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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