MARKING SCHEME

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EXAMINATION PAPER: ACADEMIC SESSION 2020/2021

MARKING SCHEME

Campus International Partners

Faculty Business

Department Accounting and Finance

Module Code ACCO 1115

Module Title Advanced Financial Accounting

Level 6

Duration 3 HOURS

Date May 2021

Module co-ordinator: Dr Dawn Reilly

INSTRUCTIONS TO CANDIDATES

Answer FOUR questions as follows:

SECTION A = 10 marks
Compulsory question 1 = 10 marks

SECTION B = 90 marks
Answer three out of four option questions 2 to 5 = 30 marks each
This is a CLOSED book examination.

Non-programmable calculators are permitted.

ONLINE EXAM
May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
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SECTION A
QUESTION 1 IS COMPULSORY

Question 1

a) 2 marks per relevant measure to a maximum of 6 marks

Commitment Example measure

Making 50% of all Amazon shipments net
zero carbon by 2030
Powering operations with renewable energy
by 2025
• Use of renewable energy powered
vehicles or bicycles or e-bikes
• Use of technology to ascertain the most
efficient delivery route
• Reduction of ‘next-day delivery’ in
favour of ‘green deliveries’
• Number of customers using pick-up
points to collect parcels
• Investment in technology to facilitate
the change to net zero carbon shipments
• Percentage of power provided by
renewable energy sources

Buying 100,000 electric vehicles • Number of electric vehicles purchased

• Number of vehicles using fossil fuels
that are still in operation
Investing $100 million in reforestation • Value of investment in reforestation
projects projects

Investing $2 billion to support the • Value of investment and breakdown of

development of technology and services that the spend per project or organisation
decarbonise and help to preserve the natural
world.

(6 marks)

b) 2 marks per relevant IFRS to a maximum of 4 marks

Only two standards are required:
Existing petrol and diesel vehicles may be overstated if they are no longer used to generate
economic benefits. The non-current assets should be subject to an impairment review under
IAS 36 and written down to recoverable amount or written off.
May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
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Useful lives of petrol and diesel vehicles or outdated technology may reduce. Judgements
and estimates are required to determine the useful lives of new electric vehicles under IAS
16. This is especially difficult given the relatively new technology and uncertainty over
battery efficiency.
Share based incentive schemes may be introduced to encourage directors to pursue
environmental targets. The scheme would be accounted for in accordance with IFRS 2 so the
P&L charge would be spread over the life of the scheme.
(4 marks)

Total = 10 marks

May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
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SECTION B
ANSWER THREE OUT OF FOUR QUESTIONS IN THIS SECTION

Question 2

A. Machine
At the commencement of the lease on 1 April 2020, Industry Ltd should recognise a lease
liability at the present value of the lease payments which is £70,218, together with the
corresponding right-of-use asset.
2 marks

Dr Right-of-use asset £70,218 ½ mark

Cr Lease liability (LL) £70,218 ½ mark

Subsequently the asset is depreciated over the shorter of its useful life of 12 years and the
lease term of 10 years, so 10 years: 1 mark

£70,218
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 10 𝑦𝑒𝑎𝑟𝑠 = £7,022 1 mark

Dr Depreciation expense P&L £7,022 ½ mark

Cr Right-of-use asset £7,022 ½ mark

The carrying amount of the right-of-use asset in the statement of financial position at the
year-end 31 March 2021 is £63,196 (£70,218 - £7,022).
1 mark

Subsequently, interest accrues on the lease liability at the implicit rate of 6%, and cash
payments of £9,000 in advance are paid as follows: 1 mark

YE b/f Cash Revised Interest c/f

b/f 6%
31 March
2021 70,218 (9,000) 61,218 3,673 64,891
2 marks
Cash paid of £9,000 is an outflow in the Statement of Cash Flows ½ mark
£9,000 is a financing activity ½ mark
Dr LL £9,000 ½ mark
Cr Cash £9,000 ½ mark
May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
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Interest of £3,673 is recorded as a finance cost in the P&L 1 mark

Dr Finance cost (P&L) £3,673 ½ mark

Cr LL £3,673 ½ mark

The total LL at the year-end in the Statement of Financial Position is £64,891: 1 mark
o £55,891 is the non-current liability ½ mark
o £9,000 is the current liability ½ mark

(16 marks)

B. Office furniture
The lease of a low value asset such as small items of office furniture may be recognised in
profit or loss on a straight-line basis.
1 mark

The rental expense is the total payments of £3,600 (900 + 500+500+500+500+700) divided
by the 3 years of the lease which equals £1,200 per annum (so £100 per month).
In the year ended 31 March 2021, the telephones are leased for 5 months so the rental
expense should be £500 (£100 x 5 months).
2 marks

Industry has paid £900 in cash by 31 March 2021 ½ mark

so there is a prepayment which is the difference of £400 (£900 - £500). 1 mark
£
Dr Rental expense 500 ½ mark
Cr Cash 900 ½ mark
Dr Prepayment 400 ½ mark

Alternative year end journal is Dr Prepayment 400, Credit Rental expense 400 if it assumed
the cash payment was recorded on 1 November 2020 (total for journal 1½ marks)
(6 marks)

May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
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C. Sale of clothing

Initially, the sale and trade receivable (trade debtor) should be translated at the historic rate
prevailing on 1 March 2021. 1 mark

$20,000 / 1.31 = £15,267 1 mark

o Dr Trade receivable £15,267 ½ mark
o Cr Sales (SPL) £15,267 ½ mark

The trade receivable account is a monetary item and must be re-translated at the closing rate
at the year end. 1 mark

$20,000 / 1.46 = £13,699 1 mark

The carrying amount of the trade receivable in the SFP at the year end is £13,699. ½ mark
There is a loss on re-translation of £1,568 (13,699 – 15,267) 1 mark
which should be recorded in the Statement of Profit or Loss ½ mark

o Dr SPL £1,568 ½ mark

o Cr Trade receivable £1,568 ½ mark

(8 marks)

Total = 30 marks

May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
 MARKING SCHEME
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Question 3
A. Convertible bonds

i. On initial recognition (1 April 2020)

• Per IFRS 9, on 1 April 2020, the convertible bond must be separated into its debt
(liability) and equity components using split accounting. (1 mark)

• The financial liability component is equal to the present value of an equivalent bond
without the option for conversion, being £1,804,503 (W1). (1 mark)

Y/E Y/E Y/E

(W1) 31/03/21 31/03/22 31/03/23
Interest (7% x 2,000,000) (1 mark) 140,000 140,000 140,000
Redemption of capital (1 mark) 2,000,000
Total cash flow 140,000 140,000 2,140,000
1 1 1
Discount factor (11%) (2 marks) 1.11 1.112 1.113
Total =
126,126 113,627 1,564,750
Present value (½ mark) 1,804,503

• The equity component is the balancing figure (the difference between the cash proceeds
received and the liability component), being £195,497 (£2,000,000 - £1,804,503). (1
mark)
o Dr Cash £2,000,000 (½ mark)
o Cr FL £1,804,503 (½ mark)
o Cr Equity (STBI) £195,497 (½ mark)
(9 marks)

ii. In Saket plc’s financial statements for the year ended 31 March 2021

• Subsequently, the equity component remains the same. (1 mark)

• The FL component is held under amortised cost (1 mark) as follows:

Effective
y/e b/f interest Cash c/f
11% 7%
1,804,503 (4 x ½ = 2 marks)
198,495 (140,000) 1,862,998
2021 or Own fig

May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
 MARKING SCHEME
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• In the year-ended 31 March 2021, a finance cost of £198,495 is recognised in the P&L.
(1 mark)
o Dr FC (P&L) £198,495 (½ mark)
o Cr FL £198,495 (½ mark)

• £140,000 is an outflow in the SoCF (financing activity/ financing and operating).

(1 mark)
o Dr FL £140,000 (½ mark)
o Cr Cash £140,000 (½ mark)

• The carrying amount of the FL on the SFP at 31 March 2021 is £1,862,998 which is a
non-current liability. (1 mark)
(9 marks)

B. Share options

i. Yearly charge to profit or loss

Year No. of No. of FV at Proportion Cumulative Current
ended employees options grant of vesting expense year P&L
(1 mark) (1 mark) period expense
(½ mark)
31 March =120-8-5-5 400 £3.30 1/3 £44,880 £44,880
2019 = 102 (½ mark) (½ mark)
(1 mark)
31 March = 120-8-4-5 400 £3.30 2/3 £90,640 £45,760
2020 = 103 (½ mark) (½ mark)
(1 mark)
31 March = 103 400 £3.30 3/3 £135,960 £45,320
2021 (½ mark) (½ mark) (½ mark)
(8 marks)

ii. Dr Payroll expense (SPL) 45,320 (½ mark)

Cr Equity 45,320 (½ mark)
(1 mark)

iii. The annual expense reflects the accruals concept. (1 mark)

The transaction is first recognised on the day the share options are granted to the employees
ie not the date they vest (31 March 2021), or the share option exercise date. (1 mark)

The share option expense remunerates employees for their service at Saket plc for the whole
of the vesting period. (1 mark)
(3 marks)
Total = 30 marks

May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
____________________________________________________________________________

Question 4

A. EPS

i.
Rights issue

5 shares at market value £3.30 5 x £3.30 16.50 ½

1 share at discounted rights price 1 x £1.50 1.50 ½
18.00
Theoretical ex-rights price 18 / 6 shares 3.00 ½
Bonus fraction 3.30 / 3.00 ½
(or = 11/10)

Weighted average number of shares

1 Apr – 30 Jun 3/12 x (500,000) x 11/10 137,500 3x½=1½
1 Jul – 30 Sep 3/12 x (500,000 x 6/5 = 600,000) 150,000 2x½=1
1 Oct – 31 Mar 6/12 x (600,000 + 40,000) 320,000 3x½=1½
Weighted average number of shares for ye 31.12.20 607,500 4

ALTERNATIVE CALCULATION
Alternative 4 marks:

Number of shares before rights issue 500,000

After rights issue 500,000 x 6/5 600,000 ½

After ‘bonus’ issue element 500,000 x 11/10 (550,000) ½
Therefore number at ‘market value’ 50,000 ½ method

1 April: 500,000 x 11/10 550,000 1

1 July: 9/12 x 50,000 37,500 1
1 October: 6/12 x 40,000 20,000 ½
Weighted average number of shares for ye 31.12.20 607,500

Earnings = [2,600,000 – 300,000] + no adjustment for OCI = 2,300,000 [½]+½

BEPS = £2,300,000 / 607,500 = 378.60p ½+½

(8 marks)

ii. Revised BEPS = 450 x 10/11 = 409.09p ½+½

(1 mark)

May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
____________________________________________________________________________

iii. In addition to the whole entity’s EPS, IAS 33: Earnings per share requires Cavi plc to
present Basic and Diluted EPS for the continuing operations only on the face of the
Statement of Profit or Loss.
2

Basic and Diluted EPS for the discontinued operation will also need to be calculated
and this information can be presented on the face of the SPL, or it can be disclosed in
a note to the financial statements.
2

(4 marks)

B. Operating segments
i.
A segment is reportable if its revenue (external plus internal) is greater than or equal to 10%
of total revenue: 1

10% x (520 + 330 = 850) = 85 1

This makes B, C and D reportable. ½

A segment is reportable if its assets are greater than or equal to 10% of total assets: 1

10% x 440 = 44 ½

This would make B, C, D and E reportable. ½

A segment is reportable if the absolute amount of its profit or loss is greater than or equal to
10% of profits (as profits are greater than losses for Geometric plc): 1

10% x (15 + 110 + 140 + 5) = 10% x 270 = 27 1

This also makes B, C, D and E reportable. 1

These quantitative criteria make the B, C, D and E segments reportable. ½

In addition, the total external revenue reported by operating segments must be at least 75% of
the entity’s total external revenue. 1

75% x external revenue = 75% x 520 = 390 ½

The total external revenue for reportable segments

May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
____________________________________________________________________________

= 250 + 120 + 40 + 30 = 440 1

which is greater than 390 and therefore only B, C, D and E are reportable. ½
(11 marks)

ii. IFRS 8 allows segments to be aggregated when they share similar economic
characteristics. 1

This means that they should have similar gross margins ½

so it might not be possible to aggregate the Beneath and Corner segments. ½

The CFO could look for other economic characteristics to see if the segments are
substantially similar. 1

If the different geographical markets where the segments operate have different
currencies, it may not be possible to argue that they share similar economic
characteristics. 1

If the CFO can demonstrate that the two segments share similar economic characteristics,
the segments would also need to have similar: (1 mark each for any two = 2 marks
maximum)
• products/services;
• production processes;
• type of customer;
• distribution methods;
• regulatory environment (eg for banks / utilities)
2
(6 marks)

Total = 30 marks

Question 5

A. Intangible assets

i. Mina Ltd meets the criteria for an intangible asset by purchasing the fishing quotas
because: (½ mark)

• The quotas are identifiable/ separable because they have been purchased separately
from Mina Ltd’s business so can be sold separately; (1 mark)
• The quotas are controlled by Mina Ltd because the quotas allow it to catch cod and
others may not without the quota; (1 mark)
May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
____________________________________________________________________________

• There are probable future economic benefits because Mina Ltd will use the cod to
make food products and sell them to supermarkets for revenue; and (1 mark)
• The cost can be measured reliably as the purchase price plus directly attributable
costs. (1 mark)

The cost on 1 February 2020 is £648,000 (60 quotas x £10,800). (1 mark)

The transaction costs of £560 and the legal fees of £1,240 are both directly attributable costs
because they would not have been incurred if Mina Ltd had not purchased the intangible
asset, so these costs are capitalised to the intangible asset. (1 mark)

The total intangible asset at 1 February 2020 is £649,800 (648,000 + 560 + 1,240). (1 ½
marks)

Dr Intangible asset 649,800 (½ mark)

Cr Cash 649,800 (½ mark)

(9 marks)

ii.

On the year end date of 31 December 2020, Mina Ltd may choose to use either the cost
model or revaluation model.

a) Cost model

Under the cost model, the intangible is measured at cost less accumulated amortisation and
impairment losses. (1 mark)

The fishing quotas have a finite life of 2 years so must be amortised over this period. (1
mark)

The amortisation charge for the year ended 31 December 2020 is £297,825 (649,800 x 1/2 x
11/12). (1 mark)

Dr Amortisation expense (P&L) 297,825 (½ mark)

Cr Accumulated amortisation 297,825 (½ mark)

The carrying amount of the intangible at 31 December 2020 under the cost model is therefore
£351,975 (649,800 – 297,825). (1 mark)

(5 marks)

b) Revaluation model

Under the revaluation model, the intangible is measured at revalued amount less accumulated
amortisation and impairment losses. (1 mark)
May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115
MARKING SCHEME
____________________________________________________________________________

The market value on 31 December 2020 is £710,400 (60 quotas x £11,840). (1 mark)

Compare this fair value to the carrying amount at year end of £351,975 (or own figure from
a)) and there is a revaluation gain of £358,425 (710,400 – 351,975). (1 mark)

Dr Intangible asset 358,425 (½ mark)

Cr Revaluation reserve 358,425 (½ mark)

The carrying amount of the intangible at 31 December 2020 is £710,400 which will be
amortised over the remaining 13 month useful life. (1 mark for either the carrying amount or
remaining UL)
(5 marks)
iii.

Mina Ltd may use the revaluation model because it meets the definition of an active market:
(1 mark)

• All fishing quotas are homogenous (identical) because each quota allows the holder to
catch 80 tonnes of cod in the North Sea; (1 mark)
• There are buyers and sellers available in the market because they are regularly bought
and sold by companies; and (1 mark)
• A price is readily available at £11,840 on 31 December 2020. (1 mark)
(4 marks)

B. Related parties

i.
Mina Ltd and Seabite Ltd are related parties because Seabite Ltd is a subsidiary of Mina Ltd.
The transaction is a related party transaction despite the sale being at market price. (2 marks)

Hans Pool and Mina Ltd are related parties because Hans Pool is the sales director and is
therefore one of the company’s key management personnel. The sale of the car is therefore a
related party transaction. (2 marks)
(4 marks)

ii. The financial statement disclosures that are required for a related party transaction
are:
• Nature of the relationship (1 mark)
• Nature of the transaction, including terms and conditions (1 mark)
• The amounts in the SPL and SFP which relate to the transaction (1 mark)

(3 marks)
Total = 30 marks

May 2021
Course Title AFA – Marking Scheme
Course Code – ACCO 1115