate.
The investment is calculated at:
Cost of investment
Add group share of post acquisition retained profit. Less any impairment losses.

IAS28 does not allow the use of proportionate consolidation of associates.

Page 11

(6 marks)
[Total: 30 Marks]

SOLUTION 2

Consolidated Statement of cash flows for the year ended 31 December 2009

Cash flows from operating activities

Cash generated from operations
Interest paid
Income tax paid (w1)
Net cash from operating activities

000
2,222
(100)
(347)

Cash flows from investing activities

Purchase of property plant and equipment (w2)
Acquisition of subsidiary Muck ltd net of cash acquired (w7)
Dividends received from associates (w6)
Proceeds from sale of property plant and equipment
Net cash used in investing activities

Cash flows from financing activities

Loan
Dividends paid to Non controlling interest (w8)
Dividends paid (w5)
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

(3,002)
(177.5)
220
680
800
(326.5)
(14)

Note: Reconciliation of profit before tax to cash generated from operations

Profit before tax
Finance cost
Depreciation charge
Amortisation charge (w3)
Loss on disposal of property plant and equipment
Share of profits from associates
Decrease in inventories (740-610-150)
Decrease in trade and other receivables (390-350-85)
Decrease in trade and other payables (520-480-75)
Cash generated from operations
W1
Cash
Bal c/d
W2
Bal b/d
Acquisition of sub (610+90)
Cash

Income Tax
000
347
Bal b/d
455
Income statement
Acquisition taxation
802

000
2,610
700
3,002
6,312

PPE

Disposals

Income statement: depreciation

Bal c/f

Page 12

000

1,775

(2,279.5)

459.5
(45)
85
40
1,350
100
782
80
120
(240)
20
45
(35)
2,222

000
210
482
110
802

000
800

782
4,730
6,312

W3

Intangibles
000
310
IS amortised
120
Bal c/f
430

Bal b/d
Acquisition
W4
Bal c/d (1,400+300)
W5

Share capital and premium

000
Bal b/d (1,000 +200)
1,700
Acquisition of Muck Ltd
1,700

Bal b/d
IS
W7
Acquisition of subsidiary
PPE (610+90)
Inventories
Trade receivables
Cash and cash equivalents
Trade payables
Taxation
Non controlling interest

000
865
764
1,629

Investments in Associates
000
500
Cash
240
Bal c/f
740

000
220
520
740

700
150
85
20
(75)
(110)
(192.50)
577.50
120
697.50
(20)
(500)
177.50

Goodwill

Less: cash and cash eq.

Non cash consideration (400 *1.25)
Cash flow on acquisition: net of cash acquired

500,000+197,500
680,000+90,000=770,000*.75
Goodwill
W8

Cash

Bal c/d

000
1,200
500
1,700

Retained earnings
000
14
Bal b/d
1,615
IS
1,629

Dividends paid
Bal c/d
W6

000
80
350
430

=
=

697,500
577,500
120,000

Non-controlling interest
000
326.50
Bal b/d
Acquisition of subsidiary (865-185+90)*25%
580
IS
906.50

000
610
192.50
104
906.50

(21 marks)
Presentation (1 mark)

Page 13

(b)
To:
From:
Date:
Re:
(i)

On consolidation of the accounts of H and S, it should be recognised that a sale from H to S couldnt give rise
to a profit as far as the group income statement is concerned, as the sale is in effect an internal group transfer.
In order for the group to realise a profit on sale, the sale must be made to a customer outside the group.
If at the end of the year, S has bought from goods from H at cost plus and the goods have not been sold
outside the group by S. Then, as far as the group is concerned, the profit made by H has not been realised,
since it is still in the inventory of S. Both the group profit and inventory will be overstated and will require
adjusting as follows:

Reduce the group profit by the amount of unrealised profit

Reduce the group inventory by the amount of unrealised profit.

Reduce group profit by majority share

Reduce non-controlling interest
Reduce group inventory
Same principles hold true for transfer of non-current assets.

If subsidiary sells goods to H, the principle is exactly the same, unrealised profit will have to be eliminated,
but this time there will be a non-controlling interest to be accounted for.

(ii)

(3 marks)

Other things being equal, in the longer term profits do have the effect of increasing the bank balance. However,
in the short term, the making of profit will not necessarily result in an increased bank balance. Profit and an
increase in cash/bank are not the same.

The reason why profit does not necessarily result in an increase in cash is due to the fact that profit is
determined by comparing income and expenditure and not receipts and payments (i.e. accruals/matching
principle).

(iii)

Likewise, losses do not necessarily result in a decrease in bank balances. Purchase of inventory on credit
will increase cost of sales but there will be no outflow of cash. Depreciation and amortisation will decrease
profits but they will not affect cash/bank. Closing inventory may fall, which although increasing cost of sales,
it would imply inventory has been sold, so increasing cash. Also, could discuss the effect of losses on sale
of non-current assets.
(3 marks)

Indirect method involves starting with the operating profit and adjusting it for non-cash charges and credits
so that one figure of operating cash flows is shown. In essence, the indirect method, starts from operating
profit, and adjusts for movements in working capital and non cash items such as depreciation.

The direct method involves showing the individual operating cash receipts from customers and cash payments
to suppliers and employees. To use the latter method, cash receipts from customers and cash payments to
suppliers and other cash payments will have to be calculated. The direct method is easiest to understand
because it deals with the natural cycle of cash flows.

The reason most companies use the indirect method is because cash flow statement is prepared from the
existing statement of comprehensive income and statement of financial position. Additionally, the direct
method requires more work to analyse the constituent cash flows.
(2 marks)
[Total: 30 Marks]
Page 14

SOLUTION 3
1.
2.

3.

(d)
(c)

(c)

4.

(d)

6.

(d)

5.

(c)

Revalued on 1 March 2007

Accumulated depreciation at 28 February 2007
650,000-220,000 / 4 years remaining life
Carrying value at 1 March 2008
Sale proceeds
Profit on disposal

650,000

107,500
542,500
750,000
207,500

Balance brought forward

Less depreciation
Less disposals (106,000 19,000) = WDV

622,000
210,000
87,000
325,000
540,000
215,000

closing balance
Therefore purchases

8,000+ 80,000 = 88,000

Final contract price

Costs to date
Costs to complete
Expected profit

Work certified
Contract value

Profit recognised

1,400
800

000s
3,000

2,200
800

1,200
3,000

800* 40%

7.

(d)
(500,000* .06) + (900,000* .04) + (600,000 *.08) *100 = 5.7%
500,000+900,000+600,000
640,000 * .057 * 8/12
= 24,320

8.

(d)
Balance 1/1/2009
Profit 2009
Less dividends

800,000
500,000
1,300,000
300,000
1,000,000

Page 15

* 100

40% complete

320

SOLUTION 4
(a)

Cost/valuation
At 1 November 2008
Additions (w1)
Revaluation
At 31 October 2009

Head Office
000

Plant & equipment

000

Total
000

2,500

300
620.53
920.53

2,800
620.53
(500)
2,920.53

100
100
(200)
-

180
165.494
345.494

280
265.494
(200)
345.494

2,400

120

2,520

(500)
2,000

Depreciation
At 1 November 2008
Charge for year
Revaluation
At 31 October 2009
Carrying amount
At 31 October 2008

At 31 October 2009

2,000

575.036

2,575.036

W1

Additions to plant and equipment

External costs
Delivery costs
Labour costs (15 x 100/120)
Materials (1.5 0.223)
Testing (3 0.15)
Sale of by-products

000
600
4
12.5
1.28
2.85
(0.1)
620.53

Depreciation 7/12 X 25% X 620.53

25% X 300,000

=
=

90,494
75,000
165,494

W2

Head office revaluation

Original cost 1 Nov 2003
Depreciation 4 years @ 4%
Carrying value at 1 November 2007
Revaluation gain
Revalued amount 1 November 2007
Depreciation (4% for 2 years)
Balance 1 November 2009
Revaluation loss (2,300 2,000)
Carrying value 31 October 2009

000
2,000
(320)
1,680
820
2,500
(200)
2,300
(300)
2,000
Page 16

(12 marks)

(b)

Investment property consists of land or buildings held to earn rentals or held for capital appreciation (or both)
rather than held:

(i)
(ii)
(iii)

(c)

for use in the production or supply of goods or services, or

for administrative purposes, or
for sale in the ordinary course of business.

The purpose of depreciation is to spread the cost of an asset over its useful life as it is consumed in an entity's
operations. But property which is acquired as an investment rather than for use is not consumed in this way
and does not have a useful life. In consequence, the charging of depreciation is not appropriate for investment
property.
(4 marks)
On 1 November 2008, the building has a carrying amount of 500,000 and should be recognised as an
investment property.
The property should be revalued to the fair value, at 31 October 2009, amounting to (525,000 - 500,000)
= 25,000 increase.

Gain/loss should be taken directly to the statement of comprehensive income. It is not shown under
revaluation reserve/ other comprehensive income.
(4 marks)
[Total: 20 Marks]

SOLUTION 5
(a)

A contingent asset is defined as a possible asset that arises from past events and whose existence will be
confirmed only on the occurrence or non occurrence of one or more uncertain future events not wholly within
the control of the entity.

An example of such an asset may arise if the entity is involved in a legal case and will receive damages if the
case is won. IAS37 requires that contingent assets should not be recognised in the statement of financial
position.

(b)

However, they should be disclosed in the notes, if the inflow of economic benefits is judged to be probable.
(4 marks)

Adjusting events: - those that provide evidence of conditions that existed at the end of the reporting period
e.g. sales of inventories held at the reporting date.

Non-adjusting events: - those that are indicative of conditions which arose after the reporting period e.g.
announcement of a major restructuring programme
( 4 marks)

Page 17

(c)

To:
From:
Date:
Re:
(i)
1.

2.

3.
4.

5.

The decision in principle was taken to sell Trent Ltd before the year end. The asset should be classified as
held for resale if it is made available for immediate sale, management are actively marketing the asset and
it is expected the sale will be completed within 12 months. The investment should be included at the lower
of cost, 1,500,000 and the fair value of 2,200,000. A justification could be made to treat this as a
discontinued operation.
Provision re faulty goods:

At 1 July 2008
Utilised in year
SCI charge (bal figure)
At 31 June 2009

0.80 x 2,000 x 500 = 800,000

Provision re
Faulty goods
000
600
(400)
600
800

John Waldons dismissal took effect before the year end. As a consequence, the compensation of 150,000
will be an adjusting event and will be charged in the financial statements for the year end 30 June 2009.

There should be a note under Contingent Liabilities:

Severn plc has guaranteed the overdraft in respect of a company in which it holds a significant investment.
It is not considered likely that the guarantee will be called upon. That companys overdraft was 450,000 at
30 June 2009.

At the statement of financial position date, the value of inventory will be the lower of cost or net realisable
value. The market price fall occurred after the statement of financial position date and thus is non adjusting
event. If the fall in market price results in the finished product sale price being reduced, there will be a case
for NRV to be re-evaluated under IAS2.
(12 marks)
[Total: 20 marks]

Page 18