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SPECIMEN EXAM 2022

5000ACC/280ACC

Financial Reporting/Financial Reporting and analysis

Question 1 [35 marks]

The statements of financial position for Milk plc and Honey Ltd are given below:

Additional information

(i) Milk plc acquired 240 million shares in Honey Ltd two years ago when the retained earnings of Honey Ltd was £160 million. The consideration was by a share for share exchange of 3 Milk plc shares for every 2 Honey Ltd shares acquired. This was recorded correctly in Milk plc’s accounts.

(ii) The share prices at the acquisition date were £1.75 per share in Milk plc and £3.00 per share in Honey Ltd.

(iii) The fair value of net assets of Honey Ltd at the date of acquisition was £800 million. The difference between book value and fair value related to plant and machinery which is depreciated on a straight-line basis over five years. Honey Ltd measures its plant and machinery using the cost model.

(iv) During the year Milk plc sold goods to Honey Ltd at a margin of 10%. Sales during the year totalled £20 million and Honey Ltd had £5 million of these goods in its year-end inventory.

(v) In addition, Honey Ltd’s trade receivables and Milk plc’s trade payables include £3 million that Milk plc owes to Honey Ltd.

(vi) Milk plc calculates goodwill using the fair value method.

Required:

a) Define the terms consolidated accounts and substance over form. (4 marks)

b) Explain how group accounts are prepared under IFRS. (5 marks)

c) Prepare the consolidated statement of financial position for Milk plc at 31^st December 20X2 (26 marks)

Question 2 [35 marks] 

Attached to this exam paper is an extract from the annual report of Walmart Inc for the year ended 31^st January 2021.

Walmart’s closing share price was as follows:

· Year ended 31^st January 2021: $140.49

· Year ended 31^st January 2020: $114.49

Required:

a) With the use of vertical analysis, evaluate the relative importance of the international segments of Walmart Inc during the years ended 31^st January 2021 and 2020. Information on the company’s international net sales can be found in the attached notes to the accounts of Walmart inc.  (10 marks)

b) Evaluate the following aspects of Walmart Inc during the years ended 31^st January 2021 and 2020:

i. Profitability

ii. Working capital efficiency

iii. Liquidity

iv. Investor concerns

Credit will be awarded for 2 ratios calculated per aspect per year to support your evaluation. (25 marks)

Question 3 [30 marks]

You are an accountant at Bolo Ltd, a small UK retail company. The company has grown rapidly and is highly geared.

Bolo Limited currently includes its tangible non-current assets at cost less accumulated depreciation. Depreciation is charged on a straight-line basis.

At 31^st March 20X9, Bolo Ltd has a retail outlet acquired on 1 April 2005 for £20 million, of which £2 million relates to land. The useful life of the building was assessed at 30 years at the date of acquisition.

On 31^st March 20X9 the fair value of the property was assessed at £24 million, of which land amounted to £4 million. The useful life was reassessed as 25 years from that date.

The Managing Director of Bolo Ltd has suggested that the company changes from using cost to revaluing the outlet at current value. He stated that this would reduce the company’s gearing and enable them to borrow further without compromising the gearing covenant with the bank.

Required

(a) With reference to IAS 16, Property, Plant and Equipment, explain the possible reporting treatments for the above asset including the accounting implications in the event that the revaluation model is used. (12 marks)

(b) Prepare extracts from the financial statements of Bolo Ltd for the year ended 31^st March 20X9 under the cost and revaluation models. (10 marks)

(c) Describe how the adoption of the revaluation model would impact on the financial statements and key financial ratios in future years. (8 marks)

Question 4 [30 marks]

The draft financial statements of Comms Ltd for the year-ended 30^th April 20X8 have been prepared. The draft profit for the period is £1,980,000.

The following information relates to the financial statements of Comms Ltd for the year-ended 30^th April 20X8:

I. On 1^st May 20X7 Comms Ltd purchased new specialist machinery at a cost of £900,000.  The company received a grant of £450,000 towards the cost of purchasing the machinery.  Receipt of the grant was correctly debited to the bank account, but the credit entry was to revenue.  Comms Ltd depreciates equipment using the straight-line method.  At the date of acquisition the machinery had an estimated useful economic life of 5 years after which its scrap value is estimated at £30,000.  No depreciation has been charged in respect of the year ended 30^th April 20X8.  Comms Ltd uses the deferred income method for capital grants. (5 marks) 

II. During the year ended 30^th April 20X8 Comms Ltd received a grant of £125,000. The grant can be used to cover any qualifying expenditure incurred during the period 1^st May 20X7 to 30^th April 20X9.  During the year ended 30^th April 20X8, £75,000 of relevant qualifying expenditure was incurred.  In the draft financial statements the whole £125,000 grant is included as deferred income in the statement of financial position. (5 marks) 

III. Since the company’s profits have been growing steadily for several years and its services are much in demand, the directors believe that Comms Ltd’s goodwill is worth £1,000,000.  This has been included in the statement of financial position as an intangible non-current asset, with the other side of the transaction included in the revaluation reserve. The directors would like to amortise this goodwill over 20 years. (5 marks) 

IV. During the year ended 30^th April 20X8 Comms Ltd’s research and development expenditure, which has been included in the statement of financial position as a non-current asset, comprised the following:

· £27,000: Applied research costs.

· £43,000: Costs of developing software which was scrapped during the year.

· £48,000: Costs of developing a cost-identification system which will generate economic benefits in excess of its cost for the next five years. The system is ready for use and will come into operation in May 20X8. (9 marks)

Required:

i) Explain, with reasons AND relevant calculations and journal entries where appropriate, the accounting treatment of items I - IV above.

Note: The total marks for this part are also indicated against each item above (24 marks) 

ii) Recalculate Comms Ltd’s profit for the period after making any necessary adjustments in relation to the above issues.  (6 marks)