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Question 1

Guelder Ltd is currently preparing its financial statements for the year ended 31 December
2020. The following balances have been extracted from the company’s nominal ledger at
31 December 2020.

Note £
Sales 1,320,000
Administrative expenses 404,300
Purchases 698,000
Stock at 31 December 2019 23,600
Trade debtors (1) 76,300
Trade creditors 81,250
Research and development costs (2) 160,000
Land and buildings (5)
Cost (land £240,000) 690,000
Accumulated depreciation at 31 December 2019 185,000
Plant and equipment (3), (4), (5)
Cost 375,150
Accumulated depreciation at 31 December 2019 196,875
Profit and loss account reserve at 31 December 2019 147,825
Called up share capital (£1 shares) 500,000
Cash at bank (debit balance) 3,600

Notes:

(1) A review of the trade debtors balance was made in January 2021 and it was discovered
that a number of customer balances were over six months overdue. All outstanding balances
were investigated and it was concluded that £3,800 of trade debtors were unlikely to be
recovered.

(2) Between 1 May 2020 and 31 December 2020 £160,000 was spent on research and
development of two new products, Alpha and Beta, using new artificial intelligence (AI)
techniques. The full £160,000 has been recognised as an intangible asset (and credited to
cash). No other accounting entries have been made. The breakdown of expenditure for the
year ended 31 December 2020 was as follows:

£ £
Initial research into use of AI 34,000

Product Alpha (costs incurred to 31 August 2020)

Product development costs 48,800
Product development assistant 25,500
– employed on 1 July 2020
Sales staff training 6,300
Initial product testing 7,200
87,800
Product Beta (costs incurred to 31 December 2020)
Product development costs 38,200
160,000

Copyright © ICAEW 2021. All rights reserved. Page 3 of 10

Product development costs were incurred from 1 May 2020 for both products. On 1 July 2020
Alpha was considered to be commercially viable. 25% of the product development costs for
both products were incurred up to 30 June 2020. A review at the end of the reporting period
showed that Beta was not considered commercially viable due to advancements in biometric
technology.

Alpha was launched on 1 September 2020 and is estimated to have a useful life of three
years.

(3) On 1 January 2020 Guelder Ltd entered into a four-year finance lease for a 3-D printer.
The printer is estimated to have a useful life of four years. The present value of the minimum
lease payments at the commencement of the lease was £11,140, which was equivalent to
fair value.

A payment of £3,215 is due on 31 December each year, commencing on 31 December 2020.

The first payment was duly made on 31 December 2020, debiting plant and equipment and
crediting cash. No other accounting entries have been made in relation to the lease. The
implicit interest rate of the lease is 6%.

(4) On 31 December 2020, the directors decided they no longer needed a machine which
originally cost Guelder Ltd £25,000 on 1 January 2016. No adjustments have been made to
reflect this decision. The machine is expected to sell for £5,000 with estimated selling costs
of £200 and has a value in use of £1,000.

(5) No adjustments have been made for depreciation for the year ended 31 December 2020.
Guelder Ltd uses the straight-line basis for depreciation. Unless indicated otherwise,
buildings are depreciated over 40 years and plant and equipment at 15% pa.

All costs associated with tangible fixed assets are recognised in cost of sales.

(6) Stock at 31 December 2020 was correctly valued at £37,800.

(7) Guelder Ltd’s tax liability for the year ended 31 December 2020 has been estimated at
£9,800. An additional amount of £3,000 is due following an HMRC investigation. No amounts
have been reflected in the nominal ledger for tax.

Requirements

1. Prepare for Guelder Ltd a profit and loss account for the year ended 31 December 2020
and a balance sheet as at that date, in a form suitable for publication. (23 marks)

2. Explain, with supporting calculations, how the asset in Note (4) above would be treated
in Guelder Ltd’s financial statements for the year ended 31 December 2020 if Guelder
Ltd followed IFRS. (4 marks)

3. FRS 102, Section 102 Concepts and Pervasive Principles identifies comparability,
verifiability, timeliness and understandability as qualitative characteristics. Explain how
these characteristics help ensure that financial statements are useful to users. (5
marks)

Total: 32 marks

Copyright © ICAEW 2021. All rights reserved. Page 4 of 10

Question 2

Willow Firth is an ICAEW Chartered Accountant and has been recently appointed as financial
controller to Wayfaring Ltd, an engineering company based in the UK. Willow reports directly
to Balsa Carob, the finance director, who is also an ICAEW Chartered Accountant. Willow is
finalising the draft consolidated financial statements for Wayfaring Ltd and has received the
following email from Balsa.

I have to present the consolidated financial statements to the board next week.

You may be unaware but Wayfaring are looking for new investment and we have some
financial institutions that are interested. We need to publish a good set of results. In
particular, it is important to have a debt/equity ratio below 1; anything higher will be
considered too highly geared.

The directors are all entitled to profit-related bonuses which have already been
estimated based on the draft figures prepared by your predecessor, so hopefully you
won’t disappoint! Usually, the directors give all employees a bonus if they receive theirs,
so you’ll be everyone’s friend!

I’m sure you’ll want to make a good impression as you have only just joined the
company.

The following information has been passed to Willow to allow her to complete the
consolidated financial statements for the year ended 31 December 2020.

Draft figures for the Wayfaring Ltd group:

Profit for the financial year £315,000

Creditors: amounts falling due after more than one year £650,000
Capital and reserves (equity) £1,163,000

Debt/Equity ratio 0.56

(based on Creditors: amounts falling due after more than one year/Capital and reserves)

Additional information:

(1) On 1 January 2020 Wayfaring Ltd acquired new equipment that will be used in its latest
laser cutting technology. The equipment cost £50,000 and is estimated to have a
ten-year useful life. The equipment uses integrated lasers that need replacing every two
years at a cost of £6,000.

The total cost of the new equipment was debited to tangible fixed assets and depreciation for
the year ended 31 December 2020 was recognised based on the ten-year useful life.

(2) On 1 January 2020 Wayfaring Ltd issued 300,000 5% £1 redeemable preference shares
at par, debiting cash and crediting capital and reserves. These shares will be redeemed on
31 December 2024 at a premium. The effective interest rate is 6.75%. The preference share
dividend was paid on 31 December 2020 and was recognised directly in reserves.

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(3) On 1 April 2020 Wayfaring Ltd received a government grant of £150,000 for setting up a
new training scheme for 12 young adults. A condition of the grant is that the on-the-job
training must run for two years at the end of which at least 25% of trainees must be retained
by Wayfaring Ltd as full-time employees. The training scheme commenced on 1 April 2020.
Wayfaring Ltd’s accounting policy is to recognise government grants using the accrual model.

As Wayfaring Ltd plans to retain at least 50% of the trainees at the end of the training period
it credited the grant to ‘other income’ on receipt.

(4) On 1 July 2020 Wayfaring Ltd and Aspen Ltd, an unrelated company, each subscribed at
par for half of Sitka Ltd’s 80,000 £1 ordinary shares on its incorporation. Wayfaring Ltd and
Aspen Ltd have entered into a contractual arrangement whereby each will receive equal
profit shares and unanimous consent is required for all key operating decisions.

Sitka Ltd made a profit for the six months to 31 December 2020 of £32,600. During
December 2020 Wayfaring Ltd made sales of £6,000 to Sitka Ltd at a mark-up of 25%. Sitka
Ltd still held these goods in stock at 31 December 2020.

Wayfaring Ltd recognised the investment in Sitka Ltd at its cost of £40,000 within fixed assets
and recognised £6,000 in turnover from the sale of goods. No further accounting entries were
made in respect of Sitka Ltd.

Requirements

1. Explain the required UK GAAP financial reporting treatment of (1) to (4) above in
Wayfaring Ltd’s consolidated financial statements for the year ended 31 December
2020, preparing all relevant calculations. (21 marks)

2. Calculate the following revised figures for the year ended 31 December 2020 for the
Wayfaring Ltd group:

• Profit for the financial year

• Creditors: amounts falling due after more than one year
• Capital and reserves (equity)
• Debt/equity ratio
(4 marks)

3. Explain how the redeemable preference shares in Note (2) above would be accounted
for if the financial statements were prepared in accordance with FRS 105, The Financial
Reporting Standard Applicable to the Micro-entities Regime and calculate redeemable
preference shares at 31 December 2020. (2 marks)

4. Discuss the ethical issues arising from the scenario for Willow and set out any actions
she should take. (5 marks)

Total: 32 marks

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Question 3

The following information is relevant to Larch Ltd for the year ended 31 December 2020.

Balance sheet as at 31 December 2020 (extract)

2020 2019
£ £
Fixed assets
Tangible assets 822,800 795,200

Capital and reserves

Equity attributable to the owners of Larch Ltd
Called up share capital (£1 shares) 410,000 300,000
Share premium account 15,000 30,000
Profit and loss account 290,000 200,600

(1) Since 31 December 2015 Larch Ltd has used the revaluation model for land and
buildings. The following data is relevant:

Land Buildings
£ £
Net book value at 31 December 2015 200,000 315,000
Valuation at 31 December 2015 320,000 400,000
Valuation at 31 December 2020 340,000 335,000

The estimated useful life of the buildings at 31 December 2015 was 40 years and this has
never changed. Larch Ltd does not make annual transfers between reserves. The valuation
at 31 December 2020 is correctly included in the closing figure for tangible fixed assets
shown above.

(2) Depreciation of £23,000 was correctly calculated and recognised for the year ended
31 December 2020 in relation to tangible fixed assets. Equipment with a net book value of
£17,500 was disposed of during the year and a loss of £2,500 was made on the disposal.
New equipment was acquired for cash during the year. Other than the revaluation there were
no other movements on tangible fixed assets during the year.

(3) Larch Ltd made two share issues during the year:

• On 1 April 2020 a bonus issue of shares, utilising the share premium account as far as
possible.

• On 1 October 2020 a further issue of 60,000 shares at a premium.

(4) Draft profit for the year was £235,400. An interim dividend was paid in July 2020.

Requirements

1. Calculate the balance on Larch Ltd’s revaluation reserve at 31 December 2020. (3

marks)

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2. Prepare an extract from Larch Ltd’s statement of cash flows for the year ended
31 December 2020, showing:

• cash flows from investing activities; and

• cash flows from financing activities.
(7 marks)

3. Calculate the earnings per share at 31 December 2020. (2 marks)

Total: 12 marks

Copyright © ICAEW 2021. All rights reserved. Page 8 of 10

Question 4

At 1 January 2020 Hemlock Ltd had a number of investments including two subsidiaries,
Elder Ltd and Aspen Ltd. Hemlock Ltd acquired its 85% investment in Aspen Ltd on
1 January 2020.

On 1 August 2020 Hemlock Ltd sold its 75% holding in Elder Ltd’s 200,000 £1 ordinary
shares, for cash consideration of £530,000.

The draft summarised balance sheets for Hemlock Ltd and Aspen Ltd, at 31 December 2020
are shown below.
Hemlock Aspen
Ltd Ltd
£ £
Fixed assets
Tangible assets 485,000 316,000
Investments 543,000 –
1,028,000 316,000
Current assets
Stock 70,800 46,000
Trade and other debtors 84,600 18,600
Cash at bank and in hand 12,500 3,700
167,900 68,300

Creditors: amounts falling due within one year

Trade and other creditors (78,400) (24,600)
Taxation (68,000) (12,300)
(146,400) (36,900)

Net current assets 21,500 31,400

Net assets 1,049,500 347,400

Capital and reserves

Called up share capital (£1 shares) 350,000 225,000
Share premium account 175,000 –
Profit and loss account 524,500 122,400
1,049,500 347,400

Additional information

(1) Hemlock Ltd amortises all goodwill over 10 years.

(2) The consideration for the acquisition of Elder Ltd was £385,000 when the profit and loss
account reserve of Elder Ltd was £176,000.

The fair values of Elder Ltd’s assets, liabilities and contingent liabilities at the date of
acquisition were equal to their carrying amounts.

At 31 December 2019 Elder Ltd’s profit and loss account reserve was £283,500 and its profit
for the financial year to 31 December 2020 was £146,400. Profits accrued evenly over the
year.

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Cumulative amortisation of goodwill at the date of disposal in respect of Elder Ltd was
£38,625.

The only accounting entries made by Hemlock Ltd on the disposal of its shares in Elder Ltd
were to credit the sale proceeds of £530,000 to income and debit them to cash.

(3) The consideration for the acquisition of Aspen Ltd was £326,400.

Cash of £150,000 was paid on 1 January 2020, the date of acquisition, and was recognised
as a fixed asset investment. The remaining £176,400 is payable on 1 January 2022, for
which no accounting entries were made. An appropriate discount rate is 5% pa.

The fair values of Aspen Ltd’s assets, liabilities and contingent liabilities at 1 January 2020
were equal to their carrying amounts. A reassessment of Aspen Ltd’s assets, liabilities and
contingent liabilities and consideration transferred took place following acquisition and no
adjustments were necessary.

Aspen Ltd has developed a number of artificial intelligence-based systems which use
predictive analytics. This technology has not been recognised in Aspen Ltd’s financial
statements as it was internally developed. However, it is a separable asset and had a fair
value of £120,000 at 1 January 2020. The technology is estimated to have a useful life of four
years from 1 January 2020.

The profit and loss account reserve of Aspen Ltd was £75,000 at 1 January 2020.

(4) Aspen Ltd pays an annual management fee to Hemlock Ltd of £24,000, which is invoiced
in 12 equal monthly instalments. The December 2020 invoice was paid by Aspen Ltd on
31 December 2020 although the cash was not received by Hemlock Ltd until 2 January 2021
due to a delay in the banking system.

(5) In December 2020 Aspen Ltd sold goods to Hemlock Ltd for £12,000 earning a 20%
gross margin. At 31 December 2020 all the goods were still held by Hemlock Ltd and the
invoice remained unpaid.

Requirements

1. Briefly explain how the profit or loss for the year from discontinued operations should be
calculated in accordance with UK GAAP and calculate the figure in respect of the
disposal of Elder Ltd. (6 marks)

2. Prepare the consolidated balance sheet of Hemlock Ltd as at 31 December 2020.

(18 marks)

Note:

You should assume that the disposal of Elder Ltd constitutes a discontinued activity in
accordance with FRS 102 Section 5, Statement of Comprehensive income and Income
Statement.

Total: 24 marks

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