ADVANCED FINANCIAL REPORTING

Mid-term Exam (Spring 2023)

Instructors: Dr. Sharjeel Hasnie / Dr. Asad Ilyas

Duration=2 hours

Name: ______________________________ ERP No._______________

Instructions:

 Part 1 – MCQs (15): Please note that each mcq has only one correct answer (A/B/C/D).
You are required to use the ANSWER SHEET for marking MCQs and this sheet is
provided at the end of this paper.
 Part 2 – Subjective section (2 questions): For this part, please use the answer sheet
provided by the examination department.

Part 1 – MCQs
Question 1

P acquired 85% of the share capital of S on Oct 1st, 2021. The profit for the year ended Dec 31st,
2021, for S was $36,000. Profits are deemed to accrue evenly throughout the year. On Dec 31st,
2021, S's statement of financial position showed the following balances:

 Share capital= $200,000

 Retained earnings= S180,000

 FV of S’s plant was $10,000 lower than the carrying amount at the time of acquisition
with a remaining useful life of 5 years.

What was the value of net assets of S at acquisition?

Question 2

On June 30th, 2022, Gap acquired 800,000 of Jack's 1 million shares. Gap issued 2 shares for
every 4 shares acquired in Jack. On June 30th, 2022, the market price of Gap's shares was $4.80
and the market price of Jack's shares was $3.5.

Gap agreed to pay $550,000 in cash to the existing shareholders on June 30th, 2023. Gap's
borrowing rate was 10% per annum. Gap also agreed to pay a professional fee of $50,000 for
advice on the acquisition.

Calculate the cost of investment for Gap?

Question 3

North owns 75% of the shareholding of South and is preparing the consolidated financial
statement on Dec31st, 2022. The carrying amounts of PPE in both companies at the closing date
are as follows:

 North= $250,000
 South= $50,000

On January 1st, 2022, South transferred some PPE to North for $50,000. On this transfer date,
the cost and carrying amounts of PPE were $60,000 & $40,000 respectively with a remaining
useful life of 5 years on this date.

What is the carrying amount of PPE in the consolidated financial statement as at Dec 31st, 2022?

Question 4

Hack acquired 80% of shareholding of sack on January 1st, 2022. From January 1st to Dec 31st,
sack sold goods to hack for $4m at a mark-up of 25%. Hack's inventory at Dec 31st, 2022
included $3.2m of such inventory.

The income statement of each company showed the following values of cost of sales for the year
ending Dec 31st, 2022.

 Hack $14.7 m
 Sack $11.6 m

Calculate consolidated cost of sales for the year ending Dec 31st, 2022?

Question 5

Crown acquired 95% of the shareholding of heel on Jan 1st, 2022. On this date, Heel owned a
building with a fair value of $100,000 in excess of its carrying amount and a remaining useful
life of 20 years. The entire amount of depreciation is charged to operating expenses. Goodwill
has been impaired by $60,000 for the year ending Dec 31st, 2022.
The balances on operating expenses for the year ending on Dec 31st, 2023, are presented below:

 Crown= $500,000
 Heel= $250,000

Calculate the consolidated operating expenses for the year ending Dec 31st, 2023?

Question 6

ABC acquired 51% of the shareholding of XYZ on Oct 1st, 2021. On this date, ABC gave a
$550,000 @8% loan to XYZ. The loan interest is recorded correctly in individual financial
statements. The total finance costs for the year ending Dec 31st, 2021, in the individual financial
statements are presented below:

 ABC= $150,000
 XYZ= $70,000

What should be the consolidated finance costs for the year ending Dec 31st, 2021?

Question 7

P acquired 80% of the share capital of S on March 31st, 2020. The income year of both
companies ends on Dec 31st. The opening and closing retained earnings of S are 10,000 &
23,000 respectively. The inter-company interest income of $4,000 by S was earned on March
30th,2020, other than this interest income, it is assumed that profits evenly accrue during the
year.

Calculate retained earnings of S at acquisition?

Question 8

The profit before tax in the individual financial statements of Jack and sparrow as at Dec 31 st,
2022 are as follows:

 Jack= $20,000
 Sparrow (51% shares owned by Jack) = $12,000

The profit on the intercompany sale of inventory by Sparrow is $5,000 and 20% of the inventory
is still in hand. Further, sparrow earned a profit of $2,000 from the intercompany sale of PPE on
Jan 1st, 2022, of the income year. An incremental depreciation charge due to increased FV of
sparrow's assets is $500.

Calculate NCI's share of profit from the consolidated income statement as at Dec 31st, 2022?
Question 9

Rock ltd. acquired 60% of the share capital of stone ltd. on Jan 1st, 2020. The post-acquisition
retained earnings of stone ltd. was increased by $1,500. Stone's equity was valued at $11,000 at
the date of acquisition and Rock ltd. paid $11,000 on acquisition.

How much share of NCI should be presented in the statement of financial position as at Dec 31st,
2020?

Question 10

P Limited owns 70% of S Limited and 30% of A Limited. The tax charge for each company for
the year is P Limited $80 million S Limited $64 million and A Limited $48 million respectively.

What should be shown as the tax charge in the consolidated statement of comprehensive income?

Question 11

Falcon Limited acquired 30% of Eagle Limited on 1 July 2022 at a cost of $5.5 million. For the
year ended 30 September 2022, Eagle Limited reported a net profit of $625,000. The investment
in associate was impaired by an amount of $25,000 and impairment remained unrecorded.

What is the value of the associate investment in the group statement of financial position as at 30
September 2022?

Question 12

P Limited owns 30% of A Limited, which it purchased on 1 May 2017 for $2.5 million. At that
date A Limited had retained earnings of $5.3 million. At the year-end date of 31 October 2017, A
Limited had retained earnings of $6.4 million after paying out a dividend of $1 million. On 30
September 2017, P Limited sold $700,000 of goods to A Limited, on which it made 30% profit.

A Limited had resold none of these goods by 31 October.

At what amount will P Limited record its investment in A Limited in its consolidated statement
of financial position at 31 October 2017?

Question 13

P Limited acquired 80% of S Limited on 1 June 2011. Sales from S Limited to P Limited
throughout the year ended 30 September 2011 were consistently $1 million per month. S Limited
made a mark-up on cost of 25% on these sales. On 30 September 2011 P Limited was holding $2
million inventory that had been supplied by S Limited in the post-acquisition period. The
impairment in consolidated goodwill is estimated to be $20,000.
By how much will the decrease in profits attributable to the non-controlling interest for the year
ended 30 September 2011, be recorded?

Question 14

P Limited has owned 80% of S Limited for many years. In the current year ended 30 June 2013,
P Limited reported total revenues of $5.5 million, and S Limited of $2.1 million. P Limited sold
goods to S Limited during the year with a total value of $1 million, earning a margin of 20%.
Half of these goods remained in year-end inventories. Further, S Limited also sold goods worth
of $0.5 million to P Limited earning a margin of 25%. A quarter of these goods were still in
inventory at the year end.

What is the consolidated revenue figure of P group for the year ended 30 June 2013?

Question 15

On 1 July 2017, P Limited acquired 60% of the equity share capital of S Limited and on that date
made a $10 million loan to S Limited at a rate of 8% per annum.

What will be the effect of this transaction on group’s retained earnings at the year-end date of 31
December 2017?
 Part 2 – Subjective section
Question 1
The following are the financial statements of three companies P, S & A ltd. for the year ended
December 31st, 2022.
Statement of financial position as at December 31st, 2022
P S A
Non-current assets $ $ $
PPE 174,000 176,000 124,000
Investments
S (80%) 184,000 - -
A (30%) 30,000 - -
Current assets 194,000 80,000 18,000
582,000 256,000 142,000
Equity & Liabilities
Share capital ($1 per share) 400,000 150,000 70,000
Retained earnings 178,000 102,000 68,000
Liabilities 4,000 4,000 4,000
582,000 256,000 142,000

Statement of comprehensive income for the year ended December 31st, 2022
P S A
$ $ $
Revenues 1,000,000 400,000 200,000
Operating cost (800,000) (280,000) (120,000)
Operating profit 200,000 120,000 80,000
Finance cost (10,000) - -
PBT 190,000 120,000 80,000
Income tax expense (46,000) (42,000) (28,000)
PAT 144,000 78,000 52,000

Additional Information:
 The shares in S ltd. & A ltd. were acquired on January 1 st, 2021, when retained earnings
of S ltd. were $30,000 and A ltd. were $20,000.
 At the date of acquisition, the fair value of S ltd. plant was $20,000 higher than the
carrying amount. On this date the remaining useful life of the plant was 5 years.
 During the year S ltd. sold goods to P ltd., the cost and selling price were $10,000 &
$20,000 respectively. At the year-end 80% of the goods remained unsold.
 During the year A ltd. also sold goods to P ltd. for $15,000. The cost of these goods was
$10,000. At the year end goods worth of $10,000 remained unsold in P’s books.
  As a result of inter-company transactions, P’s books showed $10,000 & $5,000 as owing
to S ltd. & A ltd. These balances were agreed with the amounts recorded in S & A’s
books.
 The fair value of non-controlling interest was $46,000 at the date of acquisition. On
December 31st, 2022, the goodwill in respect to S ltd. was impaired by 30% of it’s
original amount, out of which current year’s loss was $2,400. The investment in A ltd.
was also impaired $900 out of which $300 was current year’s loss.
Required:
 A consolidated statement of financial position as at December 31st, 2022
(Marks=8)
 A consolidated statement of comprehensive income for the year ended December 31 st,
2022. (Marks=7)

Question 2
On October 1st, 2020, P ltd acquired 80% of the share capital of S ltd. Below are the statements
of comprehensive income for both companies:
Statement of comprehensive income for the year ended December 31st, 2020
P S
$"000" $"000"
Revenues 170,000 84,000
Cost of sales (126,000) (64,000)
Gross profit 44,000 20,000
Operating expenses (16,600) (11,200)
Operating profit 27,400 8,800
other income - 200
PBT 27,400 9,000
Tax expense (9,400) (2,800)
PAT 18,000 6,200

Additional Information:
 At the date of acquisition, the fair value of PPE of S ltd. was $4 million higher than the
carrying amount with a remaining useful life of 5 years.
 Post-acq. sales from S ltd. to P ltd. was $10 million with a mark-up of 25% on cost. P ltd.
sold $6.5 million worth of goods to external parties during the year.
 Consolidated goodwill was impaired by $2 million during the year.
 On October 1st,2020, a loan of $1 million @12% per annum was obtained by S ltd. from
it’s parent but this transaction remained unrecorded in the individual financial statements
of both companies.
  On December 31st, an asset with a carrying amount of $1 million was sold by S ltd. to P
ltd. for $1.2 million. This transaction was recorded by both companies.

Required:
A consolidated statement of comprehensive income for the year ended December 31st, 2020
(Marks=5)