psa financial accounting question bank

CA in Bangladesh www.facebook.com/CAinBD The Institute of Chartered Accountants of Bangladesh FINANCIAL ACCOUNTING Professional Stage Application Level Question Bank www.icab.org.bd Financial accounting The Institute of Chartered Accountants of Bangladesh Professional Stage These learning materials have been prepared by the Institute of Chartered Accountants in England and Wales ISBN: 978-1-84152-838-0 First edition 2009 All rights reserved No part of this publication may be reproduced or transmitted in any form or by any means or stored in any retrieval system, or transmitted in, any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior permission of the publisher ii © The Institute of Chartered Accountants in England and Wales, March 2009 Contents Title Marks Time allocation Mins Question Answer 24 20 21 26 25 26 22 24 18 25 36 28 30 39 38 39 31 36 27 38 11 13 14 119 122 124 127 131 134 137 140 143 145 18 23 22 13 20 23 16 18 11 17 17 18 23 19 17 21 16 25 15 27 35 33 19 30 32 24 27 17 26 26 27 35 29 25 32 26 38 23 11 17 18 19 20 21 21 22 23 24 25 26 26 28 29 30 31 33 34 36 37 149 152 155 157 159 162 166 167 169 172 174 176 178 181 184 186 189 191 194 195 Page Preparation of full single entity financial statements 10 Howells Ltd Berwick Ltd Angus Ltd Goblins Ltd Harry Ltd Frodo Ltd Plodder Ltd Copeland Ltd Pippin Ltd Merry Ltd Preparation of extracts from financial statements 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Montrose Ltd Gandalf Ltd Cagreg Ltd Roberts Ltd Dumfries Ltd Crieff Ltd ITC Solutions Ltd Withington Ltd Islay Ltd Greenstones Ltd Okehampton Ltd Banchory Ltd Banff Ltd Skinner Ltd Rosetta Ltd Arran Ltd Elie Ltd Wester Ross Ltd Shadowlands Ltd Scribo Ltd © The Institute of Chartered Accountants in England and Wales, March 2009 iii Title Marks Time allocation Mins Question Answer 18 24 14 17 16 19 22 18 15 17 23 18 17 23 30 17 20 18 27 36 21 26 24 29 33 27 23 26 35 27 25 35 45 26 30 27 39 40 41 42 43 45 46 47 48 49 51 52 53 54 56 57 58 60 197 200 203 206 208 211 214 217 220 223 226 229 232 235 238 242 244 247 61 66 68 249 250 250 71 251 76 78 80 84 86 88 90 254 254 254 256 257 258 258 91 94 259 259 97 260 Page Preparation of full consolidated financial statements 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Hemmingway Ltd Highland Ltd Ullapool Ltd Law Ltd Heeley Ltd Harris Ltd Lowland Ltd Vanguard Ltd Heaton Ltd Jerome Ltd Hardmead Ltd Tain Ltd Glencoe Ltd Herdings Ltd Camden Ltd Gallant Ltd Slick Ltd Senorita Ltd Single entity financial statements Objective test questions 49 50 51 52 53 54 55 56 57 58 59 60 61 62 iv Accounting and reporting concepts BAS Presentation of Financial Statements BAS Inventories BAS Cash Flow Statements (single company only) BAS Accounting Policies, Changes in Accounting Estimates and Errors BAS 10 Events after the Balance Sheet Date BAS 16 Property, Plant and Equipment BAS 17 Leases BAS 18 Revenue BAS 32 and BAS 39 Financial Instruments BAS 36 Impairment of Assets BAS 37 Provisions, Contingent Liabilities and Contingent Assets BAS 38 Intangible Assets BFRS Non-current Assets Held for Sale and Discontinued Operations © The Institute of Chartered Accountants in England and Wales, March 2009 Title Marks Time allocation Mins Page Question Answer 101 263 107 110 114 265 266 268 Consolidated financial statements Objective test questions 63 64 65 66 Consolidated balance sheets Consolidated statements of financial performance Consolidated cash flow statements Group accounts accounting standards © The Institute of Chartered Accountants in England and Wales, March 2009 v vi © The Institute of Chartered Accountants in England and Wales, March 2009 CA in Bangladesh www.facebook.com/CAinBD Question Bank Your exam will consist of Part one 5-15 short-form questions (worth 1-4 marks each) 20 marks Part two questions (each worth around 20 marks) 80 marks Time available 2.5 hours © The Institute of Chartered Accountants in England and Wales, March 2009 © The Institute of Chartered Accountants in England and Wales, March 2009 QUESTION BANK Preparation of full single entity financial statements Howells Ltd The trial balance of Howells Ltd as at 31 December 20X8 is as follows Share capital CU1 ordinary shares CU1 5% preference shares (irredeemable) Retained earnings General reserve as at 31 December 20X8 Intangible assets Land and buildings Cost Accumulated depreciation Plant and machinery Cost Accumulated depreciation Inventories at January 20X8 Sundry net current assets Revenue Purchases Debenture interest paid Royalties received Administrative salaries Salesmen's salaries and commission Factory wages Operating lease rentals Gain on sale of property Administrative expenses Selling and distribution expenses Dividend received from Morgans Ltd 10% Debentures (issued and redeemable at par) 20X7 final dividend paid CU 20,500 450,000 82,000 CU 100,000 50,000 56,015 20,000 81,000 18,000 58,045 261,349 1,600,047 907,989 6,260 14,005 126,232 24,291 54,117 6,002 18,822 9,600 12,500 2,037,707 25,040 11,000 62,600 2,037,707 You are provided with the following information in respect of 20X8 (1) The gain on sale of the property is not expected to recur (2) Depreciation is to be provided on the basis of the following policies Buildings Plant and machinery Straight line over 50 years Straight line over 10 years The land originally cost CU115,000 In previous years the policy in respect of plant and machinery had been to depreciate on a reducing balance basis All the plant was acquired on January 20X5 with the exception of a machine acquired for CU22,000 at the start of 20X8 (3) The intangible asset is a brand arising on the purchase of a sole trader which is held in the books at original cost Following an impairment review, fair value less costs to sell has been estimated at CU10,000 and value in use at CU12,000 (4) Howells Ltd wishes to propose an ordinary dividend of CU25,000 which will be paid on 25 March 20X9 The 20X8 preference dividends have been declared but not yet paid (5) Tax of CU22,500 is to be charged for the current year (6) During the year the directors transferred CU10,000 to the general reserve © The Institute of Chartered Accountants in England and Wales, March 2009 Preparation of full single entity financial statements (7) Inventories held at 31 December 20X8 are valued at cost of CU68,000 Within this amount there are 1,000 units of finished goods valued at CU20 each These units are now expected to sell at a discounted price of CU18 each and incur CU1 selling costs per unit Requirements (a) Prepare the income statement, statement of changes in equity and notes thereto for the year ended 31 December 20X8 in a form suitable for publication to the extent the information is available You should classify expenses by function (20 marks) (b) Explain the concept of 'fair presentation' (4 marks) (24 marks) Berwick Ltd Berwick Ltd has produced the following trial balance as at 31 January 20X5 CU Profit before tax Interim dividends paid Final dividends paid Development expenditure capitalised Land and buildings Revalued Plant and machinery Cost Accumulated depreciation Motor vehicles Cost Accumulated depreciation Inventories and work in progress Trade receivables and trade payables Prepayments and accruals Value added tax Bank balance in hand and overdrawn Bank loan Share capital – ordinary shares of CU1 each Retained earnings Revaluation reserve Share premium account CU 370,000 22,000 66,000 70,000 1,500,000 650,000 160,000 250,000 90,000 370,000 420,000 97,000 249,000 3,694,000 380,000 100,000 50,000 110,000 200,000 850,000 770,000 564,000 50,000 3,694,000 Additional information (1) The company’s land and buildings were revalued on February 20X4 at CU1.5 million (land element CU300,000) The remaining useful life of the buildings at that date was estimated at 40 years The property originally cost CU1 million on February 20X0 (land element CU200,000) and was being depreciated over 50 years The company intends to transfer to retained earnings that element of the revaluation reserve realised by depreciation but has not yet done so for the year ended 31 January 20X5 (2) No adjustments have been made for the depreciation charges for the year ended 31 January 20X5 Depreciation rates are as follows Land and buildings Plant and machinery Motor vehicles – – – see (1) above 10% straight line 20% reducing balance (3) The bank loan is repayable over five years in equal annual instalments starting on 30 June 20X5 (4) Tax on profits for the year has been estimated at CU135,000 and has yet to be provided for in the trial balance © The Institute of Chartered Accountants in England and Wales, March 2009 Single entity financial statements: objective test questions 10 56 C This is true for initial revaluations upwards For a subsequent revaluation upwards which reverses a previous revaluation loss which was recognised in the income statement this will not necessarily hold true Re A, whole classes of assets must be carried under either the revaluation model or the cost model – it is not permissible to revalue just those assets where carrying amounts and market values are materially different Re B, assets must be revalued with sufficient regularity such that carrying amounts never differ materially from fair values Although BAS 16 mentions five years, longer could be justified if fair value movements are small and slow Re D, the fair value of land and buildings is based on market values, which will take into account alternative uses BAS 17 Leases D B Assets held under finance leases are recorded at their fair value (here, the cash price) and depreciated over the shorter of the lease term and the asset’s useful life Here, the lease term is six years (the primary period plus the secondary period, since this is expected to be taken up) and the useful life is five years Year ended 31 Dec 20X4 31 Dec 20X5 B/f CU 2,050 1,730 Payment CU (500) (500) Capital CU 1,550 1,230 Interest CU (4/10) 180 (3/10) 135 C/f CU 1,730 1,365 Borrowing over four periods (since paying in advance) Therefore SOTD = (4  5) ÷ = 10 Total interest = (5  500) – 2,050 = CU450 D B Borrowing over ten quarters (since paying in arrears) Therefore SOTD = (10  11) ÷ = 55 CU 6,000 26,000 (24,000) 8,000 Deposit Instalments (10  CU2,600) Cash price Total interest Allocated to 4th repayment = 7/55  CU8,000 = CU1,018 D Year ended 31 Dec 20X4 31 Dec 20X5 B/f CU 2,050 1,700 Interest CU (5/15) 150 (4/15) 120 Payment CU (500) (500) C/f CU 1,700 1,320 Borrowing over five periods (since paying in arrears) Therefore SOTD = (5  6) ÷ = 15 Total interest = (5  500) – 2,050 = CU450 256 C There is no period-end liability for an operating lease, only for a finance lease C Although this will usually lead to leases of land being treated as operating leases and leases of buildings being treated as finance leases this will not always be the case © The Institute of Chartered Accountants in England and Wales, March 2009 ANSWER BANK C Cash paid (60,000 + 30,000) Income statement charge ((60,000 + (3  30,000)) ÷ 3)) Prepayment 57 CU 90,000 (50,000) 40,000 A The underlying concept of the treatment of leases is substance over form This is a consequence of the requirement to present transactions faithfully, part of the qualitative characteristic of reliability 10 B CU24,000 (the cash price less the deposit) is owed on January 20X7 This is subject to interest at 12% for 20X7, as no further payment is made until the last day of 20X7 Therefore CU24,000  12% = CU2,880 BAS 18 Revenue B Because the risk and rewards of ownership have not yet passed (the goods are unsold at the year end) revenue should not be recognised Hence the CU20,000 selling price should be removed from revenue and trade receivables and the CU15,000 cost added in to closing inventories (and hence be removed from cost of sales) Inventories = 110,000 + 15,000 = CU125,000 Trade receivables = 190,000 – 20,000 = CU170,000 B Total contract price Less: After-sales support (500,000  years  130%) Revenue for year re supply of software Revenue for year re after-sales support (500,000  130%) CUm 5.00 (3.25) 1.75 0.65 2.4 C Supply of hardware One year of after-sales support at additional fixed fee (1m ÷ years) CUm 3.00 0.25 3.25 C Once a sale has been made, the revenue should be measured at the fair value of the consideration receivable, i.e CU290,000 C For the rendering of services, BAS 18 requires that revenue is recognised by reference to the stage of completion of the contract (provided revenue, stage of completion and costs can be measured reliably and it is probable that economic benefits will flow to the seller) We are told that all figures are reliable and that the contract is expected to make a profit – hence economic benefits will flow to the seller Therefore 40% of the revenue is recognised this year B Where costs cannot be measured reliably in respect of a contract for the rendering of services (see answer above) and the outcome of the contract is uncertain, revenue should be restricted to the extent of the costs which are recoverable D BAS 18 requires revenue from artistic performances to be recognised when the event takes place (Appendix para 15) Since the June production was delayed until July only May’s proportion of the season ticket (1/5  CU100) should be recognised by 30 June 20X6 © The Institute of Chartered Accountants in England and Wales, March 2009 257 Single entity financial statements: objective test questions 58 59 BAS 32 and BAS 39 Financial Instruments A Redeemable preference shares are classified as liabilities Dividends on these shares are shown as finance cost in the income statement, not as dividends in the statement of changes in equity D Irredeemable preference shares are classified as equity Dividends on these shares are reflected in the statement of changes in equity B (1) is a financial liability, (2) and (4) are financial assets, (3) is neither and (5) could be either, depending on which company’s financial statements are being considered C BAS 36 Impairment of Assets D They are all true (3) is true because an asset is impaired if its recoverable amount is less than its carrying amount Recoverable amount is the higher of fair value less costs to sell and value in use so if fair value less costs to sell already exceeds the carrying amount there is no need to estimate value in use C Recoverable amount is the higher of fair value less costs to sell (CU18,000) and value in use (CU22,000) C Cost Depreciation: Year ended 31 March 20X3 @ 25% Year ended 31 March 20X4 @ 25% Year ended 31 March 20X5 @ 25% Year ended 31 March 20X6 @ 25% Recoverable amount Impairment loss B B (25,000) 75,000 (18,750) 56,250 (14,063) 42,187 (10,547) 31,640 (22,000) 9,640 Recoverable amount is the higher of fair value less costs to sell and value in use i.e CU450,000 The impairment loss is therefore CU250,000 (700,000 – 450,000) Since there is CU200,000 (700,000 – 500,000) in the revaluation reserve in respect of this land, then CU200,000 of the impairment loss can be set against the revaluation reserve, with the remaining CU50,000 charged to the income statement Carrying amount at revaluation Depreciation to 31 December 20X6 (80,000  3/8) Carrying amount on 31 December 20X6 Revalued to Impairment loss Charged to revaluation reserve (see below) Charged to income statement (β) Cost January 20X2 Depreciation to 31 December 20X3 (50,000  2/10) Carrying amount on 31 December 20X3 Revalued to To revaluation reserve on 31 December 20X3 Annual transfer of excess depreciation Depreciation based on revalued amount (see above) Depreciation based on historic cost (50,000  3/10) Balance on revaluation reserve on 31 December 20X6 258 CU 100,000 © The Institute of Chartered Accountants in England and Wales, March 2009 CU 80,000 (30,000) 50,000 (20,000) 30,000 25,000 5,000 30,000 50,000 (10,000) 40,000 80,000 40,000 (30,000) 15,000 25,000 ANSWER BANK 60 61 D In addition to intangible assets with indefinite useful lives and goodwill acquired in a business combination, which must be tested for impairment annually, other assets are only required to be tested for impairment if there are indications of a possible impairment (such as a fall in market values or evidence of physical damage) BAS 37 Provisions, Contingent Liabilities and Contingent Assets B BAS 37 excludes retraining and relocation of continuing staff from restructuring provisions A All three criteria must be present C (1) is not correct – if it is probable and the amount can be estimated reliably, then it must be provided for C In (1) as the board decision had not been communicated by the year end there is assumed to be no legal or constructive obligation therefore no provision should be made In (2) as refunds have been made in the past to all customers there is a valid expectation from customers that the refunds will be made therefore the amount should be provided for In (3) there is no present obligation to carry out the refurbishment therefore no provision should be made C Since it is probable (i.e 'more likely than not') that the claim will be paid out a provision should be made for the claim against Airedale Ltd The claim Airedale Ltd has made against a third party is a contingent asset Contingent assets are only ever disclosed, and only then if it is probable that the asset will be recovered, as is the case here C As refunds have been made in the past there is a valid expectation from customers that the refunds will be made, creating a constructive (as opposed to a legal) obligation Therefore Wally Ltd must provide for customer refunds Regarding A – there is no obligating event (see answer 7) as the training has not been carried out, therefore no provision should be made B is a contingent asset as opposed to a contingent liability or a provision Regarding D – since Wally Ltd is unlikely to lose the case, disclosure should be made as a contingent liability, as opposed to a provision being made D A provision is recognised under BAS 37, inter alia, where the entity has a present obligation as a result of a past event At 31 December 20X5 there is no obligating event as neither the refit nor the fitting of the safety equipment has been carried out therefore no provision is needed for either B Since it is probable (i.e 'more likely than not') that the claim against Charlotte Ltd will succeed a provision should be made Counter-claims should be recognised as separate assets but only where reimbursement is virtually certain Here reimbursement is only 'probable' so the claim against George Ltd should be disclosed, but not recognised as an asset BAS 38 Intangible Assets D C (1) False – negative goodwill is recognised immediately in profit or loss, not shown on the balance sheet (2) False – positive goodwill is capitalised and then subject to impairment reviews – there is no alternative treatment (3) and (4) False and true – neither internally generated goodwill nor internally developed brands can be capitalised Development costs Depreciation on equipment used for development (100,000 ÷ 5) C CU 300,000 20,000 320,000 Regarding A – costs are capitalised throughout the development phase then amortised once development is complete Regarding B – this says that the project will at least break even – if it was to make a loss, the costs could not be carried forward © The Institute of Chartered Accountants in England and Wales, March 2009 259 Single entity financial statements: objective test questions 62 260 C C is given as an example of research activities in BAS 38 (para 56 (c)) Research costs are written off as incurred A is given as an example of development activities in BAS 38 (para 59 (a)) and may therefore be carried forward if certain conditions (para 57) are met B – the cost of the patent, including these legal costs, will be capitalised as a separately acquired intangible D – recoverable costs will be an asset in their own right (a receivable from the customer) D (1) Whilst there is a choice to measure all intangibles after initial recognition at cost or fair value, in order for fair value to be used it must be possible to measure fair values reliably with reference to an active market This is unlikely to be possible for most (unique) intangibles Also for one intangible to be revalued, the whole class of intangibles must be revalued (2) Revaluations must be carried out with sufficient regularity to ensure that the carrying amount does not differ from the fair value This is not necessarily annually C (1) is given as an example of research activities in BAS 38 (para 56 (b)) Research costs are written off as incurred (2) is an acquired intangible and will therefore automatically meet BAS 38’s recognition criteria Although (3) is not a separable intangible it arises from legal rights and is therefore identifiable and may be recognised provided its cost can be measured reliably (and it can, at CU50,000) Therefore a total of CU110,000 is recognised (CU60,000 plus CU50,000) A (1) can be capitalised as the BAS 38 para 57 criteria appear to be met (2) cannot be capitalised as BAS 38 prohibits the recognition of internally generated brands Regarding (3) – although goodwill acquired on a business combination is recognised under BFRS Business Combinations as an intangible asset, per BAS 38 any goodwill recorded in the acquiree’s books cannot be recognised Therefore only CU50,000 (1) is recognised A For an asset to be recognised as an intangible asset in accordance with BAS 38 it must be identifiable (1) Identifiable means the asset is either separable or arises from contractual or other legal rights – therefore (2) is not correct Once an asset had met the identifiability test it is only recognised if it is probable (not just 'possible' per (4)) that future benefits from the asset will flow to the entity and the cost of the asset must be able to be measured reliably (3) D Having been initially recognised at cost, the entity then has a choice of the cost model or the revaluation model for each class of intangibles A is false – intangible assets with indefinite useful lives are not amortised but reviewed for impairment annually B is false – residual values are assumed to be zero unless a third party is committed to buying the asset at the end of its useful life or there is an active market for that type of asset (which would be unusual for an intangible) C is false – intangible assets must meet the basic definition of an asset, which includes the fact that the asset must be under the control of the entity Employees’ skills are not controlled by the entity as the employees could decide to leave BFRS Non-current Assets Held for Sale and Discontinued Operations C A discontinued operation is one that has either been disposed of in the period, or is held for sale A held for sale asset is one where the sale has been committed or is expected to be complete within one year from the date of classification This division does not qualify as held for sale in 20X4 as it is not expected to be sold until early 20X6 It will therefore not be disclosed as discontinued until 20X5 B BFRS para 33 Additional disclosures are required by way of note D BFRS para 33 Although the disclosures described in C are required they may be given on the face of the cash flow statement, or by way of note C Since the decision to sell was made by the year end and the sale is expected to be completed within 12 months the retail division will be classified as a discontinued operation Until the noncurrent assets of the division are finally disposed of, they are shown in the balance sheet, separately from all other assets, as non-current assets held for sale (usually immediately underneath the sub-total for current assets) This will be the case at 30 June 20X7 These assets, which were classified as non-current assets prior to their division being classified as held for sale are not reclassified as held for sale in any prior periods © The Institute of Chartered Accountants in England and Wales, March 2009 ANSWER BANK D Both meet the definition of a component as they have both been reported separately The closure of Division A does not represent the discontinuance of a separate major line of business as its operations have been moved to another division Division B does represent this type of discontinuance as its operations have been outsourced D Since the sale was completed within one year of classification this is a discontinued operation in the year ended 31 December 20X7 The original loss of CU100,000 will be increased by a provision for the redundancy costs in accordance with BAS 37 C Once the division is classified as held for sale any non-current assets are reclassified as noncurrent assets held for sale and depreciation on them ceases Carrying amount on November 20X0 Depreciation up to classification as held for sale (30,000  1%  11) B On classification as held for sale an asset held under the cost model is measured at the lower of its carrying amount and its fair value less costs to sell On ultimate disposal any difference between carrying amount and disposal proceeds is treated as a loss or gain under BAS 16 Carrying amount on classification as held for sale Fair value less costs to sell (30,000 – 500) Impairment loss Profit on sale (32,000 – 29,500) CU 40,000 (29,500) 10,500 2,500 D Cost Depreciation to 31 December 20X8 (800,000 ÷ 50  12) Carrying amount on classification as held for sale Fair value less costs to sell (600,000 – 10,000) Impairment loss Loss on sale (590,000 – 580,000) 10 CU 15,000 (3,300) 11,700 B CU 800,000 (192,000) 608,000 (590,000) 18,000 10,000 Assets held under the revaluation model are revalued to fair value immediately prior to classification as held for sale Costs to sell are immediately recognised in the income statement as an impairment loss Immediately before classification as held for sale: Carrying amount Revaluation Credit to revaluation reserve CUm 1.5 1.7 0.2 On classification as held for sale: Costs to sell recognised in income statement CU20,000 Sale is in the year ended 31 December 20X8 so final profit of CU100,000 (1.8m – 1.7m) will be recognised in the income statement then and the balance in the revaluation reserve in respect of this asset transferred to retained earnings © The Institute of Chartered Accountants in England and Wales, March 2009 261 Single entity financial statements: objective test questions 11 B Cost Depreciation to 31 December 20X5 (200,000  25%) Carrying amount on revaluation Revalued to Original balance on revaluation reserve Carrying amount on revaluation on January 20X6 Depreciation for 20X6 @ 25% Depreciation for 20X7 @ 25% Carrying amount immediately before classification as held for sale CU 200,000 (50,000) 150,000 280,000 130,000 280,000 (70,000) 210,000 (52,500) 157,500 Immediately prior to classification as held for sale the asset will be revalued to its fair value of CU80,000, and this fall in value of CU77,500 will be debited to the revaluation reserve The remaining CU52,500 in the revaluation reserve will be transferred out to retained earnings on sale The classification as held for sale at below carrying amount brings forward the debit to the revaluation reserve On classification as held for sale the costs to sell of CU5,000 are recognised in the income statement 262 © The Institute of Chartered Accountants in England and Wales, March 2009 ANSWER BANK Consolidated financial statements: objective test questions 63 Consolidated balance sheets B Falcon Ltd Kestrel Ltd (80%  (15 – 10)) Less: Impairment of goodwill * Cost of investment Less: Fair value of net assets acquired (80%  20) *Goodwill CUm 58 (8) 54 CUm 24 (16) C CU'000 Fair value of net assets acquired Ordinary shares Retained earnings at January 20X1 Retained profit for the months ended 30 September 20X1 (9/12  40) 328 20 348 Group share ( 80%) Add Goodwill Cost of investment A Xanthe Ltd QED Ltd Inventories in transit Less: PURP ((20 + 10)  30%)) CU'000 160 90 10 (9) 251 C Dividends payable by parent (Xiao Ltd) Dividends payable to minority Yacht Ltd (20%  30,000) Zebra Ltd (25%  20,000) 300 80 30 410 CU 60,000 6,000 5,000 71,000 D Consolidated balance sheet Less Woolf Ltd Add back PURP (5,000  80%) Group share of Stephen Ltd Therefore, retained earnings of Stephen Ltd = 100/80  CU32,000 CU 230,000 (202,000) 4,000 32,000 CU40,000 © The Institute of Chartered Accountants in England and Wales, March 2009 263 Consolidated financial statements: objective test questions B Cost of investment Group share of post-acquisition retained earnings (30%  5) A Cost of investment Group share of post-acquisition retained earnings (40%  (220 – 30)) Less: PURP (40%  10  25%) D B 10 C 11 B CU'000 1,875 50 1,925 The unrealised profit is CU5,000 and the inventories are still held by Aster Ltd Therefore the adjustment must be to Cr consolidated inventories However as Flower Ltd is an associate the amount is only the group share of the unrealised profit i.e 30%  5,000 = CU1,500 Consolidated retained earnings per question Less: Group share of depreciation of fair value adjustment ((120 ÷ 5)  75%) Goodwill per question Less: Group share of fair value adjustment (120  75%) B CU'000 60 76 (1) 135 After the disposal, Geranium Ltd retains a 15% holding in Rose Ltd This is treated as a simple non-current asset investment and valued at the date of disposal using the equity method Net assets (15%  (5,000 + 6,500 + 6/12  2,000)) Goodwill remaining (1/4  (5,000 – 60%  8,000)) 12 CUm 12.0 1.5 13.5 CU'000 400 (18) 382 200 (90) 110 The redeemable preference shares are debt, not equity, so not feature in the calculation of minority interest Minority interest = 700,000  30% = CU210,000 13 B Cost of investment Group share of post-acquisition retained earnings (30%  8,000) Less: Goodwill impairment to date (40%  2,000) Cost of investment Less: Fair value of net assets acquired (30%  40,000) Goodwill 264 © The Institute of Chartered Accountants in England and Wales, March 2009 CU 14,000 2,400 (800) 15,600 CU 14,000 (12,000) 2,000 ANSWER BANK 14 B Mandy Ltd Len Ltd (96,000 – (96,000 – 24,000)) Less: Goodwill impairment (48,000  20%) Cost of investment Less: Fair value of net assets acquired Goodwill 64 CU 244,800 24,000 (9,600) 259,200 CU 144,000 (96,000) 48,000 Consolidated statements of financial performance A C The provision for unrealised profit is CU5,000 (30,000  20/120) Since the seller was the subsidiary, the profit is eliminated against the subsidiary's profits, meaning that both the group and the minority interest will bear their share Pumpkin Ltd Squash Ltd Less: Intra-group sales Add: PURP (8,000 – 5,000) B Sale proceeds Less: Share of net assets at disposal (80%  3,310) Less: Carrying amount of goodwill at date of disposal (2,360 – (80%  2,240) – 100) C Sale proceeds Less: Share of net assets at disposal (45%  12,500) Less: Carrying amount of goodwill at date of disposal ((5,000 – (60%  8,000))  3/4) Profit on disposal B Pre-disposal (3/12  576,000  10%) Post-disposal (9/12  576,000  40%) B Revenue (769,000 + (9/12  600,000) – 7,000) Cost of sales (568,500 + (9/12  420,000) – 7,000 + 2,000) Gross profit CU 100,000 80,000 (8,000) 3,000 175,000 CU'000 3,600 (2,648) (468) 484 CU'000 6,500 (5,625) (150) 725 CU'000 14,400 172,800 187,200 CU 1,212,000 (878,500) 333,500 © The Institute of Chartered Accountants in England and Wales, March 2009 265 Consolidated financial statements: objective test questions A Share of associate's profits (30%  120,000  6/12) Sales proceeds Less: Share of net assets at disposal (30%  1,200,000) Less: Carrying amount of goodwill at date of disposal (450,000 – (30%  1,000,000)) Profit on disposal of associate C 11 CU 30,000 4,500 34,500 CU 490,000 98,000 B Alayna Ltd – paid to group shareholders Ellen Ltd – paid to minority interest (200,000  25%) CU 500,000 50,000 550,000 Subsidiary Ltd Less: PURP (15,000  20/120  ½) CU'000 55,000 (1,250) 53,750 C 10,750 MI share ( 20%) 65 (150,000) 90,000 An adjustment representing the increase in the minority interest on the decrease in holding must be made This will be the increase in the minority interest in the net assets of Pip Ltd at disposal Net assets at disposal (400,000 + (9/12  120,000))  increase in minority interest % (was 20% now 40% therefore  20%) 10 600,000 (360,000) C Minority interest at start of year (10%  300,000) Minority interest in profits of year (10%  60,000  9/12) CU 18,000 Consolidated cash flow statements B MINORITY INTEREST CUm 266 Dividends to MI (β) 2.7 C/d 6.0 8.7 B/d IS Revaluation Acquisition of sub (6.4  25%) © The Institute of Chartered Accountants in England and Wales, March 2009 CUm 3.6 2.0 1.5 1.6 8.7 ANSWER BANK C INVESTMENTS IN ASSOCIATES CU'000 635 69 704 B/d IS (230  30%) Dividends from associates (β) C/d CU'000 700 704 C Transactions between associates and the group are not cancelled on consolidation, hence the repayment of the advance of CU30,000 will appear in the consolidated cash flow statement The cash from sale of the plant will be reflected in the associate's own cash flow statement, but not in the consolidated cash flow statement – all that is shown in the consolidated cash flow statement is dividends received by the parent from associates (100,000  20p  40% = CU8,000) D The net cash effect of the disposal is shown (i.e CU2 million cash proceeds less the CU20,000 cash and cash equivalents disposed of = CU1,980,000) B The net cash effect of the acquisition is shown This will usually be the cash consideration less the cash and cash equivalents acquired However, in this case, Dougal Ltd has acquired Lucy Ltd's overdraft so the net cash effect is the cash consideration of CU400,000 plus the overdraft of CU40,000 = CU440,000 B The cash outflow will be in respect of cash paid for purchases of PPE In calculating this figure the PPE acquired under finance leases and the PPE acquired with the subsidiary need to be excluded The former because the purchase was not for cash, the latter because any cash effect will have already been included in the consolidated cash flow statement as part of the figure for acquisition of subsidiary The cash from the disposals of CU38,000 will be shown as a cash inflow – the two are not netted off PROPERTY, PLANT AND EQUIPMENT B/d Finance leases On acquisition of subsidiary Cash additions (β) C D CU 257,900 40,000 35,000 413,000 745,900 Disposals IS - Depreciation C/d Increase in receivables (340 – 235 – 90) 15 Decrease in payables (275 – 135 – 165) 25 CU 32,000 135,000 578,900 745,900 Cash received from the sale of CU460,000 will be shown as an investing inflow, along with any dividends received from the associate – which in this case were CU225,600 (see working below) INVESTMENTS IN ASSOCIATES B/d IS (30%  350,000) CU 120,600 105,000 225,600 Dividends from associates (β) C/d CU 225,600 – 225,600 © The Institute of Chartered Accountants in England and Wales, March 2009 267 Consolidated financial statements: objective test questions 66 Group accounts accounting standards B Ulysses Ltd is not consolidated The civil war means that Sarah Ltd is no longer able to exercise control over Ulysses Ltd; consequently the definition of a subsidiary is not met Dissimilar activities are not grounds for exclusion and hence Wally Ltd is consolidated B Consul Ltd cannot exercise significant influence over Warrior Ltd because it is controlled by another company and, with a 75% holding, that company can most things, including passing special resolutions, without paying much attention to Consul Ltd Consul Ltd has the largest shareholding in Admiral Ltd and a board seat, so will be able to exercise significant influence over Admiral Ltd Sultan Ltd is not so clear cut However, it is likely that both the other entity and Consul Ltd have significant influence over Sultan Ltd A Per BFRS goodwill acquired in a business combination should be reviewed for impairment annually C Statement (1) – Untrue – there is a presumption that Lyle Ltd would be an associate of Kyle Ltd at a holding or 20% or over, but this is rebuttable (for example if another party held, say, 70% of the shares whilst Kyle Ltd only held 30%) Statement (2) – True – if Kyle Ltd controls Lyle Ltd then Lyle Ltd will be a subsidiary not an associate Statement (3) – True – there is no elimination of balances for an associate as the associate is not part of the group B CU 2,880,000 7,200,000 400,000 10,480,000 Cash (80%  3,000,000  CU1.20) Shares (80%  3,000,000   CU1.50) Acquisition fees B In accordance with BFRS 3, restructuring provisions can only be included in the goodwill calculation if there is an existing liability for the restructuring in accordance with BAS 37 Provisions, Contingent Liabilities and Contingent Assets In this case Jerry Ltd has no such existing liability and therefore the provision is excluded Cost of investment Less: Share of fair value of net assets acquired Carrying amount of net assets Fair value adjustment to PPE Contingent liability Group share  80% Goodwill CA in Bangladesh (We believe in sharing ) www.facebook.com/CAinBD 268 © The Institute of Chartered Accountants in England and Wales, March 2009 CU 1,350,000 100,000 (200,000) 1,250,000 CU 1,450,000 (1,000,000) 450,000 REVIEW FORM – FINANCIAL ACCOUNTING Your ratings, comments and suggestions would be appreciated on the following areas of this Question Bank Very useful Useful Not useful Good Adequate Poor Number of questions in each section Standard of answers Amount of guidance on exam technique Quality of marking guides Excellent Overall opinion of this Question Bank Please return to: Deputy Director, Learning & Professional Development Email: dd@icab.org.bd ICAB ICAB Bhaban 100 Kazi Nazrul Islam Ave., Kawran Bazar Dhaka 1215 www.icab.org.bd For space to add further comments please see overleaf REVIEW FORM (continued) TELL US WHAT YOU THINK Please note any further comments and suggestions/errors below ... Senorita Ltd Single entity financial statements Objective test questions 49 50 51 52 53 54 55 56 57 58 59 60 61 62 iv Accounting and reporting concepts BAS Presentation of Financial Statements BAS... Mins Page Question Answer 101 263 107 110 114 265 266 268 Consolidated financial statements Objective test questions 63 64 65 66 Consolidated balance sheets Consolidated statements of financial. .. in Bangladesh www.facebook.com/CAinBD Question Bank Your exam will consist of Part one 5-15 short-form questions (worth 1-4 marks each) 20 marks Part two questions (each worth around 20 marks)