Monitoring Test MT2AFinancialReporting F7FR-MT2A-Z08-A Accountancy Tuition Centre Ltd ATC INTERNATIONAL HUGHES INC The consolidated statement of financial position of the Hughes Inc Group as at 30 September 2008 is as follows: NON CURRENT ASSETS Property, plant and equipment (5980+4275+100) Interest in associate Goodwill Investments (200+50) CURRENT ASSETS Inventory (2520+1860-100) Receivables (2200+1755) Cash (880) EQUITY AND LIABILITIES Share capital Share premium Retained earnings (W5) 5,000 1,750 5,640 –––––– 12,390 940 –––––– 13,330 NON-CONTROLLING INTEREST (W4) NON CURRENT LIABILITIES Loans (2000+1000) 3,000 CURRENT LIABILITIES Payables (3250+2060) Bank overdraft (180) Tax payable(150) 5,310 180 150 –––––– 21,970 –––––– WORKINGS Group structure Hughes 30% 10,355 1,650 600 250 –––––– 12,855 4,280 3,955 880 –––––– 21,970 –––––– TOTAL ASSETS (1) Group $000 Auden 80% Scott Accountancy Tuition Centre (International Holdings) Ltd 2008 (2) Net assets of Scott Inc BSD $000 2,500 500 100 1,700 (100) ––––– 4,700 ––––– NCI Share capital Share premium Fair value adjustment Retained earnings per Q URP DOA $000 2,500 500 100 1,300 ––––– 4,400 ––––– G/W Change $000 0 400 (100) ––––– 300 ––––– CRE Net assets of Auden BSD $000 2,000 750 2,350 (50) ––––– 5,050 ––––– IIA Share capital Share premium Retained earnings per Q URP (3) DOA $000 2,000 750 1,800 ––––– 4,550 ––––– G/W Change $000 0 550 (50) ––––– 500 ––––– CRE Goodwill Scott $000 4,500 Cost of investment Less H% of NA’s at DOA 80% of 4,400 30% of 4,550 (3,520) Impaired (CRE) Value at 30 Sept 2008 (CBS) The goodwill in respect of Auden is included in “investment in associate” Accountancy Tuition Centre (International Holdings) Ltd 2008 Auden $000 1,545 ––––– 980 ––––– 380 (1,365) ––––– 180 ––––– 45 600 135 (4) Non-controlling interest $000 4,700 20% ––––– 940 ––––– Fair value of S net asset at reporting date NCI (5) Group retained earnings $000 5,675 240 150 (425) ––––– 5,640 ––––– All of P P% of post acq profits of S 80% of 300 P% of post acq profits of A 30% of 500 Less impaired goodwill (380 + 45) (6) Investment in Associate $000 1,545 150 (45) ––––– 1,650 ––––– Cost of investment Share of A post acq profits 30% × 500 Less Goodwill impaired OR P % of As net assets at reporting date (30% × 5,050) Goodwill not yet impaired TARANTULA INC (a) EPS Earnings (Profit available to ordinary shareholders) Number of shares (10,000/5) EPS (700/2000) (b) $000 1,515 135 ––––– 1,650 ––––– 700 2,000 ––––– 35c ––––– EPS Earnings Number of shares (2,000 × 7/5) 700 2,800 ––––– 25c ––––– 20c EPS Last years 28 × 5/7 Accountancy Tuition Centre (International Holdings) Ltd 2008 (c) EPS Earnings 1.10 to 31.3 = 2,000 × 6/12 1.4 to 30.9 = 2,500 × 6/12 1,000 1,250 ––––– Number of shares EPS (700/2,250) Last years 28 (d) 2,250 ––––– 31.11c ––––– 28c EPS Earnings 1.10 to 30.6 = 2,000 × 9/12 × 10/9 1.7 to 30.9 = 3,000 × 3/12 1,667 750 ––––– Number of shares EPS (700/2,417) Last years 28 × 9/10 Rights issue bonus fraction Number 2000 1000 ––––– 3000 ––––– Before Right Therefore bonus fraction is 10/9 (e) 700 EPS Earnings Basic Free 2000 450 –––––– Number of shares EPS (700/2,450) Proceeds if options exercised (1,200 × 5) If exercised at market value for $6000 would get Total possible shares Free shares – dilutive Accountancy Tuition Centre (International Holdings) Ltd 2008 700 –––––– 2,450 –––––– 28.57c $6,000 750 shares 1200 shares –––––––––– 450 shares –––––––––– 700 2,417 ––––– 28.96c ––––– 25.2c $/share 10 $ 20,000 7,000 –––––– 27,000 –––––– (f) EPS Earnings 1.10 to 31.12 = 2000*3/12*7/5*10/9 1.1 to 31.3 = 2800*3/12*10/9 1.4 to 30.6 = 3300*3/12*10/9 1.7 to 30.9 = 4950*3/12 777 777 917 1238 –––––– Number of shares EPS (700/3,709) Rights issue bonus fraction Number 3,300 1,650 –––––– 4,950 –––––– Before Right Therefore bonus fraction is 10/9 700 3,709 –––––– 18.87c –––––– $/share 10 $ 33,000 11,550 –––––– 44,550 –––––– FRAMEWORK (a) In order to be useful information contained in financial statements must be relevant and reliable This can only be achieved if the substance of transactions is recorded If this did not happen the financial statements would not represent faithfully the transactions and other events that had occurred Although there are many instances where there are genuine commercial reasons for contracts and transactions adopting the legal form that they (eg to secure legal title), equally the legal form is often used to achieve less desirable purposes In general these amount to manipulating the financial statements to create a favourable impression The typical outcomes of such manipulation are: the omission of assets and particularly liabilities from statements of financial position; improvements to profits and profit smoothing; improvements of other performance measures such as earnings per share, liquidity ratios, profitability ratios and gearing Clearly such effects are not helpful to users of financial statements and thus it is important that the substance of a transaction should be recorded in order to avoid the above distortions Accountancy Tuition Centre (International Holdings) Ltd 2008 (b) This transaction would be regarded as a financing transaction in that the company has not transferred the risks and rewards of ownership of the timber The timber will remain on the company’s statement of financial position as inventory and the loan (the proceeds) will appear as a liability The statement of financial position at the year end will show: Inventory Loan repayable after more than one year $40m $42.8m The statement of comprehensive income will show: Interest payable of 40m *7%= $2.8m Calculation of the effective interest rate Total finance charge over the term of the loan is: $m 56.1 (40) –––– 16.1 –––– Total repayments Amount borrowed Interest This must be spread to profits using the effective interest rate This is calculated as the IRR of the loan as follows: 56.1 / 40 – = ).07 or 7% The annual interest cost and the carrying value of the loan at each year end over the life of the loan is given below (this is not required in the question but is given for tutorial purposes) Period Opening balance 40 42.8 45.8 49 52.4 Accountancy Tuition Centre (International Holdings) Ltd 2008 Interest @ 7% 2.8 3.0 3.2 3.4 3.7 Cash flow – – – – (56.1) Closing balance 42.8 45.8 49 52.4 – Marking Scheme HUGHES INC Marks 1 2½ 2½ 1 ½ ½ ½ ½ ½ ½ –– 19 –– Presentation Property, plant and equipment Goodwill Interest in associate Investments Inventory Receivables Cash and bank Share capital and premium Retained earnings Non-controlling interest Loan Payables Overdraft Tax Total (a) (b) (c) (d) TARANTULA Marks Earnings Number of shares EPS 1 Earnings Number of shares EPS Comparative ½ 1 ½ Earnings Number of shares EPS Comparative ½ 1 ½ Number of shares EPS Comparative Rights issue bonus fraction 1 1 Accountancy Tuition Centre (International Holdings) Ltd 2008 (e) (f) Proceeds if exercised Number of shares if at market value Free shares EPS 1 1 Time apportionment and number of shares at date Application of bonus fraction Calculation and application of RIBF EPS ½ 1½ –– 21 –– FRAMEWORK Marks Reasons – mark a point up to a maximum of Description of accounting rules – mark a point to a maximum of Inventory 40m Loan 42.8m Interest 2.8m Accountancy Tuition Centre (International Holdings) Ltd 2008 1 –– 10 –– ... = 2000*3/12 *7/ 5*10/9 1.1 to 31.3 = 2800*3/12*10/9 1.4 to 30.6 = 3300*3/12*10/9 1 .7 to 30.9 = 4950*3/12 77 7 77 7 9 17 1238 –––––– Number of shares EPS (70 0/3 ,70 9) Rights issue bonus fraction Number... $000 4 ,70 0 20% ––––– 940 ––––– Fair value of S net asset at reporting date NCI (5) Group retained earnings $000 5, 675 240 150 (425) ––––– 5,640 ––––– All of P P% of post acq profits of S 80% of 300... –––––– Before Right Therefore bonus fraction is 10/9 70 0 3 ,70 9 –––––– 18.87c –––––– $/share 10 $ 33,000 11,550 –––––– 44,550 –––––– FRAMEWORK (a) In order to be useful information contained in financial