LUBS221001 FINANCIAL ACCOUNTING 2
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LUBS221001
May 2013
Examination for the degree of BA and BSc
FINANCIAL ACCOUNTING 2
SECTION A
Question 1 – You must answer this Question
Mountain plc, a public listed company, has the following investments at 31 December 2012.
On 1 January 2002 the company acquired 240 million shares in Top Limited for a cash payment of £400 million.
On 1 January 2003 the company acquired 600 million shares in Step Limited for a cash payment of £800 million.
The summarised financial statements of the three companies at 31 December 2012 are as follows:
Statement of Financial Position at 31 December 2012
Non-current assets
Property, plant & equipment Investments
Current assets
Inventories
Cash & bank
Total assets
Equity
Share capital (£1 shares) Share premium Revaluation reserve Retained earnings
Current liabilities
Trade payables
Equity and Liabilities
Mountain Step |
Top |
£m £m £m £m |
£m £m |
700 780 950
1,200
150 520 |
1,900
20 40 670 |
780
20 80 60 |
950
100 |
1,050
600
388
988
62 |
1,050 |
Comprehensive Income statement for the year ended 31 December 2012
Mountain Step Top
£m £m £m
Revenue 15,200 7,922 6,000
Cost of Sales (9,600) (4,000) (3,000)
Gross Profit 5,600 3,922 3,000
Administration expenses (3,600) (2,000) (1,600)
Profit from operations 2,000 1,922 1,400
Dividends Received 600 - -
Profit before tax 2,600 1,922 1,400
Taxation (1,000) (1,300) (300)
Comprehensive income 1,600 622 1,100
Statement of changes in equity at 31 December 2012
|
Mountain |
Step |
Top |
|
£m |
£m |
£m |
Balance at 1.1.12 |
1,100 |
694 |
288 |
Dividends |
(350) |
(500) |
(400) |
Comprehensive income |
1,600 |
622 |
1,100 |
Balance at 31.12.12 |
2,350 |
816 |
988 |
Notes:
The retained earnings of Top at 1 January 2002 were £180m and the retained
earnings of Step at 1 January 2003 were £20m.
The fair value of Step’s land at the date of acquisition was £30m in excess of its
carrying value.
Top and Step have not issued any shares since they were acquired by Mountain.
The Directors do not consider that there has been any impairment in the investment
in Top.
An impairment test on 31 December 2012 showed that consolidated goodwill
should be written down by £20m.
During the year Step sold goods to Mountain. The sales value was £800m and the
cost to Step was £600m. 25% of the goods are still held by Mountain.
REQUIRED:
a) Prepare the Consolidated Statement of Financial Position, Consolidated Statement of Comprehensive Income and Consolidated Statement of Changes in Equity of Mountain plc at 31 December 2012.
NB: You must prepare the workings to prove the opening and closing retained earnings figures for the Mountain group at 31 December 2012.
(40 Marks)
b) Explain the difference in accounting for purchased goodwill compared to internally generated goodwill. Critically discuss the IASB’s reasoning for the difference in accounting and give your opinion on whether you agree with the current treatment.
(10 Marks) Total 50 Marks
SECTION B - Answer TWO Questions from Section B
Question 2
a) IAS 36 Impairment of Assets states that impairment of an asset occurs when the ‘carrying value exceeds recoverable amount’ .
REQUIRED:
Explain what is meant by this phrase.
(5 Marks)
b) IAS 36 also states that a review of all assets should be made at each balance sheet date to look for any indication that an asset may be impaired.
REQUIRED:
Discuss the requirements of IAS 36 with respect to identifying and accounting for impairments.
(8 Marks)
c) Otter plc purchased a machine for £400,000 on 30 June 2010. Otter depreciates non current assets at 15% using the straight line method with a nil residual value. A full year’s deprecation is charged in the year of acquisition. At 31 December
2012 the net selling price of the asset is £196,000 and the value in use is £170,000.
REQUIRED:
Calculate whether an impairment has occurred with the machine held by Otter plc. Explain the accounting and provide the resulting values that should be reflected in the Income Statement and Balance Sheet for the year end 31 December 2012 in relation to this asset.
(12 Marks) Total 25 Marks
QUESTION 3
A construction contract with revenue of £30m is initially estimated to have total costs of £18m and is expected to take 4 years to complete. Estimated cumulative percentage completion in each of the 4 years was as follows at the beginning of the contract:
Year |
1 |
2 |
3 |
4 |
Cumulative % completion |
20% |
50% |
80% |
100% |
At the beginning of year 2 the total costs are re-estimated at £20m and the revised estimated cumulative % completion was as follows for the remainder of the contract:
Year |
1 (actual) |
2 (est) |
3 (est) |
4 (est) |
Cumulative % completion |
20% |
45% |
75% |
100% |
In year 1 actual costs incurred are £4m and in year 2 actual costs incurred are £6m. This gives cumulative costs incurred at the end of year 2 of £10m.
Revenue for the contract is to be billed and received evenly in each of the 4 years.
REQUIRED:
a) Explain what is meant by the term ‘construction contract’, as defined in IAS 11.
(5 Marks)
b) For the first two years of the above contract prepare comprehensive income statement and statement of financial position extracts to show how it would be reported in accordance with IAS 11: Construction Contracts.
(16 Marks)
c) If a loss had been anticipated on the above contract explain the difference this would have made to the accounting for the contract over the two years.
(4 Marks) Total 25 Marks
QUESTION 4
This question has 3 separate elements. They are not related to each other and should be answered independently of each other.
a) Lablock Ltd is a UK incorporated company that currently uses UK standards for its financial reporting. The board of directors of Lablock Ltd is considering the adoption of International Financial Reporting Standards (IFRS) in the near future. The company has ambitious growth plans which involve extensive trading with many foreign companies and the possibility of acquiring at least one of its trading partners as a subsidiary in the near future.
REQUIRED:
Identify the advantages that Lablock Ltd could gain by adopting IFRS for its financial reporting purposes.
(8 Marks)
b) Barnaby Ltd has taken out a 3 year lease on a machine. The cost of the machine to buy it would have been £10,000 and it is anticipated that it will have a total useful life of 10 years. The lease payments are £1,000 per year and the rate implicit in the lease is 15%.
REQUIRED:
Explain how the above lease should be accounted for under the current international accounting standards, giving reasons for your answer.
Discuss whether the accounting would be different under the proposals within the Exposure Draft currently being developed on leases, and give your opinion on whether you think this is an improvement on the current rules.
NB: Calculations are not required. (9 Marks)
c) Harrow plc has 5,000,000 £1 4% bonds maturing 2020 which were issued on 1 January 2009. These bonds were issued at par with issue costs of £100,000. The effective interest rate is 4.5% per annum. Interest on the bonds is payable annually in arrears. The bonds (financial instruments) were not designated as financial liabilities at fair value through profit or loss.
REQUIRED:
Calculate the amount to appear in the income statement of Harrow plc for the year to 31 December 2012 in relation to the above bonds.
(8 Marks)
Total 25 Marks
2022-08-23