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Mock Financial Reporting F7FR-MK1-Z08-Q Time allowed hours All FIVE questions are compulsory and MUST be attempted Do NOT open this paper until instructed by the supervisor Accountancy Tuition Centre Ltd ATC INTERNATIONAL Gold acquired 60% of Silver’s equity shares on October 2006 at a cost of $5,020,000, Silver’s retained earnings on this date were $6,740,000 On February 2008 Gold acquired 30% of Bronze’s shares through a for share exchange and a cash payment of $83,400 Gold’s shares were valued at $3 on February 2008 Gold exerts significant influence over the operating and financing decisions of Bronze The following are the statements of comprehensive income of the three companies for the year ending 30 September 2008 Gold $000 3,006 (2,413) _ Silver $000 2,636 (2,108) _ Bronze $000 864 (690) _ Gross profit Operating expenses Dividend received 593 (212) 120 _ 528 (168) 10 _ 174 (48) – _ Profit before tax Income tax expense 501 (125) _ 370 (90) _ 126 (30) _ Profit for the period 376 _ 280 _ 96 _ Sales revenue Cost of sales The share capital and reserves of the three companies at 30 September 2008 were: Equity share capital of $1 each Share premium Retained earnings Total equity Gold $000 1,000 3,600 7,960 _ Silver $000 400 900 7,190 _ Bronze $000 400 150 656 _ 12,560 _ 8,490 _ 1,206 _ Neither Silver nor Bronze have issued any new shares since their respective acquisitions by Gold The following information is relevant: (i) During the year the following inter company transactions took place: Gold sold goods to Silver for $120,000, one third of the goods remain in inventory at the year-end Bronze sold goods to Gold on 1st September 2008 for $25,000, all of these goods remain in inventory at the year-end Silver, whose main line of operations is the sale of computers, sold goods to Gold on 1st October 2007 for $220,000 Gold is using the computers as non-current assets and depreciating them over their useful life of years All companies sell their goods at a mark up of 25% on cost Accountancy Tuition Centre (International Holdings) Ltd 2008 (ii) Plant and equipment of Silver had a fair value which was $60,000 in excess of its carrying value at the date of acquisition These assets had four years remaining life on that date (iii) Profits accrue evenly throughout the year (iv) Silver paid a dividend of $150,000 on July 2008, no dividends have been proposed by any of the three companies (v) Non-controlling interest is valued at its proportionate share of the identifiable net assets; it is not credited with its share of goodwill Goodwill is tested for impairment on an annual basis The goodwill in respect of the acquisition of Silver has fallen in value by 12½%, based on its original value, in each of the two years since acquisition The recoverable amount of the investment in Bronze is greater than the year-end carrying value of the investment in the consolidated statement of financial position: Required: (a) Calculate the goodwill on acquisition of both Silver and Bronze and identify the charge in respect of goodwill, to the statement of comprehensive income for the current period (7 marks) (b) Prepare the consolidated statement of comprehensive income of Gold for the year to 30 September 2008 (13 marks) (c) Prepare a reconciliation of the consolidated retained earnings for year ended 30 September 2008 (5 marks) (25 marks) Accountancy Tuition Centre (International Holdings) Ltd 2008 The following trial balance relates to Telenorth at 30 September 2008: Sales revenue Inventory October 2007 Purchases Distribution expenses Administration expenses Loan note interest paid Interim dividends – ordinary – preference Investment income 25 year leasehold building – cost Plant and equipment – cost Computer system – cost Investments – at valuation Depreciation October 2007 (note (ii)) – leasehold – plant and equipment – computer system Trade accounts receivable (note (iii)) Bank overdraft Trade accounts payable Deferred tax (note (iv)) Ordinary shares of $1 each Suspense account (note (v)) 6% Loan notes (issued October 2007) 8% Preference shares Revaluation surplus (note (iv)) Accumulated profits October 2007 $000 12,400 147,200 22,300 34,440 300 2,000 480 56,250 55,000 35,000 34,500 35,700 $000 283,460 1,500 18,000 12,800 9,600 _ 1,680 17,770 5,200 20,000 26,000 10,000 12,000 3,400 14,160 _ 435,570 _ 435,570 _ The following notes are relevant: (i) An inventory count was not conducted by Telenorth until October 2008 due to operational reasons The value of the inventory on the premises at this date was $16 million at cost Between the year-end and the inventory count the following transactions have been identified: normal sales at a mark up on cost of 40% sales on a sale or return basis at a mark up on cost of 30% goods received at cost $ 1,400,000 650,000 820,000 All sales and purchases had been correctly recorded in the period in which they occurred (ii) Telenorth has the following depreciation policy: leasehold – straight-line; plant and equipment – five years straight line with residual values estimated at $5,000,000; computer system – 40% per annum reducing balance Accountancy Tuition Centre (International Holdings) Ltd 2008 Depreciation of the leasehold and plant is treated as cost of sales; depreciation of the computer system is an administration cost (iii) The outstanding account receivable of a major customer amounting to $12 million was factored to Kwikfinance on September 2008 The terms of the factoring were: Kwikfinance paid 80% of the outstanding account to Telenorth immediately; the balance will be paid (less the charges below) when the account is collected in full Any amount of the account outstanding after four months will be transferred back to Telenorth at its full book value Kwikfinance will charge 1% per month of the net amount owing from Telenorth at the beginning of each month Kwikfinance had not collected any of the amounts receivable by the year-end Telenorth debited the cash from Kwikfinance to its bank account and removed the account receivable from its sales ledger It has prudently charged the difference as an administration cost (iv) A provision for income tax of $23.4 million for the year to 30 September 2008 is required The deferred tax liability is to be increased by $2.2 million, all of which is to be charged to profit or loss (v) The suspense account contains the proceeds of two share issues: the exercise of all the outstanding directors’ share options of four million shares on October 2007 at $2 each; a fully subscribed rights issue on July 2008 of for held at a price of $3 each The stock market price of Telenorth’s shares immediately before the rights issue was $4 (vi) On 20 September 2008, the company declared a final ordinary dividend of 15 cents per share Required: Prepare: (a) (i) The statement of comprehensive income of Telenorth for the year to 30 September 2008; and (11 marks) (ii) A statement of financial position as at 30 September 2008 in accordance with International Accounting Standards as far as the information permits (14 marks) Notes to the financial statements are not required (25 marks) Accountancy Tuition Centre (International Holdings) Ltd 2008 The financial statements of Nedberg for the year to 30 September 2008, together with the comparative statement of financial position for the year to 30 September 2007 are shown below: Statement of comprehensive income – year to 30 September 2008: Sales revenue Cost of sales (note (1)) $m $m 3,820 (2,620) ––––– 1,200 (300) ––––– 900 (30) ––––– 870 (270) ––––– 600 ––––– Gross profit for period Operating expenses (note (1)) Interest – Loan note Profit before tax Taxation Profit for the period Extract from SOCIE: Profit for year Dividends: ordinary – Interim – Final Profit for period 600 (120) (280) ––– Accountancy Tuition Centre (International Holdings) Ltd 2008 (400) ––––– 200 ––––– Statements of financial position as at 30 September: Non-current assets Property, plant and equipment Intangible assets (note (2)) Current assets Inventory Accounts receivable Cash Total assets 2008 $m 1,890 650 ––––– 2,540 $m 1,420 990 70 ––––– 2,480 ––––– 5,020 ––––– Equity and liabilities Ordinary Shares of $1 each Reserves Share premium Revaluation Retained earnings 2,010 Less dividends paid and declared (400) ––––– Total equity and liabilities 940 680 nil ––––– 2007 $m 1,830 300 ––––– 2,130 1,620 ––––– 3,750 ––––– 750 500 350 140 100 nil 1,610 ––––– 2,850 870 1,300 ––––– 5,020 ––––– Non-current liabilities (note (3)) Current liabilities (note (4)) $m 1,700 (300) ––––– 1,400 ––––– 2,000 540 1,210 ––––– 3,750 ––––– Notes to the financial statements: (1) Cost of sales includes depreciation of property, plant and equipment of $320 million and a loss on the sale of plant of $50 million It also includes a credit for the amortisation of government grants Operating expenses include a charge of $20 million for the impairment of goodwill (2) Intangible non-current assets: Deferred development expenditure Goodwill (3) Non-current liabilities: 10% loan note Government grants Deferred tax Accountancy Tuition Centre (International Holdings) Ltd 2008 2008 $m 470 180 –––– 650 –––– 2007 $m 100 200 –––– 300 –––– 300 260 310 –––– 870 –––– 100 300 140 –––– 540 –––– (4) Current liabilities: Accounts payable Bank overdraft Accrued loan interest Declared dividends unpaid Taxation 875 nil 15 280 130 ––––– 1,300 ––––– 730 115 200 160 ––––– 1,210 ––––– The following additional information is relevant: (i) Intangible fixed assets: The company successfully completed the development of a new product during the current year, capitalising a further $500 million before amortisation charges for the period (ii) Property, plant and equipment/revaluation reserve: The company revalued its buildings by $200 million on October 2007 The surplus was credited to a revaluation reserve New plant was acquired during the year at a cost of $250 million and a government grant of $50 million was received for this plant On October 2007 a bonus issue of new share for every 10 held was made from the revaluation reserve $10 million has been transferred from the revaluation reserve to realised profits as a year-end adjustment in respect of the additional depreciation created by the revaluation The remaining movement on property, plant and equipment was due to the disposal of obsolete plant (iii) Share issues: In addition to the bonus issue referred to above Nedberg made a further issue of ordinary shares for cash Required: (a) A statement of cash flows for Nedberg for the year to 30 September 2008 prepared in accordance with IAS “Statement of Cash Flows” (20 marks) (b) Comment briefly on the financial position of Nedberg as portrayed by the information in your statement of cash flows (5 marks) (25 marks) Accountancy Tuition Centre (International Holdings) Ltd 2008 IAS 36 “Impairment of Assets” requires that where the carrying amount of an asset exceeds its recoverable amount, the carrying amount should be written down to the recoverable amount The phrase “recoverable amount” is defined in IAS 36 as “the higher of the assets value in use or it’s fair value less costs to sell” The issues of how one identifies an impaired asset, the measurement of an asset when impairment has occurred and the recognition of impairment losses were are also covered in the standard Required: (a) Describe the circumstances which indicate that an impairment loss relating to an asset may have occurred (7 marks) (b) AB, a public limited company, has decided to comply with IAS 36 “Impairment of Assets” The following information is relevant to the impairment review: AB acquired a car taxi business on January 2008 for $230,000 The values of the assets of the business at that date based on net selling prices were as follows: $000 120 30 10 50 (20) –––– 190 –––– Vehicles (12 vehicles) Intangible assets (taxi licence) Trade receivables Cash Trade payables On February 2008, the taxi company had three of its vehicles stolen The fair value of these vehicles was $30,000 and because of non-disclosure of certain risks to the insurance company, the vehicles were uninsured As a result of this event, AB wishes to recognise an impairment loss of $45,000 (inclusive of the loss of the stolen vehicles) due to the decline in the value in use of the income generating unit, that is the taxi business On March 2008 a rival taxi company commenced business in the same area It is anticipated that the business revenue of AB will be reduced by 25% leading to a decline in the present value in use of the business which is calculated at $150,000 The fair value of the taxi licence has fallen to $25,000 as a result of the rival taxi operator The fair values of the other assets have remained the same as at January 2008 throughout the period (8 marks) Required: Describe how AB should treat the above impairments of assets in its financial statements (In part (b) candidates should show the treatment of the impairment loss at February 2008 and March 2008.) (15 marks) Accountancy Tuition Centre (International Holdings) Ltd 2008 IAS 12 “Income Taxes” uses the concept of temporary differences Temporary differences are the difference between the carrying value of an asset and its tax base The standard distinguishes between “taxable temporary differences” and “deductible temporary differences” Required: The following balances and information relate to Capone, an incorporated enterprise, and are relevant as at 30th September 2008 Carrying value $ 198,000 100,000 67,000 20,000 Fixed assets (NBV) Oil Rig Buildings – (held at a revalued amount) Plant and machinery Assets held under finance lease Receivables: Gross amounts owed by customer Trade receivables Interest receivable Payables Fine Zero coupon bond Finance lease obligation Interest payable To be calculated 53,000 2,000 70,000 To be calculated To be calculated 1,000 Tax Base $ 49,000 Notes Note This oilrig cost the company $220,000 at the start of the year It is being depreciated on a 10% straight line basis for accounting purposes The company’s tax advisers have said that the company can claim 25% as a taxable expense in this years tax computation Note The building has been revalued during the year in accordance with IAS 16 It originally cost $75,000 It is to be written off over its remaining useful economic life of 50 years Note The asset held under the finance lease was acquired two years ago Under IAS the company has charged interest of $6,286 in total and depreciation of $5,000 per annum to the income statement The annual rental in respect of the asset is $7,000 It is classified as an operating lease for tax purposes Accountancy Tuition Centre (International Holdings) Ltd 2008 10 Note The trade receivables balance in the accounts is made up of the following amounts: $ 60,000 (2,000) (5,000) –––––– 53,000 –––––– Balances Exchange loss Doubtful debt allowance Note The credit balance on the deferred taxation account on 1st October 2007 was $3,890 Note The company is engaged in a construction contract as defined in IAS 11 The following information is relevant The contract commenced on 1st October 2007 $ 100,000 40,000 30,000 45% Contract value Costs to date Costs to complete Percentage complete Note The company borrowed $100,000 on 1st October 2007 The terms of the loan are that it is redeemable for a $150,000 in years The company allocates interest so as to give a constant periodic rate of charge on the outstanding obligation The effective yield on the bond is 8.45% Note Capone, operates in country where the tax regime is as follows; The tax code allows for the general application of the accounting principles of prudence and accruals, but it does state the following: Tax allowable depreciation is computed according to rules set out in the tax code Allowance for doubtful debts are only deductible under very strict and limited circumstances Interest is taxed/allowable on a strict cash basis Unrealised exchange differences are not taxed/allowable Profit recognised under the rules in IAS 11 is not taxable Such contracts are taxed on completion and all costs incurred are allowable in the calculation of taxable profit on the contract The tax base of property is not affected by asset revaluations The tax treatment for leases is to expense the rentals on an accruals basis The tax rate is 30% Accountancy Tuition Centre (International Holdings) Ltd 2008 11 Required: Calculate the charge to the statement of comprehensive income in respect of deferred tax for the year ending 30th September 2008 (10 marks) End of Question Paper Accountancy Tuition Centre (International Holdings) Ltd 2008 12 ... (note (1)) Interest – Loan note Profit before tax Taxation Profit for the period Extract from SOCIE: Profit for year Dividends: ordinary – Interim – Final Profit for period 600 (120) (280) ––– ... concept of temporary differences Temporary differences are the difference between the carrying value of an asset and its tax base The standard distinguishes between “taxable temporary differences”... collected in full Any amount of the account outstanding after four months will be transferred back to Telenorth at its full book value Kwikfinance will charge 1% per month of the net amount owing from
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