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~~AC3091 ZA d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON

AC3091 ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diplomas in Economics and Social Sciences and Access Route

Financial Reporting

Wednesday, 15 May 2013 : 2.30pm to 5.45pm

Candidates should answer FOUR of the following SIX questions: including AT LEAST ONE EACH
from section A and Section B. All questions will carry equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must be
detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply in all
respects with the specification given with your Admission Notice. The make and type of
machine must be clearly stated on the front cover of the answer book.

PLEASE TURN OVER


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SECTION A
Answer one question and no more than two further questions from this section.
1.

The statements of financial position for Apple Plc, Kiwi Ltd and Orange Ltd as at 31December 2012
are given below:

Non-current assets
Investments
Inventory
Trade receivables
Cash
Inter co receivable from Kiwi
Interco receivable from Orange
Total assets
Share capital
Retained earnings
Bonds (10%)
Interco payable to Apple
Trade payables
Capital, reserves and liabilities

Apple

580,000
1,800,000
200,000
340,000
140,000
80,000
320,000
3,460,000

Kiwi

1,900,000

Orange

1,400,000

600,000
500,000
140,000

1,120,000
280,000
180,000

3,140,000

2,980,000

2,000,000
1,380,000
20,000

600,000
1,740,000
150,000
80,000
570,000
3,140,000

400,000
2,000,000
40,000
320,000
220,000
2,980,000

60,000
3,460,000

Apple Plc acquired 75% of Kiwi Ltd on 1 January 2006 for 920,000 when Kiwi Ltd's share capital and
reserves were 640,000. The fair value of Kiwi Ltds non-current assets on 1 January 2006 was
1,980,000 and this revaluation has not been incorporated into Kiwi Ltds accounts.
Apple Plc acquired 20% of the bonds of Kiwi Ltd for 60,000 on 1 January 2006.
Apple Plc acquired 40% of Orange Ltd on 1 January 2007 for 400,000 when Orange Ltds share capital
and reserves were 600,000. The fair value of Orange Ltds non-current assets on 1 January 2007 was
1,600,000 and this revaluation has not been incorporated into Orange Ltds accounts.
Apple Plcs policy is to capitalise goodwill. Impairment of 15% of the goodwill of Kiwi Ltd is seen in
2012 and impairment of 20% of the goodwill of Orange Ltd is seen in 2012.
In 2012, Apple Plc acquired inventory from Kiwi Ltd for 40,000 and inventory from Orange Ltd for
100,000. This inventory has not been sold as at 31 December 2012. All companies earn a gross profit
percentage of 10% on these transactions.
Apple Plc has not accounted for the interest payable on the bonds which was due on the last day of the
period
Required:
(a)

Define the following:


i.
ii.
iii.

(b)

Non-controlling interest
Provision for unrealized profit on inventory
Impairment

(6 marks)

Prepare the consolidated statement of financial position for Apple Plc as at 31 December 2012.
(19 marks)

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2.

Company X enters into a project, expecting annual cashflows of 8,000 per annum to be generated in
perpetuity with interest rates remaining at 10% in perpetuity. The company receives 8,000 at the end
of year 1 but then revises its expectations in relation to future cashflows to 16,000 per annum in
perpetuity. The rate of interest also changes at the end of year 1 to 20% in perpetuity. These revised
estimates are not expected to change in the future. All cashflows arise at the end of the year.
Required:
(a) Discuss Hicks concepts of income and their implications for accountants.
(b)

Calculate the following:


i.
ii.
iii.
iv.

3.

(13 marks)

Hicks income number 1 ex ante


Hicks income number 1 ex post
Hicks income number 2 ex post version A and reconcile this income number to that
calculated in i.
Hicks income number 2 ex post version B and reconcile this income number to that
calculated in i.
(12 marks)

On 1 January 2001, Rice Ltd acquired 80% of the ordinary shares of a subsidiary, Cream Org. Cream
Org trades in the currency potts. On 1 January 2001 the balance on the accumulated profits of
Cream Org was 160,000 potts and the share capital of Cream Org was 1,200,000 potts.
The summary income statements and statements of financial position of Cream Org are given as
follows:
Statement of financial position as at 31 December 2012
Cream
potts
Non-current assets
Inventories
Cash
Total assets less liabilities

1,800,000
75,000
305,000
2,180,000

Share capital
Retained profit

1,200,000
980,000
2,180,000

Income statement
year ended 31 December 2012
Sales
Opening inventory
Purchases
Closing inventory

Cream
potts

Cream
potts
380,000

50,000
200,000
(75,000)
(175,000)
205,000
(20,000)
(5,000)
180,000
(30,000)
150,000
(5,000)
145,000

Gross profit
Depreciation
Other expenses
Profit before tax
Tax
Profit after tax
Dividends
Net profit for the year

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The following information is also available:


1

Non-current assets were acquired on 1 January 2001.

Opening inventories were acquired on 12 November 2011 and closing inventories were acquired
on 15 December 2012.

Exchange rates:
1 January 2001
12 November 2011
1 January 2012
average for 2012
15 December 2012
20 December 2012
31 December 2012

1 = 10 potts
1 = 5 potts
1 = 6 potts
1 = 4 potts
1 = 2 potts
1 = 2.5 potts
1 = 3 potts

The translated profit and loss account reserve brought forward for Cream Org is 99,500 under
the temporal method and 219,167 under the closing rate method.

Dividends are paid on 20 December 2012.

Required:
(a)

Outline the temporal and closing rate methods and discuss when each of these methods should
be used.
(8 marks)

(b)

Translate the income statement and statement of financial position of Cream Org using the
temporal method.
(10 marks)

(c)

Translate the income statement and statement of financial position of Cream Org using the
closing rate method.
(7 marks)

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4.

Answer all parts of the question


(a)

Discuss the problems that may arise when defining the return on assets ratio.

(5 marks)

(b)

Outline the main differences between the merger and acquisition accounting methods and
discuss the reasons why merger accounting has been discontinued.
(5 marks)

(c)

On 1 January 2007, Honey Ltd receives 1,671,000 on the issue of 8% debentures with a
nominal value of 2,000,000. The debentures are redeemable at the end of 2012 at par.
Required:
Show in tabular form how the debentures should be recorded in the financial statements of
Honey Ltd from 2007 to 2012.
(5 marks)

(d)

During 2012, a lawsuit was filed against Jam Ltd. The lawsuit relates to faulty products sold to
customers. Jam Ltd intend to fight the lawsuit but they have received legal advice indicating that
there is a 50% chance that they will lose the case.
Required:
What are contingent liabilities? Outline how the lawsuit would be treated in the financial
statements of Jam Ltd.
(5 marks)

(e)

Make Ltd started a new business selling widgets and entered into the following transactions:
100 widgets were bought on 1 January 2012 for 50 each.
10 widgets were sold on 1 June 2012 for 75 each
60 widgets were sold for 90 each on 1 December 2012.
On 1 June 2012, the replacement cost of widgets was 60 each, on 1 December 2012, the
replacement cost of widgets was 80 each and on 31 December 2012 the replacement cost of
widgets was 85 each. Make Ltd uses current value accounting based on replacement cost for
this business and has a 31 December year end.
Required:
Prepare the current value (replacement cost) income statement for the year ending 31 December
2012 using physical capital maintenance and identify the value of closing inventory as at 31
December 2012.
(5 marks)

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SECTION B
Answer one question and no more than one further question from this section.

5.

Answer either:
Discuss the aims and objectives of conceptual frameworks of accounting. Outline the desirable
characteristics of accounting information and discuss the advantages and limitations of these
qualitative characteristics for financial reporting.
(25 marks)
Or:
Critically assess the need for regulating financial reporting. Your answer should cover both traditional
and economic arguments.
(25 marks)

6.

Answer either:
Compare and contrast current purchasing power financial statements and current value financial
statements. To what extent do these types of financial statements address the criticisms of historic cost
accounting?
(25 marks)
Or:
What is goodwill? Discuss the reasons why it has been difficult to account for goodwill. Outline three
different methods for accounting for goodwill, showing how goodwill would be accounted for in the
financial statements for each of the methods and critically assess each of the methods. (25 marks)

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