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BEAM024

January 2022

ADVANCED FINANCIAL ACCOUNTING

SECTION A

Answer ALL THREE COMPULSORY questions in this section

QUESTION 1

The draft statements of financial position of P Co, S Co, and A Co as at 31 December 2017 are shown below:

Assets

Non-current Assets

Property, plant and equipment

Investments

S Co

A Co

Current Assets

Inventories

Trade receivables

Cash

Total Assets

Equity

Ordinary share capital (£1 shares) Revaluation reserve

Retained earnings

Liabilities

Trade payables

Total Equity and Liabilities

P Co £’000

4,761

600

575

5,396

1,532

1,947

239

9,654

5,000

2,500

547

8,047

1,607

9,654

S Co £’000

521

222

258

1,031

500

320

820

211

1,031

A Co £’000

411

187

202

813

300

100

250

650

163

813

The following information is also available:

. On 1 January 2016, P Co paid £600,000 cash to buy 60% of the ordinary shares of S Co. At the time, S Co had retained earnings of £280,000. The fair value of the property, plant and equipment of S Co on 1 January 2016 was £30,000 more than its carrying amount. This revaluation was not reflected on S Co’s financial statements at the time of the acquisition (Ignore any depreciation related adjustments as a result of property, plant and equipment revaluation).

. P Co also acquired 90% of the shares of A Co for £575,000 cash on 1 January 2017. At the time of the acquisition, A Co had a revaluation reserve of £60,000 and retained earnings of £230,000. The fair value of A Co’s assets and liabilities on that date was equal to their book value.

. P Co, S Co and A Co have not issued additional shares since the acquisitions.

. Goodwill arising on the purchase of S Co has suffered an impairment loss of 50% since the date of the acquisition. (Note: Do not gross-up the goodwill for impairment purposes)

. Goodwill arising on the purchase of A Co has suffered an impairment loss of 25% since the date of the acquisition. (Note: Do not gross-up the goodwill for impairment purposes)

. The following intra-group balances exist on 31 December 2017:

o S Co owes P Co £15,000

o A Co owes P Co £25,000

o A Co owes S Co £8,000

All of these balances are included in trade receivables and payables.

. Goods purchased for £8,000 from P Co are included in S Co’s inventory at 31 December 2017. P Co had invoiced these goods to S Co at cost plus 60%.

Required:

Prepare for P Co a consolidated statement of financial position as at 31 December 2017.

(Total 23 marks)

QUESTION 2

On 30 June 2017, A Co acquired 40% of the shares in I Co for £220,000 cash. The draft statements of financial position of these two companies as at fiscal year-end of 30 June 2018 are shown below. These statements do not reflect A Co’s share of profits from I Co.

Statement of Comprehensive Income

Operating Profit

Dividend Received from I Co

Profit Before Tax

Tax Expense

Profit for the year

Retained Earnings

Balance 30 June 2017

Profit for the year

Dividends Paid

Balance 30 June 2018

Statement of Financial Position

Property, plant and equipment

Investment in I Co (at cost)

Total Non-current Assets

Current Assets

Total Assets

Ordinary Share Capital (£1 shares) Retained Earnings

Total Equity

Trade Payables

Total Equity and Liabilities

A Co £

800,000

8,000

808,000

(120,000)

688,000

A Co £

412,000

688,000

1,100,000

A Co £

1,480,000

220,000

1,700,000

800,000

2,500,000

1,000,000 1,100,000

2,100,000

400,000

2,500,000

I Co £

160,000

160,000

(20,000)

140,000

I Co £

100,000

140,000

(20,000)

220,000

I Co £

500,000

500,000

400,000

900,000

400,000

220,000

620,000

280,000

900,000

The following information is also available:

. The retained earnings of I Co was £100,000 at the acquisition date of 30 June 2017.

. During the year, I Co paid £8,000 dividends to A Co which is 40% of the total £20,000.

. Neither A Co nor I Co has issued any additional shares since the acquisition date.

Required:

Prepare for A Co a consolidated statement of comprehensive income for the year ended 30 June 2018 and a consolidated statement of financial position as at the same date.

(Total 10 marks)

QUESTION 3

Please read the case below carefully and answer the relevant questions accordingly.

REV plc has an accounting policy for investment properties (IAS 40) held by the group to be measured at cost less depreciation and impairment write-downs. Included in the investment property portfolio is a complex of 10 apartments in Spain that have a carrying value of £2 million (ignore the currency translation) as of September 2012. In October 2012, REV plc made a decision to sell the entire complex. Initial investor interest has been very positive and REV plc believe that they will have no problem with securing the sale by early 2013. The fair value less costs to sell of the complex in October 2012 was estimated to be £2.8 million. Towards the end of the year the fair value estimation dropped to £1.8 million due to market correction in real estate properties. Given the likelihood of the sale, the company did not depreciate the apartments in the final quarter of the year.

In addition, REV plc estimates that the remaining investment properties (other than the properties for sale) in the group had a recoverable amount of £1.45 million at 31 December 2012. The following set of information is also available at 31 December 2012:

(Extracts) Statement of financial position at 31 December 2012 Non-current Assets

Goodwill

Property, Plant and Equipment

Intangible Assets

Interest in Joint Ventures

Investment Property

Deferred Tax Assets

£’000

19,489

10,469

2,100

3,160

3,690

1,100

Required:

a) Discuss whether the decision to sell the asset triggers an impairment test and why? Should the company continue to account for the asset in line with IAS 40 or should they use the guidance of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations as the sale is imminent?

(5 marks)

i) Given your answer to Part a) above, is the decision not to depreciate the asset correct or not? Explain your reasoning.

(4 marks)

ii) Given your answer to Part a) above, demonstrate the necessary accounting journal entry to account for the fair value increase or decrease for the asset in question.

(4 marks)

b) Evaluate whether there is any further impairment necessary for the other “Investment Properties” held at cost at the year end. Demonstrate the necessary accounting journal entry.

(5 marks) (Total 18 marks)

SECTION B

Answer any TWO questions from the THREE in this section

QUESTION 4

Part A:

R Co sold a product to a customer for £120 that is payable 24 months after delivery, with the customer obtaining the control of the product at contract inception. The contract permits the customer to return the product within 90 days. The product is new and R Co has no relevant historical evidence of product returns or other available market evidence. The cash selling price of the product is £100 for other customers that would instead pay upon delivery. The cost of the product for R Co is £80. The customer has not returned the product in the right-to-return period.

Required:

Explain how R Co should account for the product sale to the credit customer in accordance with IFRS 15 Revenue from Contracts with Customers.

(9 marks)

Part B:

R Co issued 5,000 convertible bonds at par in 2002. The bonds have a 3-year term and are issued at par with a face value of £1,000 per bond, giving total proceeds of £5,000,000. Interest is payable annually at a nominal annual interest rate of 6% in arrear, that is at the end of each year. Each bond is convertible into 250 ordinary shares at any time up to maturity.

When the bonds are issued, the prevailing market interest rate for similar debts without conversion options is 8%.

Discount factors are given below:

Year

Required:

0.94

0.89

0.84

0.93

0.86

0.79

Calculate the value of the equity component of the convertible bonds.

(8 marks) (Total 17 marks)

QUESTION 5

Part A

The following information relates to a company that prepares accounts to 30 June each year.

. The company estimates that current tax for the year ended 30 June 2018 is £780,000. This figure takes into account new tax rates which were announced in March 2018 and are confidently expected to be enacted in August 2018. If the company disregards the new tax rates, the amount due would be £810,000.

. Payments on account totalling £390,000 have been made during the year to 30 June 2018 in relation to the current tax for the year.

. Current tax for the year ended 30 June 2017 was overestimated by £30,000.

Required:

a) Calculate the amount of current tax expense in the statement of comprehensive income for the year ended 30 June 2018.

(5 marks)

b) Calculate the amount of current tax liability in the statement of financial position as at 30 June 2018.

(4 marks)

Part B

Define “finance” and “operating” leases and how the two differ from the lessor’s (financing company) perspective under IFRS 16 Leases. Explain the situations which would lead to a lease being classified as a finance lease from the lessor’s perspective under IFRS 16.

(8 marks) (Total 17 marks)

QUESTION 6

Part A:

In January 2005 W LTD purchased 10 million listed equity shares of H PLC for £5 per share. At the end of December 2005 the shares of H PLC were trading at £6.50 per share. On October 2005 W LTD received 20p per share dividend from H PLC. The transaction costs associated with the initial purchase of the shares were £3 million for W LTD. W LTD has a fiscal year end of 31st of December each year.

Required:

Prepare extracts of W LTD’s financial statements (income statement and statement of financial position) for the year ended 31 December 2005 under the following alternative assumptions:

a) The shares were bought for trading purposes and recognised via Fair Value through Profit and Loss, and

(4 marks)

b) The shares were bought as a source of dividend income and were subject of an irrevocable election at initial recognition to recognise them at Fair Value through Other Comprehensive Income.

(4 marks)

Part B:

Evaluate the mini case provided below with respect to the relevant and applicable IFRS:

On 1st of January 20X5, T plc agreed to sell a plot of land for £1,500,000 which it bought for £1,000,000 in January 20X1. Following the agreement, the consideration for the sale has been deferred until 1st of July 20X6 to allow the buyer company to apply for necessary planning permissions for the construction of a housing development. The land had previously been revalued to £1,200,000 in December 20X4 and this amount is also the carrying amount on T plc’s most recent balance sheet. T plc has recorded the sale and the deferred consideration has been included in trade receivables.

Required:

Evaluate the above transaction in in lieu of with IFRS 15 Revenue Recognition and discuss whether T plc has applied the correct revenue recognition procedures. Your discussion should take into consideration the five-step model prescribed within IFRS 15.

(9 marks) (Total 17 marks)

SECTION C

Answer only ONE out of TWO questions in this section