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ACFI3441

Financial Reporting and Accounting (Mock Exam 1)

2021/2022

Section A

Section A – COMPULSORY – Answer ALL questions (40 marks)

Q1 Grape ltd has purchased a patent for £50,000 which gives Grape ltd sole use of a manufacturing process which will allow savings of £5,000 per year for the next 5 years.

Explain whether this patent would be considered an asset, liability or equity. Your explanation should include reasons for your choice.

(4 marks)

Q2 Lily plc has recently purchased a piece of equipment for use in their trade. The following list outlines all costs related to the equipment.

	£
Purchase price	8,800
Installation cost	1,300
Administration costs	800

The purchase price includes a trade discount of £1,000 (without the trade discount, the purchase price would be £9,800)

Calculate the amount that should be capitalised in Lily plc’s financial statements.

(4 marks)

Q3 Smile plc purchased an asset with useful life of 5 years for £25,000 on 1 January 2016. On 1 January 2019 this asset was revalued to £28,000 but the useful life remained unchanged (2 years remain on this date).

Show the accounting entries for this revaluation.

(4 marks)

Q4 Achieve plc purchased an item of machinery on 1 January 2013 for £150,000 which had a useful life of ten years. On 1 January 2019 the useful life was revised to two years.

Calculate the depreciation charge for year end 31 December 2019.

(2 marks)

Q5 Stew plc borrowed £1m on 1 January 2019 to finance the production of an asset expected to take a year to build. The loan was utilised as follows, with the remaining funds invested temporarily.

£

1 January 2019 400,000

1 July 2019 600,000

The loan rate was 8% per annum, and Stew plc can invest surplus funds at 5% per annum

Ignoring compound interest, calculate both the borrowing costs that can be capitalised on this asset and consequently the capitalised cost of this asset on 31 December 2019.

(5 marks)

Q6 Fan plc has recently spent £10,000 training staff.

Identify and explain whether this cost will be capitalised under IAS 38.

(2 marks)

Q7 Kite plc is developing a new production process. Below shows the relevant expenditure.

	£
January 2019	15,000
February 2019	20,000
March 2019	5,000
April 2019	30,000

On 1 April 2019 the production process met the criteria for recognition as development costs, rather than research costs. Please calculate and explain the treatment of all above expenditure.

(3 marks)

Q8 Smile plc purchased Teeth plc many years ago which created purchased goodwill of £20,000. Smile plc has determined the goodwill to now be worth £30,000 on 31 December 2019. Please identify and explain the amount of goodwill that should be capitalised in the statement of financial position on 31 December 2019.

(2 marks)

Q9 A cash-generating unit (CGU) comprises the following:

	£
Buildings	40,000
Machinery	20,000
Goodwill	18,000
Current Assets	20,000

Following an impairment review, the recoverable amount of this CGU is now £68,000.

Please calculate the carrying amount of each asset after the impairment.

(5 marks)

Q10 Hail plc have a year-end of 31 December 2019. They sell a bundle containing a games console and a pre-order for a game at a total cost of £300. The console is worth £280 on its own, and the game will be worth £50. An individual has purchased this bundle on 15 December 2019. The console was received by the individual on the 20 December 2019. As the game is a pre-order, it was not received by the customer until 5 January 2020.

Please calculate the revenue that should be recognised in the year-end 31 December 2019 and year-end 31 December 2020 under IFRS15.

(2 marks)

Q11 Check plc have a year-end of 31 December. They started a contract on 1 January 2019 and it is estimated to be completed on 31 December 2020. The final contract price is £2,000,000. The costs incurred up to 31 December 2019 total £600,000. They are estimating that it will cost an additional £900,000 to complete. Check plc have invoiced £650,000 for the work certified until 31 December 2019 but have only received £575,000 from the customer.

Prepare calculations showing the amounts to be included in the statement of profit or loss and the statement of financial position at 31 December 2019 using the input method.

(7 marks)

Section B – Compulsory – Answer ONE question

Q12

(a) The conceptual framework includes fundamental characteristics which distinguishes useful financial information from information that is not useful. One of these fundamental characteristics is faithful representation. Please identify and explain the three elements that allow this characteristic to be achieved

(6 marks)

(b) Alt plc issued a 6% loan note on 1 July 2017 at its face value of £10 million which is redeemable on 30 June 2020 at a substantial premium. The effective interest rate applicable is 10% per annum. Alt plc suffered £200,000 direct costs on issue.

Calculate the amount that should appear in the statement of financial position as at 30 June 2019.

(6 marks)

(c) Bolt plc issued 50 million convertible £1 bonds with a nominal interest rate of 5% on 1 January 2019. The holder has the right to convert these bonds into equity on the basis of 1 fully-paid £1 share for every £1 bond held on 31 December 2021.

Bolt plc suggests that the bonds should be shown entirely as equity as they expect some of the loan note holders to choose to convert. This is beneficial for Bolt plc as it reduces their finance costs and improves their gearing.

The market rate of interest for a similar bond with a five-year term but with no conversion rights at 1 January 2019 was 9%.

The present values of £1 receivable at the end of each year are:

	5%	9%
End of year 1	0.95	0.92
End of year 2	0.91	0.84
End of year 3	0.86	0.77
Cumulative	2.72	2.53

(i) Explain why the nominal interest rate on convertible loan notes is 5%, but for non-convertible loan notes it would be 9%

(2 marks)

(ii) Explain, with reference to the relevant formula, how gearing is improved using the suggested treatment.

(6 marks)

(iii) Explain, with relevant calculations, how Bolt plc should have accounted for the convertible bond issue in the company’s financial statements for the year ended 31 December 2019.

(10 marks)

Section C – Answer ONE question

Q13

The statements of financial position for Buzz plc and Woody plc at 30 April 2020 are shown below.

	Buzz plc		Woody plc
	£000		£000
Non-current assets
Property, plant and equipment	9,740		5,010
Investments	4,000		100
	13,740		5,110
Current assets
Inventories	1,780		704
Trade Receivables	2,744		1,028
Cash and cash equivalents	178		102
	4,702		1,834
Total assets	18,442		6,944
Equity
Share capital – 50p ordinary shares	2,000		1,000
Retained earnings	8,450		5,220
Revaluation surplus	5,000		0
	15,450		6,220
Current liabilities	1,992		724
Non-current liabilities	1,000		0
Total equity and liabilities	18,442		6,944

The following additional information is available:

i) Buzz plc acquired 1,500,000 of the 50 pence ordinary shares in Woody plc on 1 May 2018 for £4,000,000.

ii) At the date of acquisition, the retained earnings of Woody plc stood at £2,088,000.

iii) At the date of acquisition, the property, plant and equipment of Woody plc had a fair value of £400,000 higher than its book value. 75% of this fair value increase relates to buildings, and the remainder relates to land. This fair value increase has not been incorporated into Woody plc’s statement of financial position. At the date of acquisition, the buildings of Woody plc had a remaining useful economic life of 10 years.

iv) During the year ended 30 April 2020, Buzz plc purchased goods from Woody plc at a cost to Buzz plc of £1,750,000. These goods had been invoiced by Woody plc at cost + 40%. At 30 April 2020, 50% of these goods remained in the inventories of Buzz plc.

v) At 30 April 2020, the inter-company balance owed by Buzz plc to Woody plc was agreed at £500,000. Inter-company current accounts are included in trade and other receivables and trade and other payables in current assets and current liabilities respectively.

vi) On 29 April 2020, Woody plc declared a final ordinary dividend for the year of 12 pence per share. Buzz plc has taken account of its share of these dividends in the company’s statement of financial position shown above. Dividends receivable are included in trade and other receivables in current assets and dividends payable are included in trade and other payables in current liabilities.

vii) It is group policy to value NCI at full fair value. Woody plc shares were trading at £2.20 just prior to acquisition by Buzz plc and this price is used to value non-controlling interests.

YOU ARE REQUIRED TO:

Prepare the consolidated statement of financial position for the Buzz group of companies as at 30 April 2020. (30 marks)

Q14

John is a retired from national services and recently received his lumpsum pension. He considers to invest by buying shares from Popote Plc, however he is not able to make an informed decision. John has accessed the two years 2020 and 2021 financial reports and approached you with the Popote Plc Annual reports seeking for the advice.