This Paper Is Not To Be Removed From The Examination Halls

This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON 279 0091 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 for
External Students
Financial Reporting
Wednesday, 18 May 2011 : 2.30pm to 5.45pm
Candidates should answer FOUR of the following SEVEN questions. All questions 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.
© University of London 2011

UL11/0081 PLEASE TURN OVER
D01 Page 1 of 8
1. The statements of financial position (balance sheets) for Ear Ltd, Mouth Ltd and Nose Ltd as at 31
December 2010 are given as follows:
Statements of Financial Position as at Ear Mouth Nose

31 December 2010 Ltd Ltd Ltd
£ £ £
Non-current asset (land) 860,000 260,000 300,000
Investment 380,000
Inventories 140,000 40,000 50,000
Trade Receivables 8,000 30,000 60,000
Dividend receivable from group companies 12,000
Inter-company loans receivable from Mouth Ltd 90,000
Inter-company loans receivable from Nose Ltd 30,000
Cash 130,000 60,000 30,000
1,650,000 390,000 440,000
Share capital (£1 nominal value) 600,000 100,000 200,000

Retained profits 260,000 210,000 160,000
Revaluation reserve 30,000
Trade payables 730,000 30,000 10,000
Inter-company loans payable to Ear Ltd 40,000 20,000
Dividend payable 60,000 10,000 20,000
1,650,000 390,000 440,000
Ear Ltd acquired 70% of Mouth Ltd for £290,000 on 1 January 2006 when Mouth Ltd‟s share
capital and reserves stood at £190,000. At this date the fair value of Mouth Ltd's non-current assets
was £280,000 but they were recorded at their historical cost of £260,000. Mouth Ltd has not
incorporated this revaluation in its books.
Ear Ltd acquired 25% of Nose Ltd for £70,000 on 1 January 2007. At this date the fair value of
Nose Ltd's non-current assets was £300,000 and Nose Ltd incorporated this revaluation into its
accounts. The share capital and reserves on 1 January 2007 of Nose Ltd, including the revaluation
reserve, stood at £250,000.
Question continues on following page
UL11/0081
D01 Page 2 of 8
No changes to the share capital of Mouth Ltd and Nose Ltd have occurred since their acquisition by
Ear Ltd.
At the year end, all group companies declare a dividend of 10p per share. These dividends have
been accounted for correctly.
Ear Ltd's inventory figure includes £10,000 of inventory which had been bought from Mouth Ltd.
Mouth Ltd had paid £2,000 for these goods. Ear Ltd‟s inventory figure also includes £15,000 of
inventory which has been bought from Nose Ltd. Nose Ltd had paid £5,000 for these goods.
Goodwill is to be capitalised. Impairment of £50,000 is seen against the value of the goodwill of
Mouth Ltd in 2010.
Required
(a) Define a subsidiary and an associate company. Outline the differences in how such
companies are accounted for. (6 marks)
(b) Prepare the consolidated statement of financial position for Ear Ltd as at 31 December
2010. (19 marks)
2. Company M owns a manufacturing plant that cost £750,000 on 1 January 2009. The plant has a
useful economic life of five years from this date and it is used to manufactures a product called
the spike. There is no second hand market for the plant except as scrap and it is estimated that at
the end of its useful life, or at any other time, it will cost £30,000 net of scrap proceeds, to
dismantle and remove it. Annual operating costs are £300,000. The plant requires an overhaul
costing £22,500 during the third year of its life. It produces a constant annual output, all of
which can be sold, with an annual selling value of £600,000.
During February 2010, a new model of the plant used to manufacture the spike is brought out.
The directors of the company now intend to replace the existing spike plant with the new plant at
the end of the existing plant‟s life. The new plant costs £825,000 and has a six year useful life at
the end of which its scrap value is expected to be £15,000. It incurs constant annual operating
costs of £270,000 and produces a constant annual output, all of which can be sold, with a selling
value £22,500 per annum higher than the output of the existing plant. When the new plant is
installed for the first time the company will incur one off costs of £37,500 adapting the building
housing the new plant.
Any replacement plant together with the cost of adapting the building would be paid for at the
time of replacement. All other cashflows occur at the end of the years concerned. The
company‟s cost of capital is 10% per annum.
Required
(a) Define deprival value and discuss the strengths and limitations of deprival value as the
basis of asset valuation in corporate financial reports (12 marks)
(b) Calculate the deprival value of the company‟s spike making plant as at 31 December 2010.
(13 marks)
UL11/0081
D01 Page 3 of 8
3. Bear Ltd started trading on 1 January 2010. The income statement and the statement of financial
position for the first year of trading are given below:
Income statement for 2010

£ £
Sales 1,350,000
Cost of sales:
Opening inventories 75,000
Purchases 900,000
Closing inventories (90,000)
(885,000)
Gross profit 465,000
Depreciation (42,000)
Other expenses (150,000)
Net profit 273,000
Statement of Financial Position

as at 31 December 2010
£
Non-current assets – plant and 1,296,000
machinery
Inventories 90,000
Other net current assets 387,000
Net assets 1,773,000
Share capital (£1 shares) 1,500,000

Retained earnings 273,000
Share capital and reserves 1,773,000
The price change indices for the year were identified as follows:
RPI Plant and Inventories

machinery (stock)
1 January 2010 100 100 100

30 June 2010 110 120 135
30 November 2010 115 130 140
31 December 2010 120 150 145
Closing inventory was acquired on 30 November 2010. All non-current assets and opening
inventory were acquired on the first day of trading. Sales and purchases accrue evenly
throughout the year.
UL11/0081
D01 Page 4 of 8
Required
(a) What are fully stabilised current value financial statements? Discuss the advantages and
limitations of fully stabilised current value financial statements. (7 marks)
(b) Prepare an income statement for Bear Ltd for the year ended 31 December 2010 and a
statement of financial position for Bear Ltd as at 31 December 2010 using current value
(replacement cost) accounting and using the financial capital maintenance concept. Base
depreciation on the year-end value of non-current assets. (9 marks)
(c) Calculate the real realised and the real unrealised holding gains and losses on inventory
and non-current assets that would appear in a set of fully stabilised current value accounts
stabilised in pounds (£) as at 31 December 2010. Where would these items be recorded in
the financial statements for 2010? (9 marks)
4. Rhymes Ltd enters into two lease transactions in 2010 as follows:
(1) An asset, asset A, which could be purchased outright for £102,004 is instead leased for
three years. The useful economic life of the asset is three years and at the end of this time,
the asset will have no residual value. Rhymes Ltd is responsible for all maintenance and
repairs and for all insurance costs for asset A. The lease for asset A provides for half-
yearly payments in advance of £20,000, the first payment being made on 1 January 2010.
(2) An asset, asset B, which could be purchased outright for £120,000 is leased for three years
for annual payments of £30,000 per annum payable in advance. The useful economic life
of asset B is eight years. At the end of the three years, Rhymes Ltd intends to return the
asset. Rhymes Ltd is not responsible for maintaining and insuring asset B.
Required
(a) What are operating and finance leases? How should they be accounted for?
(10 marks)
(b) Show how asset A and asset B would be accounted for by Rhymes Ltd in 2010 and 2011.
(15 marks)
5. Answer all parts of this question.
(a) XYZ plc is considering whether to (i) issue share capital of £200,000 (£1 nominal value
shares) or (ii) issue £100,000 (£1 nominal value shares) and raise £100,000 from a long
term loan with an interest rate of 15% per annum. The future is uncertain and if XYZ plc
has a good year, profit before interest and tax will be £100,000 but if it has a poor year,
profit before interest and tax will be £20,000. Calculate profit after tax and earnings per
share in both scenarios and comment on your results. Assume the tax rate is 35%.
(8 marks)
(b) Identify and discuss the factors that influence the determination of the functional currency
of an overseas subsidiary? (5 marks)
UL11/0081
D01 Page 5 of 8
(c) A company entered into a construction contract with the following information:
Date commenced 1 January2010

Expected completion date 31 December 2011
Final contract price £4,000,000
Costs to 31 December 2010 £1,200,000
Value of work certified to 31 December 2010 £1,240,000
Progress payments invoiced to 31 December 2010 £220,000
Estimated costs to completion £1,000,000
Required
Show how the construction contract would be accounted for in the financial statements for
the year ended 31 December 2010. (7 marks)
(d) Identify and discuss the differences to the financial statements if a company used the last
in first out (LIFO) method for valuing inventory instead of the first in first out (FIFO)
method for valuing inventory in times of rising prices? (5 marks)
6. Either
(a) What are “non-current tangible assets” and “investment properties”? Discuss the
differences in the accounting treatment of “non-current tangible assets” and “investment
properties” and discuss how the different accounting treatments affect the financial
statements.
Or
(b) Why do we need a conceptual framework? Discuss the advantages and limitations of
conceptual frameworks.
7. Either
(a) Set out the definitions of well offness and measures of income suggested by Sir John Hicks
and evaluate their usefulness, implications and limitations for financial reporting.
Or
(b) Critically appraise both the traditional and economic arguments for and against accounting
regulation.
UL11/0081
D01 Page 6 of 8
Compound interest factors over n periods at rate i per period.
Table 1: Present value factors

To determine the present value of a single payment of 1 received „n‟ periods from the present at a
constant discount rate of x% per period
Periods 5% 6% 7% 8% 9% 10% 12%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929
2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972
3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118
4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355
5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674
6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066
7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523
8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039
9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606
10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220
11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875
12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567
13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292
14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046
15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827
16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631
17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456
18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300
19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161
20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037
UL11/0081
D01 Page 7 of 8
Table 2: Cumulative present value factors (‘annuity factors’)
The table gives the present value of „n‟ annual payments of 1 received for the next „n‟ years with a
constant discount rate of x% per year. For example, with a discount rate of 8% and with six annual
payments of £1 the present value is £4.6229
Periods 5% 6% 7% 8% 9% 10% 12%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929
2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901
3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018
4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373
5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048
6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114
7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638
8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676
9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282
10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502
11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377
12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944
13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235
14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282
15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109
16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740
17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196
18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497
19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658
20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694
END OF PAPER
UL11/0081
D01 Page 8 of 8
This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON 279 0091 ZB
BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the
Social Sciences, the Diplomas in Economics and Social Sciences and Access Route for
External Students
Financial Reporting
Wednesday, 18 May 2011 : 2.30pm to 5.45pm
Candidates should answer FOUR of the following SEVEN questions. All questions 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.
© University of London 2011

UL11/0082
PLEASE TURN OVER PLEASE TURN OVER
D01 Page 1 of 8
1. The income statements (profit and loss accounts) of Arm Plc, Leg Ltd and Toe Ltd for the year
ended 31 December 2010 are given as follows:
Arm Plc Leg Ltd Toe Ltd
Sales 1,000,000 400,000 200,000

Cost of sales (140,000) (100,000) (60,000)
Gross profit 860,000 300,000 140,000
Administration costs (189,500) (42,000) (35,000)
Distribution costs (104,000) (26,000) (10,000)
Dividends receivable 36,000
Profit before tax 602,500 232,000 95,000
Tax (200,000) (60,000) (20,000)
Profit after tax 402,500 172,000 75,000
Transfers to reserves (60,000) (30,000) (24,000)
Dividends payable (20,000) (10,000) (2,000)
Retained profit for the year 322,500 132,000 49,000
Retained profit brought 1,600,000 600,000 400,000
forward
Retained profit carried forward 1,922,500 732,000 449,000
Arm Plc acquired 60% of Leg Ltd on 1 January 2003 for £150,000 when Leg Ltd's retained profits
were £80,000. The share capital of Leg Ltd totalled £50,000 on 1 January 2003. There has been
no change in Leg Ltd‟d share capital since this date.
During 2010 Leg Ltd sold goods costing £4,000 to Arm Plc for £14,000. 20% of this inventory is
included in Arm Plc‟s inventory at the year end.
Arm Plc acquired 30% of Toe Ltd on 1 January 2005 for £200,000 when Toe Ltd‟s share capital
and reserves were £75,000. The share capital of Toe Ltd is made up of 20,000 shares of 50p each.
During 2010 Toe Ltd sold goods costing £6,000 to Arm Plc for £8,000. 50% of this inventory is
still in Arm Plc‟s inventory at the year end.
Goodwill is capitalised. Impairment of £5,000 was seen against the goodwill of Leg Ltd in 2008
and impairment of £10,000 was seen against the goodwill of Toe Ltd in 2010.
At the year end Arm Plc charges both Leg Ltd and Toe Ltd a management fee of 5% of turnover.
None of the companies have accounted for this management fee.
Required
(a) Define the following:

i. subsidiary companies
ii. non controlling interest (minority interest)
iii. goodwill and impairment (6 marks)
(b) Prepare the consolidated income statement (profit and loss account) for Arm Plc for the year
ended 31 December 2010. (19 marks)
UL11/0082
D01 Page 2 of 8
2. Company M owns a manufacturing plant that cost £2,000,000 on 1 January 2009. The plant has
a useful economic life of five years from this date and it is used to manufacture a product called
the spike. There is no second hand market for the plant except as scrap and it is estimated that at
the end of its useful life, or at any other time, it will cost £80,000 net of scrap proceeds, to
dismantle and remove it. Annual operating costs are £800,000. The plant requires an overhaul
costing £60,000 during the third year of its life. It produces a constant annual output, all of
which can be sold, with an annual selling value of £1,600,000.
During February 2010, a new model of the plant used to manufacture the spike is brought out.
The directors of the company now intend to replace the existing spike plant with the new plant at
the end of the existing plant‟s useful life. The new plant costs £2,200,000 and has a six year
useful life at the end of which its scrap value is expected to be £40,000. It incurs constant annul
operating costs of £720,000 and produces a constant annual output, all of which can be sold for
£60,000 per annum higher than the output of the existing plant. When the new plant is installed
for the first time the company will incur one off costs of £100,000 adapting the building housing
the new plant.
Any replacement plant together with the cost of adapting the building would be paid for at the
time of replacement. All other cashflows occur at the end of the years concerned. The
company‟s cost of capital is 10% per annum.
Required
(a) Define deprival value and discuss the strengths and limitations of deprival value as the
basis of asset valuation in corporate financial reports. (12 marks)
(b) Calculate the deprival value of the company‟s spike making plant at 31 December 2010.
(13 marks)
UL11/0082
D01 Page 3 of 8
3. Bear Ltd started trading on 1 January 2010. The income statement for the year ended 31
December 2010 and the statement of financial position as at 31 December 2010 are given as
follows:

£ £
Sales 4,050,000
Cost of sales
Purchases 2,700,000
(2,655,000)
Gross profit 1,395,000
Expenses (450,000)
Net profit 819,000
Statement of financial position

as at 31 December 2010
Non-current assets - plant 3,888,000

and machinery
Inventories 270,000
Other net current assets 1,161,000

The price change indices for the year were identified as follows:
RPI Plant and Inventories

machinery (stock)
1 January 2010 200 200 250

30 June 2010 220 240 270
30 November 2010 230 260 280
31 December 2010 240 300 290
Closing inventory was acquired on 30 November 2010. All non-current assets and opening
inventory were acquired on the first day of trading. Sales and purchases accrue evenly
throughout the year.
UL11/0082
D01 Page 4 of 8
Required
(a) Define fully stabilised current value accounts‟ and discuss their advantages and
limitations. (7 marks)
(b) Prepare an income statement for Bear Ltd for the year ended 31 December 2010 and a
statement of financial position for Bear Ltd as at 31 December 2010 using current value
(replacement cost) accounting and using the financial capital maintenance concept. Base
depreciation on the year-end value of non-current assets. (9 marks)
(c) Calculate the real realised and the real unrealised holding gains and losses on inventory
and non-current assets that would appear in a set of fully stabilised current value accounts,
stabilised in pounds (£) as at 31 December 2010. Where would these items be recorded in
the financial statements for 2010? (9 marks)
4. Rhymes Ltd enters into two lease transactions in 2010 as follows:
(1) An asset, asset A, which could be purchased outright for £319,770 is instead leased for
three years. The useful economic life of the asset is three years and at the end of this time,
the asset will have no residual value. Rhymes Ltd is responsible for all maintenance and
repairs and for all insurance costs for asset A. The lease for asset A provides for half-
yearly payments in advance of £60,000, the first payment being made on 1 January 2010.
(2) An asset, asset B, which could be purchased outright for £360,000 is leased for three years
for annual payments of £90,000 per annum payable in advance. The useful economic life
of asset B is eight years. At the end of the three years, Rhymes Ltd intends to return the
asset. Rhymes Ltd is not responsible for maintaining and insuring asset B.
Required
(a) What are operating and finance leases? How are they accounted for? (10 marks)
(b) Show how asset A and asset B should be accounted for by of Rhymes Ltd in 2010 and
2011. (15 marks)
5. Answer all parts of this question.
(a) What is share premium? Discuss the permissible uses for the share premium account.
(5 marks)
(b) XYZ plc is considering whether to (i) issue share capital of £400,000 (£1 nominal value
shares) or (ii) issue £200,000 (£1 nominal value shares) and raise £200,000 from a long
term loan with an interest rate of 15% per annum. The future is uncertain and if XYZ plc
has a good year, profit before interest and tax will be £200,000 but if it has a poor year,
profit before interest and tax will be £40,000. Calculate profit after tax and earnings per
share in both scenarios and comment on your results. Assume the tax rate is 35%.
(8 marks)
UL11/0082
D01 Page 5 of 8
(c) Prior to IFRS, the pooling of interest method was permissible. Explain the criteria then
laid down for the use of the pooling of interest method and outline the reasons for the
banning of the method. (5 marks)
(d) Technology Ltd entered into the following research and development expenditure in 2010:
£
Research (pure and applied) £600,000
Development £700,000
The development costs relate to a project to develop a new product. The project is
expected to be successful, leading to a new product which will generate substantial
revenues for the company. The company has enough resources to fund the project. Staff
costs of £400,000 have been incurred on the project during 2010. In addition capital
expenditure of £300,000 has been incurred during 2010. The capital expenditure relates to
the acquisition of equipment for final tests on the product and is depreciated using the
straight line method. The equipment has a useful economic life of 3 years and is then
expected to have no residual value
Required
Show how the research and development costs will be treated in the financial statements of
Technology Ltd in 2010. (7 marks)
6. Either
(a) What are “non-current tangible assets” and “investment properties”? Discuss the
differences in the accounting treatment of “non-current tangible assets” and “investment
properties” and discuss how the different accounting treatments affect the financial
statements.
Or
(b) Discus the reasons for initiating standard setting in the 1970‟s and assess the advantages
and limitations of standard setting in the UK.
7. Either
(a) Set out the definitions of well offness and measures of income suggested by Sir John Hicks
and evaluate their usefulness, implications and limitations for financial reporting.
Or
(b) Compare and contrast the different methods for translating the financial statements of
foreign subsidiaries. Discuss how the foreign exchange reserves arise under each method,
how they should be accounted for and the situations in which each of the methods should
be used.
UL11/0082
D01 Page 6 of 8

To determine the present value of a single payment of 1 received „n‟ periods from the present at a
constant discount rate of x% per period
Periods 5% 6% 7% 8% 9% 10% 12%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929
2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972
3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118
4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355
5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674
6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066
7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523
8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039
9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606
10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220
11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875
12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567
13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292
14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046
15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827
16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631
17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456
18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300
19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161
20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037
UL11/0082
D01 Page 7 of 8
The table gives the present value of „n‟ annual payments of 1 received for the next „n‟ years with a
constant discount rate of x% per year. For example, with a discount rate of 8% and with six annual
payments of £1 the present value is £4.6229
Periods 5% 6% 7% 8% 9% 10% 12%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929
2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901
3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018
4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373
5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048
6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114
7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638
8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676
9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282
10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502
11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377
12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944
13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235
14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282
15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109
16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740
17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196
18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497
19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658
20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694
END OF PAPER
UL11/0082
D01 Page 8 of 8
Examiners’ commentaries 2011

91 Financial reporting
Important note
This commentary reflects the examination and assessment arrangements
for this course in the academic year 2010–11. The format and structure
of the examination may change in future years, and any such changes
will be publicised on the virtual learning environment (VLE).
General remarks
Learning outcomes
At the end of this course, and having completed the Essential reading and
activities, you should be able to:
• explain and apply a number of theoretical approaches to financial
accounting
• record and analyse data
• prepare financial statements under alternative accounting conventions
• describe a number of regulatory issues relating to financial accounting
• critically evaluate theories and practices of, and other matters relating
to, financial accounting.
What are the Examiners looking for?

The exam paper contains seven questions, five of which combine
numerical and written components and two of which are essay based.
Each of the essay questions has a choice of two essays. The combined
questions require candidates to prepare calculations on a variety of
topics as well as showing a critical grasp of the theories underlying the
techniques. To do well candidates need to be able both to explain and
evaluate the theories and prepare a range of financial statements and
calculations.
For quantitative parts of questions, Examiners are looking for accurate
preparation of financial statements which follow generally accepted
formats with clear headings and accurate application of accounting
techniques to specific areas within financial reporting. Workings should
always be provided clearly.
Written components of combined questions require clear and coherent
explanations of theories, techniques and practices and critical evaluation
of theories and practices.
Good answers to essay-based questions will be structured coherently and
logically, include an introduction, a main body and conclusion and cover
all parts of the essay question.
Typically an essay-based question will require an explanation of an issue
within financial reporting and a critical analysis of the issue. Explanations
should be clear and include a discussion of key definitions with examples
if appropriate. The critical analysis should show critical awareness of both
1
sides of an argument or application of a theory or concept to financial

reporting with an assessment of its appropriateness to financial reporting.
Planning your time in the examination

All questions in the paper carry equal marks and equal time should be
devoted to each question. It is important that candidates attempt four
questions and all parts of each question they answer. Marks for each
section are given to each section and should be used by candidates to
guide their work and time allocation. Where questions are in parts,
candidates should avoid excessively long answers to some parts and
missing out other parts.
Key steps to improvement

Candidates can improve performance by improving the presentation of
their work, providing clear workings, answering the required number
of questions and attempting all sections of a question. Often candidates
seem to focus attention on the preparation of financial statements and the
financial calculations without being able to explain, discuss and evaluate
the theories and practices central to financial reporting.
Question spotting
Many candidates are disappointed to find that their examination
performance is poorer than they expected. This can be due to a number
of different reasons and the Examiners’ commentaries suggest ways
of addressing common problems and improving your performance.
We want to draw your attention to one particular failing – ‘question
spotting’, that is, confining your examination preparation to a few
question topics which have come up in past papers for the course. This
can have very serious consequences.
We recognise that candidates may not cover all topics in the syllabus in
the same depth, but you need to be aware that Examiners are free to
set questions on any aspect of the syllabus. This means that you need
to study enough of the syllabus to enable you to answer the required
number of examination questions.
The syllabus can be found in the ‘course information sheet’ in the
section of the VLE dedicated to this course. You should read the
syllabus very carefully and ensure that you cover sufficient material in
preparation for the examination.
Examiners will vary the topics and questions from year to year and
may well set questions that have not appeared in past papers – every
topic on the syllabus is a legitimate examination target. So although
past papers can be helpful in revision, you cannot assume that topics
or specific questions that have come up in past examinations will occur
again.
If you rely on a question spotting strategy, it is likely
you will find yourself in difficulties when you sit the
examination paper. We strongly advise you not to adopt
this strategy.
2

91 Financial reporting – Zone A
Important note
Format of the examination paper

Candidates should answer FOUR of the following SEVEN questions. All
questions 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.
Eight-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.
Comments on specific questions
Question 1
The statements of financial position (balance sheets) for Ear Ltd, Mouth Ltd and
Nose Ltd as at 31 December 2010 are given as follows:
Statements of Financial Position as at 31 Ear Ltd. Mouth Ltd. Nose Ltd.
December 2010
£ £ £
Non-current asset (land) 860,000 260,000 300,000
Investment 380,000
Inventories 140,000 40,000 50,000
Trade Receivables 8,000 30,000 60,000
Dividend receivable from group companies 12,000
Inter-company loans receivable from Mouth Ltd 90,000
Inter-company loans receivable from Nose Ltd 30,000
Cash 130,000 60,000 30,000
1,650,000 390,000 440,000
1
Share capital (£1 nominal value) 600,000 100,000 200,000

Retained profits 260,000 210,000 160,000
Revaluation reserve 30,000
Trade payables 730,000 30,000 10,000
Inter-company loans payable to Ear Ltd 40,000 20,000
Dividend payable 60,000 10,000 20,000
1,650,000 390,000 440,000

Ear Ltd acquired 70% of Mouth Ltd for £290,000 on 1 January 2006 when Mouth
Ltd’s share capital and reserves stood at £190,000. At this date the fair value of
Mouth Ltd’s non-current assets was £280,000 but they were recorded at their
historical cost of £260,000. Mouth Ltd has not incorporated this revaluation in its
books.
[For the full question, please refer to the Examination paper.]
Reading for the question
Subject guide, Chapter 7.
International financial reporting, Chapter 24.
Approaching the question
This question requires a detailed knowledge of preparation of consolidated
financial statements, in this case consolidated statements of financial
position. Candidates should know what consolidated financial statements
are, why they are prepared, what companies are included in consolidated
financial statements and the definitions and explanation of key items
included in consolidated financial statements. For the preparation of
consolidated statements, candidates need to know the formats of these
statements and be able to calculate the different components of the
statements. It is important that candidates show detailed workings of how
they arrive at figures included in the financial statements.
Part (a) full definitions of all terms are required and differences between
how they should be accounted for should be clearly explained.
Part b
Solutions to Part b provided below with key workings
Workings
Non current assets 1,140,000 860,000 + 280,000
Investments 20,000 38,000 – 290,000 – 70,000
Goodwill 100,500
Investment in associate co 95,000 25% * 380,000
Inventories 172,000 140,000 + 40,000 – 8,000

Trade receivables 38,000
Interco receivables from nose 30,000
Dividends receivable from nose 5,000
Cash 240,000 130,000 + 60,000 + 50,000
2
Share capital 600,000

P+L reserves 320,900
NCI/Minority interests 96,600 30% * 322,000
Trade payables 760,000
Dividends payable 63,000
Capital, reserves and liabilities 1,840,500

Goodwill
Mouth = 290,000 – 70% (190,000 + 20,000) = 143,000
Nose = 70,000 – 25% (250,000) = 7,500
Impairment = 50,000
Reserves
Ear Mouth Nose
P+L 260,000 210,000 160,000
Purp (8,000) (10,000)
Revised P+L 260,000 202,000 150,000
Share cap 600,000 100,000 200,000
Revaln 20,000 30,000
Capital and reserves 860,000 322,000 380,000
Retained earnings =
260,000 + 70% (202,000 – 90,000) + 25% (150,000 – 20,000) – 50,000
= 260,000 + 78,400 + 32,500 – 50,000 = 320,900
Alternative presentations are acceptable (e.g. goodwill of a added to
investment in a as follows or calculated as cost of investment + share of
post acq reserves – impairment).
Question 2
Company M owns a manufacturing plant that cost £750,000 on 1 January 2009.
The plant has a useful economic life of five years from this date and it is used
to manufactures a product called the spike. There is no second hand market for
the plant except as scrap and it is estimated that at the end of its useful life, or
at any other time, it will cost £30,000 net of scrap proceeds, to dismantle and
remove it. Annual operating costs are £300,000. The plant requires an overhaul
costing £22,500 during the third year of its life. It produces a constant annual
output, all of which can be sold, with an annual selling value of £600,000.
International financial reporting, Chapters 5 and 6.
This question covers both a discussion of deprival value and calculations
relating to deprival value. Candidates should attempt both parts of the
question and answer all the questions set. For the calculations, candidates
need to be able to apply the concepts of deprival value to an example. It
is important that candidates show detailed workings of how they arrive at
their answer.
3
Part a
A good discussion of deprival value with examples together with the
strengths and limitations of the concept is required. A discursive style
should be used rather than bullet points.
Part b
Solutions with key workings are provided below.
Aec = (825,000 + 4.3553 * 270,000 – 0.5645 * 15,000)/4.3553 =
457,480.
Have budget
2010 2011 2012 2013 2014…
Op costs of old machine 300,000 300,000 300,000
Overhaul 22,500
Removal 30,000
New building work 37,500
AEC 457,480
Totals 0 322,500 300,000 367,500 457,480
Have not budget

Adapt building 37,500
Aec 457,480 457,480 457,480 457,480
Extra income (22,500) (22,500) (22,500)
Difference 37,500 112,480 134,980 67,480 0
Df 1 0.9091 0.8264 0.7513
Pv 37,500 102,256 111,547 50,698 0
Pv of difference = cost of replacing services of existing asset = £302,001

= = deprival value
Note Some figures may be included differently in the AEC and have or
have not budgets and full credit is given for correct workings if different
to the above.
Question 3
Bear Ltd started trading on 1 January 2010. The income statement and the
statement of financial position for the first year of trading are given below:
This question covers both a discussion of fully stabilised current value
accounts and the preparation of current value financial statements and
calculations for key components of fully stabilised financial statements.
Candidates should attempt both parts of the question and answer all the
questions set. For the calculations, it is important that candidates show
detailed workings of how they arrive at their answer.
4
Part a
For the discussion of fully stabilised current value financial statements, it
is important that candidates discuss all parts of the question, provide clear
explanations and examples and assess both the advantages and limitations
of the concept in a discursive style. Bullet points should be avoided if
possible.
Part b
Solutions for part b are provided below:
IS £
Sales 1,350,000 1,350,000

Cost of sales
Op invent 75,000 135/100 101,250
Purchases 900,000 900,000
Clo invent (90,000) 135/140 (86,786)
(885,000) (914,464)
GP 465,000 435,536
Exp (150,000) (150,000)

Depreciation (42,000) 150/100 (63,000)
profit 222,536
Nca – unrealised 648,000
Nca realised 21,000
Invent – unrealised 3,214
Invent – realised 29,464
Retained earnings 273,000 924,214
Balance sheet
Non current assets 1,296,000 150/100 1,944,000
Inventories 90,000 145/140 93,214
Other net current assets 387,000 387,000
Net assets 1,773,000 2,424,214
Share capital (£1 shares) 1,500,000 1,500,000

Retained earnings 273,000 924,214
Share capital and 1,773,000 2,424,214

reserves
5
Part c
Solutions for Part c are given below.
Nca real unrealised 1,944,000 – 1,296,000 * 120/100 = 388,800
Nca real realised 63,000 – 42,000 * 120/100 =12,600
Inventory real realised 894,214 * 120/110 – 977,905 = 19,692
Inventory real unrealised 93,214 – 90,000 * 120/115 = (699)
Question 4
Rhymes Ltd enters into two lease transactions in 2010 as follows:
1. An asset, asset A, which could be purchased outright for £102,004 is instead
leased for three years. The useful economic life of the asset is three years and
at the end of this time, the asset will have no residual value. Rhymes Ltd is
responsible for all maintenance and repairs and for all insurance costs for asset
A. The lease for asset A provides for half-yearly payments in advance of £20,000,
the first payment being made on 1 January 2010.
2. An asset, asset B, which could be purchased outright for £120,000 is leased for
three years for annual payments of £30,000 per annum payable in advance.
The useful economic life of asset B is eight years. At the end of the three years,
Rhymes Ltd intends to return the asset. Rhymes Ltd is not responsible for
maintaining and insuring asset B.
[For the full question, please refer to the examination paper.]
The question covers both a discussion on operating and finance leases and
calculations showing how these would be accounted for in financial statements.
For the discussion of operating and finance leases, it is important that candidates
discuss all parts of the question, provide clear explanations and examples and
assess both the advantages and limitations of the concept in a discursive style.
Bullet points should be avoided if possible.
For the calculations, it is important that candidates show detailed workings of
how they arrive at their answer.
Part a
A discussion of the definition of operating and finance leases with examples is
required with discussion of how these different leases are accounted for.
Part b
Solutions for Part b are given below.
Asset a
Recognition that it is finance lease and reasons
Rate implicit in the lease
102,004 = 20,000 + 20,000 a5]?
a5]? = 82,004/20,000
a5]? = 4.1002 which gives a rate of 7% from tables.
6
Rental payments
Date Rental Finance charge Reduction in Balance of obligation
payment obligation under finance lease
1.1.2010 102,004
1.1.2010 20,000 X 20,000 82,004
1.7.2010 20,000 5,740 14,260 67,744
1.1.2011 20,000 4,742 15,258 52,486
1.7.2011 20,000 3,674 16,326 36,160
1.1.2012 20,000 2,531 17,469 18,691
1.7.2012 20,000 1,308 18,692 0 Rounding
difference
Income statement
2010 finance charge = 5,740 + accrual of 4,742 which relates to prior period
2011 finance charges = 3,674 + accrual of 2,531.
Sfp
Asset: non-current asset at 102,004 – with annual depreciation of 34,001.
2010 net book value = 68,003.
2011 net book value =34,002.
Liability
2010
Accrual of finance charge = 4,742
Lease obligation = 67,744 split between current of 31,584 and non current
of 36,160
2011
Accrual of finance charge = 2,531.
Lease obligation = 36,160 (all current).
Asset B
State that it is an operating lease and give the reason why.
Lease payments in income statement = £30,000 in 2010 and 2011.
Question 5
Answer all parts of this question.
a. XYZ plc is considering whether to (i) issue share capital of £200,000
(£1 nominal value shares) or (ii) issue £100,000 (£1 nominal value shares) and
raise £100,000 from a long term loan with an interest rate of 15% per annum.
The future is uncertain and if XYZ plc has a good year, profit before interest and
tax will be £100,000 but if it has a poor year, profit before interest and tax will
be £20,000. Calculate profit after tax and earnings per share in both scenarios
and comment on your results. Assume the tax rate is 35%. (8 marks)
b. Identify and discuss the factors that influence the determination of the
functional currency of an overseas subsidiary? (5 marks)
[For the full question, please refer to the examination paper.]
Subject guide, Chapters 8, 9, 11 and 14.
International financial reporting, Chapters 12, 15, 25, 26 and 27.
7

This question covers the accounting treatment of several different items,
some parts requiring discussion of concepts or key items in financial
statements and some parts require calculations. All parts of the question
should be attempted with clear workings provided of any required
calculations. The marks given to each section are indicated and these should
be used as a guide for how long candidates should spend on each section.
Solutions to Parts
Part a
Share capital Good Bad
PBIT 100,000 20,000
Tax (35,000) (7,000)
Pat 65,000 13,000
e/s 0.33 0.07
Share capital + debentures

PBIT 100,000 20,000
interest (15,000) (15,000)
PBT 85,000 5,000
Tax (29,750) (1,750)
Pat 55,250 3,250
e/s 0.55 0.03
Appropriate comments should be made for example relating to
variability and risk.
Part b
Up to five factors that influence the functional currency should be discussed.
Part c
Under IAS 11
Profit on contract = 4,000,000 – 1,200,000 – 1,000,000 = £1,800,000
Attributable profit = 1,8000,000 * 1,240,000/4,000,000 = 31%
Income statement
Sales 1,240,000
Cost of sales 31% * 2,200,000 (682,000)
Profit 558,000
sfp = amounts recoverable = costs to date + recognised profit – progress
payments = 1,200,000 + 558,000 – 220,000 = £1,538,000
under ssap 9
income statement same
balance sheet
Work in progress = £518,000
Debtors £1,020,000.
Part d
The definition of LIFO and FIFO should be given and the differences
between the methods and the impact of the difference methods on the
financial statements should be discussed clearly.
8
Question 6
Either
a. What are “non-current tangible assets” and “investment properties”? Discuss
the differences in the accounting treatment of “non-current tangible assets”
and “investment properties” and discuss how the different accounting
treatments affect the financial statements.
or
b. Why do we need a conceptual framework? Discuss the advantages and
limitations of conceptual frameworks.
This question related to a key component of financial statements, that of
non-current assets and investment properties. Candidates need to be able
to discuss the definitions of these items, analyse and discuss professional
accounting requirements in these areas, and provide appropriate examples.
A comparison of different accounting treatments and their impact on
financial statements is important and must be explicitly covered in the
answer. A discursive style should be adopted, avoiding bullet points if
possible.
Good answers should contain definitions of non-current tangible assets
and investment properties and identify the different accounting treatments
(depreciation, revaluations) possibly with a numerical example. The
impact on the SFP and income statement needs to be discussed, again
perhaps referring to a numerical example. Candidates may discuss the
economic consequences of the different treatment.
Part a
Good answers should contain definitions of non current tangible assets
Part b
This question related to an important issue within financial reporting,
that of the conceptual framework. Candidates need to be able to
define conceptual frameworks and discuss advantages and limitations
of conceptual frameworks. The question relates to standard setting in
general and not to any specific accounting standard, but candidates may
provide some examples of specific standards to illustrate their argument.
However, candidates must not write exclusively about specific standards
and not address the question set. A discursive style should be adopted,
avoiding bullet points if possible.
Good answers would define a conceptual framework and perhaps briefly
outline the main contents of a typical conceptual framework. Both the
9
advantages and disadvantages (see Chapter 2) should be discussed, with

candidates assessing these advantages and disadvantages.
Question 7
Either
a. Set out the definitions of well offness and measures of income suggested by
Sir John Hicks and evaluate their usefulness, implications and limitations for
financial reporting.
or
b. Critically appraise both the traditional and economic arguments for and
against accounting regulation.
Part a
This question related to Hicks’s concepts of well-offness and income.
Candidates need to be able to discuss and explain the concepts clearly
using appropriate examples to illustrate their arguments. Equally
important is the evaluation of the concepts in relation to financial
reporting. A discursive style should be adopted, avoiding bullet points if
possible.
Good answers would describe and give examples of the required
definitions, possibly referring to a numerical example. All three aspects
of usefulness, implications and limitations (see Chapter 3) need to be
addressed with some assessment of the issues raised.
Part b
This question related to accounting regulation in general rather to any
specific regulations. Candidates need to be able to define accounting
regulation illustrating this with suitable examples. Candidates need to be
able to discuss the advantages and disadvantages of accounting regulation
form different theoretical perspectives and relate this to issues seen within
accounting regulation in practice. A discursive style should be adopted,
Good answers should define accounting regulation and perhaps outline
the different types of regulation within accounting. Both traditional
and economic arguments (for example, Beaver’s arguments) need to be
discussed and assessed and arguments both for and against regulation
need to be presented.
10

To determine the present value of a single payment of 1 received ‘n’
periods from the present at a constant discount rate of x% per period
Periods 5% 6% 7% 8% 9% 10% 12%
1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929
2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972
3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118
4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355
5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674
6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066
7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523
8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039
9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606
10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220
11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875
12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567
13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292
14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046
15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827
16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631
17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456
18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300
19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161
20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037
11

The table gives the present value of ‘n’ annual payments of 1 received
for the next ‘n’ years with a constant discount rate of x% per year. For
example, with a discount rate of 8% and with six annual payments of £1
the present value is £4.6229
Periods 5% 6% 7% 8% 9% 10% 12%
1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929
2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901
3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018
4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373
5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048
6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114
7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638
8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676
9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282
10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502
11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377
12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944
13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235
14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282
15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109
16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740
17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196
18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497
19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658
20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694
12

91 Financial reporting – Zone B
Important note
Format of the examination paper

Candidates should answer FOUR of the following SEVEN questions. All
questions 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.
Eight-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.
Comments on specific questions

Question 1
The income statements (profit and loss accounts) of Arm Plc, Leg Ltd and Toe Ltd
for the year ended 31 December 2010 are given as follows:
Arm Plc Leg Ltd Toe Ltd
Sales 1,000,000 400,000 200,000
Cost of sales (140,000) (100,000) (60,000)
Gross profit 860,000 300,000 140,000
Administration costs (189,500) (42,000) (35,000)
Distributionistribution costs (104,000) (26,000) (10,000)
Dividends receivable 36,000
Profit before tax 602,500 232,000 95,000
Tax (200,000) (60,000) (20,000)
Profit after tax 402,500 172,000 75,000
Transfers to reserves (60,000) (30,000) (24,000)
Dividends payable (20,000) (10,000) (2,000)
Retained profit for the year 322,500 132,000 49,000
Retained profit brought forward 1,600,000 600,000 400,000
Retained profit carried forward 1,922,500 732,000 449,000
1
Arm Plc acquired 60% of Leg Ltd on 1 January 2003 for £150,000 when Leg Ltd’s
retained profits were £80,000. The share capital of Leg Ltd totalled £50,000 on
1 January 2003. There has been no change in Leg Ltd’d share capital since this
date.
This question requires a detailed knowledge of preparation of consolidated
financial statements, in this case consolidated income statements.
Candidates should know what consolidated financial statements are, why
they are prepared, what companies are included in consolidated financial
statements and the definitions and explanation of key items included in
consolidated financial statements. For the preparation of consolidated
statements, candidates need to know the formats of these statements
and be able to calculate the different components of the statements. It is
important that candidates show detailed workings of how they arrive at
figures included in the financial statements.
Part a
All definitions need to be discussed fully.
Part b
Solutions are provided below. All workings in £’000.
Sales (1,000 + 400 – 14) 1,386,000

Cost of sales (140 +100 – 14 + 2) (228,000)
Administration costs (189.5 + 42) (231,500)
Distribution costs (104 + 26) (130,000)
Investment income (36 – 6 – 0.6) 29,400
Management fee from a 10,000
Share of Associate’s earnings 0.3 * (95 – 1 – 10) 25,200
Goodwill (10,000)
Profit before tax 851,100
Tax 200 + 60 + 30% * (20) (266,000)
Profit after tax 585,100
NCI / Mint 40% (172 – 20 – 2) (60,000)
Transfer to reserves 60 + 0.6 * 30 + 0.3 * 24 (85,200)
Dividends payable (20,000)
Profit for the year 419,900
Retained profit brought forward 2,007,500
Retained profit carried forward 2,427,400
Workings
Ret Profit brought forward= 1,600 + 60% (600 – 80) + 30% (400 – 65)
– 5 = 1,600 + 312 + 100.5 – 5 = 2,007.5
2
Question 2
Company M owns a manufacturing plant that cost £2,000,000 on 1 January 2009.
The plant has a useful economic life of five years from this date and it is used
to manufacture a product called the spike. There is no second hand market for
the plant except as scrap and it is estimated that at the end of its useful life, or
at any other time, it will cost £80,000 net of scrap proceeds, to dismantle and
remove it. Annual operating costs are £800,000. The plant requires an overhaul
costing £60,000 during the third year of its life. It produces a constant annual
output, all of which can be sold, with an annual selling value of £1,600,000.
International financial reporting, Chapters 5 and 6.
This question covers both a discussion of deprival value and calculations
relating to deprival value. Candidates should attempt both parts of the
question and answer all the questions set. For the calculations, candidates
need to be able to apply the concepts of deprival value to an example. It
is important that candidates show detailed workings of how they arrive at
their answer.
Part a
For the discussion of deprival value, it is important that candidates discuss
all parts of the question, provide clear explanations and examples and
assess both the advantages and limitations of the concept in a discursive
style. Bullet points should be avoided if possible.
Part b
Solutions to Part b are given below.
Aec = (2,200,000 + 4.3553 * 720,000 – 0.5645 * 40,000)/4.3553 =
1,219,947.
Have
2010 2011 2012 2013 2014…
Op. costs of old machine 800,000 800,000 800,000
Overhaul 60,000
Removal 80,000
New building work 100,000
AEC 1,219,947
Totals 0 860,000 800,000 980,000 1,219,947
Have not
Adapt building 100,000
Aec 1,219,947 1,219,947 1,219,947 1,219,947
Extra income (60,000) (60,000) (60,000)
Difference 100,000 299,947 359,947 179,947 0
Df 1 0.9091 0.8264 0.7513
Pv 100,000 272,682 297,460 135,194 0
Pv of difference = cost of replacing services of existing asset = £805,336

= deprival value.
3
Note: Some figures may be included differently in the AEC and have or
have not budgets and full credit is given for correct workings if different
to the above.
Question 3
Bear Ltd started trading on 1 January 2010. The income statement for the year
ended 31 December 2010 and the statement of financial position as at
31 December 2010 are given as follows:
£ £
Sales 4,050,000
Cost of sales
Purchases 2,700,000
(2,655,000)
Expenses (450,000)
Net profit 819,000
Statement of financial position as at
31 December 2010
£
Non-current assets – plant and machinery 3,888,000
Inventories 270,000
Other net current assets 1,161,000
This question covers both a discussion of fully stabilised current value
accounts and the preparation of current value financial statements and
calculations for key components of fully stabilised financial statements.
Candidates should attempt both parts of the question and answer all the
questions set. For the calculations, it is important that candidates show
detailed workings of how they arrive at their answer.
Part a
For the discussion of fully stabilised current value financial statements, it
is important that candidates discuss all parts of the question, provide clear
possible.
4
Part b
Solutions to Part b are given below.
IS £
Sales 4,050,000 4,050,000
Cost of sales
Op invent 225,000 270/250 243,000
Purchases 2,700,000 2,700,000
Clo invent (270,000) 270/280 (260,357)
(2,655,000) (2,682,643)
GP 1,395,000 1,367,357
Exp (450,000) (450,000)

Depreciation (126,000) 250/200 (189,000)
728,357
Nca – unrealised 1,944,000
Invent unrealised 9,642
NCA – realised 63,000
Invent – realised 27,643
Retained earnings 819,000 2,772,642
Balance sheet SFP

Non-current assets 3,888,000 300/200 5832,000
Inventories 270,000 290/280 279,642
Other net current assets 1,161,000 1,161,000
Net assets 5319,000 7,272,642
Share capital (£1 shares) 4,500,000 4,500,000
Retained earnings 819,000 2,772,642
Share capital and reserves 5,319,000 7,272,642
Part c
Nca real unrealised 5,832,000 – 3,888,000 * 120/100 = 1,166,400.
Nca real realised 189,000 – 126,000 * 120/100 = 37,800.
Invent real realised 2,682,643 * 120/110 – 2,933,716 = (7,196).
Invent real unrealised 279,642 – 270,000 * 120/115 = (2,097).
5
Question 4
Rhymes Ltd enters into two lease transactions in 2010 as follows:
1. An asset, asset A, which could be purchased outright for £319,770 is
instead leased for three years. The useful economic life of the asset is
three years and at the end of this time, the asset will have no residual
value. Rhymes Ltd is responsible for all maintenance and repairs and for
all insurance costs for asset A. The lease for asset A provides for half-
yearly payments in advance of £60,000, the first payment being made on
1 January 2010.
2. An asset, asset B, which could be purchased outright for £360,000 is
leased for three years for annual payments of £90,000 per annum payable
in advance. The useful economic life of asset B is eight years. At the end of
the three years, Rhymes Ltd intends to return the asset. Rhymes Ltd is not
responsible for maintaining and insuring asset B.
The question covers both a discussion on operating and finance leases
and calculations showing how these would be accounted for in financial
statements. For the discussion of operating and finance leases, it is
important that candidates discuss all parts of the question, provide clear
possible.
For the calculations, it is important that candidates show detailed
workings of how they arrive at their answer.
Part a
A discussion of the definition of operating and finance leases with
examples is required with discussion of how these different leases are
accounted for.
Part b
Solutions for Part b are given below.
The answer requires a recognition that it is finance lease, and the reason
for this.
Asset a
Rate implicit in the lease:
319,770 = 60,000 +60,000 a5]?
a5]? = 259,770/60,000
a5]? = 4.3295 which gives a rate of 5% from tables.
6
Rental payments
Date Rental payment Finance charge Reduction in obligation Balance of obligation
under finance lease
1.1.2010 319,770
1.1.2010 60,000 x 60,000 259,770

1.7.2010 60,000 12,989 47,011 212,759
1.1.2011 60,000 10,638 49,362 163,397
1.7.2011 60,000 8,170 51,830 111,567
1.1.2012 60,000 5,579 54,421 57,146
1.7.2012 60,000 2,857 57,143 0 Rounding
difference
Income statement
2010 finance charge =12,989 + accrual of 10,638 which relates to prior
period.
2011 finance charges = 8,170 + accrual of 5,579.
Sfp
Asset: non-current asset at 319,770, with annual depreciation of 106,590.
2010 net book value = 213,180.
2011 net book value =106,590.
Liability
2010
Lease obligation = 212,759.
Current = 101,192.
Non-current = 111, 567.
2011
Lease obligation = 111,567 – all current.
Asset B
Operating lease
Operating lease and reason why.
Lease payments in income statement = £90,000 in 2010 and 2011.
7
Question 5
Answer all parts of this question.
a. What is share premium? Discuss the permissible uses for the share premium
account. (5 marks)
b. XYZ plc is considering whether to (i) issue share capital of £400,000 (£1
nominal value shares) or (ii) issue £200,000 (£1 nominal value shares) and
raise £200,000 from a long term loan with an interest rate of 15% per annum.
The future is uncertain and if XYZ plc has a good year, profit before interest
and tax will be £200,000 but if it has a poor year, profit before interest and
tax will be £40,000. Calculate profit after tax and earnings per share in both
scenarios and comment on your results. Assume the tax rate is 35%. (8 marks)
Subject guide, Chapters 7, 10, 12 and 14.
International financial reporting, Chapters 13, 16, 18, 24, 26 and 27.
This question covers the accounting treatment of several different items,
some parts requiring discussion of concepts or key items in financial
statements and some parts require calculations. All parts of the question
should be attempted with clear workings provided of any required
calculations. The marks given to each section are indicated and these
should be used as a guide for how long candidates should spend on each
section.
Solutions to parts
a. Definition of share premium and its uses should be fully discussed.
b.
Share capital Good Bad
PBIT 200,000 40,000
Tax (70,000) (14,000)
Pat 130,000 26,000
e/s 0.325 0.065
Share capital + debentures

PBIT 200,000 40,000
Interest (30,000) (30,000)
PBT 170,000 10,000
Tax (59,500) (3,500)
Pat 110,500 6,500
e/s 0.553 0.033
Appropriate comments should be made for example on variability and
risk.
c. Both the criteria for merger accounting and the reasons for why it was
banned need to be fully discussed.
d. Research will be written off to income statement as an expense.
Development project: Development will be capitalised and amortised if
it meets criteria which this project appears to. Identify criteria.
Capitalise staff costs of £400,000 and depreciation of £100,000.
8
Note: full marks were given if candidates assumed that the

development costs were in addition to staff costs and capital
expenditure.
Question 6
Either
a. What are “non-current tangible assets” and “investment properties”? Discuss
the differences in the accounting treatment of “non-current tangible assets”
and “investment properties” and discuss how the different accounting
treatments affect the financial statements.
Or
b. Discuss the reasons for initiating standard setting in the 1970’s and assess
the advantages and limitations of standard setting in the UK.
Part a
This question related to a key component of financial statements, that
of non-current assets and investment properties. Candidates need to
be able to discuss the definitions of these items, to analyse and discuss
professional accounting requirements in these areas, and provide
appropriate examples. A comparison of different accounting treatments
and their impact on financial statements is important and must be
explicitly covered in the answer. A discursive style should be adopted,
Good answers should contain definitions of non-current tangible assets
Part b
This question related to an important issue within financial reporting,
that of standard setting in the UK. Candidates need to be able to define
standard setting and discuss advantage and limitations of standard
setting, a topical subject in financial reporting. The question relates to
standard setting in general and not to any specific accounting standard
but candidates may provide some examples of specific standards to
illustrate their argument. However, candidates must not write exclusively
about specific standard and not address the question set. A discursive style
should be adopted, avoiding bullet points if possible.
Good answers should outline the process of standard setting in the UK
and may provide a definition of what an accounting standard is. Answers
should discuss the reasons for standard setting (see Chapter 1) and
discuss the advantages and disadvantage of standard setting. Candidates
9
may also discuss recent developments in standard setting in the UK and

discuss the improvements and advantages and limitations of the recent
developments.
Question 7
Either
a. Set out the definitions of well offness and measures of income suggested by
Sir John Hicks and evaluate their usefulness, implications and limitations for
financial reporting.
Or
b. Compare and contrast the different methods for translating the financial
statements of foreign subsidiaries. Discuss how the foreign exchange
reserves arise under each method, how they should be accounted for and the
situations in which each of the methods should be used.
Part a
This question related to Hicks’s concepts of well-offness and income.
Candidates need to be able to discuss and explain the concepts clearly
using appropriate examples to illustrate their arguments. Equally
important is the evaluation of the concepts in relation to financial
reporting. A discursive style should be adopted, avoiding bullet points if
possible.
Good answers would describe and give examples of the required
definitions, possibly referring to a numerical example. All three aspects
of usefulness, implications and limitations (see Chapter 3) need to be
addressed with some assessment of the issues raised.
Part b
The question related to the topic of foreign exchange within financial
reporting. Candidates need to be able to explain the accounting
techniques, providing suitable examples to illustrate their answer.
Candidates also need to be able to compare and contrast different
techniques in this question, identify the key similarities and differences
between the different techniques and explain and discuss the impact of
different techniques on financial statements. A discursive style should be
adopted, avoiding bullet points if possible.
Good answers should outline the temporal and closing rate methods and
compare and contrast these methods, for example, the key exchange
rates used, where the FX is accounted for, treatment of goodwill, etc.,
possibly referring to a numerical example. Candidates should describe
the situations when the different methods should be used and identify
the factors which indicate the functional currency and which method is
required.
10

Periods 5% 6% 7% 8% 9% 10% 12%
1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929
2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972
3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118
4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355
5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674
6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066
7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523
8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039
9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606
10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220
11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875
12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567
13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292
14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046
15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827
16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631
17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456
18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300
19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161
20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037
To determine the present value of a single payment of 1 received ‘n’
periods from the present at a constant discount rate of x% per period
The table gives the present value of ‘n’ annual payments of 1 received
for the next ‘n’ years with a constant discount rate of x% per year. For
example, with a discount rate of 8% and with six annual payments of £1
the present value is £4.6229.
Periods 5% 6% 7% 8% 9% 10% 12%
1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929
2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901
3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018
4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373
5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048
6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114
7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638
8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676
9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282
10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502
11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377
12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944
13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235
14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282
15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109
11
16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740

17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196
18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497
19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658
20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694
12

This Paper Is Not To Be Removed From The Examination Halls

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

This Paper Is Not To Be Removed From The Examination Halls

Uploaded by

Copyright:

Available Formats

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON 279 0091 ZA

Wednesday, 18 May 2011 : 2.30pm to 5.45pm

© University of London 2011

Statements of Financial Position as at Ear Mouth Nose

Share capital (£1 nominal value) 600,000 100,000 200,000

1,650,000 390,000 440,000

Question continues on following page

Income statement for 2010

Net profit 273,000

Statement of Financial Position

Net assets 1,773,000

Share capital (£1 shares) 1,500,000

Share capital and reserves 1,773,000

RPI Plant and Inventories

1 January 2010 100 100 100

Question continues on following page

4. Rhymes Ltd enters into two lease transactions in 2010 as follows:

5. Answer all parts of this question.

Question continues on following page

Date commenced 1 January2010

Table 1: Present value factors

Periods 5% 6% 7% 8% 9% 10% 12%

Periods 5% 6% 7% 8% 9% 10% 12%

UNIVERSITY OF LONDON 279 0091 ZB

Wednesday, 18 May 2011 : 2.30pm to 5.45pm

© University of London 2011

Sales 1,000,000 400,000 200,000

(a) Define the following:

Income statement for 2010

Statement of financial position

Non-current assets - plant 3,888,000

Net assets 5,319,000

Share capital (£1 shares) 4,500,000

Share capital and reserves 5,319,000

RPI Plant and Inventories

1 January 2010 200 200 250

Question continues on following page

4. Rhymes Ltd enters into two lease transactions in 2010 as follows:

5. Answer all parts of this question.

Question continues on following page

Table 1: Present value factors

Periods 5% 6% 7% 8% 9% 10% 12%

Periods 5% 6% 7% 8% 9% 10% 12%

Examiners’ commentaries 2011

What are the Examiners looking for?

sides of an argument or application of a theory or concept to financial

Planning your time in the examination

Key steps to improvement

Examiners’ commentaries 2011

Format of the examination paper

Comments on specific questions

Share capital (£1 nominal value) 600,000 100,000 200,000

1,650,000 390,000 440,000

Inventories 172,000 140,000 + 40,000 – 8,000

Net assets 1,840,500

Share capital 600,000

Capital, reserves and liabilities 1,840,500

Have not budget

Pv of difference = cost of replacing services of existing asset = £302,001

Sales 1,350,000 1,350,000

Exp (150,000) (150,000)

Retained earnings 273,000 924,214