Question 1

a) Defining terminology

Up to 2 marks per valid definition

b) Preparation of consolidated accounts

Up to 2 marks per valid point of explanation, maximum 5 marks

Explanation may cover:

As if all group transactions had been carried out by a single equivalent company

Add together 100% of the assets and 100% of the liabilities of each individual company in the group at the reporting date

Calculate goodwill on the date of acquisition and recognise it in the group financial statements Eliminate intra-group balances - receivables & payables, borrowings

Eliminate unrealised profits in sales between members of the group

c) Group statement of financial position

WORKINGS IN £m

W1   Group structure

Milk

Honey Ltd

(2 years)

80%  = 240 / 300 £1 shares

20% NCI = 100-80

Marks

1

0.5

W2   Net assets of subsidiary

Ordinary share capital

Retained earnings

Fair value adjustment

Plant and machinery cost (800 - 600) Accumulated depreciation (200/5 x 2)

Reporting

Acquisition         date          Change

300               300                                                0.5

160               260            100                               1 post acq

200

200         - (80) (80)

1.5 1w + 0.5adj 1.5 1w + 0.5adj

20

W3   Goodwill

Consideration (240m x 3/2 x £1.75)                                                                630                              2

Fair value of NCI (300 x 20% x £3.00) 180 2

810

Less: FV of net assets of subsidiary at acquisition (W2) (660) 1 of

Carrying value 150 0.5 of

W4   Non-controlling interest

At acquisition (w3)                                                                                            180                             0.5

Share of Honey post acquisition profits (20% x W2) 4 1 of

Carrying value 184

W5   Retained earnings

Milk plc                                                                                                              660                             0.5

Share of Honey post acquisition profits (80% x W2)                                         16                               1 of

Unrealised profit (5m x 10%) (1) 2

Carrying value 676

Question 2

a)Vertical analysis

Y/E 31/1/21 Y/E 31/1/20

€'000 Vertical €'000 Vertical

% %

Mexico and Central America              32,642 26.90% 33,350 27.76% 1

United Kingdom                                  29,234 24.09% 29,243 24.34% 1

Canada                                               19,991 16.47% 18,420 15.33% 1

China                                                  11,430 9.42% 10,671 8.88% 1

Other 28,063 23.12% 28,446 23.68% 1

Total 121,360 120,130 For calculations 5

Up to 2 marks per valid comment, maximum 6

Valid comments may look at:

Highest/lowest impact, highest/lowest growing, best/worsening/improving control, etc

Possible explanations for what the calculations show

Implications for what the analysis shows

b) Ratio analysis

Total revenues

Cost of sales

Gross profit

Total assets

Current liabilities

Capital employed

Profitability

Gross profit margi

559,151

(420,315)

138,836

252,496

(92,645)

159,851

1.5 mark per pair of ratios, maximum 3 marks for 2 ratios x 2 years

24.8% x100 = 24.7%

523,964

Operating profit margin x100 =

Return on capital employed x100 =

Return on equity x100 =

OR

Return on equity x100 =

Efficiency

Inventory holding period                                    x365 =

420,315

6,516

559,151

Payables and accruals settlement period

49,141 420,315

Short-term solvency / Liquidity

90067

Current ratio

92,645

45,118

92645

Investor

Earnings per share (pence) x100 =

20568

74,669

1.5 mark per pair of ratios, maximum 3 marks for 2 ratios x 2 years

44,435

394,605

6,284

523,964

46,973

394,605

1.5 mark per pair of ratios, maximum 3 marks for 2 ratios x 2 years

0.97 :1	61806	0.79 :1
	77,790 17,371
0.49 :1		0.22 :1
	77790

1.5 mark per pair of ratios, maximum 3 marks for 2 ratios x 2 years

477.22 c x100 = 522.14 c

Price earnings ratio

Analysis

14049

477.22

29.44 times 21.93 times

Total for ratios 12

Up to 2 marks per valid comment, maximum 4 for each category Plus Up to 2 marks for well-reasoned conclusion

Total maximum 13

Question 3

(a) Up to 2 marks per valid comment – maximum 9

Comments may include:

If the property is not revalued it should be stated at cost less accumulated       depreciation less accumulated impairment losses. The current market value is irrelevant.

Under IAS 16, Property, Plant and Equipment, a non-current asset can be measured at fair value where it can be measured reliably.

If the property is revalued it should becarried at revalued amount (current market      value) less subsequent accumulated depreciation and less subsequent accumulated impairment losses.

All items in the same class to must be revalued if one is revalued. The retail outlet appears to be the only property classified under IAS 16.

If the revaluation model is implemented on 31st March 20X9, the depreciation expense for the current year will be the same as if the new policy had not been adopted. The revisited depreciation will take effect from 1st April 20X9.

If the revaluation model is implemented on 31st March 20X9, any accumulated depreciation up to that point should be transferred to the revaluation reserve

The accumulated depreciation account must therefore be reduced to zero on 31st March 20X9 if the revaluation model is implemented on 31st March 20X9.

If the revaluation model is implemented on 31st March 20X9, they should depreciate the asset using the revalued amount over the remaining economic life.

If the revaluation model is implemented on 31st March 20X9, notes to accounts for the year ended 31st March 20X9 should disclose the depreciation methods and     measurement bases used, including the depreciation and carrying value of the       buildings as these would have been reported if they had continued using the cost  model.

(b) Financial statement extracts (figures in £)

Revaluation Model

Statement of profit or loss and other comprehensive income

Depreciation expense ((20m-2m)/30)                600,000            600,000

Other comprehensive income

Gain on revaluation  (24m – 17.6m)                                         6,400,000

Marks as follows

1 @ +

1w 3

1w 2

Statement of changes in equity

Gain on revaluation

Revaluation

Reserve

6,400,000

o/f 2

Statement of financial position

Property, plant and equipment

Freehold land and buildings   (Cost model: 20m less 4yrs x 0.6m)

Equity

Revaluation reserve

17,600,000       24,000,000

6,400,000

o/f cost model

o/f

2

1

10

(c) Comments

may

include:

Up to 2 marks per valid comment – maximum 8

Under the revaluation model the depreciation charge will be £800,000 ((24m-4m)/25) compared to £624,000 ((17.6-2)/25) under the cost model.

The depreciation expense will increase under the revaluation model because of the increase to fair value and the reduction in useful life.

This will result in profits being lower which will reduce profitability ratios such as EPS and ROCE.

The revaluation reserve will increase equity and this will increase capital employed. This will reduce ratios such as ROCE and ROSF.

As a result of the increase in equity capital gearing ratios will be lower. Income gearing ratios (interest cover) will fall due the decrease in profit.

The revaluation surplus may be transferred to retained earnings as the asset is depreciated. This will be £17,600 (800,000-624,000) per annum.

Because of this the retained earnings balance will be the same regardless of which accounting policy is adopted.

Question 4

(a) I: Capital grant

Marks as below for workings and journal entries, maximum 3 PLUS 1 mark per valid comment, maximum 3

Comments may include:

The income must be allocated over the periods which benefit from the use of the asset (accruals) using the deferred income approach

Under the deferred income method the grant income should be transferred to the statement of profit or loss as other operating income over 5 years on the  straight line basis

To correct the error:                              £                 £

Dr Revenue                                       450,000

Cr Other operating income (450000/5)                  90,000

Cr Deferred income (450000 - 90000)                360,000

In line with the relevant accounting principles (accruals / IAS 16), the machinery should be depreciated in the current year.

Annual depreciation to SOPL will be = (900000 - 30000)/5

II: Revenue grant

1 mark for the jounal entries plus marks as follows per valid comment – maximum 5

Comments may include:

The grant income should be recognised as other operating income in the

statement of profit or loss in the periods where the qualifying expenditure is incurred

Any unrecognised part of the grant should be carried forward as a deferred income liability in the statement of financial position as it relates to              obligations to transfer economic benefits in the future.

£75,000 of the grant relates to qualifying expenditure in the current year and so should be recognised in the statement of profit or loss as other operating income.

The remainder (£125000 - 75000 = £50000) should be carried forward as deferred income in the statement of financial position

Maximum

To transfer the earned income:            £                 £

Dr Deferred income                             75,000

Cr Other operating income (450000/5)                   75,000