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SECTION A COMPULSORY

QUESTIONS 1 10

10 Multiple Choice Questions. For each question, choose ONE of the proposed answers.

1 Which of the following items should be capitalised within the initial carrying
amount of an item of plant?

I A deduction to reflect the estimated realisable value

II Cost of a three-year maintenance agreement
III Cost of transporting the plant to the factory
IV Cost of installing a new power supply required to operate the plant
V Cost of a three-week training course for staff to operate the plant

a. I and II
b. I, II and III
c. III and IV
d. I, IV and V

2 Riley acquired a non-current asset on 1 October 2014 at a cost of £100,000 which had a
useful economic life of ten years and a nil residual value. The asset had been correctly
depreciated up to 30 September 2019. At that date the asset was damaged and an
impairment review was performed. On 30 September 2019, the fair value of the asset less
costs to sell was £30,000 and the expected future cash flows were £8,500 per annum for the
next five years. The current cost of capital is 10% and a five year annuity of £1 per annum at
10% would have a present value of £3·79.

What amount would be charged to profit or loss for the impairment of this asset for the year
ended 30 September 2019?

a. £17,785
b. £20,000
c. £30,000
d. £32,215

3 Each of the following events occurred after the reporting date of 31 March 2019, but
before the financial statements were authorised for issue.

Which would be treated as a NON-adjusting event under IAS 10 Events after the Reporting
Period?

a. The settlement of an insurance claim for a loss sustained in December 2018

b. A public announcement in April 2019 of a formal plan to discontinue an operation
which had been approved by the board in February 2019
c. Evidence that £20,000 of goods which were listed as part of the inventory in the
statement of financial position as at 31 March 2019 had been stolen
d. A sale of goods in April 2019 which had been held in inventory at 31 March 2019. The
sale was made at a price below its carrying amount at 31 March 2019
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4 Repro, a company which sells photocopying equipment, has prepared its draft financial
statements for the year ended 30 September 2019. It has included the following transactions
in revenue at the stated amounts below.

Which of these has been correctly included in revenue according to IFRS 15 Revenue from
Contracts with Customers?

a. Agency sales of £250,000 on which Repro is entitled to a commission

b. Sale proceeds of £20,000 for motor vehicles which were no longer required by Repro
c. Sales of £150,000 on 30 September 2019. The amount invoiced to and received from
the customer was £180,000, which includes £30,000 for ongoing servicing work to be
done by Repro over the next two years
d. Sales of £200,000 on 1 October 2018 to an established customer which (with the
agreement of Repro) will be paid in full on 30 September 2020. Repro has a cost of
capital of 10%

5 I a e e f f e ea e ded 31 Ma c 2020, C a a a
accountant has suggested the following accounting treatments:
I Making a provision for a constructive obligation of £400,000; this being the sales value of
g d e ec ed be e ed b e a c e af e e ea e d de ec a
advertised 30-day returns policy
II Based on past experience, a £200,000 provision for unforeseen liabilities arising after the
year end
III The partial reversal (as a credit to the statement of profit or loss) of the accumulated
depreciation provision on an item of plant because the estimate of its remaining useful life
has been increased by three years
IV Providing £1 million for deferred tax at 25% relating to a £4 million revaluation of property
during March 2020 even though Cumla has no intention of selling the property in the near
future

Which of the above suggested treatments of provisions is/are permitted by IFRS?

a. I only
b. I and II
c. II and III
d. IV

6. An associate is an entity in which an investor has significant influence over the investee.
Which of the following indicate(s) the presence of significant influence?

I The investor owns 330,000 of the 1,500,000 equity voting shares of the investee
II The investor has representation on the board of directors of the investee
III The investor is able to insist that all of the sales of the investee are made to a subsidiary of
the investor
IV The investor controls the votes of a majority of the board members

a. I and II only
b. I, II and III
c. II and III only
d. All four
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7 The following information is available for the property, plant and equipment of Fry as at 30
September:
2019 2018
£000 £000
Carrying amounts 23,400 14,400

The following items were recorded during the year ended 30 September 2019:
I Depreciation charge of £2·5 million
II An item of plant, with a carrying amount of £3 million, was sold for £1·8 million
III A property was revalued upwards by £2 million
IV Environmental provisions of £4 million relating to property, plant and equipment were
capitalised during the year

Wha am ld be h i F a eme f ca h fl f cha e f e ,

plant and equipment for the year ended 30 September 2019?

a. £7.3 million
b. £8.5 million
c. £10.5 million
d. £12·5 million

8 On 1 October 2019, Bertrand issued £10 million x £1 convertible loan notes at par which carry
a nominal interest (coupon) rate of 5% per annum. The loan notes are redeemable on 30
September 2022 at par for cash or can be exchanged for equity shares. A similar loan note,
without the conversion option, would have required Bertrand to pay an interest rate of 8%.

The present value of £1 receivable at the end of each year, based on discount rates of 5%
and 8%, can be taken as:
5% 8%
End of year 1 0·95 0·93
2 0·91 0·86
3 0·86 0·79

H ld he c e ible l a a ea i Be a d a eme f fi a cial ii i i ial

recognition (1 October 2019)?

Equity Non-current liability

£000 £000
a. 810 9,190
b. nil 10,000
c. 10,000 nil
d. 40 9,960

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9 O 30 Se e be 2019, Ra c g e a c ed a d a ed a cost of £1
million. Some items of inventory which had cost £210,000 had been damaged in a flood (on
15 September 2019) and are not expected to achieve their normal selling price which is
calculated to achieve a gross profit margin of 30%. The sale of these goods will be handled
by an agent who sells them at 80% of the normal selling price and charges Razor a
commission of 25%.

At what value will the closing inventory of Razor be reported in its statement of financial
position as at 30 September 2019?

a. £1 million
b. £790,000
c. £180,000
d. £970,000

10 Although most items in financial statements are shown at their historical cost,
increasingly the IASB is requiring or allowing current cost to be used in many areas of
financial reporting. Drexler acquired an item of plant on 1 October 2017 at a cost of
£500,000. It has an expected life of five years (straight-line depreciation) and an estimated
residual value of 10% of its historical cost or current cost as appropriate. As at 30 September
2019, the manufacturer of the plant still makes the same item of plant and its current
price is £600,000.

What is the correct carrying amount to be shown in the statement of financial position of
Drexler as at 30 September 2019 under historical cost and current cost?

Historical cost Current cost

£ £
a. 320,000 600,000
b. 320,000 384,000
c. 300,000 600,000
d. 300,000 384,000

(Total 80 marks)

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QUESTION 11

Gallilea purchased the following equity investments:

On 1 January 2019: 70% of the issued share capital of Ghent. The acquisition was through
a share exchange of four shares in Gallilea for every five shares in Ghent. The market price
f Ga ea a e a 1 Ja a 2019 a 3 e a e. Ga ea a ag eed to pay the
a e de fG e 1.20 e ae 1 Ja a 2021. Ga ea c f ca a 10%
per annum.

On 1 April 2019: 6.75 million shares in Pursal paying £2.80 per share in cash immediately
assuming significant influence over the investee.
The summarised statements of profit or loss for the three companies for the year ended 30
September 2019 are:

Gallilea Ghent Pursal

£000 £000 £000
Revenue 112,000 40,000 46,000
Cost of sales (73,000) (34,000) (21,000)
Gross profit/(loss) 39,000 6,000 25,000
Other income 720 Nil Nil
Distribution costs (5,000) (3,000) (4,500)
Administrative expenses (7,800) (7,000) (8,500)
Finance costs (1,400) (1,000) Nil
Profit / (loss) before tax 25,520 (5,000) 12,000
Income tax (expense) / credit (5,200) 1,000 (3,000)
Profit / (loss) for the period 20,320 (4,000) 9,000

The following information is relevant:

(a) The other income of Gallilea includes a dividend of 4p per share paid by Ghent on 31 March
2019.

(b) T e de a fG e a dP a a e ca a a d e e e a 1 Oc be 2018 e e:
Ghent Pursal
000 000
Equity shares of £1 each 18,000 22,500
Retained earnings 21,000 36,000

(c) A fair value exercise was carried out at the date of acquisition of Ghent as follows:
Carrying amount Fair value Remaining life (straight line)
£000 £000
Land 17,000 20,000 not applicable
Plant 31,000 34,000 three years
The fair values have not been reflected G e f a ca ae e . Pa de ec a
included in cost of sales.

Ghent also had a contingent liability which Gallilea correctly estimated to have a fair value of
£280,000 at 1 January 2019. This value had not changed by 30 September 2019.
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(d) Ga ea c a e e -controlling interest at fair value at the date of acquisition.

For this purpose the directors of Gallilea considered a share price for Ghent of £2.80 per
share to be appropriate.

(e) No fair value adjustments were required on the acquisition of Pursal.

(f) In the nine months to 30 September 2019 Gallilea sold goods to Ghent at a selling price of
£20 million. Gallilea made a profit of cost plus 20% on these sales. £6 million (at cost to
Ghent) of these goods were still in the inventories of Ghent at 30 September 2019.

(g) Impairment tests for Ghent were conducted on 30 September 2019. They concluded that the
goodwill of Ghent should be written down by £1.2 million (to be treated as an administrative
expense).

(h) All trading profits and losses are deemed to accrue evenly throughout the year.

Required:

(i) Calculate the goodwill arising on the acquisition of Ghent at 1 January 2019, (48 marks)

(ii) Prepare the consolidated statement of profit or loss for the Gallilea Group for the year ended
30 September 2019. (72 marks)

Work to the nearest £000.

(Total 120 marks)

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SECTION B ANSWER ANY TWO QUESTIONS FROM THREE

QUESTION 12
You have been asked e e a e e f a ca ae e f La g L d ( La g ) f e ea
e ded 31 Ma c 2020. T e c a a ba a ce a a 31 Ma c 2020 be .
Debit Credit
£000 £000
Plant & equipment at cost 46,330
Plant & equipment accumulated depreciation at 31 March 2020 16,451
Land (valuation) at 1 April 2019 12,000
Trade and other payables 22,916
Trade and other receivables 20,007
Allowance for doubtful debts 1,346
Cash at bank 14,554
Retained earnings at 1 April 2019 14,612
Share capital (£1 shares) 14,800
Share premium 5,200
Revaluation reserve as at 1 April 2019 4,000
Draft profit for the year 8,500
6% loan note 13,000
Corporation Tax 85
Deferred taxation as at 1 April 2019 126
Inventories at 31 March 2020 8,145
101,036 101,036

The following information is relevant:

After the year-end, inventories that cost £260,000 were found to be damaged and could only be
sold for £132,000.

The land was revalued at 31 March 2020 and because of the effects of Brexit was found to be
worth only £6 million. The land had an original cost of £8 million. Ignore deferred taxation effects
of this revaluation.
At the year-end, Laing carried out an impairment test on its fleet of delivery vehicles which had
a carrying amount of £2,400,000. The fair value, less costs to sell, of these delivery vehicles
was deemed to be £1,693,000 and the value in use was calculated as £1,912,000. No
adjustment has yet been made in respect of this impairment test.
The allowance for doubtful debts is to increase to £1,700,000 at 31 March 2020.
Laing pays annual rent for its head office in advance. An amount of £480,000 was paid on 1
July 2019.
Laing needs to accrue outstanding audit fees of £300,000.
The 6% loan note was issued on 1 April 2019 at its nominal value of £13 million. The direct costs
of issue were £500,000 and these were charged to administrative expenses. The loan note will
be redeemed at a premium in 2025. The effective rate of interest is 8% per annum. 6 months
interest on the loan note was paid and charged to profit or loss on 1 October. No accrual was
made for the other 6 months.
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The corporation tax balance of £85,000 included in the trial balance was the result of an over-
estimate of the tax liability for the previous year. The corporation tax charge in respect of the
profits for the current year to 31 March 2020 is estimated to be £1,680,000.

At 31 March 2020, the tax base of Laing net assets (excluding land) was £4 million less than
their carrying amounts. The movement on deferred tax should be taken to profit or loss. The
income tax rate of Laing is 20%.

The company issued 5,000,000 new ordinary shares during the year at an issue price of £1.60
per share (paid in cash) on 31 January 2020. The share issue has been correctly recorded in
the trial balance at 31 March 2020.

The company paid dividends of 5p per share on 31 December 2019 and 4p per share on 31
March 2020. The dividends paid have been treated as an expense in the calculation of the draft
profit for the year.

REQUIRED

(i) Calculate the revised profit figure for the year to 31 March 2020. (52 marks)

(ii) Draft the statement of financial position for Laing Ltd as at 31 March 2020 (48 marks)

(Total 100 marks)

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QUESTION 13

The following issues relate to company clients of the firm of accountants you work for. Each
company has a year-end of 31 March 2020.

You are required to prepare a brief report for your manager explaining the appropriate
accounting treatments in each case along with supporting calculations as necessary.

You should cite relevant accounting regulations in your answer.

(i) Enterprise PLC are in the process of finalising their annual financial statements for the year to
31 March 2020. The profit after tax for Enterprise for the year ended 31 March 2020 has been
calculated as £3.6 million.

One outstanding issue is the calculation of the basic earnings per share figure for disclosure on
the face of the Statement of Profit or Loss. At 1 April 2019, the company had in issue 20 million
x £1 equity shares but they had made a fully subscribed rights issue on 1 October 2019 of one
new share for every four shares held at a price of £3.20 each. The market price of the equity
shares of Enterprise immediately before the issue was £3.50.

The Basic EPS for the year to 31 March 2019 was 25.8 pence.
(50 marks)

(ii) Archer Limited have entered into a leasing arrangement for the first time during the current year,
acquiring some specialised plant on 1 April 2019. The contract specifies an identified asset
which will be under the control of Archer for the period of the lease. The directors of Archer are
unsure as to how the lease should be accounted for in their financial statements.

The lease agreement required an initial deposit of £100,000 paid on 1 April 2019 and the first
annual rental of £500,000 to be paid on 31 March 2020. Further annual payments of £500,000
would be paid on 31 March each year for the next three years and a final instalment of £507,419
on 31 March 2024. The present value of the lease payments amounted to £2 million, the useful
life of the plant is 5 years and the agreement had an implicit finance cost of 10% per annum.

(50 marks)

(Total 100 marks)

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QUESTION 14

(i) Tandren has internally developed intangible assets comprising the capitalised expenses of the
d c f f ae ed a c c de ed ca . T e a gbe a e
generate substantial sums of revenue for the company through sales to schools on a global
basis.

The intangible asset is a material item in the statement of financial position. The costs incurred
improving the software to a higher standard of performance are capitalised. The costs related
to maintaining the software at that same standard of performance and correcting software
b g a e e e ed.

Ta d e acc g c ae a a g b e a e a e a ed a ca c . T e
company considers the software to have an indefinite useful life which is reconsidered annually
when it is tested for impairment.

Required:
Discuss the approach adopted by Tandren in accounting for their intangible asset.

(50 marks)

(ii) T e C ce a F a e f F a c a Re g e f a e a e ea e e
bases to be used in the valuation of assets and liabilities. These are:

Historical cost

Current cost

Realisable (settlement) value

Present value

Required:
Explain these four measurement bases and give an example of each being used in
international financial reporting standards.
(50 marks)

(Total 100 marks)

END OF EXAMINATION PAPER