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ACCT40315-WE01

FINANCIAL REPORTING & ACCOUNTING

Question 1   (THIS QUESTION IS COMPULSORY)

Shown below are the recently issued (summarised) financial statements of Tree, a publicly listed company, for the year ended 30 June 20X5, together with comparatives for 20X4 and extracts    from the Chief Executive’s report that accompanied their issue.

Statement of Profit or Loss

Turnover

Cost of sales

Gross profit

Operating expenses

Finance costs

Profit before tax

Corporation tax (@ 25%)

Profit for the period

Statement of Financial Position

Non-current assets

Goodwill

Tangible non-current assets

Current assets

Inventories

Trade receivables

Bank

Creditors: amounts falling due within one year Bank overdraft

Trade payables

Corporation tax

Creditors: amounts falling due after one year 8% loan notes

Capital and reserves

Equity shares of £1 each

Retained earnings

20X5

£000

250,000

(200,000)

50,000 (26,000) (8,000)

16,000 (4,000)

12,000

20X5

£000

 

10,000

210,000

220,000

 

25,000

13,000

38,000

 

 

17,000

23,000

4,000

44,000

 

100,000

114,000

 

100,000

14,000

114,000

20X4

£000

180,000

(150,000)

30,000 (22,000)

8,000 (2,000)

6,000

20X4

£000

90,000

90,000

 

15,000

8,000

14,000

37,000

13,000

2,000

15,000

112,000

 

100,000

12,000

112,000

Extracts from the Chief Executive's report:

''Highlights of Tree's performance for the year ended 30 June 20X5:

a 39% increase in turnover

gross profit margin up from 16.7% to 20%

profit doubled for the period

In response to the improved position the Board paid a dividend of 10p per share in June 20X5, an increase of 25% on the previous year.'

You have also been provided with the following information

On 1 July 20X4, Tree purchased the whole of the net assets of Leaf (previously a privately owned entity) for £100 million. The contribution of the purchase to Tree’s results for the year ended 30    June 20X5 was:

20X4

£000

Turnover                                                                           70,000

Cost of sales                                                                  (40,000)

Gross profit                                                                       30,000

Operating expenses                                                         (8,000)

Profit before tax                                                               22,000 

There were no disposals of tangible non-current assets during the year.

The following ratios have been calculated for Tree for the year ended 30 June 20X4:

Return on year-end capital employed

(profit before interest and tax over total assets less current liabilities) Net asset (equal to capital employed) turnover

Net profit (before tax) margin

Current ratio

Closing inventories holding period (in days)

Receivables’ collection period (in days)

Payables’ payment period (based on cost of sales) (in days) Gearing (debt over debt plus equity)

7.1%

1.6

4.4%

2.5

37

16

31

nil

Required:

Assess the financial performance and position of Tree for the year ended 30 June 20X5 compared to the previous year. You should support your analysis with a suitable range of accounting ratios   (worth up to 26 marks). Your answer should refer to the information in the Chief Executive’s report and the impact of the purchase of the net assets of Leaf. (100 marks)

Question 2

The following consolidation schedule relates to the Pascal Co group for the financial year ended 31 December 20X4.

Income Statements for the year ended 31 December 20X4

Revenue

Cost of sales

Gross profit

Distribution costs

Administrative expenses

Other income

Profit before tax

Tax expense

Profit for the year

Pascal

£m

860

(560)

300  (50) (100) 20

170

(40)

130

Sartre

£m

340

(210)

130 (60) (20) 10

60

(20)

40

Bentham

£m

100

(50)

50

(13)

(7)

 

-

30

(10)

20

Additional information:

(i)     Pascal Co purchased 60% of the ordinary share capital of Sartre Co on 1 April 20X4 for £120m.

(ii)    Pascal Co purchased 80% of the ordinary share capital of Bentham Co on 1 January 20X3

with the intention of selling this shareholding at a profit within a relatively short timeframe.      This duly occurred on 31 March 20X5. Group profit for the year on discontinued operations to 31 December 20X4 is calculated at £6m. At 31 December 20X4 Bentham Co was classified   as a discontinued operation under IFRS 5 Non-current assets held for sale and discontinued operations.

(iii)

Pascal Co

Sartre Co

Bentham Co

Dividends

(paid)

£m

40

20

10

(iv)   Included in the inventories of Sartre Co at 31 December 20X4 were goods purchased from

Pascal Co during the year totalling £20 million upon which Pascal Co received a 20% margin.

(v)    During the year ended 31 December 20X4 Sartre sold to Pascal Co a consignment of goods to the value of £10 million. These were in turn sold to a major customer. Sartre Co charged a mark-up of 25% on these goods.

Required:

a)     Briefly explain why Bentham Co. would be classified as a discontinued operation under       IFRS5 Non-current assets held for sale and discontinued operations and the disclosure       requirements relating to Bentham Co. in the consolidated financial statements of the Pascal Co group. (20 marks)

b)     Produce a consolidated income statement for the Pascal Co group for the year to 31           December 20X4 based upon the financial statements provided and notes (i) to (v) inclusive. (60 marks)

c)     With reference to the consolidated income statement for the Pascal Co group for the year to

31 December 20X4, explain why it is necessary to eliminate unrealised profit when preparing group financial statements. (20 marks)

Question 3

You have been asked to help prepare the financial statements of Walrus plc for the year ended 31 March 20X4. A trial balance as at 31 March 20X4 is shown below.

£000                £000

Land, at cost                                                                                  120

Buildings, at cost                                                                           250

Equipment, at cost                                                                         196

Vehicles, at cost                                                                            284

Goodwill, at cost                                                                            300

Accumulated depreciation at 1 April 20X3:

Buildings                                                                                                               90

Equipment                                                                                                             76

Vehicles                                                                                                              132

Inventory at 1 April 20X3                                                               107

Trade receivables and payables                                                    183                  117

Allowance for receivables                                                                                          8

Bank balance                                                                                                           57

Corporation Tax                                                                                                         6

Ordinary shares of £1 each                                                                                   200

Retained earnings at 1 April 20X3                                                                         503

Sales                                                                                                                   1,432

Purchases                                                                                     488

Director’s fees                                                                                150

Wages and salaries                                                                       276

General distribution costs                                                              101

General administrative expenses                                                  186

Dividend paid                                                                                   20

Rents received                                                                                                         30

Disposal of vehicle                                                                                                   10

2,661

The following further information is available:

1.  The company’s non-depreciable land was valued at £300,000 on 31 March 20X4 and this valuation is to be incorporated into the accounts for the year to 31 March 20X4.

2.  The company’s depreciation policy is as follows: Buildings       4% p.a. straight line            Equipment    40% p.a. reducing balance Vehicles        25% p.a. straight line

In all cases, a full year’s depreciation is charged in the year of acquisition and no depreciation is charged in the year of disposal. None of the assets had been fully depreciated by 31 March 20X3.

3.  On 1 February 20X4, a vehicle used entirely for administrative purposes was sold for         £10,000. The sale proceeds were banked and credited to a disposal account but no other entries were made in relation to this disposal. The vehicle had cost £44,000 in August       20X0. This was the only disposal of a non-current asset made during the year to 31 March 20X4.

4.  Depreciation is apportioned as follows:

Distribution      Administrative

costs              expenses

Buildings                                   50%                   50%

Equipment                                 25%                   75%

Vehicles                                    70%                   30%

5.  The company’s inventory at 31 March 20X4 is valued at £119,000.

6.  Trade receivables include a debt of £8,000 which is to be written off. The allowance for       receivables is to be adjusted to 4% of the receivables which remain after this debt has been written off.

7.  Corporation tax for the year to 31 March 20X3 was over-estimated by £6,000. The corporation tax liability for the year to 31 March 3014 is estimated to be £30,000.

8.  One-quarter of wages and salaries were paid to distribution staff and the remaining three- quarters were paid to administrative staff.

9.  General administrative expenses include bank overdraft interest of £9,000.

10.A dividend of 10p per ordinary share was paid on 31 December 20X3. No further dividends are proposed for the year to 31 March 20X4.

Required:

Prepare the following financial statements for Walrus plc in accordance with the requirements of the international standards:

(a)    A Statement of Profit or Loss and Comprehensive Income for the year to 31 March 20X4 . (b)    A Statement of Financial Position as at 31 March 20X4 . (100 marks)

Question 4

4(a)

Bodyline sells sports goods and clothing through a chain of retail outlets. It offers customers a full refund facility for any goods returned within 28 days of their purchase provided they are unused and in their original packaging. In addition, all goods carry a warranty against manufacturing defects for 12 months from their date of purchase. For most goods the manufacturer underwrites this warranty such that Bodyline is credited with the cost of the goods that are returned as faulty. Goods purchased from one manufacturer, Header, are sold to Bodyline at a negotiated discount which is designed to compensate Bodyline for manufacturing defects. No refunds are given by Header, thus Bodyline has to bear the cost of any manufacturing faults of these goods.

Bodyline makes a uniform mark-up on cost of 25% on all goods it sells, except for those supplied from Header on which it makes a mark-up on cost of 40%. Sales of goods manufactured by Header consistently account for 20% of all Bodyline’s sales.

Sales in the last 28 days of the trading year to 30 September 20X3 were £1,750,000. Past trends reliably indicate that 10% of all goods are returned under the 28-day return facility. These are not faulty goods. Of these 70% are later resold at the normal selling price and the remaining 30% are sold as sale’ items at half the normal retail price.

In addition to the above expected returns, an estimated £160,000 (at selling price) of the goods sold during the year will have manufacturing defects and have yet to be returned by customers. Goods returned as faulty have no resale value.

Required:

(i)     Explain the  need for the accounting standard  IAS37  Provisions, contingent liabilities and contingent assets. Illustrate your answer with three practical examples of how the standard addresses controversial issues.

(ii)    Describe the nature of the above warranty/return facilities and calculate the provisions Bodyline

is required to make at 30 September 20X3 for goods subject to the 28 day returns policy and for goods that are likely to be faulty. (60 marks)

4(b)

Rockbuster has recently purchased an item of earth moving plant at a total cost of £24 million. The plant has an estimated life of 10 years with no residual value, however its engine will need             replacing after every 5,000 hours of use at an estimated cost of £7.5 million. The directors of         Rockbuster intend to depreciate the plant at £2.4 million (£24m/10 years) per annum and make a  provision of £1,500 (£7.5m/5,000 hours) per hour of use for the replacement of the engine.

Required:

Explain  how  the  plant  should  be  treated  in  accordance  with  relevant  International  Financial Reporting Standards and comment on the directors’ proposed treatment. (20 marks)

4(c)

The following information relates to Z plc:

(i)     Alan owns 27% of the ordinary shares of Z plc. Elaine is his wife.

(ii)    Z plc owns 60% of the ordinary shares of Y plc.

(iii)   Z plc owns 15% of the ordinary shares of X plc.

(iv)   Barbara is a director of Z plc. She owns 75% of the ordinary shares of W Ltd. David is her

husband. He owns 10% of the ordinary shares of V Ltd.

(v)    Colin works for Z plc as a ma