ACC303 FINANCIAL REPORTING II 1st SEMESTER 2020/21 Final Exam
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ACC303
1st SEMESTER 2020/21 Final Exam
BA Accounting – Year 4
FINANCIAL REPORTING II
Section A – Compulsory
On 1 January 2018, Solar plc paid £856,400 to purchase 339,500 shares in Pluto. Solar's policy is to report any non-controlling interests (NCI) at fair value at the date of acquisition. At 1 January 2018, the value of the goodwill attributable to the non-controlling interest in Pluto was £125,000. At the end of 2020, the statements of financial position for the two companies are as follows:
Statements of Financial Position 31 December 2020
Solar Plc
Pluto Plc
E
Non-current Assets
Tangible(net book value)
Investment in Pluto Plc
E
2,045,600
856,400
E
E
1,047,000
Nil
Current Assets
Inventories
Trade receivables
Bank and cash
Total Assets
Equity
Issued share capital:
E 1 ordinary shares
Share premium account
Revaluation surplus
Retained earnings
Non-current Liabilities
10% Loan notes
Current Liabilities
Trade payables
Bank overdraft
Loan interest
Total Equity & Liabilities
425,400
335,400
23,000
------------
1,310,000
356,000
260,000
730,300
------------
356,500
123,000
50,000
------------
114,500
125,200
46,600
------------
3,685,800
=======
485,000
Nil
220,000
320,000
------------
200,000
92,300
Nil
16,000
------------
1,333,300 =======
Additional Information:
(1) At the date of acquisition, Pluto’s retained earnings stood at £210,000 and both companies have not issued any new shares since 2017.
(2) At the date of acquisition the land and buildings of Pluto were revalued to fair values and a revaluation surplus of £180,000 was created. All other assets were deemed to be stated at fair values.
(3) On 31 December 2020 the group carried out a full scale revaluation exercise in line with IAS 16 Property, Plant and Equipment which is reflected in the individual statements of financial position above. Solar does not depreciate land and buildings.
(4) As a result of the slightly disappointing performance of Pluto, the directors of Solar are of the view that the goodwill remaining in Pluto at 31 December 2020 is only worth £362,650.
(5) The details of intra-group transactions during 2020 are as follows:
(i) Solar makes sales to Pluto at a mark-up on cost of 50%. At 31 December 2020, Pluto’s inventory includes £18,000 of goods bought from Solar.
(ii) At 31 December, Solar’s books showed Pluto as a receivable for £50,000.
However, this did not take into account a cheque for £20,000 that was sent by Pluto on 30 December and had not been received by 31 December.
(iii) On 1 January 2020 Solar sold an item of plant to Pluto for £300,000. Solar carried
this plant at £200,000 on the date of sale. Pluto has charged depreciation of £30,000 on this plant since it was acquired. The plant is depreciated using 10% straight-line method.
Required
(a) Prepare a consolidated statement of financial position for the Solar group at 31December 2020 (28 marks).
(b) Explain:
(i) what is a negative goodwill (2 marks)
(ii) when the negative goodwill may arise (3 marks)
(ii) how you would account for this negative goodwill. (2 marks)
Section A: Total 35marks
All calculations must be clearly shown
Section B–Compulsory
Megahealth plc has an accounting year end of 31st March, and its two most recent Statements of financial position are given below.
As at 31 March
Non-current assets
Property, plant & Equipment (net)
Investments
Current Assets
Inventory
Trade receivables
Held for sale investments
Cash
Total Assets
Equity
Share Capital
Share Premium
Revaluation Surplus
Retained Earnings
Non-current liabilities
10% Bank loan
|
2020 £000 |
£000
7,440 800 |
8,240
740
720
20
4
1,484
|
9,724 |
|
3,600 800 1,200 1,412 |
7,012
800
2019
£000 £000
6,260
200
6,460
460
800
nil
80
1,340
|
7,800 |
|
3,000 600 800 732 |
5,132
1,400
Current Liabilities
Bank loan
Trade Payables
Accrued wages
Provision for warranties
Taxation
Bank overdraft
Total Liabilities and Equity
Additional notes.
200
400
48
300
320
nil
1,268
7,800
|
(i) Included in Megahealth plc's Profit or Loss and Statement of Changes in Equity for the year ended 31 March 2020 are the following items:
£000 Investment income 60 Interest expense 124 Income tax 340 Dividends paid 504 Depreciation expense 1,300 |
|
(ii) During the year ended 31 March 2020, Megahealth plc sold plant and equipment, originally costing £800,000, for £100,000. At the time of disposal, the accumulated depreciation on these assets was £640,000. |
|
(iii) The non-current investments are shares that Megahealth plc have bought in a listed company. |
|
(iv) All shares are ordinary shares with a nominal price of 50p. |
|
(v) Held for sale investments will mature within 3 months. |
Required:
(a) Prepare a statement of cash flows for Megahealth plc for the year ended 31 March 2020 using the indirect method in IAS 7 Statement of Cash Flows. (20 marks)
(b) Analyse the statement of cash flow prepared above and discuss what it might be indicating about the cash management of Megahealth plc. (5 marks)
Section B: Total 25 marks
All calculations must be clearly shown
SECTION C: Compulsory
Answer all parts of the section (from part C1 to C4).
Total 40 marks for section C (Part C1-11 marks, Part C2-11 marks, Part C3-10 marks and Part C4- 8 marks). All calculations must be clearly shown.
Part C1
An asset which cost £ 800,000 on 1 January 2020 is being depreciated on the straight line basis over a six-year period with an estimated residual value of £80,000. The asset could be sold on 31 December 2020 for £740,000 with disposal costs of £75,000.
The company that owns the asset has conducted an impairment review at 31 December 2020 and estimates that the asset will generate the following cash flows over the remainder of its useful life:
Year Inflows (£000)** Outflows(£000) ** Discount factor at 6%
2021
2022
2023
2024
2025
180
140
240
200
150*
20
20
20
40
30
0.943
0.890
0.840
0.792
0.747
* The cash inflow for 2025 includes the estimated residual value of £80,000.
** Assume that all cash flows occur at the end of the year concerned and a discount rate of 6% is used for the present value calculation.
Required:
(a) Determine the asset’s value in use (to the nearest £000) (3 marks).
(b) Determine the asset's recoverable amount and explain how you have determined this amount (3 marks).
(c) Calculate the amount of the impairment loss that has occurred and explain how this should be accounted for (3 marks).
(d) Calculate the amount of depreciation that should be charged in relation to the asset for each of the remaining years of its useful life (2 marks).
Total for part C1: 11 marks
All calculations must be clearly shown
Part C2
The IASB Conceptual Framework states that financial information cannot faithfully represent transactions unless it represents their underlying economic substance rather than just their legal form.
IFRS16 Leases replaces IAS17 Leases for accounting periods beginning on or after 1 January 2019. The former IAS 17 classified all lease contract into ‘finance lease’ and ‘operating lease’ .
Required:
(a) Critically evaluate IAS 17. Why did it provide less faithful representation (especially
for leases which would have been classified as ‘operating leases’ by IAS17)? (4 marks) (b) Outline the way in which IFRS 16 lessees to account for leases. (3 marks)
|
Berlin plc prepares financial statements to 31 December each year. On 1 January 2020, Berlin plc entered a lease contract with the following conditions.
(i) At the inception of lease contract, the estimated useful life of equipment is three years and residual value is nil. Assume a straight-line method for the depreciation. (ii) The annual lease rental is £36,000, payable in arrears for the next three years. The first rental was due and was paid on 31 December 2020. (iii) The interest rate implicit in the lease is 8% and the discount factors at 8% are as follows;
|
(c) Compute the 'the right of use assets' at the inception date of lease contract (i.e., on
1 January 2020). (2 marks).
(d) Compute the depreciation charge and the finance cost of Berlin plc for the year ended
31 December 2020 (2 marks).
Total for part C2: 11 marks
All calculations must be clearly shown
Part C3
Coventry plc prepares accounts to 31 December each year and it is considering to purchase a new machine for £1,200. In relation to the purchase of new machine, the head of accounting department provides the following estimates for the next three years. This machine is the only item that will cause a temporary difference.
2022-12-14