FR March/June 2021 (20/21 syllabus)

Q1:
This scenario relates to two requirements.

Pastry Co is considering the acquisition of a subsidiary in the catering industry. Two

companies have been identified as potential acquisitions and extracts from the
financial statements of Cook Co and Dough Co have been reproduced below:

Statements of profit or loss for the year ended 30 September 20X7:

Cook Dough Co
Co $'000
$'000
Revenue 21,500 16,300
Cost of sales (14,545) (8,350)
Gross profit 6,955 7,950
Operating expenses (1,940) (4,725)
Finance costs (650) (200)
Profit before tax 4,365 3,025
Income tax (1,320) (780)
Profit for the year 3,045 2,245

Extracts from the statements of financial position as at 30 September 20X7:

Cook Co Dough Co
$'000 $'000
Non-current assets
Property 22,250 68,500
Equity
Equity shares of $1 1,000 1,000
each
Revaluation surplus - 30,000
Retained earnings 18,310 2,600
Non-current liabilities
Loan notes 7,300 5,200

Notes:
(1 Both companies are owner-managed. Dough Co operates from
) expensive city centre premises, selling to local businesses and the
public. Cook Co is a large wholesaler, selling to chains of coffee
shops. Cook Co operates from a number of low-cost production
 facilities.

(2 On 1 October 20X6, Dough Co revalued its properties for the first

) time, resulting in a gain of $30m. The properties had a remaining
useful life of 30 years at 1 October 20X6. Dough Co does not make
a transfer from the revaluation surplus in respect of excess
depreciation. Cook Co uses the cost model to account for its
properties. Dough Co and Cook Co charge all depreciation
expenses to operating expenses.

(3 Cook Co charges the amortisation of its research and development

) to cost of sales, whereas Dough Co charges the same costs to
operating expenses. These costs amounted to $1.2m for Cook Co
and $2.5m for Dough Co.

(4 The notes to the financial statements show that Cook Co paid its
) directors total salaries of $110,000 whereas Dough Co paid its
directors total salaries of $560,000.

(5 The following ratios have been correctly calculated in respect of

) Cook Co and Dough Co for the year ended 30 September 20X7:

Cook Co Dough Co
Gross profit margin 32.3% 48.8%
Operating margin 23.3% 19.8%
Return on capital 18.8% 8.3%
employed

(a) Adjust the relevant extracts from Dough Co's financial statements
to apply the same accounting policies as Cook Co and re-calculate Dough Co's ratios provided in
note (5).

(6 marks)

(b) Based on these adjusted accounting ratios, compare the performance of the two companies.
Your answer should comment on the difficulties of making a purchase decision based solely on the
extracts of the financial statements and the information provided in notes (1) to (5).

(14 marks)

(20 marks)
 This table should be used to answer part (a):

Adjustment (if
Dough Co Adjusted Dough Co
required)
Statement of Profit or Loss for the
$'000 $'000
year ended 30 September 20X7
Revenue 16,300
Cost of sales (8,350)
Gross profit 7,950
Operating expenses (4,725)
Finance costs (200)
Profit before tax 3,025
Income Tax (780)
Profit for the year 2,245

Statement of Financial Position at

30 September 20X7
Non-current assets
Property 68,500
Equity
Equity shares of $1 each 1,000
Revaluation Surplus 30,000
Retained Earnings 2,600
Non-current liabilities
Loan notes 5,200

Ratios:
(b)

Q2:
This scenario relates to two requirements.

On 1 January 20X2, Gold Co acquired 90% of the 16 million $1 equity share capital of
Silver Co. Gold Co issued three new shares in exchange for every five shares it
acquired in Silver Co. Additionally Gold Co will pay further consideration on 31
December 20X2 of $2.42 per share acquired. Gold Co's cost of capital is 10% per
annum and the discount factor at 10% for one year is 0.9091. At the date of
acquisition, shares in Gold Co and Silver Co had fair values of $8.00 and $3.50
respectively.

Statement of profit or loss for the year ended 30 September 20X2:

Gold Co Silver Co
$'000 $'000
Revenue 103,360 60,800
Cost of sales (81,920) (41,600)
Gross profit 21,440 19,200
Distribution costs (2,560) (2,980)
Administrative expenses (6,080) (3,740)
Investment income 800 -
Finance costs (672) -
Profit before tax 12,928 12,480
Income tax expense (4,480) (2,560)
Profit for the year 8,448 9,920

The following information is relevant:

(1 At 1 October 20X1, the retained earnings of Silver Co were $56m.

)

(2 At the date of acquisition, the fair value of Silver Co's assets were equal to their
) carrying amounts with the exception of two items:
 - An item of plant had a fair value of $2.6m above its carrying amount. The
remaining life of the plant at the date of acquisition was three years. Depreciation
is charged to cost of sales.

- Silver Co had a contingent liability which Gold Co estimated to have a fair value
of $850,000. This has not changed as at 30 September 20X2.

Silver Co has not incorporated these fair value changes into its financial
statements.

(3 Gold Co's policy is to value the non-controlling interest at fair value at the date of
) acquisition. For this purpose, Silver Co's share price at that date can be deemed
to be representative of the fair value of the shares held by the non-controlling
interest.

(4 Sales from Gold Co to Silver Co in the post-acquisition period had consistently

) been $600,000 per month. Gold Co made a mark-up on cost of 25% on these
sales. Silver Co had $1.2m of these goods in inventory as at 30 September
20X2.

(5 Gold Co's investment income is a dividend received from its investment in a 40%
) owned associate which it has held for several years. The associate made a profit
of $3m for the year ended 30 September 20X2.

(6 On 1 October 20X1 Gold Co issued 100,000 $100 6% convertible loan notes at

) par value, with interest payable annually in arrears over a five-year term. The
equivalent rate for non-convertible loan notes was 8%. Gold Co has recorded the
loan notes as a liability at par value and charged the annual 6% interest to
finance costs.

Discount factors in year Annuity factors for 5 years:

5:
6% 0.747 6% 4.212
8% 0.681 8% 3.993

(7) At 30 September 20X2 no impairment to goodwill is required.

(8) Profits accrue evenly throughout the year unless otherwise stated.

(a) Calculate the goodwill arising on the acquisition of Silver Co.

(6 marks)

(b) Prepare the consolidated statement of profit or loss for Gold Co for the year ended 30
September 20X2.

Note: All workings should be done to the nearest $'000.

(14 marks)
FR September/December 2022 (22/23 syllabus)
Q1:
This scenario relates to two requirements.

Treats Co manufactures confectionery. The following sector average ratios have been
obtained for the year ended 30 September 20X6:

Ratio Sector average

Return on year-end capital employed 28.8%
(ROCE)
Net asset turnover 2.4 times
Gross profit margin 55%
Operating profit margin 12%
Current ratio 1.8:1
Inventory turnover period 25 days
Gearing (debt/equity) 43%
Receivables collection period 15 days

Extracts from the financial statements of Treats Co for the year ended 30 September
20X6 are as follows:

Statement of Profit or Loss:

$'000
Revenue 214,553
Cost of sales (108,009)
Gross profit 106,544
Operating expenses (99,078)
Profit from operations 7,466
Finance costs (1,329)
Profit before taxation 6,137
Taxation (1,783)
Profit for the year 4,354

Statement of Financial Position:

$'000
ASSETS
Non-current assets:
Property, plant and equipment (note (1)) 61,984

Current assets:
Inventories 30,393
Trade and other receivables 17,603
47,996
Total Assets 109,980

EQUITY and LIABILITIES

Equity:
Ordinary shares 7,000
Other components of equity (Share 13,605
premium)
Retained earnings 5,363
Total equity (note (2)) 25,968

Non-current liabilities:
Borrowings 33,621

Current liabilities:
Trade and other payables 25,390
Overdraft (note (3)) 24,090
Current tax liabilities 911
50,391
Total Equity and Liabilities 109,980

The following information is also relevant:

(1 The property, plant and equipment relates to retail stores operated by Treats Co
) and the manufacturing plant, all of which are depreciated on a straight line basis
over 20 years. The original cost of these assets was $637.84m and the directors
are now considering replacing and updating much of the plant and equipment.

(2 Treats Co paid a dividend of $7.14m during the year despite the concern raised
) by some directors over the existing overdraft.
(3 The overdraft is used for working capital management purposes and does not
) form part of the long-term financing of Treats Co.

(4 Treats Co sells its products through supermarket chains in addition to its owned
) retail stores. Most companies in the sector exclusively sell through their own
retail stores.

Note: The following preformatted table relates to part (a) of the question and has
been replicated in the response area.

Ratio Workings Treats Co Sector average per

question
Return on year-end capital employed to be 28.8%
(ROCE) calculated
Net asset turnover to be 2.4 times
calculated
Gross profit margin to be 55%
calculated
Operating profit margin to be 12%
calculated
Current ratio to be 1.8:1
calculated
Inventory turnover period to be 25 days
calculated
Gearing (debt/equity) to be 43%
calculated
Receivables collection period to be
calculated

(a) Calculate for Treats Co the equivalent ratios to those provided for the confectionery
manufacturing sector.

Note: The preformatted table relating to part (a) (see below) has also been replicated in
the question scenario for your information.

(5 marks)
(b) Analyse the performance and financial position of Treats Co in comparison to its
sector averages.

(15 marks)

Requirement (a) Ratios:

Ratio Sector average per

Workings Treats Co question

Return on year-end capital employed 28.8%

(ROCE) to be calculated

Net asset turnover 2.4 times

to be calculated

Gross profit margin 55%

to be calculated

Operating profit margin 12%

to be calculated

Current ratio 1.8:1

to be calculated

Inventory turnover period 25 days

to be calculated

Gearing (debt/equity) 43%

to be calculated

Receivables collection period 15 days

to be calculated

Requirement (b) analysis:

Q2: This scenario relates to two requirements.

Perd Co acquired 80% of Sebastian Co on 1 April 20X6. Non-controlling interest

is valued at fair value.

Extracts from the draft financial statements of both entities are shown below:

Statement of profit or loss for the year ended 31 March 20X8:

Perd Co Sebastian Co
$'000 $'000
Revenue 58,200 34,300
Cost of sales (34,340) (20,400)
Gross profit 23,860 13,900
Operating expenses (18,040) (7,130)
Profit from 5,820 6,770
operations
Investment income 3,000 -
Finance costs (3,240) (1,600)
Profit before tax 5,580 5,170
Tax (1,560) (1,480)
Profit for the year 4,020 3,690

Statement of financial position as at 31 March 20X8:

Perd Co Sebastian Co
$'000 $'000
Total 297,310 110,540
assets

The following information is relevant:

(1) The cost of Perd Co's investment in Sebastian Co has been excluded from the
total assets listed above. As part of the consideration for Sebastian Co, $8m is
due to be paid on 1 April 20X8. Perd Co recorded a liability of $7.547m in its
individual statement of financial position at 31 March 20X7 which correctly
represents the liability at that date. No other accounting entries have been made
in relation to this consideration for the year ended 31 March 20X8. Perd Co has
a cost of capital of 6%.

(2) On acquisition of Sebastian Co, the goodwill was correctly calculated at $3.2m.
In the year to 31 March 20X7, goodwill was deemed to have been impaired by
$400,000. A further impairment of $300,000 is to be recognised for the year
ended 31 March 20X8. Impairment losses are charged to operating expenses.
(3) At 1 April 20X6, Sebastian Co's property had a carrying amount of $11m but a
fair value of $14m. At this date, the property had a remaining life of 15 years.
Sebastian Co sold the property for $15m on 30 September 20X7. For the year
ended 31 March 20X8, Sebastian Co has recorded the historic cost depreciation
and the historic cost profit on disposal of the property in operating expenses.
Depreciation is charged on a pro-rata basis.

(4) Perd Co made sales of $9m to Sebastian Co during the year ended 31 March
20X8. Sebastian Co had only paid for $2m of these goods at 31 March
20X8. These sales were made at a mark-up on cost of 25%, and Sebastian Co
holds one third of these goods at 31 March 20X8.

(5) At 31 March 20X8, the Perd group decided to revalue its non-current assets for
the first time. Perd Co's assets were deemed to have increased by $4.1m and
Sebastian Co's assets by $0.7m. Neither company has recorded the revaluation
in its individual financial statements. Ignore deferred tax.

(6) Sebastian Co paid a dividend of $1m in the year, which has been correctly
recorded by both companies.

(a) Prepare the consolidated statement of profit or loss and other comprehensive income
for the Perd group for the year ended 31 March 20X8.

(15 marks)

(b) Calculate the total assets that would be recognised in the consolidated statement of
financial position for the Perd group as at 31 March 20X8.

(5 marks)
FR March/June 2023 (22/23 syllabus)
Q1:
This scenario relates to three requirements.

The following trial balance was extracted from the accounting records of Sphinx Co
as at 31 December 20X5:

$'000 $'000
Land and buildings at cost (land $50m) - note 200,000
(1)
Plant and equipment at cost - note (1) 320,000
Accumulated depreciation at 1 January 20X5
- Buildings 90,000
- Plant and equipment 111,200
Inventory at 31 December 20X5 115,000
Trade and other receivables 130,000
Trade and other payables - note (2) 70,500
Bank 16,200
Current tax payable - note (4) 2,500
7% 20X9 loan notes - note (3) 30,000
Equity shares of $1 each - note (5) 120,000
Share premium - note (5) 5,000
Retained earnings - 1 January 20X5 158,150
Draft 20X5 profit before taxation 166,450
767,500 767,500

The draft profit before taxation figure in the above trial balance has been calculated
before any adjustments that may be required from notes (1) to (5) below.

The following information is also relevant:

(1 Until 1 January 20X5, Sphinx Co held land and buildings at cost. On 1 January
) 20X5 Sphinx Co had them valued at $250m, of which $80m related to the land.
No entries have yet been made to incorporate this valuation. The buildings have
a remaining useful life of 20 years as at 1 January 20X5.

Deferred tax on the revaluation is calculated at 20%.

Sphinx Co has a policy to make an annual reserve transfer in respect of the

additional depreciation charged each year. Prior to the revaluation the buildings
 were being depreciated over 50 years on a straight-line basis.

Plant and equipment is depreciated at 15% per annum using the reducing
balance method.

No depreciation for any assets has been charged in the year.

(2 On 31 October 20X5 Sphinx Co acquired inventory from an overseas supplier on

) credit for 40m Dinars. The invoice was paid in full on 25 January 20X6.

Sphinx Co had correctly recorded the purchase on 31 October 20X5, but no

further entries have been made at the year-end.

The following exchange rates are relevant:

31 October 20X5 $1=4 Dinars
31 December 20X5 $1=5 Dinars
25 January 20X6 $1=4.8 Dinars

(3 Interest on the loan notes is paid every six months with the next payment due on
) 1 January 20X6. The draft profit before taxation figure in the trial balance
includes the first interest payment on the 7% loan notes made on 1 July 20X5.

(4 A provision for income tax of $30m is required for the year ended 31 December
) 20X5. The balance on current tax represents the under/over provision of tax for
the year ended 31 December 20X4.

(5 On 1 September 20X5 Sphinx Co made a 1 for 5 rights issue at $1.25 per share.
) The rights issue was correctly accounted for on 1 September 20X5 and the
shares are included in the trial balance above.
(a) Prepare a schedule of adjusted profit for the year ended 31 December 20X5.
(4 marks)

(b) Prepare Sphinx Co's statement of changes in equity for the year ended 31
December 20X5.
(6 marks)

(c) Prepare the statement of financial position of Sphinx Co as at 31 December

20X5.
(10 marks)

(20 marks)
Q2:
This scenario relates to three requirements.

Vroom Co is an established company in the automotive industry and has been selling
cars globally for many years.

On 1 January 20X3, Vroom Co acquired 80% of Sleek Co’s $100m share capital.
Sleek Co is a company which specialises in electric vehicles. Vroom Co paid cash of
$650m on 1 January 20X3 and will pay a further $300m of cash on 1 January 20X6 if
Sleek Co meets certain performance targets. At 1 January 20X3, the fair value of the
$300m of consideration due to be paid on 1 January 20X6 was $210m and at 31
December 20X3 the fair value was deemed to be $160m.

Sleek Co is Vroom Co’s only subsidiary. Extracts from the Vroom Group’s
consolidated statement of profit or loss for the year ended 31 December 20X3 and
from Vroom Co’s statement of profit or loss for the year ended 31 December 20X2
are shown below.

Statement of profit or loss for the year ended 31 December:

20X3 20X2
Vroom Group Vroom Co
(consolidated (single entity)
) $m
$m
Revenue 13,450 12,200
Cost of sales (11,150) (9,800)
Gross profit 2,300 2,400
Operating expenses (1,570) (1,460)
Profit from operations 730 940

A member of the finance team has correctly calculated the capital employed figures to
be as follows:

20X3 20X2
Vroom Group Vroom Co
(consolidated) (single entity)
$m $m
Capital 33,670 31,450
employed

The following information is relevant:

(1 At acquisition, Sleek Co had retained losses of $80m. Sleek Co also had

) unrecognized intangible assets estimated to have a fair value of $250m and a
useful life of ten years. The non-controlling interest is measured at fair value, and
the share price of Sleek Co at acquisition was $6.80.

(2 Sleek Co has been correctly accounted for in the consolidated financial

) statements for the year ended 31 December 20X3. Sleek Co’s individual financial
statements for the period showed revenue of $380m with losses from operations
of $170m.

(3 In the face of declining global sales, Vroom Co recently undertook the decision to
) invest in Sleek Co due to the new technology it made use of, particularly in
relation to the research it was undertaking regarding long battery lives and self-
driving technology.

(4 During 20X3, Sleek Co continued to invest significant amounts in the battery and
) self-driving technology. In January 20X4 it was confirmed that the new battery
technology was viable. Sleek Co was able to patent this technology and the
project entered the development phase at this point. It is expected that this will
be completed during early 20X4. The self-driving technology is still in the
research phase.

(5 Vroom Co also launched a range of after-sales service arrangements for new

) customers during 20X3. Due to lower repairs required on new vehicles, these
have been profitable for Vroom Co.

(a) Calculate the goodwill that arose on the acquisition of Sleek Co.
(4 marks)

(b) Using the preformatted table provided, calculate the following ratios for the
years ended 31 December 20X3 and 31 December 20X2 for the Vroom Group
and Vroom Co respectively:
- Gross profit margin;
- Operating profit margin; and
- Return on capital employed (ROCE).
(3 marks)

(c) Analyse the performance for the Vroom Group for the year ended 31
December 20X3 compared to the performance of Vroom Co for the year ended
31 December 20X2.
(13 marks)