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PROFESSIONAL LEVEL EXAMINATION

MONDAY 16 MARCH 2015


(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR questions (100 marks).
1.

Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2.

Answer each question in black ballpoint pen only.

3.

Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4.

The examiner will take account of the way in which answers are presented.

5.

When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.

You MUST enter your candidate number in this


box.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2015. All rights reserved.

Page 1 of 11

BLANK PAGE

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Page 2 of 11

1.

You are the financial controller at Coghlan Ltd and an ICAEW Chartered Accountant. You are
finalising the financial statements for the year ended 30 September 2014. Your colleague, a
part-qualified ICAEW Chartered Accountant, has produced the following draft financial
statements with some additional information. He was assisted by the managing directors
son, who was on work experience at Coghlan Ltd.
You are under pressure from the managing director to finalise the financial statements as
quickly as possible as he is about to go on holiday. The managing director has reminded you
that your performance appraisal is due and has hinted that if you finalise the financial
statements quickly he will make sure this is reflected in your appraisal which is linked to your
salary.
Draft statement of profit or loss for the year ended 30 September 2014

3,359,200
(2,198,050)
1,161,150
(1,039,700)
121,450
(500,000)
(38,000)
(416,550)

(416,550)

Revenue (Note 1)
Cost of sales
Gross profit
Administrative expenses (Note 2)
Operating profit
Other costs (Note 3)
Finance costs (Note 4)
Loss before tax
Income tax (Note 5)
Loss for the year
Draft statement of financial position as at 30 September 2014

ASSETS
Non-current assets
Property, plant and equipment (Note 6)
Current assets
Inventories (Note 7)
Trade and other receivables
Cash and cash equivalents

1,110,325

142,100
125,400
1,200
268,700
1,379,025

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares) (Note 4)
Share premium
Retained earnings
Current liabilities
Trade and other payables
Provision (Note 3)
Income tax (Note 5)
Total equity and liabilities

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294,500
94,000
425,825
814,325
31,900
500,000
32,800
564,700
1,379,025

Page 3 of 11

Additional information:
(1)

Coghlan Ltd has launched a new monthly technical magazine to its customers on a
subscription basis, based on a calendar year. 36,000 was received in annual
subscriptions in December 2013 for the year commencing 1 January 2014. This was
recognised immediately as revenue as the amount could be measured reliably and the
economic benefit had flowed to Coghlan Ltd.

(2)

On 1 October 2013 Coghlan Ltd entered into a new six-year lease for a regional office.
Lease payments are 1,200 per month payable at the beginning of each month. The
building is estimated to have a useful life of 30 years. Coghlan Ltd negotiated a rent
holiday for the first six months. As a consequence, the rent for the final six months of
the lease will be double. The first payment of 1,200 was made on 1 April 2014. The
lease payments were recognised in administrative expenses as they were paid.

(3)

The provision of 500,000 shown in the financial statements above relates to


outstanding lawsuits for the supply, prior to the year end, of faulty products by Coghlan
Ltd to a number of customers. This amount has been recognised as a provision based
on advice from Coghlan Ltds lawyers that the claims are very likely to succeed within
the next six months, which has led to some adverse publicity. The product was
withdrawn in August 2014.
Since recognising the above provision, Coghlan Ltd discovered that there are an
additional 50 faulty products still in circulation. Coghlan Ltds lawyers estimated for each
product 350 would need to be paid.
During the year Coghlan Ltd started offering a one-year repair warranty with its luxury
products. If minor repairs were required for all the relevant goods sold the cost would be
65,000, compared to 157,000 if major repairs were required. Coghlan Ltd estimates
that 20% of the goods sold will require minor repairs and 5% will require major repairs.
No provision was recognised in respect of the warranties for the year ended
30 September 2014 as no goods had been returned by this date.

(4)

An interim ordinary dividend of 10p per share was paid on 11 May 2014 and recognised
as a finance cost. Shortly after this, Coghlan Ltd entered into a share buyback scheme
to reacquire 45,000 1 ordinary shares for 1.90 cash per share. The total cash paid
was debited to share capital.

(5)

The income tax figure shown in the statement of financial position is the balance
remaining on the nominal ledger after paying the liability for the previous year. As a loss
was made for the year ended 30 September 2014 a tax refund of 65,000 has been
appropriately estimated but has not yet been recognised.

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(6)

Depreciation on property, plant and equipment for the year ended 30 September 2014
has not yet been charged. The following information is available:

Cost (land 250,000)


Accumulated depreciation at
1 October 2013
Depreciation rate and method
(buildings)

Land and buildings

Fixtures and
fittings

1,125,000
187,500

236,000
63,175

5% pa straight-line

Recoverable amount (land


225,000) at 30 September 2014

600,000

20% pa reducing
balance
170,000

Land and buildings consist of Coghlan Ltds head office and main warehouse which are
located together on one piece of land. Local market values decreased following an
announcement that a wind farm is to be built in the area.
All expenses in respect of property, plant and equipment should be recognised in
administrative expenses.
(7)

Inventories at 30 September 2013 and 2014 were valued at net realisable value, as this
was higher than cost. The following inventory valuations are relevant.

Cost
Net realisable value

30 September 2014

98,000
142,100

30 September 2013

79,000
114,550

Requirements
(a)

Prepare a revised statement of profit or loss for Coghlan Ltd for the year ended
30 September 2014 and a revised statement of financial position as at that date, in a
form suitable for publication. Notes to the financial statements are not required.
(19 marks)

(b)

IAS 1, Presentation of Financial Statements, requires financial statements to be


prepared using the accruals basis of accounting and the IASBs Conceptual Framework
refers to going concern as the underlying assumption in the preparation of financial
statements. Explain these two concepts, illustrating their application with reference to
Coghlan Ltd.
(6 marks)

(c)

Discuss the ethical issues arising from the scenario for you as financial controller and
the steps that you should take to address them.
(5 marks)
Total: 30 marks

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2.

The draft financial statements of Porcaro plc, which has a number of wholly-owned
subsidiaries, are being prepared by your trainee, Carmine. A number of outstanding issues
are set out below which require your attention, as financial controller, as Carmine was unsure
of the correct accounting treatment.
The draft consolidated profit for the year ended 30 September 2014 is 483,150.
(1)

On 1 October 2013 Porcaro plc borrowed 600,000 at 6% pa, repayable in three years
time, to help fund the construction of an office block. Porcaro plc immediately paid
200,000 to acquire land and gained planning permission on this date but construction
did not start until 31 December 2013. The remaining amount was put into a deposit
account earning interest at 3% pa and was used to make payments to the construction
company of 100,000 on 1 March 2014 and 200,000 on 1 September 2014. The
building was not complete at the year end and a further payment of 100,000 was due
to the construction company after 30 September 2014. All relevant interest was
received and paid on 30 September 2014.
Carmine recognised the net interest paid in the statement of profit or loss and
capitalised all other costs incurred as an asset in the course of construction.

(2)

On 1 October 2013 Porcaro plc issued 6,000 5% 100 convertible bonds. Each bond is
redeemable in four years time at par or can be converted into 100 1 ordinary shares.
Interest is payable annually in arrears and the market rate of interest for similar bonds
without the conversion option is 7% pa. Carmine has credited the cash proceeds from
the bond issue to non-current liabilities. The annual interest of 30,000 was paid at the
year end and was recognised as a finance cost.

(3)

On 1 April 2014 Porcaro plc paid 72,000 for a licence for the production of a state of
the art microchip. At the end of six years it is thought that the licence will be worthless
due to advances in technology. Carmine has recognised the licence in the draft financial
statements as an intangible asset of 90,000 as this is the amount that a competitor
offered to Porcaro plc for the licence on 30 June 2014 due to its unique nature. Carmine
showed the increase in value as a revaluation surplus in equity.

(4)

On 1 May 2014 Porcaro plc and three other unrelated trading companies each
purchased one quarter of the 100,000 1 ordinary shares, at par, of a newly
incorporated company, Barbarossa Ltd. Under a contractual agreement each investor is
entitled to an equal share of the profits and losses and unanimous consent is required
for all key operating decisions. For the period ended 30 September 2014 Barbarossa
Ltd reported a profit after tax of 130,000, no dividends have yet been paid. On
acquisition, Carmine recognised the cost of the 25,000 shares in Barbarossa Ltd as a
current asset. No other accounting entries have been made in respect of Barbarossa
Ltd.

On 1 October 2013 Porcaro plc had in issue 270,000 1 ordinary shares. On 1 February
2014 Porcaro plc made a 1 for 3 rights issue for 1.70 per share. The market price of one
Porcaro plc ordinary share immediately before the rights issue was 2.10.

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Requirements
(a)

Explain the required IFRS financial reporting treatment of the four issues above in the
financial statements for the year ended 30 September 2014, preparing all relevant
calculations and setting out the required adjustments in the form of journal entries.
(27 marks)

(b)

Using your results from Part (a) calculate a revised figure for consolidated profit for the
year.
(2 marks)

(c)

(i)

Calculate basic earnings per share for the Porcaro plc group.

(ii)

Briefly explain the treatment of the rights issue in the above calculation. (6 marks)

(d)

Describe the difference between IFRS and UK GAAP in relation to issue (1) above.
(1 mark)
Total: 36 marks

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Page 7 of 11

3.

Henrit plc has two subsidiary companies, one of which was acquired during the year ended
30 September 2014. Set out below is an extract from all three companies draft statements of
financial position.
Draft statements of financial position at 30 September 2014 (extracts)

ASSETS
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventories

Henrit plc (single


company)

Bonham Ltd

Crago Ltd

963,200
475,000

469,400

623,150

46,980

18,900

31,300

Additional information:
(1)

At 1 October 2013 Henrit plc held property, plant and equipment with a carrying amount
of 729,400, none of which had been acquired under finance leases. During the year
ended 30 September 2014 Henrit plc sold equipment with a carrying amount of
124,000, recognising a profit on disposal of 9,500. Depreciation of 113,000 was
recognised.
Henrit plc acquired new plant during the year; some additions were made under a
finance lease with the remainder for cash. The draft financial statements show a total
finance lease liability of 97,725 at 30 September 2014 and a lease payment of 15,000
was made during the year.

(2)

The statement of profit or loss shows finance costs of 25,875 which relate to the
interest due on a bank loan and interest on the finance lease. Interest at 5% pa is
payable on the bank loan. At 1 October 2013 Henrit plc had a bank loan of 290,000,
with additional funding of 160,000 obtained on 1 April 2014.

(3)

At 1 October 2013 Henrit plc had an investment in a wholly owned subsidiary, Bonham
Ltd. This investment cost 200,000 and gave rise to goodwill at acquisition of 73,400.
On 1 April 2014 Henrit plc acquired 60% of the ordinary share capital of Crago Ltd for
consideration comprising cash of 230,000 and 45,000 1 ordinary shares in Henrit plc,
with a market value of 3.15 each. The investment in Crago Ltd was recognised in noncurrent assets at 275,000 being the cash consideration and the share issue at 1
nominal value. The fair value of the assets and liabilities acquired were 615,000 at the
date of acquisition which was the same as their carrying amount. The non-controlling
interest and goodwill on the acquisition of Crago Ltd were calculated using the fair value
method. The fair value of the non-controlling interest at 1 April 2014 was 261,000.

(4)

Immediately after its acquisition by Henrit plc, Crago Ltd sold a machine to Henrit plc for
53,000. The machine had originally been acquired by Crago Ltd for 95,000 on
1 October 2011 and had an estimated five year useful life, which has never changed.

(5)

In August 2014 Bonham Ltd sold goods to Crago Ltd for 11,500 at a mark-up of 15%.
All of these goods were still in Crago Ltds inventories at the year end.

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Requirements
(a)

Using the draft financial statements for Henrit plc and the additional information set out
in (1) and (2) above, prepare extracts from Henrit plcs single company statement of
cash flows for the year ended 30 September 2014 showing figures under the headings:
(i)
(ii)

(b)

Cash flows from investing activities


Cash flows from financing activities

(6 marks)

Using the draft financial statements of all three companies and the additional
information set out in (3) to (5) above prepare extracts from the consolidated statement
of financial position of Henrit plc as at 30 September 2014 showing:
(i)
(ii)

Non-current assets
Current assets

(5 marks)
Total: 11 marks

PLEASE TURN OVER

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Page 9 of 11

4.

At 1 October 2013 Mantia plc had investments in two companies: an 80% holding in
Appice Ltd and a 65% holding in Starkey Ltd.
On 1 April 2014 Mantia plc sold all of its 91,000 1 ordinary shares in Starkey Ltd, for
427,000. The disposal proceeds were credited to a suspense account. Starkey Ltds
retained earnings at 1 October 2013 were 243,000. Mantia plc measures all non-controlling
interest and goodwill on acquisition using the proportionate method.
The draft individual statements of profit or loss of the three companies are shown below:
Draft statements of profit or loss for the year ended 30 September 2014

Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Investment income
Profit before tax
Income tax expense
Profit for the year

Mantia plc

Appice Ltd

Starkey Ltd

2,986,000
(1,343,700)
1,642,300
(419,575)
1,222,725
42,600
1,265,325
(259,000)
1,006,325

768,000
(345,600)
422,400
(84,480)
337,920

337,920
(68,000)
269,920

1,672,000
(585,200)
1,086,800
(334,100)
752,700

752,700
(152,500)
600,200

The draft individual statements of financial position at 30 September 2014 for Mantia plc and
Appice Ltd show:

Equity
Ordinary share capital (1)
Retained earnings

Mantia plc

Appice Ltd

500,000
596,300

80,000
384,200

Additional information:
(1)

Mantia plc acquired its holding in Appice Ltd on 1 October 2012 when Appice Ltds
retained earnings were 136,000. The fair values of all Appice Ltds assets and
liabilities at the date of acquisition were the same as their carrying amounts, with the
exception of a machine which was estimated to have a fair value of 70,000 in excess
of its carrying amount. The machine was assessed as having a remaining useful life of
ten years at 1 October 2012. Depreciation of plant and machinery is recognised in
operating expenses.

(2)

Mantia plc acquired its holding in Starkey Ltd several years ago for 230,000 when
Starkey Ltds retained earnings were 162,000. The fair values of all Starkey Ltds
assets and liabilities at the date of acquisition were the same as their carrying amounts.
Starkey Ltds revenue and costs accrued evenly over the current year.

(3)

During the year Appice Ltd sold goods to Mantia plc for 32,000 earning a gross margin
of 15%. At the year-end Mantia plc still held a quarter of these goods.

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(4)

Mantia plc and Appice Ltd paid a dividend of 1.20 and 40p per share respectively
during the year ended 30 September 2014.

(5)

Mantia plc has undertaken its annual impairment review of goodwill and identified that
an impairment of 25,000 has arisen in relation to Appice Ltd and should be recognised.
No impairment of goodwill arose in the year in respect of the acquisition of Starkey Ltd,
however, cumulative impairments of 18,000 had been recognised at 1 October 2013.

Requirements
(a)

Prepare, for Mantia plc for the year ended 30 September 2014:
(i)

a consolidated statement of profit or loss;

(ii)

the retained earnings column from the consolidated statement of changes in


equity.

You should assume that the disposal of Starkey Ltd constitutes a discontinued activity in
accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued
Operations.
(20 marks)
(b)

Describe the differences between IFRS and UK GAAP in relation to the acquisition and
disposal of Starkey Ltd.
(3 marks)
Total: 23 marks

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PROFESSIONAL LEVEL EXAMINATION


MONDAY 8 JUNE 2015
(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR questions (100 marks).
1.

Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2.

Answer each question in black ball point pen only.

3.

Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4.

The examiner will take account of the way in which answers are presented.

5.

When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.

You MUST enter your candidate number in this


box.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2015. All rights reserved.

Page 1 of 9

1.

The following trial balance has been extracted from the nominal ledger of Antigua plc at
31 December 2014.
Note(s)

Sales
Purchases
Land and buildings
(1)
Valuation (land 140,000)
Accumulated depreciation at 31 December 2013
Plant and equipment
(1), (2)
Cost
Accumulated depreciation at 31 December 2013
Retained earnings at 31 December 2013
Revaluation surplus at 31 December 2013
Ordinary share capital (1 shares)
Bank account
Operating expenses
(3)
Trade and other receivables
Trade and other payables
Income tax
(4)
Inventories at 31 December 2013

8,417,010
4,741,400
1,490,000
90,000
578,000
231,200
15,010
757,000
50,000
101,300
2,017,500
578,700
325,100
127,000
678,000
10,098,610

10,098,610

The following additional information is available:


(1)

Antigua plc originally measured its land and buildings under the cost model. All
buildings were acquired on 1 January 2006 and had a zero residual value and a total
estimated useful life of 50 years at that date. On 1 January 2011 Antigua plc adopted
the revaluation model for its land and buildings and revalued all its land and buildings at
that date, with no change to total estimated useful lives. No further revaluations have
been necessary since this date.
On 31 December 2014 a building which was surplus to requirements met the held for
sale criteria of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
The building is included in property, plant and equipment at its carrying amount on
31 December 2013. Details in respect of this building are as follows:

Cost on 1 January 2006


76,000
Valuation on 1 January 2011
108,000
Estimated fair value on 31 December 2014
58,000
Estimated costs to sell
5,000
Depreciation for the year ended 31 December 2014 has not yet been charged on any of
Antigua plcs property, plant and equipment. Depreciation on buildings should be
presented in operating expenses and depreciation on plant and equipment should be
presented in cost of sales. Plant and equipment is depreciated on a reducing balance
basis using a rate of 20% pa.
Antigua plc does not make annual transfers between the revaluation surplus and
retained earnings.

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(2)

On 1 July 2014 Antigua plc paid 103,500 for a piece of high-tech equipment, which is
included in the total for plant and equipment in the trial balance above. A government
grant of 50% of the cost of the equipment was received to help finance the purchase of
this equipment as part of the governments drive to encourage investment in new
technology. There were no future performance-related conditions attached to the grant.
The grant was debited to cash and credited to purchases, although Antigua plcs
published accounting policy for government grants is to use the netting-off method.

(3)

On 1 January 2014 Antigua plc entered into a six year finance lease for a machine with
a fair value of 50,250, a zero residual value and a useful life of seven years. Lease
payments of 9,250 are due annually on 1 January. The first payment of 9,250 was
duly made on 1 January 2014 and included in operating expenses. No other accounting
entries have been made in respect of this lease. Antigua plc allocates finance charges
on a sum-of-the-digits basis.

(4)

The income tax in the trial balance represents a refund in respect of prior years, which
was made on 15 June 2014, following an appeal to HMRC. The income tax liability for
the year ended 31 December 2014 has been estimated at 497,500.

(5)

Inventories at 31 December 2014 were valued at their cost of 752,000. This included
118,000 for one product line which had a total list price of 142,000 on 31 December
2014. However, on 15 January 2015 the directors discovered that, since December
2014, a number of competitors had been selling an equivalent product for 30% less than
Antigua plcs list price.

Requirements
(a)

Prepare a statement of profit or loss for Antigua plc for the year ended 31 December
2014 and a statement of financial position as at that date, in a form suitable for
publication.
(25 marks)
NOTES: Notes to the financial statements are not required.
Expenses should be analysed by function.

(b)

Describe the differences between IFRS and UK GAAP in respect of the financial
reporting treatment of the government grant.
(3 marks)

(c)

The IASB Conceptual Framework refers to five elements of the financial statements.
Give one example of each of these elements from the financial statements of Antigua
plc, explaining how each meets the definition of the relevant element.
(5 marks)
Total: 33 marks

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2.

The finance director of the Cuba Ltd group, Philippe, who is due to retire very shortly, has
prepared draft consolidated financial statements for the year ended 31 December 2014.
Shortly after Philippe completed the draft consolidated financial statements, he was taken ill
and has been on sick leave since then. The managing director of Cuba Ltd asked Jos, the
financial controller, to make any adjustments necessary to complete the consolidated
financial statements. Both Jos and Philippe are ICAEW Chartered Accountants.
On examining the draft financial statements prepared by Philippe, Jos has identified the
following issues:
(1)

On 1 January 2014 Cuba Ltd acquired a zero coupon bond with a nominal value of
100,000 for 94,500. The bond is quoted in an active market. Brokers fees of 2,500
were incurred in relation to the purchase and recognised in profit or loss. The bond is
redeemable on 31 December 2015 at a premium of 10% of its nominal value and will be
held to maturity. The effective interest rate on the bond is 6.49%. On purchase of the
bond Philippe debited investments within non-current assets with 110,000, being the
redemption value, credited cash with 94,500 and credited income with 15,500, and
has made no subsequent accounting entries in respect of this bond.

(2)

On 1 July 2014 Cuba Ltd disposed of its entire holding in Honduras Ltd for 256,600.
Cuba Ltd had acquired 80% of the ordinary share capital of Honduras Ltd a number of
years ago for 147,800, when the fair value of Honduras Ltds net assets was 157,500.
At acquisition, the non-controlling interest was measured at its fair value of 40,100. No
impairment losses in respect of goodwill acquired in the business combination with
Honduras Ltd have arisen.
At 31 December 2013, Honduras Ltd had net assets with a fair value of 301,000. In the
year ended 31 December 2014 Honduras Ltd made a loss of 16,600, with revenue and
costs accruing evenly over the year.
In the draft consolidated financial statements for the year ended 31 December 2014
Philippe has included a single figure for Honduras Ltd: a profit on disposal of 108,800,
being the difference between the sale proceeds of 256,600 and the cost of the original
investment of 147,800. The investment in Honduras Ltd represented a separate major
line of business of the Cuba Ltd group.

(3)

In previous years Cuba Ltd had traded only with UK suppliers. However, in November
2014, Cuba Ltd began importing goods from Germany. The goods were received on
23 November 2014, and the purchase invoice, for 158,000, was correctly processed by
Philippe. No adjustments have subsequently been made to this figure.
At the year end the invoice was unpaid and the goods were still in inventory. Philippe
has valued this inventory using the spot rate at 31 December 2014 and included it in
closing inventory used to prepare the draft consolidated financial statements.
The spot exchange rates were as follows:
23 November 2014 1:0.85
31 December 2014 1:0.90

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Page 4 of 9

(4)

During the year Cuba Ltd made a significant proportion of its purchases (550,000) from
Grenada Ltd, a company owned by Philippes wife. At 31 December 2014 75,000 was
due to Grenada Ltd in respect of these purchases. No disclosure of this transaction has
been made in Cuba Ltds draft consolidated financial statements. When Jos queried
this with the managing director of Cuba Ltd, the managing director told him that he had
been assured by Philippe that no disclosure was necessary as the purchases had all
been made at an arms length price.

Philippe is due to return to work next week and has told Jos, in a brief telephone call, that
he is expecting to present the draft consolidated financial statements to the board exactly as
he prepared them as he has already accrued for his bonus based on the consolidated profit
for the year per those draft financial statements.
Requirements
(a)

Explain the required IFRS financial reporting treatment of the four issues above in the
consolidated financial statements of Cuba Ltd for the year ended 31 December 2014.
You should prepare all relevant calculations and quantify the effects on the draft
financial statements where possible.
(21 marks)

(b)

Discuss the ethical issues arising for Philippe and Jos from the scenario and the steps
that Jos should take to address them.
(5 marks)

(c)

Describe the differences between IFRS and UK GAAP in respect of the financial
reporting treatment of Issue (2) above.
(2 marks)
Total: 28 marks

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3.

Columbia plc operates in the manufacturing sector. The companys statement of financial
position as at 31 December 2013 included the following balances:

Property, plant and equipment

1,456,700

Ordinary share capital (1 shares)


Share premium account
Retained earnings

300,000
35,000
145,800
480,800

The following information is relevant to its financial statements for the year ended
31 December 2014:
(1)

Columbia plc constructed a new manufacturing facility, capitalising the following costs,
all of which were incurred between 1 January 2014 and 30 November 2014:

100,000
358,300
10,000
32,500
11,000
45,600
21,000

Site preparation
Materials and labour
Professional fees
General overheads
Construction overheads
Costs of relocating staff to the new facility
Initial safety inspection

The facility was ready for use on 30 November 2014. However, due to delays in moving
equipment into the facility, it was not in fact used until January 2015. As a result no
depreciation on the facility has been calculated or recognised. The overall life of the
facility is estimated to be 20 years. The next safety inspection is due in three years time
and thereafter every three years.
(2)

The following transactions took place and were recognised in respect of other property,
plant and equipment:

(3)

Depreciation of 235,600 was charged.


An asset with a carrying amount of 125,700 was disposed of at a loss of 14,300.
Columbia plc acquired plant and equipment for cash of 432,500.

The following share issues were made during the year ended 31 December 2014. All
shares have a nominal value of 1 per share.
Date

Type of shares

Number of shares

1 February 2014
Ordinary
75,000
1 July 2014
4% Irredeemable preference
50,000
1 November 2014
Ordinary
1 for 4 bonus issue

Copyright ICAEW 2015. All rights reserved.

Issue price
1.50 per share
Par
-

Page 6 of 9

The dividend on the irredeemable preference shares is mandatory and if it is unpaid at


the end of the period it becomes cumulative in the following period. The dividend due on
these shares was paid on 1 January 2015 but no entry was made in the financial
statements for the year ended 31 December 2014. An interim ordinary dividend of 15p
per share was paid on 30 June 2014.
(4)

Columbia plcs draft statement of profit or loss for the year ended 31 December 2014
shows a profit for the year of 52,600. Columbia plc wishes to retain the maximum
balance on retained earnings whilst still following IFRS.

Requirements
(a)

Explain the required IFRS financial reporting treatment of the manufacturing facility
described in (1) above, with supporting calculations.
(5 marks)

(b)

(i)

Calculate a revised profit for Columbia plc for the year ended 31 December 2014.

(ii)

Prepare extracts from Columbia plcs statement of financial position as at


31 December 2014, and the investing and financing sections of its statement of
cash flows for the year then ended.
(14 marks)
Total: 19 marks

Copyright ICAEW 2015. All rights reserved.

Page 7 of 9

4.

Dominica plc has investments in two companies, a subsidiary, Tobago Ltd, and an associate,
Anguilla Ltd. The unqualified assistant accountant has prepared a draft consolidated
statement of financial position at 31 December 2014 by simply adding together each line of
the individual statements of financial position of Dominica plc and Tobago Ltd. However, he
was unsure how to deal with Anguilla Ltd so has not included any of that companys figures in
the consolidation.
The draft consolidated statement of financial position as at 31 December 2014 is shown
below, together with the individual statement of financial position of Anguilla Ltd at the same
date:
Dominica plc group
(draft consolidated)

ASSETS
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares)
Share premium account
Revaluation surplus
Retained earnings

Current liabilities
Trade and other payables
Taxation

Total equity and liabilities

Anguilla
Ltd

3,780,400
756,000
4,536,400

351,200

351,200

400,800
182,400
53,400
636,600

42,000
35,600
6,800
84,400

5,173,000

435,600

1,400,000
890,000
1,061,600
1,367,900
4,719,500

200,000

168,100
368,100

320,000
133,500
453,500

61,900
5,600
67,500

5,173,000

435,600

Additional information:
(1)

Dominica plc acquired 85% of Tobago Ltd on 1 January 2014 for 600,000 when
Tobago Ltds equity was as follows:

Ordinary share capital (1 shares)


Share premium account
Revaluation surplus
Retained earnings
Equity

Copyright ICAEW 2015. All rights reserved.

160,000
80,000
140,000
63,200
443,200

Page 8 of 9

On 31 December 2014 Tobago Ltds retained earnings were 181,500 and its
revaluation surplus was 240,000. All other components of equity were unchanged.
The consideration of 600,000 was made up of 400,000 cash payable immediately
and a further 200,000 payable on 31 December 2015 if the post-acquisition profits of
Tobago Ltd exceeded a certain amount by that date. At 1 January 2014 the probability
of Tobago Ltd hitting the earnings target was such that the fair value of the possible
cash payment was 100,000. At 31 December 2014 the probability had risen such that
the fair value of the possible cash payment was judged to be 150,000. When preparing
the draft consolidated statement of financial position the assistant accountant included
the full 600,000 in investments and the full 200,000 in trade and other payables.
The fair values of the assets and liabilities of Tobago Ltd at the date of acquisition were
equal to their carrying amounts, with the exception of inventory. On 1 January 2014 the
fair value of Tobago Ltds inventories was 124,000 but their carrying amount was
107,000. At 31 December 2014 half of these inventories were still held by Tobago Ltd.
Dominica plc has decided to measure goodwill and the non-controlling interest using the
proportionate method.
(2)

Dominica plc acquired 35% of Anguilla Ltd on 1 January 2005 for 156,000 when the
retained earnings of Anguilla Ltd were 104,500. At this date a property owned by
Anguilla Ltd had a fair value 100,000 in excess of its carrying amount and a remaining
useful life of 20 years. The remaining assets and liabilities at the date of acquisition
were equal to their carrying amounts.

(3)

On 1 January 2014 Dominica plc sold a machine to Tobago Ltd for 180,000. The
machine had a carrying amount in Dominica plcs books of 156,000. The estimated
remaining useful life of the machine was reassessed on the date of sale at six years.

(4)

During the year Dominica plc sold goods to Anguilla Ltd for 20,000, making a gross
profit margin of 30%. At 31 December 2014 Anguilla Ltd held one-third of these goods in
its inventories.

(5)

Inventories in the statements of financial position of all three companies at 31 December


2014 were based on physical inventory counts carried out on 31 December 2014.
However, on 10 January 2015 Tobago Ltd received a report from one of its customers,
Trinidad Ltd, showing that on 31 December 2014 Trinidad Ltd held 23,600 (cost to
Trinidad Ltd) of Tobago Ltds inventories on a sale or return basis. Tobago Ltd makes a
gross profit margin of 25% on all sales but has not yet raised any invoices for this
transaction.

Requirement
Prepare the consolidated statement of financial position of Dominica plc as at 31 December
2014.
Total: 20 marks

Copyright ICAEW 2015. All rights reserved.

Page 9 of 9

PROFESSIONAL LEVEL EXAMINATION


MONDAY 7 SEPTEMBER 2015
(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR questions (100 marks).
1.

Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2.

Answer each question in black ballpoint pen only.

3.

Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4.

The examiner will take account of the way in which answers are presented.

5.

When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.

IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.

You MUST enter your candidate number in this


box.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2015. All rights reserved.

Page 1 of 11

BLANK PAGE

Copyright ICAEW 2015. All rights reserved.

Page 2 of 11

1.

The financial controller at Gamow Ltd has prepared draft financial statements for the year
ended 31 March 2015. However, there are some issues which need to be finalised before the
financial statements can be presented to the board. You are the financial controllers
assistant, and you have been provided with the following information and asked to complete
the financial statements.
Draft statement of profit or loss for the year ended 31 March 2015

1,896,200
(567,430)
1,328,770
(283,600)
(189,720)
855,450
(1,560)
853,890
(74,000)
779,890

Revenue (Notes 1 to 3)
Cost of sales
Gross profit
Administrative expenses
Other operating costs
Operating profit
Finance costs
Profit before tax
Income tax
Profit for the year
Draft statement of financial position as at 31 March 2015

ASSETS
Non-current assets
Property, plant and equipment
Intangible assets (Note 2)
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

1,260,780
275,000
1,535,780
47,300
121,240
3,800
172,340
1,708,120

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares)
Retained earnings

580,000
541,720
1,121,720

Non-current liabilities
6% convertible bonds (Note 4)
Current liabilities
Trade and other payables
Provisions (Note 5)
Income tax
Total equity and liabilities

Copyright ICAEW 2015. All rights reserved.

300,000

92,400
120,000
74,000
286,400
1,708,120

Page 3 of 11

Additional information:
(1)

On 1 July 2014 Gamow Ltd introduced a discount loyalty card scheme for select
customers, issuing 200 cards for 1,250 each in return for a 25% discount on all
purchases over the next two years. The financial controller included the total cash
received of 250,000 as part of revenue for the year ended 31 March 2015.
An analysis of purchases over the last five years for these customers shows that
purchases are evenly spread throughout each year.

(2)

During the year ended 31 March 2015 Gamow Ltd incurred 275,000 of research and
development expenditure on a new product, the Mendel. All of this expenditure was
capitalised as an intangible asset. The following costs have been incurred:
Background investigation work (1 April 31 May 2014)
Initial development work (1 June 15 July 2014)
Second phase development work (16 July 30 November 2014)
Product launch costs (December 2014)
Staff training (February 2015)

25,000
42,800
160,000
31,600
15,600
275,000

The Mendel was assessed as being commercially viable on 16 July 2014 and product
development was completed by the end of November 2014. The product was launched
in December 2014, although the first products were not delivered until April 2015.
2,000 advance orders were taken during the product launch events, with customers
paying deposits of 50 per Mendel. The only accounting entries made in respect of the
advance orders were to recognise the cash deposits and credit revenue.
(3)

On 1 January 2015 Gamow Ltd made a one-off sale to a customer in mainland Europe.
The sale was for 22,000 and a 120 day credit period was given to the customer. The
sale was recognised in revenue and receivables using the 1 January 2015 spot
exchange rate. No other accounting entries have been made. The cash from the
customer was received on 1 May 2015. The spot exchange rates are as follows:
1 January 2015
31 March 2015
1 May 2015

(4)

1:0.83
1:0.79
1:0.80

On 1 April 2014 Gamow Ltd issued 30,000 6% 10 convertible bonds at par. On


31 March 2017 each bond can be redeemed for cash at par or converted into three
ordinary shares. The interest due on the bonds was paid on 1 April 2015. The
equivalent effective interest rate on similar bonds without the conversion rights is
9% pa. The only accounting entries made at 31 March 2015 were to recognise the
300,000 cash received as a non-current liability.

Copyright ICAEW 2015. All rights reserved.

Page 4 of 11

(5)

During the period a legal claim was made against Gamow Ltd in relation to a delivery of
goods made on 1 April 2014 which were of a poor quality. This was an isolated incident
with a fault with one of the production machines and the goods should not have been
delivered to the customer. Gamow Ltds legal department believe that the claim is likely
to succeed and an out of court settlement is estimated at 120,000. A provision was
recognised at 31 March 2015 for 120,000 and the costs were debited to other
operating costs. Due to a number of complications with the claim it is estimated that it is
not likely to be settled until April 2016. The appropriate discount rate is 7%.

(6)

Depreciation on property, plant and equipment for the year ended 31 March 2015 has
not yet been charged. All depreciation is charged on a straight-line basis. Buildings
were assessed as having a 40 year useful life, and plant and machinery a 15 year
useful life.
The cost of property, plant and equipment at 1 April 2014 included:

Land
Buildings
Plant and machinery

350,000
1,080,000
384,900

No new items of property, plant and equipment were acquired in the year, although a
machine was sold on 1 April 2014 for 9,300. This machine had originally been
purchased on 1 April 2008 for 19,500. The only accounting entries made in respect of
this disposal were to credit the cash proceeds to non-current assets.
All expenses in respect of property, plant and equipment should be recognised in
administrative expenses.
Requirements
(a)

Prepare the following for Gamow Ltd, in a form suitable for publication:
(i)

a revised statement of profit or loss for the year ended 31 March 2015;

(ii)

a revised statement of financial position as at 31 March 2015; and

(iii)

a provisions note to the financial statements, including both the movements table
and accompanying narrative.
(27 marks)

(b)

Describe any differences between IFRS and UK GAAP in respect of the presentation of
financial statements.
(4 marks)

(c)

(i)

Explain the concept of substance over form using Gamow Ltd to illustrate your
explanation.

(ii)

Explain the concepts of present fairly and true and fair view.

(6 marks)
Total: 37 marks

Copyright ICAEW 2015. All rights reserved.

Page 5 of 11

2.

Meitner plc is a UK company operating in the global healthcare market. The draft financial
statements for the year ended 31 March 2015 have been prepared by the financial controller
and include:

Profit before tax


Equity

1,460,000
2,600,180

The following information is required to finalise the financial statements:


(1)

On 1 April 2014 Meitner plc received a government grant of 375,000 and credited it to
other income. The grant is to help fund local employment within Meitner plcs research
facilities.
A condition of the grant is that the "local workforce" must make up at least one third of
the total number of Meitner plcs employees for the three years from the date of receipt
of the grant. Local workforce is defined in the grants terms and conditions as living
within a 10 mile radius of the research facility. At 31 March 2015 the local workforce
made up 35% of Meitner plcs total number of employees. This percentage is expected
to rise over the next two years and Meitner plc is confident that it will not have to repay
the grant.

(2)

Meitner plc is planning to centralise its operations in a few years time which will release
some additional finance. However, funding is needed now to finance the initial research
stage of a new drug so Meitner plc sold its head office building for 8 million on 1 July
2014 and then immediately leased it back. The lease is for five years, with payments set
at a market rate and has been correctly accounted for. The carrying amount of the
property at 1 July 2014 was 6.5 million, with a 30 year remaining useful life, and the
propertys fair value was estimated at 7.3 million at that date. Meitner plc derecognised
the property on 1 July 2014 and recognised a profit on disposal of 1.5 million as part of
other income.

(3)

On 1 December 2014 Meitner plc made the decision to close two smaller manufacturing
operations in Ostwald and Dirac and to move to a single central location. The following
information is relevant for the properties at the two operations at 1 December 2014:
Cost
Date of acquisition
Carrying amount
Fair value (independent professional valuations)
Selling costs (as a percentage of fair value)

Ostwald
1,372,500
1 April 2006
976,000
1,300,000
1.5%

Dirac
1,890,000
1 December 2005
1,323,000
1,169,700
1%

On 1 December 2014 both properties were offered for sale at their fair value and
advertised in the relevant trade press. The companys commercial property agent has
advised that properties in Ostwald are generally selling within four to eight months.
Properties within Dirac have dropped in value recently due to speculation that a major
road restructure could affect the area. Meitner plc has decided not to sell the property
yet and instead wait for the outcome of the road planning decision which is expected to
take at least a year.

Copyright ICAEW 2015. All rights reserved.

Page 6 of 11

Although there had been some interest in Ostwald, both properties remained unsold at
31 March 2015. Meitner plc continued to depreciate both properties during the year on a
straight-line basis over their 30 year useful life. Meitner plc measures all property, plant
and equipment on a cost basis.
(4)

On 1 February 2015 Meitner plc repurchased 150,000 of its 1 ordinary shares for
1.40 each. The only accounting entries made were to credit cash and debit
investments.

Requirements
(a)

Explain the required IFRS financial reporting treatment of the four issues above in the
financial statements for the year ended 31 March 2015, preparing all relevant
calculations.
(23 marks)

(b)

Calculate revised figures for Meitner plc for both profit before tax and equity for inclusion
in the financial statements for the year ended 31 March 2015.
(3 marks)
Total: 26 marks

Copyright ICAEW 2015. All rights reserved.

Page 7 of 11

3.

For several years Fermi plc has owned a number of subsidiary companies and a 35%
investment in an associate, Boas Ltd.
On 1 September 2014 Fermi plc acquired 70% of the ordinary share capital of Selye Ltd. The
consideration consisted of 70,000 1 ordinary shares with a fair value of 1.90 per share, and
135,000 in cash.
The junior accountant at Fermi plc, Elion, is preparing the draft consolidated financial
statements and has asked for your help, as his senior and an ICAEW Chartered Accountant.

(a)

The following information is needed to complete missing figures from the consolidated
statement of cash flows.
Consolidated statement of financial position as at 31 March 2015 (extracts)

Non-current assets
Investment in associate
Current assets
Trade and other receivables
Equity
Share capital (1 ordinary)
Share premium account
Non-controlling interest
Current liabilities
Trade and other payables

2015

2014

239,420

176,300

112,400

83,100

575,000
425,750
471,400

460,000
320,000
246,700

96,700

53,840

Consolidated statement of profit or loss for the year ended 31 March 2015 (extracts)
Share of profits of associate
Non-controlling interest

83,200
139,600

Additional information:
(i)

Cash flows from operating activities had been calculated as 386,480 although the
movement in trade receivables and payables was excluded from this calculation.

(ii)

On 1 September 2014 Selye Ltds net assets totaled 420,550 and included:
Trade and other receivables
Cash and cash equivalents
Trade and other payables

(iii)

61,400
3,150
36,700

The consolidated statement of changes in equity shows that Fermi plc made a share
issue for cash on 1 January 2015.

Requirement
Prepare, for inclusion in Fermi plcs consolidated statement of cash flows for the year ended
31 March 2015, a revised figure for cash flows from operating activities and extracts from the
investing activities and financing activities sections in so far as the information above allows.
(7 marks)

Copyright ICAEW 2015. All rights reserved.

Page 8 of 11

(b)

Elion is having difficulties trying to calculate Fermi plcs consolidated gross profit for the year
ended 31 March 2015. A number of transactions between group companies arose during the
year, as detailed below.
In addition, Selye Ltds results have not been included in the draft consolidated results for the
Fermi plc group as Elion was unsure what should be included as the acquisition occurred
part way through the year.
The following information is available to complete the consolidated gross profit figure.
(i)

Draft extracts from the Fermi plc group and the individual financial statements of Selye
Ltd are:

Revenue
Cost of sales
Gross profit

Fermi plc group

2,345,800
(1,290,200)
1,055,600

Selye Ltd

963,000
(537,000)
426,000

Selye Ltds revenue and costs accrued evenly over the year ended 31 March 2015.
(ii)

In January 2015 Fermi plc sold goods to one of its other subsidiary companies for
27,600 and to Boas Ltd, its associate, for 24,000. All goods were sold at a mark-up
on cost of 20%. At 31 March 2015 both companies still held half of these goods in their
inventories.

Requirement
Prepare a revised extract for gross profit, showing the breakdown of revenue and cost of
sales, as part of Fermi plcs consolidated statement of profit or loss for the year ended
31 March 2015.
(5 marks)
(c)

The finance director has asked Elion to prepare a paper for consideration by the board on
different forms of financing including possible takeover and merger opportunities. Elion is
concerned that he lacks the right level of expertise, as he is still a trainee ICAEW Chartered
Accountant.
Requirement
Set out which of the key fundamental principles from the ICAEW Code of Ethics might be
relevant to the above scenario and explain any action that Elion should take.
(4 marks)
Total: 16 marks

Copyright ICAEW 2015. All rights reserved.

Page 9 of 11

4.

At 31 March 2015 Huygens plc has one subsidiary company, Planck Ltd. It also has a 25%
investment in Quimby Ltd, along with three other equal investors.
The draft, summarised statements of financial position of the three companies at 31 March
2015 are shown below:

ASSETS
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital
(1 shares)
Share premium account
Retained earnings
Current liabilities
Trade and other payables
Income tax

Total equity and liabilities

Huygens
plc

Planck
Ltd

Quimby
Ltd

911,700
116,250
1,027,950

89,400

89,400

85,000

85,000

43,700
71,000
5,600
120,300

32,000
17,900
3,100
53,000

24,400
10,300
2,940
37,640

1,148,250

142,400

122,640

300,000
105,000
579,650
984,650

50,000

57,200
107,200

100,000

15,240
115,240

98,600
65,000
163,600

21,400
13,800
35,200

4,600
2,800
7,400

1,148,250

142,400

122,640

Additional information:
(1)

On 1 October 2014, Huygens plc acquired 80% of the ordinary shares of Planck Ltd
when the retained earnings of Planck Ltd were 39,000. The consideration consisted of
cash of 85,000 paid on 1 October 2014 and a further cash payment of 42,000,
deferred until 1 October 2015. No accounting entries have been made in respect of the
deferred cash payment. An appropriate discount rate is 5% pa. Huygens plc recognises
goodwill and non-controlling interests using the fair value method.
The fair values of Planck Ltds other assets, liabilities and contingent liabilities at
1 October 2014 were equal to their carrying amounts with the exception of a specialised
piece of plant which had a fair value 15,000 in excess of its carrying amount. This plant
had a ten year remaining useful life on 1 October 2014.
The fair value of the non-controlling interest in Planck Ltd on 1 October 2014 was
estimated at 26,000.

Copyright ICAEW 2015. All rights reserved.

Page 10 of 11

(2)

In December 2014 Planck Ltd sold goods to Huygens plc for 12,800, earning a gross
margin of 15% on the sale. Huygens plc still held 9,600 of these goods in its
inventories at 31 March 2015.
Planck Ltd still had the full invoice value of 12,800 in its trade receivables at 31 March
2015, however Huygens plc only showed half of the invoice value in its trade payables
as it made a payment of 6,400 on 31 March 2015.

(3)

Quimby Ltd is a joint venture, set up by Huygens plc and its fellow venturers on 1 April
2014. Each venturer paid 25,000 for a 25% share of Quimby Ltd. On 1 November
2014 Quimby Ltd paid a total dividend of 15,000. Huygens plc credited the dividend
received to investments within non-current assets.

Requirements
(a)

Prepare the consolidated statement of financial position of Huygens plc as at 31 March


2015.
(18 marks)

(b)

Calculate Huygens plcs distributable profits at 31 March 2015, explaining your


calculation.
(3 marks)
Total: 21 marks

Copyright ICAEW 2015. All rights reserved.

Page 11 of 11

PROFESSIONAL LEVEL EXAMINATION


MONDAY 7 DECEMBER 2015
(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR questions (100 marks).
1.

Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2.

Answer each question in black ballpoint pen only.

3.

Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4.

The examiner will take account of the way in which answers are presented.

5.

When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and
International Accounting Standards.

IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.

You MUST enter your candidate number in this


box.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2015. All rights reserved.

Page 1 of 9

1.

The following trial balance was extracted from the nominal ledger of Darwin plc, an
engineering company, at 30 June 2015.
Note
Sales
Purchases
Administrative expenses
Distribution costs
Construction costs
Finance costs
Bank loan
Land and buildings
Cost (land 50,000)
Accumulated depreciation at 30 June 2014
Plant and equipment
Cost
Accumulated depreciation at 30 June 2014
Retained earnings at 30 June 2014
Ordinary share capital (1 shares)
Bank account
Trade and other receivables
Trade and other payables
Inventories at 30 June 2014
Income tax

(1)
(1)
(1)
(2)

6,558,550

5,106,100
1,008,300
262,800
163,500
15,250
100,000
400,000
160,000

(3)
382,000
159,100
148,100
500,000
40,500

(4)

403,375
342,750
(5)
(6)

266,175
1,500
8,009,000

8,009,000

The following additional information is available:


(1)

Construction costs relate to the building of a specialised machine, the Baler, which is a
qualifying asset. Construction commenced on 1 October 2014 and was still in progress
on 30 June 2015. To help fund this, borrowings of 100,000 were arranged. 30,000
was drawn down on 1 October 2014 at an interest rate of 5% pa and the remaining
70,000 on 1 April 2015 at an interest rate of 4% pa. All interest was paid on 30 June
2015 and charged to finance costs. The loan is repayable on 31 December 2015.

(2)

Darwin plc has previously measured property, plant and equipment under the cost
model. However, with effect from 1 July 2014, the directors decided to adopt the
revaluation model for land and buildings. A valuation of all land and buildings on 1 July
2014 gave a total of 600,000 (including land of 200,000). This valuation has not been
reflected in the trial balance above. Darwin plc wishes to make an annual transfer
between the revaluation surplus and retained earnings.
The remaining useful life of buildings was reassessed on 1 July 2014 at 40 years. There
were no additions to, or disposals of, land and buildings in the year ended 30 June
2015. Depreciation on buildings should be presented in administrative expenses.

Copyright ICAEW 2015. All rights reserved.

Page 2 of 9

(3)

A review of machinery on 31 December 2014 identified that one machine, the Molder,
was not operating efficiently. The Molder was purchased on 1 July 2012 for 38,400.
The review on 31 December 2014 showed that if the Molder were to be retained it
would generate future cash flows with a present value of 10,000. If the Molder were to
be sold it would realise 11,000, with selling costs of 1,500. An equivalent new Molder
could be purchased for 56,000.
No adjustments in respect of this review were recognised.
Plant and equipment is depreciated on a reducing balance basis, at a rate of 25% pa.
Depreciation on plant and equipment should be presented in cost of sales.

(4)

150,000 4% 1 redeemable preference shares were issued at par on 1 July 2014. The
cash received in respect of these shares was credited to retained earnings. The shares
are redeemable on 30 June 2018 at a premium. The effective interest rate is 4.75% pa.
The preference dividend was paid on 30 June 2015 and debited to retained earnings.

(5)

Inventories at 30 June 2015 were correctly valued at 175,400. During the inventory
valuation it was discovered that inventories at 30 June 2014 had, in error, been
overvalued by 100,000. This error was not adjusted for in the trial balance above.

(6)

The income tax figure in the trial balance represents the excess of the liability provided
for at 30 June 2014 over the amount paid in February 2015. The liability for the current
year was appropriately estimated at 18,600.

Requirements
(a)

Prepare a statement of profit or loss for Darwin plc for the year ended 30 June 2015,
and a statement of financial position as at that date, in a form suitable for publication.
(23 marks)
Notes to the financial statements are not required.
Expenses should be analysed by function.

(b)

Explain the IFRS financial reporting treatment of the error in respect of opening
inventories (Note (5) above) in the published financial statements of Darwin plc for the
year ended 30 June 2015.
(3 marks)

(c)

The IASB Conceptual Framework refers to four different measurement bases. Explain
these four bases with reference to the figures in Note (3) above.
(5 marks)
Total: 31 marks

Copyright ICAEW 2015. All rights reserved.

Page 3 of 9

2.

Alan is the finance director of Girton plc and an ICAEW Chartered Accountant. He has
prepared draft individual and consolidated financial statements for the year ended 30 June
2015 for Girton plc. The consolidated financial statements include the following figures:

Profit for the year attributable to the shareholders of Girton plc


Earnings per share
Equity
Ordinary share capital (1 shares)
Share premium
Retained earnings

574,500
127.7p

450,000
90,000
890,200

You are the financial controller at Girton plc and an ICAEW Chartered Accountant. The
managing director is concerned about Alan's treatment of certain matters within the draft
financial statements, particularly given that the directors bonus is linked to earnings per
share.
The managing director has asked you to review the following issues and correct the financial
statements.
(1)

On 1 January 2015 Girton plc acquired 150,000 of Downing Ltds 200,000 1 ordinary
shares. The consideration was comprised of 100,000 1 ordinary shares in Girton plc
issued on 1 January 2015, cash of 375,000 paid on 1 January 2015 and additional
cash due on 1 January 2016 of 147,000.
Alan has calculated goodwill on the business combination with Downing Ltd as 49,575
and has recognised this amount as an intangible asset in the consolidated financial
statements. However, Alan only included the cash consideration of 375,000 in his
calculation and has not accounted for the remaining consideration. When you queried
this Alan said that this was because cash was the only part of the consideration which
involved a transfer of funds in the current year. The market price of Girton plcs shares
on 1 January 2015 was 1.20 per share.
You reviewed the board minutes and established that goodwill and the non-controlling
interest were to be calculated using the fair value method. Alan has used the
proportionate method. The fair value of the non-controlling interest on 1 January 2015
was 115,000.
Downing Ltds financial statements for the year ended 30 June 2015 show profit for the
year of 245,600 and retained earnings of 356,700. These financial statements include
a note concerning a contingent liability in respect of ongoing legal proceedings against
Downing Ltd. The proceedings had commenced on 15 December 2014. The contingent
liability had a fair value of 75,000 on 1 January 2015. Alan made no adjustment for this
liability when he calculated goodwill arguing that it did not form part of Downing Ltds net
assets on 1 January 2015.
The consolidated statement of profit or loss for the year ended 30 June 2015 correctly
reflects the results of Downing Ltd.

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Page 4 of 9

(2)

On 1 February 2015 Girton plc made a one for five bonus issue of ordinary shares. Alan
has not accounted for the bonus issue, although the issue was based on the correct
number of ordinary shares. On 30 June 2015 Girton plc acquired 100,000 of its own 1
ordinary shares for 2 cash per share. Alan debited the consideration to ordinary share
capital.

(3)

During the year Girton plc sold goods totalling 216,700 on credit to Selwyn Ltd, a
company wholly-owned by Alans son. At 30 June 2015 there was a trade receivable of
54,400 in respect of these sales. No disclosures were made in the individual or
consolidated financial statements of Girton plc for this transaction. When you queried
this Alan said that this was because the sales were made at an arms length price. The
managing director was unaware of these sales until the credit controller asked him to
review the year-end allowance for doubtful debts, which includes 20,000 in respect of
this debt, as Selwyn Ltd is known to be in financial difficulties.

(4)

On 1 April 2015 Girton plc sold a package of products for 191,250 cash. The package
was made up of equipment and 12 months of helpdesk support. The equipment
normally retails at 175,000 and the support at 50,000. Alan recognised revenue of
191,250 in the financial statements for the year ended 30 June 2015, on the grounds
that the equipment sale had been made in that year and the provision of helpdesk
support was part of that sale.

The published financial statements for the year ended 30 June 2014 show that Girton plc had
an earnings per share of 118.6p.
Requirements
(a)

Explain the required IFRS financial reporting treatment of issues (1) to (4) above in the
financial statements for the year ended 30 June 2015, preparing all relevant
calculations. Unless stated otherwise, an applicable discount rate is 5% pa. (22 marks)

(b)

Using your results from Part (a) calculate the following for Girton plcs consolidated
financial statements for the year ended 30 June 2015:

(c)

(i)

Revised profit for the year attributable to the shareholders of Girton plc

(ii)

Revised number of ordinary shares

(iii)

Basic earnings per share and comparative figure.

(4 marks)

Discuss the ethical issues arising from the scenario for yourself and Alan and the steps
that you should take to address them.
(5 marks)
Total: 31 marks

Copyright ICAEW 2015. All rights reserved.

Page 5 of 9

3.

The financial controller of Peterhouse Ltd has prepared draft financial statements for the year
ended 30 June 2015, including the following:
Draft statement of cash flows for the year ended 30 June 2015

Cash flows from operating activities


Cash generated from operations
Interest paid
Income tax paid
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of ordinary share capital
Ordinary dividend paid
Increase in bank overdraft
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 July 2014
Cash and cash equivalents at 30 June 2015

978,700
(2,100)
(195,500)
781,100
(1,041,200)
(1,041,200)
150,000
(23,900)
85,000
211,100
(49,000)
49,150
150

The financial controller has failed to deal correctly with the following matters:
(1)

The draft statement of financial position as at 30 June 2015 includes inventories of


135,800. However, the financial controller had valued 2,000 units of one product, the
Perro, in work in progress and 1,000 units in finished goods at their costs per unit of 15
and 18 respectively. Finished units usually sell for 25 per unit. However, difficult
trading conditions meant that Peterhouse Ltd had to discount the finished units by 30%
and incurred selling costs of 1 per unit. Work in progress was all at the same stage of
production and a further 3 per unit was still to be incurred to finish off these items.

(2)

On 1 July 2014 Peterhouse Ltd entered into a three-year finance lease for a machine
with a list price of 31,000. Lease payments comprise an initial payment of 8,000 on
1 July 2014, followed by three annual instalments of 8,000 each, in arrears, the first of
which was paid on 30 June 2015. Both payments made in the year ended 30 June 2015
were debited to cost of sales. The machine has a useful life of four years. The interest
rate implicit in the agreement is 5% pa.

(3)

At 30 June 2015, there was interest due but not paid of 1,500. This accrual was
included in trade and other payables. The figure for interest paid in the draft statement
of cash flows is that from the statement of profit or loss.

(4)

On 1 July 2014 a machine with a carrying amount of 15,600 was sold for cash of
17,200. The sale was correctly recognised in the statement of profit or loss and
statement of financial position but no adjustment was made for it in the draft statement
of cash flows. The figure for purchase of property, plant and equipment in the draft
statement of cash flows is the movement between the opening and closing figures from
the statements of financial position adjusted by the depreciation charge for the year.

Copyright ICAEW 2015. All rights reserved.

Page 6 of 9

(5)

150,000 1 ordinary shares were issued during the year at a price of 1.50 per share.
The financial controller credited ordinary share capital with the par value and credited
retained earnings with the premium.

(6)

The figure for the ordinary dividend paid in the draft statement of cash flows is the
movement between the opening and closing retained earnings figures from the
statements of financial position adjusted by the profit for the year. This figure does not
agree to the actual dividend paid per the statement of changes in equity.

(7)

A bank overdraft was arranged during the year. The increase in bank overdraft shown in
the draft statement of cash flows is the overdraft as at 30 June 2015.

Requirements
(a)

Using the information in Note (1) above, calculate the carrying amount of inventories at
30 June 2015.
(3 marks)

(b)

Using the information in Note (2) above, prepare extracts from the statement of profit or
loss of Peterhouse Ltd for the year ended 30 June 2015 and statement of financial
position as at that date reflecting the finance lease.
(6 marks)

(c)

Using all of the information above, prepare a revised statement of cash flows for
Peterhouse Ltd for the year ended 30 June 2015. A note showing the reconciliation of
profit before tax to cash generated from operations is not required.
(8 marks)
Total: 17 marks

PLEASE TURN OVER

Copyright ICAEW 2015. All rights reserved.

Page 7 of 9

4.

At 1 July 2014 Pembroke Ltd held 80% and 40% respectively of the ordinary share capital of
Newnham Ltd and Wolfson Ltd. On 1 November 2014 Pembroke Ltd acquired 70% of the
ordinary share capital of Trinity Ltd. Pembroke Ltd measures non-controlling interest and
goodwill using the proportionate method.
Extracts from the draft individual financial statements of the four companies for the year
ended 30 June 2015 are shown below:
Draft statements of profit or loss
Pembroke Ltd

Newnham Ltd Trinity Ltd Wolfson Ltd

Revenue
Cost of sales

945,200
(583,700)

754,800
(573,600)

705,000
(418,500)

161,700
(66,300)

Gross profit
Operating expenses

361,500
(128,900)

181,200
(116,400)

286,500
(122,550)

95,400
(109,900)

Profit/(loss) before tax


Income tax expense

232,600
(60,000)

64,800
(13,000)

163,950
(31,950)

(14,500)

Profit/(loss) for the year

172,600

51,800

132,000

(14,500)

Draft statements of financial position (extracts)


Pembroke Ltd

Equity
Ordinary share capital (1
shares)
Retained earnings

600,000
1,025,400
1,625,400

Newnham Ltd Trinity Ltd Wolfson Ltd

500,000
363,600
863,600

400,000
271,000
671,000

200,000
(120,600)
79,400

Additional information:
(1)

Details of the three investments were as follows.

Cost of investment
Retained earnings at date of investment

Newnham Ltd Trinity Ltd Wolfson Ltd

844,000
360,000
118,200
301,000
175,000
181,900

The fair values of the assets and liabilities of all three companies at the date of the
investments were the same as their carrying amounts with the exception of a property
owned by Newnham Ltd which was estimated to have a fair value of 120,000 above its
carrying amount. This property was assessed as having a remaining useful life of 25
years on 1 July 2012, the date of Newnham Ltds acquisition by Pembroke Ltd.
Depreciation on properties is presented in operating expenses.

Copyright ICAEW 2015. All rights reserved.

Page 8 of 9

(2)

During the current year, Pembroke Ltd charged management fees of 24,000 to
Trinity Ltd. These fees were included in revenue and operating expenses respectively.

(3)

On 1 January 2015 Trinity Ltd sold a machine to Pembroke Ltd for 51,000. At this date,
the machine had a carrying amount in Trinity Ltds books of 39,000. The estimated
remaining useful life of the machine was reassessed on the date of sale at five years.
Depreciation on this machine is presented in cost of sales.

(4)

Pembroke Ltd undertakes annual impairment reviews in respect of all its investments.
At 30 June 2014 cumulative impairment losses of 50,000 had been recognised in
respect of goodwill arising on the acquisition of Newnham Ltd.

(5)

Revenues and costs accrued evenly over the year, with the exception of consultancy
fees of 12,000 paid by Trinity Ltd to an unrelated company for the period to
30 October 2014. These fees were recognised in operating expenses.

Requirements
(a)

(b)

Prepare for Pembroke Ltd for the year ended 30 June 2015:
(i)

a consolidated statement of profit or loss

(ii)

the non-controlling interest column from the consolidated statement of changes in


equity.
(17 marks)

Describe any differences between IFRS and UK GAAP in respect of the preparation of
consolidated financial statements. Answers may be presented in a bullet point format.
(4 marks)
Total: 21 marks

Copyright ICAEW 2015. All rights reserved.

Page 9 of 9

PROFESSIONAL LEVEL EXAMINATION


MONDAY 7 MARCH 2016
(3 hours)

FINANCIAL ACCOUNTING AND REPORTING


This paper consists of FOUR questions (100 marks).
1.

Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.

2.

Answer each question in black ballpoint pen only.

3.

Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.

4.

The examiner will take account of the way in which answers are presented.

5.

When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.

Unless otherwise stated, make all calculations to the nearest month and the nearest .
All references to IFRS are to International Financial Reporting Standards and
International Accounting Standards.

IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.

You MUST enter your candidate number in this


box.

DO NOT TURN OVER UNTIL YOU


ARE INSTRUCTED TO BEGIN WORK

Copyright ICAEW 2016. All rights reserved.

Page 1 of 9

1.

The financial controller of Laderas plc is on long-term sick leave. Parry Dagwood, who has
spent two years taking a career break, was appointed as temporary financial controller at the
beginning of the financial year. This is Parrys first job on returning to work and he is
responsible for preparing the financial statements for the year ended 30 September 2015.
The finance director told Parry the board is hoping for high profits and a strong financial
position as the company may seek additional funding. Parry is hoping to be offered a
permanent position.
You are the assistant accountant at Laderas plc working for Parry. There are a number of
outstanding issues which you were asked to help finalise before the financial statements can
be presented to the board. Both you and Parry are ICAEW Chartered Accountants.
On 30 September 2015 Laderas plcs nominal ledger showed the following balances.
Sales
Purchases
Administrative expenses
Other operating costs
Intangibles brands
Plant and machinery
Cost
Accumulated depreciation at 30 September 2014
Land and buildings
Cost (land 300,000)
Accumulated depreciation at 30 September 2014
Retained earnings at 30 September 2014
Ordinary share capital (1 shares)
Share premium account
Revaluation surplus
Cash at bank
Inventories at 30 September 2014
Trade and other receivables
Trade and other payables
Lease liability

Note(s)
(1)

(2)
(3)

1,323,700
721,400
237,400
113,000
133,000
290,600
78,000

(3)

(4)
(4)
(2)

(5)

992,600
176,000
70,690
520,000
307,500
55,000
15,600
52,690
47,800
61,200
12,000

Outstanding issues:
(1)

On 1 December 2014 Laderas plc received a government grant of 75,000 to assist


with the purchase of a specialised machine which has an estimated useful life of five
years. As there were no conditions attached to the grant it was credited in full to sales,
although Laderas plcs policy is to use the netting-off method. The machine cost
125,000 and was ready for use on 1 January 2015. The total cost of the machine has
been included in the plant and machinery balance above.

(2)

On 1 March 2015 Laderas plc recognised two new unique brands as intangible assets.
The first brand was acquired for 78,000 on 1 March 2015 and on the same date an
internally generated brand was also recognised. An external expert valued the internally
generated brand at 55,000 on 1 March 2015 and this was recognised in the
revaluation surplus. The total of 133,000 was debited to intangible assets. Both brands
are estimated to have a four-year useful life, although no amortisation was recognised
in the current year. All expenses relating to intangible assets should be recognised in
other operating costs.

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Page 2 of 9

(3)

Depreciation on property, plant and equipment for the year ended 30 September 2015
has yet to be charged. All depreciation is charged on a straight-line basis. Buildings
were estimated as having a 40 year useful life, and plant and machinery an 8 year
useful life, unless stated otherwise.
A new building was acquired on 1 April 2015 for 350,000 and was recognised in
property, plant and equipment.
All expenses related to property, plant and equipment should be recognised in cost of
sales.

(4)

On 1 July 2015 Laderas plc made a 1 for 4 rights issue at 1.20 per share. The market
price of one Laderas plc ordinary share immediately before the rights issue was 1.85.
The entire proceeds were credited to the share premium account.

(5)

On 1 October 2014 Laderas plc entered into a three-year lease for a piece of
equipment. Laderas plc negotiated the lease so that there was nothing to pay in the first
year followed by two payments of 6,000 each on 1 October 2016 and 1 October 2017.
The equipment has a useful life of eight years but will be returned to the lessor at the
end of the three-year lease term. The full amount payable under the lease of 12,000
was debited to cost of sales and credited to lease liability.

(6)

An inventory count was carried out at the main warehouse on 30 September 2015 and
inventory held there was correctly valued at 42,600. However it was subsequently
discovered that 1,200 units of one product, Eros, had not been included in this amount.
This was an isolated incident. The unit selling price of the Eros is 8.25 and the total
associated costs are:
Materials and direct labour
Variable overheads
Fixed overheads

14,800
4,200
2,000

Due to an industrial dispute production of the Eros in the year ended 30 September
2015 was slightly lower than planned, at 3,800 rather than 4,000 units.
(7)

The income tax liability for the current year has been estimated at 21,600.

Requirements
1.1 Prepare the statement of profit or loss for Laderas plc for the year ended 30 September
2015 and a statement of financial position as at that date, in a form suitable for
publication.
(19 marks)
1.2 Calculate basic earnings per share for the year ended 30 September 2015.

(4 marks)

1.3 Prepare extracts from the statement of financial position as at 30 September 2015 for
the transactions described in Issue (1) applying UK GAAP.
(3 marks)
1.4 Identify and explain the inherent limitations of financial statements that may reduce their
usefulness to users.
(4 marks)
1.5 Discuss the ethical issues arising from the scenario and list the steps that the assistant
accountant should take to address them.
(5 marks)
Total: 35 marks

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Page 3 of 9

2.

The following issues need to be resolved to finalise the financial statements of Chayofa Ltd
for the year ended 30 September 2015:
(1)

On 1 October 2014 Chayofa Ltd began constructing a specialised piece of plant. The
plant underwent a final safety inspection on 30 June 2015 and was ready for use the
following day. The plant has a useful life of 15 years, although replacement blades,
which cost 14,000, will be needed every five years. No depreciation was recognised
for the year ended 30 September 2015 as the plant was not working at its full capacity
because staff were still being trained.
The following amounts were incurred between 1 October 2014 and 30 June 2015 and
capitalised as part of property, plant and equipment:

Materials cost (including the blades)


124,000
Labour costs
41,500
Sale of by-products produced as part of testing process
(450)
Staff training
1,800
Consultancy fees re installation and assembly
1,150
Professional fees
1,300
Safety inspection
1,500
Allocated overheads (50% general administration:
14,200
50% directly attributable)
185,000
The labour costs consist of 31,500 in respect of the plants installation and assembly
and a 10,000 allocated share of the sales directors salary. The sales director was
responsible for discussing the new plants capabilities with existing customers.

(2)

Prior to the year end Chayofa Ltd decided to acquire three new pieces of equipment.
The total cost of 101,000 for all the equipment was accrued for at 30 September 2015
and capitalised as part of property, plant and equipment. The following information is
relevant:
Equipment A

Equipment B

Equipment C

Decision made to acquire asset


Payment date
Delivery date

28 Aug 2015
28 Oct 2015
28 Sept 2015

30 Sept 2015
1 Dec 2015
1 Nov 2015

18 Sept 2015
30 Nov 2015
25 Sept 2015

Cost (note)

34,000

27,000

40,000

Note: The cost of Equipment C was an estimated figure at 30 September 2015. The
actual cost was finalised on 31 October 2015 at 38,000.
The orders can be cancelled at no cost.

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Page 4 of 9

(3)

On 1 October 2014 Chayofa Ltd acquired a recycling centre with an estimated useful life
of 15 years. A condition of the purchase is that Chayofa Ltd will need to restore any
environmental damage caused by its activities. On 1 October 2014 the estimated cost in
15 years time of restoring the land to its original state was 450,000. However, it is
possible that new technology over the 15 years will reduce these costs by 10%. The
relevant annual discount rate was assessed as 6%. The cost of the recycling centre has
been capitalised and depreciation was calculated based on this cost. The only other
accounting entries made at 30 September 2015 were to recognise a provision and an
expense of 450,000.

(4)

On 31 August 2015 a machine was identified as requiring maintenance work. The


machine originally cost 60,000 on 1 October 2009 and had an estimated useful life of
eight years at that date. Depreciation was charged on a straight-line basis. The machine
was revalued on 30 September 2012 to 42,000, with no change in its total useful life.
Annual transfers between retained earnings and the revaluation surplus are not made.
An impairment review was carried out on 30 September 2015 and the machine was
assessed as working at an acceptable level with a revised remaining useful life of five
years. On that date the machines fair value was assessed as being 10,500 with selling
costs of 500 and its value in use as 11,000.

Requirement
Explain the required IFRS financial reporting treatment of Issues (1) to (4) above in the
financial statements for the year ended 30 September 2015, preparing all relevant
calculations and setting out the required adjustments in the form of journal entries.
Total: 28 marks

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Page 5 of 9

3.

Hiedras plc has a number of subsidiary companies and an investment in an associate,


Amparo Ltd. The draft consolidated financial statements for the year ended 30 September
2015 are being prepared and there are a number of outstanding issues.

3.1 Hiedras plc acquired 75% of the ordinary share capital in Isora Ltd several years ago for total
consideration of 495,000. The fair values of Isora Ltds assets, liabilities and contingent
liabilities at acquisition were equal to their carrying amounts. On 1 July 2015 Hiedras plc sold
all of its shares in Isora Ltd for 765,000. Hiedras plc measured the goodwill and noncontrolling interest using the proportionate method.
Isora Ltds financial statements showed equity of:
At acquisition

Ordinary share capital (1 shares)


Retained earnings
Revaluation surplus

200,000
234,800
175,000
609,800

At 30 September
2014

200,000
461,700
237,000
898,700

Isora Ltd made a profit for the year ended 30 September 2015 of 108,000, which accrued
evenly over the year. There was no impairment loss in respect of the goodwill acquired in the
business combination with Hiedras plc for the nine month period to the date of disposal
although cumulative impairment losses of 35,000 had been recognised up to 30 September
2014.
Requirements
(a)

Calculate the profit or loss from discontinued operations for inclusion in the consolidated
statement of profit or loss for Hiedras plc in relation to the disposal of Isora Ltd for the
year ended 30 September 2015.
(4 marks)

(b)

Describe any differences between IFRS and UK GAAP in respect of the presentation of
discontinued operations.
(2 marks)

3.2 On 1 April 2015 Hiedras plc acquired its 30% investment in Amparo Ltd for consideration of
263,000.
Amparo Ltd made a profit for the year ended 30 September 2015 of 51,300, accruing evenly
over the year, and has paid no dividends since the acquisition.
The fair values of the assets and liabilities of Amparo Ltd at the date of acquisition were
equal to their carrying amounts with the exception of some land and a building with a
remaining useful life of 15 years as at 1 April 2015. The following values are relevant at
1 April 2015:
Carrying
amount
Fair value

Land
150,000
375,000
Building
285,000
450,000
435,000
825,000
Requirement
Prepare extracts from Hiedras plcs consolidated statement of financial position and
consolidated statement of profit or loss in respect of its investment in Amparo Ltd for the year
ended 30 September 2015.
(4 marks)

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Page 6 of 9

3.3 On 1 October 2014 Hiedras plc sold a piece of land to an unconnected company, Eras Ltd,
for 500,000, to raise some short-term finance. Hiedras plc will continue to have access to
the land and has the right to buy it back on 30 September 2016 for 575,000, giving Eras Ltd
a return of 15% over the two year period. On 1 October 2014 the land had a fair value of
1,250,000 and a carrying amount of 350,000. Hiedras plc derecognised the land and
recognised a profit on disposal of 150,000. An annual rate for 15% over two years is 7.25%.
Requirement
Briefly explain with supporting calculations, the financial reporting treatment for the land in
the financial statements of Hiedras plc for the year ended 30 September 2015.
(5 marks)

3.4 The financing activities section of the consolidated statement of cash flows was not
completed. The following extract is from the draft consolidated statement of financial position
at 30 September 2015:
2015

Equity
Ordinary share capital (1 shares)
Share premium account
Retained earnings

570,000
275,000
594,200
1,439,200

2014

320,000
120,000
375,600
815,600

In November 2014 Hiedras plc made a bonus issue out of retained earnings. This was
followed in February 2015 by an issue of 155,000 ordinary shares for cash at 2.00 per
share. Profit attributable to the owners of Hiedras plc for the year ended 30 September 2015
was 441,100 and the only dividend paid in the year was an interim dividend paid by Hiedras
plc.
Requirement
Prepare an extract from Hiedras plcs consolidated statement of cash flows, showing Cash
flows from financing activities for the year ended 30 September 2015. Use the information in
part 3.4 only.
(3 marks)
Total: 18 marks

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Page 7 of 9

4.

At 30 September 2015 Gordo plc has two subsidiary companies: Orotava Ltd, which was
acquired during the year, and Tixera Ltd.
The draft consolidated statement of financial position for the Gordo group and the individual
statement of financial position of Orotava Ltd, at 30 September 2015 are shown below.
Investments include the cost of the two subsidiaries and a number of shareholdings of below
5% each. Figures for the Gordo group were prepared by adding across the two statements of
financial position of Gordo plc and Tixera Ltd.
Gordo group
(draft
consolidated)

ASSETS
Non-current assets
Property, plant and equipment
Investments
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital (1 shares)
Share premium account
Retained earnings
Current liabilities
Trade and other payables
Income tax

Total equity and liabilities

Orotava Ltd

936,400
667,800
1,604,200

389,500

389,500

46,170
53,900
4,700
104,770

21,500
36,950
1,400
59,850

1,708,970

449,350

600,000
250,000
679,270
1,529,270

150,000
75,000
147,150
372,150

67,400
112,300
179,700

37,800
39,400
77,200

1,708,970

449,350

Additional information:
(1)

Equity from the individual statements of financial position of Gordo plc and Tixera Ltd at
30 September 2015 are shown below:

Ordinary share capital (1 shares)


Share premium account
Retained earnings

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Gordo plc

400,000
200,000
580,870
1,180,870

Tixera Ltd

200,000
50,000
98,400
348,400

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(2)

The fair values of Tixera Ltds assets, liabilities and contingent liabilities at the date of
acquisition by Gordo plc were equal to their carrying amounts. Tixera Ltds retained
earnings at the date of acquisition were 61,200 and the consideration for the
acquisition of 75% of the ordinary shares of Tixera Ltd was 220,000. A reassessment
of Tixera Ltds assets, liabilities, contingent liabilities and consideration transferred took
place following the acquisition and no adjustments were necessary.
Gordo plc chose to recognise the goodwill and non-controlling interest using the
proportionate method.

(3)

On 1 January 2015, Gordo plc acquired 85% of the ordinary shares of Orotava Ltd
when the retained earnings of Orotava Ltd were 89,650. The consideration consisted
of cash of 340,000 and 85,000 1 ordinary shares in Gordo plc. The market value of
Gordo plcs shares on 1 January 2015 was 1.20 per share.
The fair values of Orotava Ltds assets, liabilities and contingent liabilities at 1 January
2015 were equal to their carrying amounts with the exception of a building which had a
fair value 150,000 in excess of its carrying amount. This building had a 25 year
remaining useful life on 1 January 2015.
Gordo plc chose to recognise the goodwill and non-controlling interest using the fair
value method. The fair value of the non-controlling interest in Orotava Ltd on 1 January
2015 was estimated at 52,000.

(4)

In July 2015 Tixera Ltd sold goods to Orotava Ltd for 14,000, at cost plus a mark-up of
25%. At 30 September 2015 Orotava Ltd still held half of these goods in its inventories.
Payment for the full invoice value of 14,000 was outstanding at the year end.

(5)

On 1 October 2014 Tixera Ltd sold a machine to Gordo plc for 45,000. Tixera Ltd had
originally bought the machine for 60,000 on 1 October 2011. The machine had a total
useful life of eight years which has never changed.

Requirement
Prepare the revised consolidated statement of financial position of Gordo plc as at
30 September 2015.
Total: 19 marks

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