SECTION A

Answer ALL questions from this section.

A1

On 1 January 2020, Ruby Group plc acquired 80% of the share capital of Sapphire plc at a cost of £884m. The draft balance sheets at 31 December 2020 before agreeing inter-company balances are as follows:

At 31 December 2020

Tangible non-current assets (at cost) Loan to Sapphire plc

Investment in 80% of Sapphire plc at cost Inventories (Stock)

Cash

Trade payables

10 year bank loan

Loan from Ruby Group plc

Share capital

Retained profit as at 1 January 2020              Retained profit for year to 31 December 2020

i)   During the year to 31 December 2020 goods were transferred from Ruby Group plc to Sapphire plc. Of these goods, items transferred at £120m remained in the inventory (stock) of Sapphire plc at 31 December 2020. These items had originally cost Ruby Group plc £82m.

ii)  The balances on the intra-group loan account did not agree at 31 December 2020 because Ruby plc had not recorded a cheque for £39 million paid by Sapphire plc on 31 December

2020 in part repayment of the loan.

iii) At the date of acquisition the tangible non-current (fixed) assets of Sapphire plc had a book value of £792m. The directors of Ruby plc estimated the fair value of the tangible non- current (fixed) assets of Sapphire plc to be £866m.

iv) During the year to 31 December 2020 no shares were issued by Sapphire plc.

v)  Non-current (fixed) assets of Sapphire plc are depreciated at 5% per year on the straight- line basis on cost or valuation.

vi) Assume  that  an  impairment  review  of goodwill  at  31  December  2020  leads  to  the identification of impairment losses of £33m for the goodwill of Sapphire plc.

vii) All calculations should be to two decimal points.

Required:

a)  Compute each of the following account balances for Ruby Group plc as at 31 December 2020:

i)   Goodwill on consolidation

ii)  Tangible non-current assets

iii) Inventory

iv) Cash

v)  Non-controlling interest

vi) Group reserves

(5 (3 (3 (2 (5 (4

marks)

marks)

marks)

marks)

marks)

marks)

b)  Produce the consolidated statement of financial position (balance sheet) for Ruby Group plc at 31 December 2020.   Presentation of your answer should reflect best accounting practice as far as the information allows.

(8 marks)

Total: 30 marks

A2

Tap Plc trades light machineries. Below are the company’s financial statements:

Tap Plc

Statement of Profit or Loss for the year ended 31 December 2020

£

Revenue                                                                           670,500

Cost of sales                                                                 (270,500)

Gross profit                                                                      400,000

Operating expense                                                        (192,500)

Depreciation expense                                                     (18,000) 

Profit before tax                                                                189,500

Interest expense                                                              (10,000)

Tax expense                                                                   (34,000) 

Net income                                                                       145,500

Statement of Financial Position as at 31 December

Non-current Assets

Property, plant and equipment

Current Assets

Inventory

Trade receivables

Bank

Total Assets

Equity

£1 Ordinary shares

Retained earnings

Total equity

Current Liabilities

Trade payables

Operating expenses

Non-current Liabilities

7% Loan notes - 31.12.2023

Total Liabilities & Equities

2020

£

312,000

88,750

37,100

26,500

464,350

100,000

200,000

2019

£

290,000

54,300

32,900

29,200

406,400

80,000

157,000

During the year, there were no disposals of property, plant and equipment nor were the assets revalued or impaired during the year.

Required:

(I) Prepare the Statement of Cash Flows for Tap Plc for the year ended 31 December 2020 using the direct OR indirect method. Show all workings.                                   (20 marks)

(II) Discuss the usefulness of Statement of Cash Flow to a company’s shareholders.

(Maximum 100 words)

(5 marks) Total: 25 marks

A3

(a)

Explain the following and describe their accounting treatment and disclosure requirements in accordance with IAS 10 Events after the Reporting Period.

(I)       Adjusting event

(II)       Non-adjusting event

(12 marks)

(b)

The  Conceptual  Framework  for  Financial  Reporting  identifies  two  concepts  of  capital maintenance.

Required:

(I)        Explain the TWO concepts of capital maintenance.

(II)       Explain why investors and management might have different preference for capital

maintenance concepts.

(8 marks)

(Maximum 300 words)

Total: 20 marks

SECTION B:

Answer ONE question from this section.

B1

(a)

Ballot Plc acquired a bus service business on 1 January 2018 for £270,000. The business provides public transport around the city of Melton, under a contract with the local authority. The value of the assets of the business at that date based on the net selling price were as follows:

£000

Bus license                                40

Receivables                               15

Bank balance                             45

Payables                                  (10)

240

On 1 February 2018, one of the busses was destroyed in a landslide. The net selling value of the bus was £50,000. The bus was insured for £45,000. However, the bus insurance does not provide cover for natural disasters. As a result of this event, Ballot Plc’s directors wish to recognise an impairment loss of £65,000 (including the loss of the damaged bus) due to the decline in value in use of the cash generating unit, i.e. the bus business as a whole.

Required:

Describe how Ballot Plc should treat the above impairment of assets in its financial statements, in accordance with IAS 37 Impairment of Assets.

(10 marks)

(b)

On 1 January 20X1, Helium Plc purchased a property at a cost of £100 million. The property was classified as property, plant and equipment (PPE) in accordance to IAS 16 Property, Plant and Equipment and is being depreciated over 50 years. At the end of 20X5, an impairment loss of £5 million was recognised.

At the end of 20X8, the carrying amount of the property was as follows:

£’million

Property, at cost                                                          100.0

Accumulated impairment loss                                        (5.0)

Accumulated depreciation (20X1 - 20X5)                    (10.0)

Accumulated depreciation (20X6 - 20X8)                       (5.7)

Net carrying amount                                                       79.3

At the beginning of 20X9, the property was classified as investment property carried at fair value in accordance with IAS 40. The fair value of the investment property at the date of

change in use was £90 million.

Required:

Explain how Helium Plc should account for the transfer of PPE to investment property, in accordance to IAS 40 Investment Properties.

(15 marks)

(Maximum 300 words)

Total: 25 marks

B2

(a)

IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be included in the cost of asset.

Required:

For each of the scenarios below, compute the borrowing cost to be capitalised:

i)     A loan of £ 10 million was taken at the rate of 12% on 1 January 2018 for the purpose of constructing a warehouse. Funds that were not utilised were deposited and this generated interest income of £260,000 during the year 2018.

ii)    A company has a 7% £20 million loan and a 9% £15 million loan. The company used £17 million from the loans to construct a warehouse. The warehouse takes

10 months to build.

(9 marks)

(b)

Connect  Plc  prepares  financial  statements  to  31  December  each  year.  The  following information is given for the year ended 31 December 2018.

On 1 July 2018 Connect Plc purchased all the equity capital of Link. Link sells a branded consumer product and the directors of Connect Plc have obtained evidence that the fair value of this brand is £10 million, with an indefinite useful life. The value of the brand name is not included in the statement of financial position of Link, as the directors of Link believe that the brand does not satisfy the recognition criteria  in accordance with  IAS 38.  However, the directors have taken legal steps to prevent other entities from using the brand name.

Apart from the brand name, Connect Plc also has a project which began on 1 October 2016. The project’s aim was to develop a more efficient system to manage the company’s production. A total cost of £3 million was incurred in the year 2017 and this amount was reflected in the statement of comprehensive income for the year 2017. On  1 July 2018, the directors of