SECTION A

For each question, choose ONE of the proposed answers. (2 marks each)

1.     Iroko holds three separate inventory lines at the year-end. These are valued as follows:

Product	FIFO £	LIFO £	NRV £
X	9,120	5,040	7,080
Y	13,560	16,080	15,360
Z	18,240	20,400	22,080

40,920        41,520        44,520

According to IAS 2 Inventories, what amount of inventories should be recognised in the statement of financial position as at the end of the reporting period?

a.     £38,880

b.      £40,800

c.      £40,920

d.     £41,520

2.     MN obtained a government licence to operate a mine from 1 April 2019. The licence requires that, at the end of the mine’s useful life, all buildings must be removed from the site and the site landscaped. MN estimates that the cost of this decommissioning work will be £1,000,000 in ten years’ time (present value at 1 April 2019 £463,000) using a discount factor of 8%.

According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets how much should MN include in provisions in its statement of financial position as at 31 March 2020?

a.     £463,000

b.      £1,000,000

c.      £500,040

d.     £1,080,000

3.     In December 2016 Heinz Ltd revalued a piece of land from a cost of £700,000 to its market value of £1.5 million. In December 2020, due to a downturn in the local economy, the market value fell to £650,000.

How much of the impairment loss should be recognised in profit or loss as an expense in Heinz Ltd’s statement of profit or loss for the year ended 31 December 2020?

a.     £NIL

b.     £50,000

c.     £800,000

d.     £850,000.

4.     On 1 October 2010 Bamford purchased an office building for £1.4 million. At that date it had an estimated useful life of 30 years. On 1 October 2018 Bamford began to let the building to a third party, reclassifying it as an investment property and adopting the fair value model in accordance with IAS 40 Investment Property. On 1 July 2020, Bamford began to use the office block for its own operations again. An independent valuer estimated that useful life of the building was 25 years from 1 July 2020 and provided the following additional information:

Fair value of the property

£000

At 1 October 2019                                 2,100

At 1 July 2020                                        1,900

At 30 September 2020                           1,950

Bamford has adopted the cost model for tangible assets that fall within the scope of IAS 16 Property, plant and equipment.

What is the total charge to profit or loss in respect of the office building for the year ended 30 September 2020?

a.     £19,000

b.      £76,000

c.      £214,000

d.     £219,000

5.     Crete acquired 80% of the equity share capital of Rhodes on 1 July 2019. For the year ended

30 June 2020, the cost of sales of Crete was £270,000 and the cost of sales of Rhodes was £150,000. During the year ended 30 June 2020, Crete sold goods Rhodes for £80,000 at a mark up of 25%. At the year-end, one quarter of these goods were still in inventory.

What is the consolidated cost of sales for the year ended 30 June 2020?

a.     £340,000

b.      £344,000

c.      £356,000

d.     £420,000

6.     Gordon Ltd purchased an item of plant at a cost of £12 million on 1 January 2019. Gordon charged depreciation at 20% per annum (straight line) and received capital allowances of 25% (reducing balance) in respect of the purchase. This was the only temporary difference in respect of the years to 31 December 2019 and 2020. The tax rate is 20%.

What is the amount of Deferred Tax in Profit or Loss for Gordon for the year ended 31 December 2020?

a.     £30,000 debit

b.      £90,000 debit

c.      £30,000 credit

d.     £90,000 credit

7.     Kale has correctly calculated its basic earnings per share (EPS) for the current year.

Which of the following items need to be additionally considered when calculating Kale’s diluted EPS for the year?

I.     A 1 for 5 rights issue of equity shares during the year at £1 ·20 when the market price of the equity shares was £2 ·00

II.     The issue during the year of a convertible (to equity shares) loan note

III.     The granting during the year of directors’ share options exercisable in three years’ time

IV.     Equity shares issued during the year as the purchase consideration for the acquisition of a new subsidiary company

a.     All four

b.      I and II only

c.      II and III only

d.      III and IV only

8.     On 1 April 2020, Sharp Limited acquired a financial debt instrument (a financial asset) at its nominal value of £12 million. The instrument carries a fixed coupon interest of 7% which is receivable  annually  in  arrears.  Transaction  costs  associated  with  the  acquisition  were £104,000.

What is the carrying value of the financial asset as at 1 April 2020?

a.     £11,896,000

b.      £12,000,000

c.      £12,104,000

d.     £12,840,000.

9.     TrainEuro sells European train tickets to customers through an online service. TrainEuro buys tickets at discounted prices and then sells them to the public at cost plus 15%. During the year ended 30 June 2019, TrainEuro’s train ticket sales amounted to £23m.

What  is  the  amount  of  revenue  that  TrainEuro  should  recognise  in  its  financial statements for the year ended 30 June 2019?

a.     £3 million

b.      £3.45 million

c.      £20 million

d.     £23 million

10.   Comparability is identified as an enhancing qualitative characteristic in the IASB’s Conceptual Framework for Financial Reporting.

Which of the following does NOT improve comparability?

a.      Restating the financial statements of previous years when there has been a change of accounting policy

b.      Prohibiting changes of accounting policy unless required by an IFRS or to give more relevant and reliable information

c.      Disclosing discontinued operations in financial statements

d.     Applying an entity’s current accounting policy to a transaction which an entity has not engaged in before

SECTION B

QUESTION 11

(i)        On 1 October 2019, Margate acquired 75% of Deal’s equity shares by a share exchange of two new shares in Margate for every five acquired shares in Deal. In addition, Margate will pay the shareholders of  Deal £2.42  per share on 30  September 2020. The  market value of Margate’s shares at  1 October 2019 was £2 each. Margate has not recorded any of the purchase consideration in Deal.

On 1 January 2020, Margate acquired 25% of the equity shares in Dover paying £3 per share in  cash  and  Dover was  correctly  identified  as  an  associate  company  of  Margate.  This transaction has been correctly recorded in the books of Margate.

The summarised statements of financial position of the three companies as at 31 March 2020 are:

Margate              Deal           Dover

ASSETS                                            £000             £000             £000

Property, plant & Equipment           56,625          62,000          50,000

Investment in Dover                       48,375                    -                    -

Current assets                                 68,000           36,500           61,000

Total assets                                 173,000          98,500        111,000

 

EQUITY

Share capital (£1 shares)               44,000          32,000          64,500

Retained earnings                           57,000           10,500           23,500

101,000          42,500          88,000

Non-current liabilities

8% debentures                               60,000          40,000          20,000

Current liabilities

Total liabilities

12,000           16,000             3,000

72,000          56,000          23,000

173,000          98,500        111,000

The following information is relevant:

O   During the year to 31 March 2020, Deal made a profit of £4 million, Dover made a profit of £6 million.

O  At the date of acquisition of Deal, Margate conducted a fair value exercise on Deal’s net assets which were equal to their carrying amounts with the exception of an item of plant which had a fair

value of £6 million below its carrying amount. The plant had a remaining economic life of three years at 1 October 2019.

O   Margate’s policy is to value the non-controlling interest at fair value at the date of acquisition. A share price for Deal of £2.70 each is representative of the fair value of the shares held by the non-controlling interest.

O   Since acquisition, Margate has made sales of goods to Deal. Deal had £4.6 million of these goods in inventory at 31 March 2020. Margate’s mark-up on sales is 15%.

O  There are impairment losses of 20% on goodwill in the period to year-ended 31 March 2020.

O   Margate’s cost of capital is 10% per annum. Assume a present value factor of 0.83 for a 2-year discounting calculation.

O  Assume profits for all companies arose evenly.

Required:

Prepare the Consolidated Statement of Financial Position for the Margate Group for the year ended

31 March 2020.

(25 marks)

(ii)         Margate acquired some ordinary shares in Ashford in May 2020. Margate was one of three

shareholders, the majority shareholder held 60% of voting shares, a second shareholder held 22% of voting shares and Margate held 18% of the voting shares.

The board of directors consisted of ten members. The majority shareholder was represented by six of the board members, while Margate and the other shareholder were represented by two members each.

A shareholders’ agreement stated that certain board and shareholder resolutions required either unanimous or majority decision.

It was envisaged that during the coming month Margate would supply technical services to Ashford. Margate do not intend to account for its investment in Ashford as an associate, because of a lack of significant influence over the entity. Margate felt that the 60% majority owner used its influence as the parent to control and govern its subsidiary.

Required:

Discuss whether you agree with Margate’s assertion that they do not have significant influence over

Ashford.

(5 marks)

(Total: 30 Marks)

SECTION C – ANSWER ANY TWO QUESTIONS

QUESTION 12

The draft financial statements of Auckland plc for the year to 31 March 2020 are as follows:

Statement of Profit or Loss and Other Comprehensive Income

Note                  £000

Revenue

Cost of sales

Gross profit

Operating expenses

Interest payable

Interest receivable

Profit before tax

Income tax

Profit for the period

Other Comprehensive Income

Loss on revaluation of land

Total comprehensive income for the year Statements of Financial Position as at:

Non- current assets

Property, plant and equipment

Current assets

Inventory

Trade receivable

Bank

Total assets

Capital and reserves:

Ordinary shares of £1 each

Share premium

Revaluation Reserve

Retained earnings

Non-Current liabilities

Deferred tax

Government grants

Lease obligations

8% Convertible loan

Current liabilities

12,400

(6,800)

5,600

(2,604)

(180)

70

2,886

(460)

2,426

 

(400)

2,026

31 March 2020

£000         £000

7,344

2,850

1,810

402

3,930

10,733

2,000  800  700 4,010 7,510

550  200  300  400 1,450

Trade payable                                                                                         700                                960

Lease obligations                                                                                        150                                  187

Income tax                                                                                                   520                                  295

Government grants                                                      4                             160                                  125

Bank Overdraft                                                                                        NIL                                 206

1,530                            1,773

Total equity and liabilities                                                            12,406                            10,733

The following information is relevant:

(1) Non- current assets

O    Land was revalued downwards by £400,000 on 1 April 2019.

O    During the year an item of plant that had cost £800,000 and had accumulated depreciation of £120,000 was sold at a loss (included in cost of sales) of £60,000 on its carrying value.

O    The depreciation charge for the year was £1,400,000.

(2) Share capital and loan stocks  The increase in the share capital during the year was due to the following events:

O    On 1 June 2019 there was a bonus issue (out of share premium) of two bonus shares for every 10 shares held:

O    On 1 February 2020 the 8% convertible loan stock holders exercised their right to convert to ordinary shares. The terms of conversion were 50 ordinary shares of £1 for each £100 of 8% convertible loan stock.

O    The remaining increase in the ordinary shares had been due to issue of shares for cash on

1 September 2019.

(3) Government grant

O    A credit of £180,000 for the current year’s amortisation of government grants for capital expenditure has been included in cost of sales.

(4) Plant with a fair value of £560,000 was acquired on a lease basis. The interest payable on the lease  is  included  in  the  amount  charged  to  the  Statement  of  Profit  or  Loss  and  Other Comprehensive Income for the year ending 31 March 2020.

Required

Prepare a Statement of Cash Flows for Auckland plc for the year ended 31 March 2020 using the indirect method.

(20 marks)

Comment on what the statement you have prepared tells users about the cash flows of Auckland plc for the year-ended 31 March 2020.

(5 marks)

(Total: 25 marks)

QUESTION 13

The following issues relate to company clients of the firm of accountants you work for. Each company has a year-end of 31 March 2020.

You are  required to prepare a  brief report for your manager explaining the appropriate accounting treatments at the 31 March 2020 year-end in each case along with supporting calculations as necessary.

You should cite relevant accounting regulations in your answer.

(i)   Richmond owned a 100% subsidiary, Bedale that is treated as a cash generating unit. On 31 March 2020 there was an industrial accident (a gas explosion) that caused damage to some of Bedale’s plant. The assets of Bedale immediately before the accident were:

Goodwill

Patent

Factory building

Plant

Receivables and cash

£000

1,800

1,200

4,000

3,500

1,500

12,000

As a result of the accident, the recoverable amount of Bedale is £6.7 million and the impairment loss needs to be ascertained and recorded.

The explosion destroyed (to the point of no further use) an item of plant that had a carrying amount of £500,000.

Bedale has an open offer from a competitor of £1 million for its patent.

The receivables and cash are already stated at their fair values less costs of disposal (net realisable values).

(13 marks)

(ii)  On 1 April 2019, Nicholas plc issued £12 million x £1 convertible loan notes at par which carry

a nominal interest (coupon) rate of 6% per annum.

The loan notes are redeemable on 31 March 2023 at par for cash or can be exchanged for equity shares. A similar loan note, without the conversion option, would have required Nicholas to pay an interest rate of 9%.

The present value of £1 receivable at the end of each year, based on discount rates of 6% and 9%, can be taken as:

End of

year

1

2

3

4

6%

0.94

0.89

0.84

0.79

9%

0.92

0.84

0.77

0.71

(12 marks)

(Total: 25 marks)