Monitoring Test MT1BFinancialReporting F7FR-MT1B-Z08-A Accountancy Tuition Centre Ltd ATC INTERNATIONAL ORANGE GROUP INC Orange Group – Consolidated statement of financial position as at 31 December 2007 ASSETS Non current assets Investments (only Apple Inc) Tangible (243,500+162,000+20,000)(W8) Intangible – goodwill – (W3) $ 12,000 425,500 2,000 ––––––– 439,500 Current assets Inventory (52,000+30,000–2,400(W7)) Receivables (33,000+21,000+16,000–16,000) Cash and bank 79,600 54,000 14,000 ––––––– 587,100 ––––––– Total assets EQUITY AND LIABILITIES Capital and reserves Share capital – Orange only Retained earnings – (W5) 300,000 189,950 ––––––– 489,950 53,650 ––––––– 543,600 Non-controlling interest – (W4) Current liabilities Payables (13,500+10,000) Proposed dividends to Oranges shareholders Proposed dividends to minority interest 20,000–15,000 Total equity and liabilities Accountancy Tuition Centre (International Holdings) Ltd 2008 23,500 15,000 5,000 ––––––– 587,100 ––––––– Consolidated statement of comprehensive income for the year ended 31 December 2007 Revenue (597,000+462,000–120,000(W6)) Cost of sales (322,000+271,000–120,000(W6)+2,400(W7)) Gross profit Administrative expenses (101,000+32,000+3,000 goodwill charge for 2006) Distribution costs (53,000+27,000) Operating profit Investment income (7,500+2,000+15,000(W9)–22,500(W9)) Profit before tax Taxation Profit after tax Attributable to: Non-controlling interest (25% of 113,000–2,400(W7) Shareholders of Parent Extract from SOCIE Profit retained as at January 2007 (W10) Profit for year Dividends – Orange only CONSOLIDATION WORKINGS Establish group structure Orange Non-controlling interest 25% 75/100 = 75% Apple Accountancy Tuition Centre (International Holdings) Ltd 2008 27,650 182,950 ––––––– 210,600 ––––––– 32,000 182,950 (25,000) ––––––– 189,950 ––––––– Profit retained as at 31 December 2007 (1) $ 939,000 (475,400) ––––––– 463,600 (136,000) (80,000) ––––––– 247,600 2,000 ––––––– 249,600 (39,000) ––––––– 210,600 (2) Net assets of Apple Share capital Retained earnings Per question Unrealised profits Fair value adjustment Total (3) Reporting date $ 100,000 Date of acquisition $ 100,000 97,000 (2,400) 20,000 ––––––– 214,600 ––––––– NCI 30,000 Goodwill Value of goodwill 31 Dec 2006 Value of goodwill 31 Dec 2007 (SOFP) Impairment charged to CRE Impairment charged to current years SOCI 20,000 ––––––– 150,000 ––––––– G’WILL $ 122,500 (112,500) ––––––– 10,000 ––––––– Non-controlling interest Consolidated retained earnings at 31 December 2007 Orange’s share of Post acquisition profits of Apple 75% × 64,600 Less goodwill impaired 48,450 (8,000) ––––––– 189,950 ––––––– Group retained earnings Accountancy Tuition Centre (International Holdings) Ltd 2008 $ 214,600 25% ––––––– 53,650 ––––––– $ 134,500 15,000 All of Orange – per question – dividend receivable 67,000 (2,400) ––––––– 64,600 ––––––– CRE 5,000 2,000 8,000 3,000 Fair value net assets at reporting date NCI % (5) $ Goodwill Cost of investment Orange % of Apples net assets at the date of acquisition 75% × 150,000 (4) Change (6) Interco sales Dr Cr Revenue 120,000 Cost of sales 120,000 To eliminate interco sales (7) Unrealised profits % 125 100 ––– 25 ––– Sales Cost of sales Gross profit Dr Cr Cost of sales Inventory $ 12,000 (9,600) –––––– 2,400 –––––– 2,400 Apple 2,400 SOFP To eliminate unrealised profits Tutorial note: Remember to adjust Apple’s net asset statement (8) Fair value adjustment At date of acquisition assets worth $150,000 Per net asset statement assets worth $130,000 Therefore need to revalue by $20,000 (9) Dividends Dr Cr Div receivables Investment income 15,000 15,000 To record Dividends receivable by Orange from Apple Tutorial note: Remember to adjust Orange’s retained earnings Dr Cr Proposed dividend Div Receivable 15,000 15,000 To eliminate interco balances in SOFP Dr Cr Investment income Div Appropriation 22,500 22,500 To eliminate interco items in the SOCI Accountancy Tuition Centre (International Holdings) Ltd 2008 (10) Opening group retained earnings $ 49,000 All of Orange at January 2007 – per SOCI Orange’s share of Post acquisition profits of Apple 75% × (14,000-30,000) Less goodwill impaired (5,000) –––––– 32,000 –––––– Group retained earnings (12,000) CARLISLE INC Statement of comprehensive income extracts Revenue Cost of sales Gross profit A101 $ 97,500 (100,000) ––––––– (2,500) ––––––– B102 $ 475,000 (340,000) ––––––– 135,000 ––––––– C103 $ 345,000 (403,000) ––––––– (58,000) ––––––– Extracts from financial statements D104 $ 28,000 (28,000) ––––––– ––––––– Total $ 945,500 (871,000) ––––––– 74,500 ––––––– $ 945,500 1,577,500 40,500 28,000 Revenues recognised in the year Costs to date plus foreseeable profits less losses Gross amounts due from customers Gross amounts due to customers WORKINGS (1) Calculate total expected profit Revenue Costs To date Future Total expected Contract profit/(loss) A101 $ 650,000 B102 $ 1,000,000 C103 $ 850,000 D104 $ 790,000 150,000 450,000 ––––––– 600,000 ––––––– 50,000 400,000 240,000 ––––––– 640,000 ––––––– 360,000 800,000 88,000 ––––––– 888,000 ––––––– (38,000) 28,000 672,000 ––––––– 700,000 ––––––– 90,000 Accountancy Tuition Centre (International Holdings) Ltd 2008 (2) Calculate percentage complete on a cost basis A101 B102 C103 D104 Costs to date Total expected costs 150,000 600,000 400,000 640,000 800,000 888,000 28,000 700,000 % complete 25% 62.5% 90% 4% (3) Statement of comprehensive income A101 $ REVENUE Revenue to date A 25% of 650,000 B 62.5% of 1,000,000 C 90% of 850,000 D Make equal to costs Previous period Current year revenue COSTS A 25% of 600,000 B 62.5% of 640,000 C Balance as loss making contract D Use actual costs incurred Previous period Current year expenses PROFITS To date Previous period Current year profits (4) Disclosures Costs to date Foreseeable profits/(losses) Total Amounts billed Due from customers Due to customers B102 $ C103 $ D104 $ 162,500 625,000 765,000 (65,000) ––––––– 97,500 ––––––– 150,000 (150,000) ––––––– 475,000 ––––––– 400,000 (420,000) ––––––– 345,000 ––––––– 803,000 28,000 ––––––– 28,000 ––––––– 28,000 (50,000) ––––––– 100,000 ––––––– (60,000) ––––––– 340,000 ––––––– (400,000) ––––––– 403,000 ––––––– ––––––– 28,000 ––––––– 12,500 225,000 (38,000) (15,000) ––––––– (2,500) ––––––– (90,000) ––––––– 135,000 ––––––– (20,000) ––––––– (58,000) ––––––– ––––––– ––––––– A101 $ 150,000 12,500 ––––––– 162,500 (130,000) ––––––– 32,500 Accountancy Tuition Centre (International Holdings) Ltd 2008 B102 $ 400,000 225,000 ––––––– 625,000 (650,000) ––––––– C103 $ 800,000 (38,000) ––––––– 762,000 (765,000) ––––––– (25,000) (3,000) D104 $ 28,000 ––––––– 28,000 (20,000) ––––––– 8,000 ORLICK (a) Definitions A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset Title may or may not eventually be transferred An operating lease is a lease other than a finance lease (b) Accounting treatment This lease appears to be a finance lease The lease term is six-years (because it is almost certain that Orlick will contract to lease the asset for the secondary period) which is equal to the useful life of the asset At the end of this second period, the useful economic life of the asset is expected to be negligible The present value of the minimum lease payments is: $760,000 $760,000 $760,000 $760,000 + + + (1·10) (1·10) (1·10) (1·10) Which is approximately equal to $2·4 million, the fair value of the asset The profit or loss will show depreciation as an operating expense The asset will be depreciated over six years, which is both the lease term and the useful economic life of the asset Therefore (assuming a straight line basis of deprecation) the annual depreciation will be $400,000 The profit or loss will also show a finance cost of $240,000, being the “interest” on the effective borrowing of $2·4 million at 10% The statement of financial position will show property, plant and equipment at a depreciated cost of $2 million ($2·4 million – $400,000) The effective borrowing will be shown as a liability, split between current and non-current liabilities In order to compute the split, it is necessary to “profile” the effective loan for the first two years as shown below: Year Opening Balance $000 2,400 1,880 Finance Cost $000 240 188 Cash Paid $000 (760) (760) Closing Balance $000 1,880 1,308 Therefore the total liability at the end of year is $1,880,000, of which $1,308,000 is noncurrent and $572,000 ($1,880,000 – $1,308,000) current Accountancy Tuition Centre (International Holdings) Ltd 2008 Marking Scheme ORANGE INC Marks ½ 2 1 ½ ½ 2½ 1½ ½ 1 ½ ½ ½ ½ 22 –– 20 –– CBS presentation Investments Tangible NCA Goodwill Inventory Receivables Cash and bank Share capital Retained earnings Minority interest Payables Dividends CIS presentation Revenue Cost of sales Admin expenses Distribution costs Investment income Tax Minority interest Dividend Total Maximum CARLISLE % complete ½ mark per contract Revenue to date mark per contract Deduct prior periods revenue ½ mark per contract Costs to date mark per contract Deduct prior period costs ½ mark per contract Disclosures Costs to date ½ each contract Profit/loss ½ each contract Billings ½ each contract Due to/from customers ½ each sum Total ORLICK FL definition OL Definition Discussion of points, mark for each relevant point to max Interest expense PPE value Non current liability Current liability Accountancy Tuition Centre (International Holdings) Ltd 2008 1½ 1½ 2 –– 20 –– 1 1 –– 10 –– ... will contract to lease the asset for the secondary period) which is equal to the useful life of the asset At the end of this second period, the useful economic life of the asset is expected to... ownership of an asset Title may or may not eventually be transferred An operating lease is a lease other than a finance lease (b) Accounting treatment This lease appears to be a finance lease The lease... before tax Taxation Profit after tax Attributable to: Non-controlling interest (25% of 113,000–2,400(W7) Shareholders of Parent Extract from SOCIE Profit retained as at January 20 07 (W10) Profit