ACCA F7 INT Revision Mock Ans J11%28with Marks%29

ACCA

Paper F7 (INT)

Financial Reporting June 2011

Revision Mock – Answers

To gain maximum benefit, do not refer to these answers until you have completed the revision mock questions and submitted them for marking.

PAPER F7 ( INT ) : F INANCIAL REPO RTING

2 KAPLAN PU BL ISHING

© Kaplan Financial Limited, 2011

The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials.

All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

REVIS ION MOCK : ANSWERS

KAPLAN PU BL ISHING 3

ANSWER 1

(a) Consolidated Statement of Financial Position for Pip group as at 30 September 2010 Non-current assets $000 $000 Marks Goodwill (W3) 42,495 4 Property, plant and equipment (224,000 + 100,000 + (5,000 + 4,000 – 1,000 fair value adj (W2))

332,000

2

Investment in Associate (W6) 29,000 1½ Investments (33,000 –15,000 (W6))

18,000 1

––––––– 421,495 Current assets Inventory (40,000 + 32,000 – 5,000 (W7)) 67,000 1 Receivables (48,800 + 30,000 – 5,000 intra-company receivable)

73,800 1

Bank (9,000 + 8,000 + 2,000 cash in transit) 19,000 1 ––––––– 159,800 ––––––– 581,295 ––––––– Equity and liabilities Equity Share capital (100,000 + 22,400 (W3)) 122,400 1 Share premium (W3) 82,880 1 Group reserves (W5) 173,295 2½ Non-controlling interests (W4) 23,000 2 ––––––– 401,575 Non-current liabilities Loan notes (60,000 + 36,000) 96,000 ½ Deferred consideration (W8) 25,720 1 ––––––– 121,720 Current liabilities Trade payables (30,000 + 18,000 – 3,000 inter-co payable) 45,000 1 Taxation (6,000 + 7,000) 13,000 ½ ––––––– 58,000 ––––––– 581,295 –––––––



Working paper

(W1) Group structure

Pip

Squeak

(W2) Net assets of Squeak

@ acq’n @

reporting date

$000 $000 Share capital 70,000 70,000 Retained earnings ½ 30,000 39,000 ½ 100,000 109,000 Fair value adj: Land (15,000 – 10,000)

½ 5,000 5,000

Plant (44,000 – 40,000) 4,000 4,000 Fair vale dep’n: ((4,000 / 4yrs) × 1 year) – (1,000) ½ PURP (W7) (5,000) ½ ––––––– ––––––– 109,000 112,000 ––––––– ––––––– (W3)

3,000 post-acq profit

(W3) Goodwill in Squeak $000 Marks Parent’s holding (investment) at fair value – Share exchange(*) 56,000 × 2/5 × $4.70 – Deferred consideration 30,000 × 1/(1.08)3

105,280 23,815

_______

1 1

129,095 NCI value at acquisition (fair value) 20% × 70,000 × $1.60

22,400

1

151,495 Less fair value of net assets at acquisition (W2) (109,000) 1 ______ Total goodwill 42,495

56m / 70m =80%Alf

01/10/08

2 years ago

25%

01/10/09

1 year ago

Subsid = seller, therefore:

Dr Subsid reserves - (W2)

Cr Inventory - CSFP



(*) Share exchange results in: Share capital 56,000 × 2/5 × $1 22,400 Share premium 56,000 × 2/5 × $3.70 82,880 ______ 105,280 ––––––

(W4) Non-controlling interest $000 Marks Fair value at acquisition (W3) 22,400 ½ Share of post-acquisition reserves 20% × 3,000 (W2)

600 ______

2 (with 1½ for post-acq – see

W2)

23,000 ______

(W5) Group reserves $000 Marks 100% Pip retained earnings 158,800 ½ 80% Squeak post-acq profit (80% × 3,000 (W2)) 2,400 1 Finance cost re deferred consideration (1,905) ½ 25% Alf post-acq profit (25% × $56,000) 14,000 ½ ______ 173,295

______

(W6) Investment in Associate $000 Marks Cost of investment 15,000 ½ 25% post-acq profit (25% × 56,000) 14,000 1 ______ 29,000

______

(W7) PURP $000 Squeak to Pip Left in stock 20,000 (20,000 / 133.3% × 33.3%)

5,000

(W8) Deferred consideration $000 Marks Opening liability (W3) 23,815 ½ Finance cost (23,815 × 8%) 1,905 ½ –––––– Closing liability 25,720 ––––––



(b) The difference in accounting treatment for Squeak and Alf is primarily due to the weighting of shares that Pip holds in these companies.

Squeak

Pip has invested in 80% of the equity share capital of Squeak which is likely to give them control over the operating and financial policies of the company. Squeak is therefore treated as a subsidiary of Pip. Consolidated statements are required to be prepared from the date of acquisition reflecting the group as a single economic entity.

Alf

Pip has invested in 25% of the equity share capital of Alf which generally will not give control over the company operating and financial policies. Instead Pip is generally deemed to have a significant influence over Alf’s policies. The results of Alf are not required to be consolidated but instead we equity account in accordance with IAS 28.

ACCA marking scheme (a) Statement of financial position Marks Goodwill 4 PPE 2 Investment in associate 1½ Investments 1 Inventory 1 Receivables 1 Bank 1 Share capital 1 Share premium 1 Group reserves 2½ NCI 2 Loan notes ½ Deferred consideration 1 Trade payables 1 Taxation ½ (b) Investments One mark per sensible comment (up to max of 4) 4

–– Total 25 ––



ANSWER 2

(a) Statement of comprehensive income for Fizzled for the year ended 31 October 2010 $000

Revenue (232,500 – 6,000 (W1)) 226,500 Cost of sales (W2) (125,898) ––––––– Gross profit 100,602 Operating expenses (42,000 – 3,077 lease rental) (38,923) ––––––– Profit from operations 61,679 Investment income (1,500 + (35,000 - 30,000) gain on inv. property) 6,500 Finance costs (5,000 + 730 (W5)) (5,730) ––––––– Profit before tax 62,449 Tax (11,500 – 600 (W6)) (10,900) ––––––– Profit for the year 51,549 Other comprehensive income: Revaluation surplus (W3) 29,600 ––––––– Total comprehensive income 81,149 –––––––

(b) Statement of financial position for Fizzled as at 31 October 2010 $000 $000

Non-current assets Land and buildings (80,400 + 29,600 (W3) – 1,450 (W3)) 108,550 Plant – owned (41,940 – 8,388 (W4) – 5,120 (W4)) 28,432 Plant – leased (13,500 – 2,700 (W2)) 10,800 Investment property 35,000 ––––––– 182,782 Current assets Inventory (67,500 + 5,000 (W1)) 72,500 Trade receivables (66,000 – 6,000 (W1)) 60,000 Cash 9,000 Held for sale (W4) 3,800 ––––––– 145,300 ––––––– 328,082 ––––––– Equity Ordinary $1 shares 60,000 Revaluation reserve (see SOCIE) 29,110 Retained earnings (See SOCIE) 184,039 –––––––

273,149



Non-current liabilities Finance lease (W5) 8,076 Deferred tax (W6) 8,400 ––––––– 16,476 Current liabilities Trade payables 24,000 Income tax 11,380 Finance lease (W5) – capital 2,347 - interest 730 ––––––– 38,457 ––––––– 328,082 –––––––

(c) Statement of changes in equity for Clone Plc for the year ended 31 March 2009

S.C R.R R.E Total Balances at 1 November 2009 60,000 - 138,000 198,000 Total comprehensive income 29,600 51,549 81,149 Transfer (W3) (490) 490 -

Interim dividend paid (6,000) (6,000)

––––––– ––––––– ––––––– –––––––

60,000 29,110 184,039 273,149

––––––– ––––––– ––––––– –––––––

Working paper

(W1) Sale or return agreement

Per IAS 18 Revenue the return period has not yet lapsed and therefore the revenue cannot be recognised and the goods need to be brought back into inventory.

Remove sale Dr Revenue – SCI 6,000 Cr Receivables – SFP 6,000 Put goods back into inventory Dr Closing inventory – SFP 5,000 Cr Closing inventory – SCI 5,000 (W2) Cost of sales

$000 Marks Per draft accounts 117,040 ½ Sale or return (W1) (5,000) ½ Building depreciation (W3) 1,450 ½ Plant depreciation (W4) 8,388 ½ Impairment (W4) 1,320 ½ Lease asset depreciation (13,500/5) 2,700 ½ 125,898



(W3) Land & buildings

Revaluation:

Tutorial note

The revaluation takes place at the start of the year, therefore revalue immediately and then depreciate revalued amount over the remaining useful economic life.

$000 Dr Land & buildings net book value 29,600 Cr Revaluation reserve (110,000 – 80,400) 29,600 Depreciation: $000 Dr Cost of sales 1,450 Cr Accumulated depreciation (58,000 / 40 years remaining) 1,450 Reserves transfer: $000 Dr Revaluation reserve 490 Cr Retained earnings (1,450 – 48,000/50) 490 (W4) Plant & equipment

Depreciation:

Tutorial note

A full year’s depreciation should be charged before the held for sale asset is taken into account as this was only made available at the end of the year and therefore would have incurred a full year’s depreciation.

$000 Dr Cost of sales 8,388 Cr Accumulated depreciation (41,940 × 20%) 8,388

Held for sale:

Tutorial note

The held for sale asset should be carried as a current asset at the lower of carrying value or fair value less costs to sell per IFRS 5 Discontinued operations and held for sale assets.



Carrying value Fair value less costs to sell $000 $000 Cost 10,000 Selling price 4,000 Accumulated depreciation b/fwd (3,600) Commission – 5% (200) Depreciation in year (10,000 – 3,600) × 20%

(1,280)

––––––– ––––––– 5,120 3,800 ––––––– –––––––

Tutorial note

Fair value less cost to sell is lower, therefore an impairment loss of $1,320 (5,120 – 3,800) also needs to be recorded.

$000 Dr Held for sale (current asset) 3,800 Dr Impairment expense (cost of sales) 1,320 Cr Plant & equipment 5,120 (W5) Finance lease obligation $000 Opening liability 13,500 Payment (3,077) ––––––– 10,423 Finance cost (7%) 730 ––––––– Closing liability 11,153 –––––––

Closing liability analysis: $000 Current Interest 730 Capital (3,077 – 730) 2,347 Non-current (11,153 – 3,077) 8,076 ––––––– 11,153 ––––––– (W6) – Deferred tax $000 Temporary differences 28,000 Tax rate × 30% ––––––– Deferred tax provision at year end 8,400 Deferred tax provision b/fwd 9,000 ––––––– Deferred tax credit to income statement 600 –––––––



ACCA marking scheme Statement of comprehensive income Marks

Revenue Per TB ½ Sale or return ½ Cost of sales: Per TB ½ Sale or return ½ Building depreciation ½ Plant depreciation ½ Impairment ½ Lease depreciation ½ Operating expenses Per TB ½ Lease rental ½ Investment income Increase in investment property 1 Finance costs: Finance lease interest 1 Taxation: Per TB ½ Decrease in deferred tax ½ OCI Revaluation surplus 1

––– 9 ––– Statement of financial position

Land and buildings Opening balance ½ Revaluation ½ Depreciation charge ½ Plant: Opening balances ½ Held for sale removal ½ Depreciation charge ½ Leased plant Recognition at fair value ½ Depreciation ½ Investment property: Closing valuation 1 Inventory: Per TB ½ Sale or return ½ Trade receivables Per TB ½ Sale or return ½ Cash Per TB ½ Held for sale 1 Equity Revaluation reserve c/f ½ Retained earnings c/f ½ Finance lease Non-current liability 1 Current liability - capital ½ Current liability - interest ½ Deferred tax 1 Current liabilities: Trade payables and tax ½

––– 13

––– SOCIE

Opening balance ½ Revaluation surplus ½ Profit for the year ½ Transfer 1 Dividend ½

––– 3

––– Total 25 –––



ANSWER 3

(a) Statement of movements in cost and accumulated depreciation of property, plant and equipment

Cost Accumulated depreciation

Carrying value

Marks

$000 $000 $000 Brought forward 25,325 12,104 13,221 ½ Disposal (see below) (2,840) (1,875) (965) 2 Finance lease assets 960 960 1 Additions (bal fig for cost) 4,492 4,492 1 Depreciation charge (bal fig for accum dep’n) 2,395 (2,395) 1 ––––––– ––––––– ––––––– Carried forward 27,937 12,624 15,313 ½ ––––––– ––––––– –––––––

Disposal calculation: $000 Sale proceeds 915 Loss on disposal 50 Carrying value on disposal 965 (1 mark)

If the accumulated depreciation at disposal is $1,875,000 and the carrying value is $965,000 then the original cost of the plant disposed of must be $2,840,000. (1 mark)

(b) Statement of cash flows extract for the year ended 31 October 20X9 $000 Marks Cash flows from operating activities: Profit before tax 1,299 ½ Finance costs 809 ½

Gain on financial assets (44) 1 Depreciation (part a) 2,395 ½ (OFR) Amortisation of intangible assets (1,439– 1,765) 326 1 Increase in warranty provision (511 – 428) 83 1 Loss on sale of assets 50 1 ––––––– 4,918 Increase in inventories (10,931 – 9,480) (1,451) ½ Increase in receivables (4,429 – 3,892) (537) ½ Decrease in payables (14,299 – 23,162) (8,863) ½ ––––––– Cash generated from operations (5,933) Interest paid (809) ½ Tax paid (W1) (496) 1½ ––––––– Net cash from operating activities (7,238) –––––––



Workings

(W1) Tax paid

Dr Cr $000 $000 b/f (108 + 250) 358 Inc stmt charge 672Cash paid (bal fig) 496 c/f (234 + 300) 534 1,030 1,030

(c) (i) The price earnings ratio is calculated by dividing market value per share by earnings per share. The ratio is a major stock market indicator of performance. A high P/E ratio suggests that there is confidence in the future prospects of the entity and that high growth is to be expected.

(ii) Gearing 2011

Debt = 6,950 + 993 + 150 = 8,093

Ratio = 8,093 / (8,093 + 11,001) = 42.4% (or 8,093 / 11,001 = 73.5%)

Gearing 2010

Debt = 1,500 + 356 + 45 = 1,901

Ratio = 1,901 / (1,901 + 10,724) = 15.1% or 1,901 / 10,724 = 17.7%

(iii) The gearing ratio has risen from a modest 15% in 2010 to a moderate 42% in 2011. There has been a significant increase in the level of borrowings, with an issue of loan notes for $5.45 million ($6.95m - $1.5m).

The company have only spent $4,492,000 on property, plant and equipment in the year and therefore this suggests that the additional debt finance has partly been raised to fund working capital requirements. The cash flows from operating activities show a net outflow of over $7 million and the company has also utilised an overdraft facility in 2011.

Both inventory and receivables have increased in the year and this, together with a considerable reduction in payables, is the most notable reason for the fall in the company’s cash balance. The reason for the reduction in payables is not clear however it could be due to a withdrawal of or tightening of credit terms from suppliers.

Given the increase in borrowings this year the company may struggle to attract further debt finance in the near future, particularly given the relatively low interest cover, with profit from operations covering finance cost only 2.6 times ((2,064+44) / 809).

To improve the gearing ratio, the company could look to raise further equity finance instead. However, its P/E ratio is below average which suggests a lack of confidence in the future prospects of the business. The share issue during the year has raised a premium of $2 (100/50) per share whereas previous issues appear to have raised an average of $3.75 (1,500/400).

Perhaps the company should concentrate on improving its working capital before seeking any further long term finance. It also holds some financial assets and could look to sell these as a way of raising further finance.



ACCA marking scheme Marks Statement of movements on PPE Brought forward figures ½ Disposal calculations Carrying value at disposal 1 Cost at disposal 1 Impact of new finance leases 1 Carried forward figures ½ Additions (bal fig) 1 Depreciation charge (bal fig) 1 6 Cash flows from operating activities Profit before tax ½ Adjustments for: Finance cost ½ Gain on financial asset 1 Depreciation ½ Amortisation 1 Warranty provision 1 Loss on disposal of asset 1 Changes in working capital 1½ Interest paid ½ Tax paid 1½ 9 Ratio analysis Price earnings ratio Calculation 1 Explanation 1 Gearing ratio 2011 1 2010 1 Analysis – of cash flow in general 1 per valid point 4 Prospects of long term finance debt 1 equity 1 10 TOTAL 25

ANSWER 4

(a) An impairment loss arises where the carrying amount of an asset in higher than its recoverable amount.

The recoverable amount of an asset is defined in IAS 36 Impairment of assets as the higher of its fair value less costs to sell (net realisable value) and its value in use (present value of future cash flows).

When an impairment loss arises, the loss is the difference between the carrying amount and the recoverable amount.

Frequency of testing

Goodwill and any intangible assets that are deemed to have an indefinite useful life should be tested for impairment at least annually.



In addition, at each reporting period end, an entity must consider if there has been any indication that other assets may have become impaired and, if so, an impairment test should be carried out. If there are no indications then testing is not required.

(b) Pad

For a revalued asset, the impairment loss is treated as a revaluation decrease. The loss is first set against any revaluation surplus and the balance of the loss is then treated as an expense in profit or loss.

Income statement extract – year ended 31 March 2011

$000

Depreciation (W1) 1,100

Impairment expense (W2) 1,400

Statement of financial position extract – at 31 March 2011 $000 Non-current assets Machine 5,500 Equity Revaluation reserve nil

Workings:

(W1) Carrying value of asset pre-impairment

Asset purchased on 1 April 2008 and owned for 2 years prior to the original revaluation. Therefore, the carrying value at the date of revaluation was $8,000,000 ($10,000,000 – ($10,000,000 / 10 years x 2 years)).

The asset was then revalued at 1 April 2010:

Valuation $8,800,000

Carrying value $8,000,000

Revaluation surplus $800,000 (Dr NCA; Cr Revaluation Reserve)

The carrying value at 31 March 2011 (prior to the impairment) is then:

Valuation b/f $8,800,000

Depreciation for year $1,100,000 (to income statement) ($8,800k / 8 years)

Carrying value $7,700,000

(W2) Impairment

Non-current assets should be valued at the lower of their carrying amount or recoverable amount. At 31 March 2011 the carrying value of the machine was $7.7 million (W1) and its recoverable amount was $5.5 million. Therefore, an impairment loss of $2.2 million exists ($7.7 million - $5.5 million).

The impairment loss should be accounted for as follows:

Dr Revaluation reserve $800,000 (reverse the original surplus)

Dr Impairment expense $1,400,000 (to income statement)

Cr Machine $2,200,000 (reduce the carrying amount of the asset)



Pin

The cash generating unit should be carried at no more than its recoverable amount. At 31 March 2011 the carrying value of the unit was $20.5 million but the recoverable amount was $14 million.

However, before this impairment can be determined it must be noted that included within the unit is a specifically impaired asset. The licence carrying value of $2.4 million appears to be greater than its recoverable amount. The recoverable amount is $2 million as this is the offer that Lock has received in respect of the licence and is greater than the value in use of the asset. This asset must therefore be written down to its recoverable amount first:

Dr Impairment expense $400,000

Cr Licence $400,000

Cash generating unit

Now that the specifically impaired asset has been dealt with the cash generating unit can be reviewed for impairment. At 31 March 2011 the carrying value of the unit (following the impairment of the licence) was $20.1 million but the recoverable amount was $14 million. So an impairment loss of $6.1 million exists.

The impairment loss should be allocated firstly against goodwill and then against the remaining assets according to their carrying amounts. However, the licence should not be written down any further as it’s recorded value is now considered to be recoverable in full.

Assets

Carrying value pre-impairment

Impairment loss

Carrying value post-impairment

$000 $000 $000 Goodwill 3,300 (3,300) - Licence 2,000 - 2,000 Factory 9,200 (1,741) 7,459 Plant & equipment 5,600 (1,059) 4,541 ––––––– ––––––– ––––––– 20,100 (6,100) 14,000 ––––––– ––––––– ––––––– (W3) Allocate impairment loss against CGU

Remaining loss to allocate after goodwill write off = 6,100 – 3,300 = 2,800

* Pro-rate over remaining assets according to carrying values

(9,200 + 5,600) = 14,800

Factory impairment = 9,200 / 14,800 * 2,800 = 1,741

P&E impairment = 5,600 / 14,800 * 2,800 = 1,059



ACCA marking scheme Marks (a) Lower of CV and recoverable amount 1 Recoverable amount 1 Impairment loss calculation 1 Frequency of testing – goodwill and indefinite life intangibles 1 Frequency of testing – other assets 1

–– 5

(b) Pad

Explanation 1 Depreciation expense 1

Impairment expense 2 CV of machine at year end 1

–– 5 (c) Pin

Write down of licence (specifically impaired asset) 1 Write off goodwill in full 1 Allocation of impairment to Factory 1

Allocation of impairment to P&E 1 Not reducing licence value any further 1

–– 5

–– Total 15

ANSWER 5

(a) As construction contracts typically span more than one accounting period, the correct amount of revenue and profit must be reflected in each period so as to reflect a faithful representation of the contract.

If construction contracts were treated in the same way as other sale of goods, then the revenue and profit would not be recognised until the contract had been completed (the ‘completed contracts’ basis). This would be a prudent approach. However, the problem is that it would not necessarily result in faithful representation, as the entity will be earning revenue and profit throughout the contract.

IAS 11 remedies this by recognising profit on uncompleted contracts in proportion to some measure of the percentage of completion applied to the estimated total contract profit. This can be seen to reflect the accruals concept, however it should only be applied where the outcome of the contract is reasonably foreseeable.

In the event that a loss on a contract is foreseen, the whole of the loss must be recognised immediately, thereby ensuring the continuing application of prudence.



(b) Endeavour

Statement of comprehensive income extract – year ended 31 October 2010 $000 Marks Revenue 15,000 1 Costs (75% (W2) × 14,000) + 1,250 (rectification costs) (11,750) 2 ––––––– Profit (75% (W2) × 6,000 (W1)) – 1,250 (rect) 3,250 –––––––

Statement of financial position extract – at 31 October 2010 $000 Gross amounts due from customers (W3) 5,000 Workings:

(W1) Total expected profit $000 Contract price 20,000 Expected costs (14,000) ––––––– Profit 6,000 –––––––

(W2) Percentage of completion

Work certified / contract price = 15,000 / 20,000 = 75%

(W3) Gross amounts due from customers $000 Marks Costs to date (14,250 – 1,250) 13,000 1 Profit recognised (75% × 6,000) 4,500 1 Progress payments received (12,500) 1 ––––––– Profit 5,000 –––––––

ACCA marking scheme

(a) Issue – spanning more than one accounting period 1 Faithful presentation 1 Percentage of completion method / accruals concept 1 Prudence concept re recognition of losses 1

–– 4 (b) Income statement: Revenue 1 Costs – percentage of total expected 1 - rectification costs 1 Statement of financial position:

Costs to date 1 Profit recognised 1

Less progress payments received 1 ––

6 ––

Total 10

ACCA F7 INT Revision Mock Ans J11%28with Marks%29

Documents

Transcript of ACCA F7 INT Revision Mock Ans J11%28with Marks%29