ACCA Paper F7 (International) - LSBF Tuition Mock Examination - June 2012 - Answer Guide

ACCA

Paper F7

Financial Reporting (International) Tuition Mock Examination

June 2012

Answer Guide

Health Warning!

How to pass Attempt the mock examination under exam

conditions BEFORE looking at these suggested answers. Then constructively compare your

answer, identifying the points you made well and identifying those not so well made.

If you got basics wrong then re-revise by re-writing them out until you get them correct.

How to fail Simply read or audit the answers congratulating

yourself that you would have answered the questions as per the suggested answers.

2 www.studyinteract ive.org

© Interactive World Wide Ltd, April 2012

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording or otherwise, without the prior written

permission of Interactive World Wide Ltd.

www.studyinteract ive.org 3

Question 1

Tutorial Help and Key Points

This is a typical CSFP with Associates. Follow the procedure from the Class

Notes: ie the group structure, the consolidation adjustments and net assets list

and thereafter value the associate and do goodwill, NCI, and consolidated

reserves.

Watch out for impairment in respect of the Associate as the examiner sees it as

relating to the entire value, not just goodwill. It is absolutely crucial to take the

impairment figure given by the examiner in the question and not the group

percentage.

Also, when taking the difference between the date of acquisition and date of

consolidation net assets, multiply by the group percentage and it is this figure

that must be shown in the Associate valuation and in consolidated reserves.

Don’t forget accumulated depreciation is needed on fair value adjustments for

the subsidiary.

Marking Guide

Marks

Statement of financial position:

Property plant and equipment 2 Investments 1 Inventory ½ Receivables 1

Cash 1 Ordinary share capital 1 Loan notes 1

Payables ½ Taxation ½ Overdraft ½ _______

9

Goodwill in Sally:

Investment at cost (consideration) ½

Net assets acquired calculated as: Share capital ½ Retained earnings ½

Fair value adjustment – PP+E 1 Goodwill impairment ½ FV of NCI at acquisition ½ Goodwill impairment (NCI) ½ _______

4


Investment in associate:

Group share of Andy’s net assets at CSFP 1 Net assets at acquisition calculated as: Share capital ½ Retained earnings ½

Goodwill on acquisition 1 Goodwill impairment 1 _______

4

NCI:

NCI at FV at acqn ½ NCI share of post-acqn 1

NCI impairment ½ _______

2

Group reserves:

Parent 1 Group share of subsidiaries post acquisition 1

Group share of goodwill impairment in subsidiary 1 Group share of associate’s post acquisition 2 Goodwill impairment of associate 1 _______

6

Total marks 25


Helen Group Statement of Financial Position as at 31 March 2012

$000 Non-current assets Property, plant and equipment (18,112.5 + 8,100 + 405[W2]) 26,617.5

Investments (9,000 +2,047 - 7,290 – 1,417.5) 2,339.5 Investment in associate (W) 1,590 Goodwill (W) 2,728 ________

33,275 ________

Current assets

Inventory (1,867.5 + 765) 2,632.5 Receivables (1,170 + 652.5 - 90) 1,732.5 Cash (540 + nil + 90) 630 ________

4,995 ________

Total assets 38,270 _______

Equity and liabilities

Equity Ordinary share capital 11,250

Retained earnings (W) 19,770 ________

31,020

Non-controlling interest (W) 995.5 ________

32,015.5 Non-current liabilities

10% loan notes (1,125 + 540) 1,665 Current liabilities

Payables (945 + 2,160) 3,105 Taxation (495 + 562) 1,057 Overdraft 427.5 ________

4,589.5 ________

Total equity and liabilities 38,270 _______

Working 1 - Group structure

Andy Associate

Helen

Sally Subsidiary

90%

1,620 _____

1,800

30%

270 _____

900


Working 2 - Net assets and consolidation adjustments

Per Q

(i) Fair value adjustment for PP+E in S:

$000

Fair value adjustment at acquisition 675 Post acquisition depreciation (675/5 yrs x 2 yrs) (270) _____

Fair value adjustment at consolidated SFP date 405 _____

(ii) Intra-group balances:

Cash in transit (direction of transfer - Sally to Helen)

Dr Cash $90,000

Cr Receivables $90,000

(iii) Pre-acquisition retained earnings – Andy:

$000 Retained earnings b/f 1,800 Pre-acquisition profit for the year (Apr – Sept 09) 675 _____

($1,350 x 6/12) 2,475 _____

Net assets list

Sally Andy

At acq'n At CSFP At acq'n At CSFP

$000 $000 $000 $000

Share capital 2,700 2,700 1,350 1,350

Retained earnings 1,800 5,175 2,475 3,150

Property (FV adj) 675 675 - -

Depreciation - -270 - -

5,175 8,280 3,825 4,500

For G/W For G/W

Difference of $3,105 to NCI

& consol reserves Difference of $675 to Assoc

Valn & cons res

Investment in associate - Andy

$000 Investment at cost ($5.25 x 270,000) 1,417.5

Plus: Grp share of post-acq Res = Net Assets change 30% x 675 202.5 Less: G/W Impairment (30) _________

Valuation of associate in CSFP 1,590 _________


Working 3 – Goodwill, NCI and Consolidated Reserves

Goodwill in Sally – (CI)

$000 Investment at cost ($4.50 x 1,620,000) 7,290

Fair value of NCI at acq’n ($3.85 x 180 shares) 693 ________

7,983 Less: net assets at acq’n (5,175) ________

2,808 Less: goodwill impairment (80)

Goodwill at net book value 2,560.5 ________

Goodwill at NBV in CSFP 2,728 ________

Non-controlling Interest

$000

Fair value of NCI at acq’n ($3.85 x 180 shares) 693 Plus: NCI 10% x 3,105 (8,280 – 5,175) 310.5 Less: Impairment of Goodwill (10% x 80) (8) ________

NCI (CSFP) 995.5 ________

Consolidated Reserves

$000 Helen (Parent) 16,875 Group share of Sally’s post acquisition ($3,105 x 90%) 2,794.5

Less: Group share of goodwill impairment in Sally ($80 x 90%) (72) Share of Andy’s post acquisition ($675 x 30%) 202.5 Less: Goodwill impairment in Andy (30) ________

Total to CSFP 19,770 ________


Question 2


Master the formats for the income statement and SFP – remember that

dividends and retained profits brought forward are not shown in the income

statement but either in a SOCIE or through workings.

In the other comprehensive income section, don’t forget to show revaluations –

tutorial note: if you get investment properties in the exam, this is not shown in

OCI, but in the main income statement.

Cost of sales is much bigger than most students realise, ie includes research

and development, depreciation, etc.

It is easier to do finance costs as a working, otherwise the income statement

might become untidy.

Development costs are amortised but research is always written off.

Marking Guide

Marks

Presentation of both financial statements 1

Statement of comprehensive income:

Revenue ½

Cost of sales 3 Investment income ½ Administration costs ½ Distribution costs ½

Finance costs 1 Taxation 2 Other comprehensive income (revaluation reserve) 1 _______

9


Statement of financial position:

Property, plant and equipment 3 Investments ½ Development costs 2½ Inventory ½

Receivables ½ Bank ½ Ordinary share capital ½ Share premium ½

Retained earnings 2 Revaluation reserve 1 Debentures ½

Deferred tax 1 Trade payables ½ Current tax ½ Accruals 1 _______

15

Total marks 25

Glee Products Statement of Comprehensive Income for the year to

31 March 2012

$000

Revenue 22,578

Less: Cost of Sales (W1) (11,574) ______

Gross Profit 11,004

Investment income 187

Administration costs (4,235)

Distribution costs (4,373) ______

Operating Profit 2,583

Finance costs (W3) (248) ______

Profit before tax 2,335

Taxation (W4) (964) ______

Profit after tax 1,371

Other comprehensive income:

Revaluation reserve (W2) 1,615 ______

Total comprehensive income for the year 2,986 ______


Glee Products Statement of Financial Position as at 31 March 2012

$000 $000

Non-current assets

Property, plant and equipment (W2) 15,330

Investments at fair value 4,813

Capitalised development costs (W5) 545 ______

20,688

Current assets

Inventory 3,630

Receivables 4,070

Bank and cash 2,251 ______

9,951 ______

Total assets 30,639 ______

Equity and liabilities

Equity

Ordinary share capital 12,375

Share premium 3,795

Retained earnings (W6) 1,682

Revaluation reserve (1210 + 1615) 2,825 ______

20,677

Non-current liabilities

6% Debentures 4,134

Deferred tax (W4) 2,229 ______

6,363

Current liabilities

Trade payables 2,805

Current tax 670

Accruals (W3) 124 ______

3,599 ______

Total equity and liabilities 30,639 ______

Workings

W1 Cost of sales

$000

Opening inventory 2,000

Purchases 11,153

Closing inventory (3,630)

Depreciation (W2) 1,221

Research costs (W5) 327

Amortisation (W5) 503

Total 11,574


W2 PP+E

Land Buildings Equipment Total

$000 $000 $000 $000

Cost per TB 5,500 8,773 9,350 23,623

Accumulated depreciation nil (4,125) (4,562) (8,687)

NBV b/f 5,500 4,648 4,788 14,936

Charge for the year:

(4788 x 20%) nil (263) (958) (1,221)

(8773 x 3%)

NBV at date of revaluation 5,500 4,385 3,830 13,715

Revaluation surplus (Bal fig) nil 1,615 nil 1,615

Valuation to SFP 5,500 6,000 3,830 15,330

W3 Finance costs

$000

Debenture interest paid 124

Accrual (Bal fig) 124 ___

Finance cost for the year ($4,134 x 6%) 248 ___

W4 Taxation

$000

Expense:

Current tax 670

Under-provision b/f 17

Deferred tax movement* 277 _____

Tax charge for the year 964 _____

* Deferred tax provision

$000

Provision b/f 1,952

Movement (Bal fig) 277 _____

Provision c/f ($7,430 x 30%) 2,229 _____


W5 R&D

$000

Capitalised development costs at 1 April 2011 2,384

Accumulated amortisation at 1 April 2011 (1,468)

Development costs incurred in the year to 31 March 2012 132 _____

1,048

Amortisation for the year [(2,384+132) x 20%] (503) _____

Carrying value to SFP 545 _____

Research costs of $327,000 will be written off to cost of sales.

W6 Retained earnings

$000

Retained earnings b/f 1,067

Profit for the year 1,371

Dividends paid (756) _____

1,682 _____


Question 3


Learn the format for the statement of cashflow – note that the operating

activities category is divided into three parts.

1 The add backs of depreciation, amortisation, etc (but don’t forget

Government Grant amortisation is a credit in the income statement,

the opposite of depreciation).

2 Next comes the working capital section – the secret here is to

imagine the movements happen as if they are cash inflows and

outflows, and each movement happens in isolation.

3 Finally, we have the section that deals with items such as tax paid,

interest paid, etc – remember that dividend paid can be shown either

here or in the later category financing.

When dealing with non-current assets, even though revaluation is non-cash, it

must be brought into the calculation so as to isolate the pure cash movement.

Similarly, when dealing with share issues and share premium, bonus issues are

again non-cash, and must be included to isolate pure cash.

With written parts, follow the answer guide to pick up ideas – traditionally these

parts are ignored by weaker students, but they are the most generously marked

– a rough guide is 1 mark per relevant point.

Marking Guide

This is set out within the answer.


(a)

Statement of cash flows for Grebden for the year ended 30 September

2012

$m Marks

Profit before tax 870 ½ Finance costs 30 ½ Depreciation 320 ½

Loss on disposal 50 ½ Amortisation of development expenditure (W1) 130 1½ Government grant release (W2) (90) 1½

Goodwill impairment 20 _____

½

1,330 Increase in inventory (480) ½

Increase in receivables (310) ½ Increase in payables 145

_____ ½

Cash generated from operations 685 Interest paid (W3) (20) 1½ Income taxes paid (W4) (130)

____ 2

Net cash from operating activities 535 Cash flows from investing activities

Purchase of PPE (250) ½ Development expenditure (500) ½ Proceeds of sale of PPE (W5) 20 2½

Grant received 50 ½

_____

Net cash used in investing activities (680)

Cash flows from financing activities Issue of share capital (W6) 450 3 Proceeds from long-term borrowings (300 – 100) 200 1

Dividends paid (320) ____

½

Net cash used in financing activities 330

Net increase in cash and cash equivalents 185 Cash and cash equivalents at beginning of period (115)

_____ ½

Cash and cash equivalents at end of period 70 ½

Workings

(W1) Development expenditure

$m Balance b/f 100 Capitalised 500

Amortisation charge (β) (130) _____

c/f 470


(W2) Government grant

$m Balance b/f (900 + 400) 300

Awarded in year 50 Amortised (β) (90)

_____

c/f (1,400 + 600) 260

(W3) Loan interest $m Accrual b/f 5

Income statement 30 Paid (β) (20)

_____

Accrual c/f 15

(W4) Tax

$m

Balance b/f (160 current + 140 deferred) 300 Income statement 270 Paid (β) (130)

_____

c/f (130 + 310) 440

(W5) PPE

$000

Balance b/f 1,830 Revaluation 200

Additions 250 Depreciation (320) Disposal CV (70)

_____

c/f 1,890 Proceeds of sale = 50 loss + 70 CV = $20m

(W6) Share issue

$m

Revaluation reserve b/f - Revaluation 200 Transfer (10) Bonus issue (β) 50

____

Revaluation reserve c/f 140 Share

capital $m

Share

premium $m

Total

$m

c/f 750 350

Bonus issue (50) Share issue (β) (200)

_____ (250)

_____ 450

b/f 500 100


(b)

Commentary on financial position of Grebden

Grebden has an overall cash inflow of $330m. The main sources of the

cash inflows are:

● $685m cash generated from operations

● $450m proceeds of a share issue

● $200m proceeds of a loan issue.

Of these inflows, the cash generated by operations is sustainable and will

continue in future years, assuming that Grebden continues to trade as

present.

The financing inflows are ‘one-off’ cash flows, and Grebden cannot raise

finance in this way on an ongoing basis.

Whilst the operating cash flows amply cover the ongoing cash outflows of

interest, tax and a dividend, the ‘one-off ‘ cash inflows have been used to

finance ‘one-off’ expenditure, namely the purchase of new plant and

development expenditure.

Both of these items of expenditure are expected to result in future

benefits to Grebden, in the form of revenues, profits and in turn cash

inflows. They are therefore an efficient way to spend the proceeds of the

financing activities.

In terms of cash from operations, an operational profit of $900m ($870m

+ $30m finance costs) equates to a cash flow of $685m. Where

operational cash flow is less than operating profit, explanation should be

sought.

In this case the lower amount is largely due to the management of

working capital and in particular the increases in receivables and

inventory. Although these have a negative impact on cash flow, the

increases may have valid business reasons, for example due to increased

activity or providing extended credit to new customers or stocking up

ahead of a big order. If these reasons are not in existence, the

increases may be evidence of poor working capital management, which

should be addressed.

Finally the issue of the dividend payment should be considered. A

dividend of $320m is paid in the same year that the company has raised

$650m in finance. More efficient management of cash flows would have

seen the dividend withheld for a year and less external financing sought.

1 per

valid

explained

point to a

maximum

of 5


Question 4


Part (a)

When dealing with finance leases don’t forget that the user capitalises the asset

in its books. Watch out for whether the payments are in advance or in arrears

as in this question. Clearly, if the payments are made at the end of each year

interest will have accrued for the 12 months leading up to the payment date and

must therefore be added to the opening balance before deducting the payment.

The secret to doing the split between current and non-current correctly, is to

take the figure at the end of the year following the year being reported on as

the non-current liability ($6,327) and when this is compared to the closing

balance of total liability at the end of the reporting year, will reveal the current

liability.

Operating leases are much easier and you must carefully isolate the accrual.

Part (b)

Discussing leasing is easy as the user of the asset behaves like the owner even

though legal title remains with the lessor.

With operating leases the ownership remains with the lessor as risks and

rewards have not passed to the lessee.

Marking Guide

Marks

(a)

Operating lease expense 2 Depreciation expense 1

Finance cost 1 Leased machinery asset 1 Non-current finance lease liability 2 Current finance lease liability 2

Accrual for operating lease 1 _______

10

(b)

Award marks for each relevant point up to a maximum of five 5

Total marks 15


(a)

Machinery

The item of machinery should be treated as a finance lease because the lease term

is over the majority of the assets useful life.

The lease payments are made at the end of each year of the lease, in arrears.

Liability:

Period Opening Bal Interest (10%) Payment Closing Bal

Year 1 8,700 870 -2,000 7,570 Year 2 7,570 757 -2,000 6,327

Non-current liability at the end of year 1 $6,327 Current liability at the end of year 1 ($7,570 - $6,327) $1,243 _____

Total liability at the end of year 1 $7,570 _____

Depreciation:

$8,700 x 12% $1,044

Photocopier

This photocopier should be treated as an operating lease as it is a short term rental

(3 of the 15 year life).

It should be recognised as an expense in the statement of comprehensive income

on an accruals basis.

Operating lease expense = ($4,500 x 2) $3,000 per annum

3 years

In year 1:

Dr Operating lease rental (SOCI) $3,000

Cr Accruals (SOFP) $3,000

Mayweather Ltd Statement of Comprehensive Income (extract) for the

year ended 30 September 2011

$ Operating lease expense 2,000 Depreciation expense 1,044

Finance costs 870


Mayweather Ltd Statement of Financial Position (extract) as at

30 September 2011

$ Non-current assets Leased machinery 7,656 ($8,700-$1,044) Non-current liabilities

Amounts due under finance lease 6,327 Current liabilities Amounts due under finance lease 1,243

Accruals 3,000

(b)

In the financial statements we must reflect the commercial substance of

transactions rather than merely their legal form. The leasing of assets is a classic

case of this.

Assets acquired through a finance lease are legally owned by the lessor but in

substance are owned by the lessee because the risks and rewards of ownership

have passed to the lessee. To this extent we must show in the financial statements

the leased asset as a non-current asset and treat it in the same way by

subsequently depreciating the asset over its useful life. We also need to reflect the

fact that an obligation has been created through entering into this lease by way of a

non-current liability.

However, assets acquired through an operating lease are not owned by the lessee

in substance as significant risks and rewards of ownership have not passed to the

lessee. For example, in the Mayweather scenario the company had a maintenance

agreement with the lessor, this means that if the photocopier breaks down the

lessor would need to repair the asset. Therefore the lessee does not bear the risks

associated with the asset. For this reason, assets rented by an operating lease

would not be capitalised in the statement of financial position, but reflected in the

statement of comprehensive income as a simple rental. The expense for each

period then being calculated on an accruals basis.


Question 5


This is a standard question, parts of which are always examined as it is a

fundamental skill expected of a qualified accountant – be careful with the date

of the revaluation. If revaluation is at the start of the year it is the revalued

amount that must be depreciated; if revaluation is at the end of the year, first

do depreciation on the opening balance to reduce it to NBV before doing the

revaluation. In other words, carefully follow the instructions in the question.

Revise the straight line and reducing balance depreciation methods as these are

examined in every sitting.

Marking Guide

Marks

Revaluation of land 2 NBV at date of disposal 3½ Capitalised machinery cost 2 Depreciation calculations after disposal and addition 2½

Total marks 10

(i)

Revaluation of land

$

Original cost: 80,000

Accumulated dep'n Nil _______

NBV at date of revaluation 80,000

Increase in asset cost (Bal fig) 70,000

Valuation 150,000 _______


(ii)

Disposal of delivery vans

Remove the original cost = $16,000

Remove the accumulated depreciation = $7,134*

* Accumulated dep'n (600+2,310+1,964+1,669+591)

$

1.7.05 Cost 16,000

Dep'n up to 30.9.05 ($16,000 x 15% x 3/12) -600 _______

NBV at 30.9.05 15,400

Dep'n for yr to 30.9.06 ($15,400 x 15%) -2,310 _______

NBV at 30.9.06 13,090

Dep'n for yr to 30.9.07 ($13,090 x 15%) -1,964 _______

NBV at 30.9.07 11,126

Dep'n for yr to 30.9.08 ($11,126 x 15%) -1,669 _______

NBV at 30.9.08 9,457

Dep'n up to 1.3.09 ($9,457 x 15% x 5/12) -591 _______

NBV at date of disposal 8,866 _______

(iii)

Capitalise cost

$

Purchase price 25,000

Delivery costs 5,000

Initial testing of the machine 3,000 _______

Increase PP&E 33,000 _______


(iv)

Depreciation

Land Buildings Plant and machinery

Motor vehicles

$ $ $ $

Cost 80,000 120,000 30,000 37,000

Accum dep'n Nil _______

-96,000 _______

-12,000 ______

-17,640 ______

NBV 80,000 24,000 18,000 19,360

Disposal -8,866

Addition 33,000

Revaluation 70,000 _______

_______

______

______

Sub total 150,000 24,000 51,000 10,494

Charge for the year:

Buildings (120,000 / 50 yrs) -2,400

Plant (30,000 x 20%) -6,000

New machine -6,050

(33,000 x 20% x 11/12)

Motor vehicles -1,574

(10,494 x 15%) _______

_______

______

______

NBV at 30.9.11 150,000 _______

21,600 _______

38,950 ______

8,920 ______

219,470 _______

Total value of PP&E to be shown on the statement of financial position is

$219,470

ACCA Paper F7 (International) - LSBF Tuition Mock Examination - June 2012 - Answer Guide

Documents

Transcript of ACCA Paper F7 (International) - LSBF Tuition Mock Examination - June 2012 - Answer Guide