F7 SQB June12 Extract

2012 EDITION | Study Question Bank

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ACCA

PAPER F7

FINANCIAL REPORTING (INTERNATIONAL)

STUDY QUESTION BANK

JUNE 2012

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STUDY QUESTION BANK – FINANCIAL REPORTING (F7)

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CONTENTS Question Page Answer Marks Date worked FINANCIAL STATEMENTS

1 Oscar 1 1001 18 2 Mercury 2 1003 22 3 Sulphur 3 1005 17 4 Cayman 4 1007 26 ACCOUNTING CONCEPTS

5 Nette (ACCA J04) 6 1009 6 6 Limitations 6 1010 8 7 Framework 6 1011 8 8 Regulatory Framework 6 1012 5 9 Four Concepts (ACCA D98) 7 1013 16 10 IASB (ACCA J98) 7 1014 12 11 Objectives (ACCA Pilot Paper 97) 7 1015 20 12 Comparability (ACCA J04) 8 1016 8 TANGIBLE ASSETS AND DEPRECIATION (IAS 16)

13 Adjustments 8 1016 15 14 Sponger 9 1018 12 15 Fam 10 1020 14 16 Stoat (ACCA D99) 11 1022 20 ACCOUNTING FOR SUBSTANCE

17 Substance over form 11 1023 12 18 Hughes and Custom cars 11 1025 8 ACCOUNTING POLICIES etc (IAS 8)

19 Perseus (ACCA J01) 12 1025 20 REVENUE (IAS 18)

20 Jenson 13 1027 25 ACCOUNTING FOR LEASES (IAS 17)

21 XYZ 14 1030 14 22 Snow 15 1033 15 INTANGIBLE ASSETS (IAS 38)

23 Intellectual Individuals 15 1035 15 24 Rovers (ACCA J97) 16 1037 9 25 Lamond (ACCA D00) 17 1038 20 INVENTORY (IAS 2)

26 Allrights Inc 18 1039 8 27 Sampi (ACCA J98) 19 1040 13

FINANCIAL REPORTING (F7) – STUDY QUESTION BANK

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CONTENTS Question Page Answer Marks Date worked CONSTRUCTION CONTRACTS (IAS 11)

28 William 20 1041 12 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS (IAS 37) AND EVENTS AFTER THE BALANCE SHEET DATE (IAS 10)

29 Earley 20 1043 13 30 Accounting treatment 21 1044 12 INCOME TAXES (IAS 12)

31 Shep (I) 22 1045 32 Shep (II) 23 1046 33 Shep (III) 24 1047 34 Shep (IV) 24 1048 35 Broken dreams 25 1048 15 GROUP ACCOUNTS

36 Consolidations 26 1049 19 37 Honey 28 1053 12 38 Hatton 29 1055 12 39 Haggis 31 1057 12 40 Hammer 32 1059 12 41 Hut 33 1061 10 42 Hat 34 1063 15 43 Humphrey 35 1065 10 44 High 36 1067 10 45 Happy 37 1069 13 46 Haley 38 1071 10 47 Hamish 39 1073 10 48 Hydrogen 40 1074 16 PRINCIPLES OF PRICE LEVEL ACCOUNTING

49 Period of inflation 41 1076 15 CASH FLOW STATEMENTS (IAS 7)

50 Standard 41 1078 20 51 Fallen 42 1081 20 ANALYSIS AND INTERPRETATION

52 Witton Way 44 1083 20 53 Rapido 45 1085 18 54 Not-for-profit 46 1088 10 EARNINGS PER SHARE (IAS 33)

55 Earnings per share 47 1089 14


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Question 5 NETTE

Nette, a public limited company, manufactures mining equipment and extracts natural gas. The directors are uncertain about the role of the IASB’s “Conceptual Framework for Financial Reporting” (the Framework) in corporate reporting. Their view is that accounting is based on the transactions carried out by the company and these transactions are allocated to the company’s accounting period by using the matching and prudence concepts. The argument put forward by the directors is that the Framework does not take into account the business and legal constraints within which companies operate.

Required:

Explain the importance of the “Framework” to the reporting of corporate performance and whether it takes into account the business and legal constraints placed upon companies.

(6 marks)

Question 6 LIMITATIONS

Financial statements identify position, performance and changes in position over a period of time. The main statements include Statement of Financial Position, Statement of Comprehensive Income and Statement of Cash Flows. These statements are intended to show how well a company has performed and give an indication of the value of the business. However, many accountants feel that the financial statements are limited in their value to the users of financial statements.

Required:

Identify and discuss the limitations of financial statements. (8 marks)

Question 7 “THE FRAMEWORK”

(a) State the main purpose of the Conceptual Framework for Financial Reporting (“The Framework”) adopted by the International Accounting Standards Board (IASB). (4 marks)

(b) Explain the status of “The Framework”. (2 marks)

(c) State the underlying assumption of financial statements identified by The Framework. (2 marks)

(8 marks)

Question 8 REGULATORY FRAMEWORK

Required:

Briefly explain what a regulatory framework is and discuss the reasons why there is a need for a regulatory framework in financial reporting.

(5 marks)

George

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George

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©2012 DeVry/Becker Educational Development Corp. All rights reserved. 11

Question 16 STOAT

The directors of Stoat, a limited liability company, are reviewing the company’s draft financial statements for the year ended 30 June 2012.

Two matters under discussion are depreciation and non-current asset valuation – several directors are of the opinion that the company’s depreciation methods and rates are unsatisfactory, and that the statement of financial position values of some of the non-current assets are unrealistic.

Required:

Draft a memorandum for the directors dealing with the following matters:

(a) The purpose of depreciation and the factors affecting the assessment of useful life according to IAS 16 “Property, Plant and Equipment”. (7 marks)

(b) Three items of evidence obtainable from inside or outside the company, to check whether the company’s depreciation rates are in fact likely to be too low. (3 marks)

(c) The disclosures, if any, which would be required in the financial statements if the company decided to change its depreciation methods. (4 marks)

(d) The requirements of IAS 16 “Property, Plant and Equipment” regarding revaluation of non-current assets. (6 marks)

(20 marks)

Question 17 SUBSTANCE OVER FORM

“The accounting treatment and disclosure of the vast majority of transactions will remain the same whether they are accounted for on the basis of ‘substance’ or ‘form’. However, some transactions will have a commercial effect not fully indicated by their legal form, and where this is the case, it will not be sufficient to account for them merely by recording that form.”

Required:

Discuss the proposal that accounts should always reflect the commercial substance of transactions. (12 marks) Question 18 HUGHES AND CUSTOM CARS

(a) On 10 December 2011, Hughes sold inventory with a production cost of $30 million to the Wodwo Bank for $36 million cash. Hughes has a call option (an option to repurchase) on the goods exercisable on 10 January 2012 at a price of $37.8 million. The Wodwo Bank has a put option (an option to resell to the seller) exercisable on 10 February 2012 at a price of $39.7 million.

Required:

Discuss how the transaction should be accounted for in the accounts of Hughes at 31 December 2011. (4 marks)

George

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George

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Question 22 SNOW

On 1 January 2011, Snow entered into the following finance lease agreements: (a) Snowplough To lease a snowplough for 3 years from Ice. The machine had cost Ice $35,000. A deposit of $2,000 was payable on 1 January 2011 followed by 6 half yearly instalments of

$6,500 payable in arrears, commencing on 30 June 2011. Finance charges are to be allocated on a sum of digits basis.

(b) Snow machine To lease a snow machine for 5 years from Slush. The snow machine cost Slush $150,000 and

is estimated to have a useful life of 5 years. Snow has agreed to make 5 annual instalments of $35,000, payable in advance, commencing

on 1 January 2011. The interest rate implicit in the lease is 8.36%. Required:

Show the relevant extracts from the accounts of Snow for year ended 31 December 2011. (15 marks) Question 23 INTELLECTUAL INDIVIDUALS

Intellectual Individuals is a company involved in a wide range of activities. At 31 December 2011 it provided you with details of the following projects: Project Rico

This is the idea of the company’s flamboyant chairman, Bobby Bobov. The aim is to try and convert lead into gold. During the year expenditure of $332,000 has been incurred on trying to set up such a process, with no success to date. Project Mounsey

The company has for the last few years been trying to devise a miniature radio transmitter for golf balls. This will enable golfers to locate their balls when they are mis-hit into the rough. The company had no success until the end of 2008, when a breakthrough was made, although costs of $120,000 had been incurred to that date. The product went on sale at the end of 2010 after a further $200,000 expenditure had been incurred on cosmetic changes. The advertising budget is $100,000 a year for the three years commencing 1 January 2011. The product has achieved spectacular sales and profits. The company anticipates sales continuing for between five and fifteen more years from the end of the current year.

George

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Question 36 CONSOLIDATIONS

(a) Statements of financial position at 31 December 2010

P S $ $ Investment in S 65,000 – Sundry net assets 115,000 55,000 ———– ——— 180,000 55,000 ———– ——— Ordinary share capital ($1 shares) 140,000 30,000 Retained earnings 40,000 25,000 ———– ——— 180,000 55,000 ———– ——— P acquired the whole of the issued share capital of S for $65,000 on 31 December 2010. Required:

Prepare the consolidated statement of financial position at 31 December 2010. (3 marks)

(b) Statements of financial position at 31 December 2011

P S $ $ Investment in S 65,000 – Sundry net assets 129,000 62,000 ———– ——— 194,000 62,000 ———– ——— Ordinary share capital ($1 shares) 140,000 30,000 Retained earnings 54,000 32,000 ———– ——— 194,000 62,000 ———– ——— Same facts as in part (a) above.

Goodwill has been impaired by $4,000 since acquisition.

Required:

Prepare the consolidated statement of financial position at 31 December 2011, (4 marks)



(c) P acquired 80% of ordinary share capital of S for $52,000 on 31 December 2010

Non-controlling interest is valued at their proportionate share of the subsidiary’s identifiable net assets; it is not credited with its share of goodwill.

P S $ $ Investment in S 52,000 – Sundry net assets 115,000 55,000 ———– ——— 167,000 55,000 ———– ——— Ordinary share capital ($1 shares) 127,000 30,000 Retained earnings 40,000 25,000 ———– ——— 167,000 55,000 ———– ——— Required:

Prepare the consolidated statement of financial position at 31 December 2010. (4 marks)

(d) Statements of financial position at 31 December 2011

P S $ $ Investment in S 52,000 – Sundry net assets 129,000 62,000 ———– ——— 181,000 62,000 ———– ——— Ordinary share capital ($1 shares) 127,000 30,000 Retained earnings 54,000 32,000 ———– ——— 181,000 62,000 ———– ——— Same facts as in part (c) above regarding the acquisition..

Goodwill has been impaired by $3,200 since acquisition.

Required:

(i) Prepare the consolidated statement of financial position at 31 December 2011. (4 marks)

(ii) The market price of a share in S on the date of acquisition was $2.15.

Re-calculate consolidated retained earnings, goodwill and non-controlling interest if P had chosen to value non-controlling interest on acquisition at fair value. (4 marks)

(19 marks)



Financial statements are drawn up at a specified point in time. A cut-off therefore has to be established to be able to prepare the financial statements. The point of cut-off could be in the middle of a very detailed or complex transaction or related transactions which again the financial statements may not be able to reflect fully.

From the end of the reporting period to when the statements are authorised for publication is usually a minimum of three months. A lot can happen in that three-month period, so the statements become out of date very quickly.

Many transactions take place between related parties. Although certain disclosures should be made regarding related party transactions it is still difficult for the financial statements to fully reflect the impact of these transactions.

Answer 7 ”THE FRAMEWORK”

(a) Main purpose

To assist the Board of IASCF in developing future International Financial Reporting Standards (IFRSs) and reviewing existing ones

To promote harmonisation of regulations by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs

To assist national standard-setting bodies in developing national standards

To assist preparers of accounts in applying IFRSs and in dealing with topics that have yet to be covered by an IFRS.

To assist auditors in forming an opinion on whether the accounts comply with IFRS.

To assist users of financial statements in the interpretation of information contained in those statements.

To provide those who are interested in the work of the IASB with information about its approach to the formulation of standards.

(b) Status

The Framework is not an IFRS hence it does not define standards.

Nothing in the framework overrides any specific IFRS.

In a limited number of cases where a conflict between the framework and an IFRS arises, the IFRS prevails.

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(c) Underlying assumption

Going concern

Financial statements are normally prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future.

Therefore is assumed that the enterprise has neither intention nor need to liquidate or curtail materially the scale of operations.

If such an intention or need exist, the financial statements may have to be prepared on a different basis (and the basis used is disclosed).

Answer 8 REGULATORY FRAMEWORK

A regulatory framework has been defined as “a system of regulations and the means to enforce them, usually established by a governing body to regulate a specific activity.” Without such a framework the system would fail to function properly and ad hoc rules and regulations would emerge which individuals and bodies would not be able to understand fully. There would be no direction or guidelines governing the content, or rules, that should be followed and parties would devise their own rules.

A regulatory framework is needed for financial reporting to ensure that all relevant parties understand exactly what should be reported by the entity, and how. The framework may be a set of rules and regulations detailing exactly what and to whom an entity should report or it may be a less formal framework providing guidance for reporting.

Company law and/or accounting standards can be issued to create Generally Accepted Accounting Practice (GAAP) for reporting entities to follow when preparing their financial statements. There is a need for some form of regulatory framework in financial reporting to ensure there is consistency in accounting treatments so that comparisons can be made between financial statements (e.g. year-on-year and between companies).

Under IFRS the IASB has issued the “Conceptual Framework for Financial Reporting”. This is a conceptual framework which is used by the IASB to assist relevant parties in the needs and requirements of users of financial statements. It is used in conjunction with International Financial Reporting Standards to form a set of principles with which reporting entities should comply when preparing and presenting their financial statements. The conceptual framework is not in itself a regulatory framework as there is no formal means of enforcing the issued standards, and as they are principles-based they are open to interpretation.

Other GAAPs have formed regulatory frameworks in order to regulate the financial reporting activities of their members. UK GAAP is formed of company law issued by the UK government and accounting standards issued by the Accounting Standards Board. The ASB has a body within it, the Financial Reporting Review Panel, whose function is to “police” the financial statements issued by UK companies. It aims to ensure that published financial statements are prepared in conformity with the UK regulatory framework.

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(c) Disclosures if depreciation methods are changed

The effect, if material, in the year of change;

The reason for the change.

(d) Revaluation of non-current assets

IAS 16 “Property, Plant and Equipment” allows the revaluation of non-current assets other than goodwill if a policy of revaluation is adopted.

IAS 16 requires that if any asset of a class is revalued, all assets of that class must be revalued. Once revaluation is adopted, values must be kept up to date.

Any change in value will be recognised in equity as a revaluation surplus, after being included in other comprehensive income. Any surplus, or loss, cannot be reclassified when the asset is disposed, although a reserve transfer can be made from the revaluation surplus to retained earnings.

There are extensive disclosure requirements, including the basis of valuation, whether an independent valuer was involved and the date and amounts of valuations.

Answer 17 SUBSTANCE OVER FORM

Preparing accounts on a substance over form basis means that they should reflect the commercial effect of transactions rather than their legal form. The arguments for and against this treatment are discussed below. Framework The IASB’s Conceptual Framework for Financial Reporting notes that financial statements are frequently described as showing a “true and fair view” (as in the UK), or as “presenting fairly” the financial position (as in the US). Many other countries adopt similar requirements for financial statements, particularly in Europe where the requirements of directives state that all member states’ financial statements should give a true and fair view. This is, for example, translated as “donner une image fidele” in France. Some countries interpret this as meaning in accordance with their own legislation, particularly in Germany, but generally speaking, legislatures and accounting standard setters increasingly recognise an overriding notion of truth and fairness. One of the fundamental qualitative characteristics required by the Framework is that of “Faithful Representation”. To faithfully represent a transaction the entity must reflect the economic reality (substance) rather than its legal form, if there is a difference. It gives the example of an entity disposing of an asset in such a way that the documentation purports to pass legal ownership to a third party, but where agreements exist to ensure that the entity continues to enjoy the future economic benefits embodied in the assets. In such circumstances the reporting of a sale would not represent faithfully the transaction entered into.

George

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Application of the principle IAS 17 Leases requires that finance leases be capitalised in the statement of financial position where certain conditions are met. In such cases the legal form of the transaction is that the lessor retains the legal title to the assets. The economic substance of the transaction however is that the lessee is the true “owner” of the asset as the lease transfers substantially all the risks and rewards incident to the ownership of the asset. The lessee therefore includes it in its financial statements. Not to do so would distort gearing ratios. IFRS 10 Consolidated Financial Statements requires that group accounts be prepared to show information about the group as that of a single entity, without regard for the legal boundaries of the separate legal entities. IAS 32 Financial Instruments: Presentation recognises that some financial instruments take the legal form of equity, but are liabilities in substances and requires that classification of an instrument is made on the basis of an assessment of its substance when it is first recognised. IAS 1 Presentation of Financial Statements states the importance of prudence, substance over form and materiality in the selection and application of accounting policies and the preparation of financial statements. Other areas where the principle applies include the factoring of receivables and the sale and repurchase of inventories. Factored debts are “sold” to a third party in exchange for a proportion of the carrying amount of the debt. Such agreements vary considerably in their nature and some leave the entity with most of the risks associated with the collection of the receivables. In such circumstances it may be appropriate to keep the receivables on the face of the statement of financial position and recognise the cash received from the factor as a liability, rather than accounting for the transaction as a sale of the receivable. Consistency, comparability and subjectivity Another argument put forward against the use of substance over form is that it introduces yet more subjectivity into accounts (the judgment of the true substance). It is argued that if transactions were accounted for on a legal basis, there would be greater certainty and objectivity in the preparation of accounts and hence more comparability. It may be true that the certainty of legal form would increase, but this does not mean the comparability. In fact most accountants would say that it is the substance over form principle which is designed to increase comparability by making transactions of a similar nature treated in similar ways. It may introduce another element of subjectivity, but accounts preparation inevitably does involve many judgmental decisions. It is these judgments that make accounts fair as well as true, and hence duly comparable. Accounting or extra disclosure A further argument against the proposal is that it may not be essential to account on the basis of substance over form, but merely to provide additional disclosure. The argument here rests on whether any amount of disclosure can compensate for a transaction which is fundamentally misleadingly treated in the accounts. If additional disclosure is not so much addition as contradictory to the accounting treatment, then surely the result is confusing the user and hence still misleading and not true and fair.



Conclusion Broadly speaking, the Anglo-Saxon world regards economic substance as being more important than legal form. This is at least in part due to the historical separation of fiscal and financial accounting. Countries with civil, as opposed to common law legal traditions place more emphasis on the fiscal correctness of financial statements. With increasing globalisation of capital markets the trend, at the moment seems to be away from legal form, and towards economic substance. However, the inherent uncertainties in the notion of economic substance mean that there is an ever increasing volume of accounting standards on what exactly is meant by “substance” as it is very easily abused. Answer 18 HUGHES AND CUSTOM CARS

(a) Hughes The Conceptual Framework for Financial Reporting states that financial statements should

show the economic substance of transactions over their legal form. Hughes has entered into a sale and repurchase agreement with the Wodwo Bank. Hughes

has received $36 million now. If Hughes exercises its call option after one month, it will repurchase the inventory at a premium of $1.8 million which represents a finance charge of 5% for the month. If the Wodwo Bank exercises its put option after two months, Hughes will repurchase the inventory at a premium of $3.7 million which represents a finance charge of 5% for each of the two months.

It is highly likely that one or other of the options will be exercised. Taking the transactions

as a whole, the commercial substance is that of a short-term loan secured on the inventory. The inventory should remain in inventory at $30 million at year end. $36 million should

be shown in current liabilities. The interest payable to 31 December 2011 of $1.2 million ($1.8m × 21/31) should be charged to profit or loss and added to the liability in the statement of financial position.

(b) Custom Cars Unless Sigma’s cash contribution is very substantial (say 80% as opposed to 20% of the

expenditure incurred by Custom Cars), there should be no doubt that Custom Cars owns the extension (and has the risks and rewards of ownership).

The fittings supplied free of charge by Sigma could be excluded from the statement of

financial position on the grounds that they are not owned by Custom Cars. Also their economic benefit is primarily to Sigma in promoting Sigma’s product.

Answer 19 PERSEUS

(a) Adjustments to be made

(i) For inventory

The opening balance of retained earnings should be adjusted in the statement of changes in equity.

Comparative information should be restated, unless it is impracticable to do so

George

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Answer 22 SNOW

Extracts from the financial statements of Snow for year ended 31 December 2011 Profit or loss Profit is stated after charging $ Finance charges $(1,714 + 1,429 + 9,614) (W1 and 2) 12,757 Depreciation 41,667 Statement of financial position Tangible non-current assets held under finance leases Plant and machinery Cost $ At 1 January 2011 – Additions $(35,000 + 150,000) 185,000 ———— At 31 December 2011 185,000 ———— Accumulated depreciation At 1 January 2011 –

Charge for year $

+

5000,150

3000,35 41,667

——— At 31 December 2011 41,667 ——— Carrying amount At 31 December 2011 143,333 ——— At 1 January 2011 – ——— Finance lease payables

Amounts payable: $ Within one to five years 166,000 ($6,500 × 4 + $35,000 × 4) Less future finance charges 18,243 ($2,857 + $15,386 *) ——— 147,757 ——— * $35,000 × 5 = $175,000 – $150,000 – $9,614 = $15,386 Accruals $ Finance leases 46,000 ($11,000 + $35,000)



WORKINGS (1) Snowplough (a) Calculation of finance charge $ Deposit 2,000 MLP (6 × $6,500) 39,000 Fair value of asset (35,000) ——— Finance charge 6,000 ——— (b) Allocation of finance charge Period Digits Finance ended charge $

30 Jun 2011 621

6 × $6,000 1,714

31 Dec 2011 521

5 × $6,000 1,429

30 Jun 2012 421

4 × $6,000 1,143

31 Dec 2012 321

3 × $6,000 857

30 Jun 2013 221

2 × $6,000 571

31 Dec 2013 121

1 × $6,000 286

—— ——— 21 6,000 —— ———

2

1)n(n + = 2

)7(6 = 21

(c) Period Capital Interest Amount Repayment Capital ended O/S at start O/S at end O/S at end $ $ $ $ $ 30 Jun 2011 33,000 1,714 34,714 (6,500) 28,214 31 Dec 2011 28,214 1,429 29,643 (6,500) 23,143 30 Jun 2012 23,143 1,143 24,286 (6,500) 17,786 31 Dec 2012 17,786 857 18,643 (6,500) 12,143



$23,143

Capital $23,143

Interest –

During 2011 $11,000

End 2011 $12,143β

(2) Snow machine Period Amount Repayment Capital Interest Amount Ended O/s at start O/S at start at 8.36% O/S at end $ $ $ $ $ 31 Dec 2011 150,000 (35,000) 115,000 9,614 124,614 31 Dec 2012 124,614 (35,000) 89,614 7,492 97,106

$124,614

Capital $115,000

Interest $9,614

During 2011 $25,386

End 2011 $89,614 β

Answer 23 INTELLECTUAL INDIVIDUALS

(a) Memorandum To Bobby Bobov, Chairman, Intellectual Individuals From Amelia Bobouka Date 22 February 2012 Subject Accounting treatment of research projects I would advise you of the means by which the accounting department is dealing with

current research projects.

(i) Project Rico This research falls within the IAS 38 Intangible Assets definition of research as

being original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge. The work being performed is experimental in nature, and to date there are not indications that it will be successful. It would thus be imprudent to capitalise such expenditure, and accordingly it should be written off in the year incurred.

George

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WORKINGS (1) Standard deferred tax working C/f Total $

Tangible assets (W2) 715,000 Operating lease (W3) 88,000 Deferred development expenditure 80,000 ———— 883,000 ————

Deferred tax @ 33% 291,390 ———— (2) Provision at 30 June 2012 “Full” basis (800,000 – 260,000 + 175,000) = $715,000 (3) Operating lease $ At 30 June 2012 Profit or loss charge to date 72,000 Rentals paid to date 160,000 ———— Temporary difference 88,000 ———— Answer 36 CONSOLIDATIONS

(a) Consolidated statement of financial position at 31 December 2010

$ Goodwill 10,000 Sundry net assets (115,000 + 55,000) 170,000 ———— 180,000 ———— Equity capital 140,000 Retained earnings 40,000 ———— 180,000 ———— (1) Net assets S Reporting Acquisition Post- date acquisition $ $ $ Share capital 30,000 30,000 – Retained earnings 25,000 25,000 – ——— ———

55,000 55,000 ——— ———

George

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(2) Goodwill $ Cost of shares 65,000 Net assets acquired S (100% × 55,000) (W1) (55,000) ———

10,000 ———

(b) Consolidated statement of financial position at 31 December 2011

$ Goodwill (10,000 – 4,000) 6,000 Sundry net assets (129,000 + 62,000) 191,000 ———— 197,000 ———— Equity capital 140,000 Retained earnings 57,000 ———— 197,000 ———— (1) Net assets S Reporting Acquisition Post- date acquisition $ $ $ Share capital 30,000 30,000 – Retained earnings 32,000 25,000 7,000 ——— ———

62,000 55,000 ——— ———

(2) Goodwill S $ Cost of shares 65,000 Net assets acquired S (100% × 55,000) (W1) (55,000) ———

10,000 ———

(3) Retained earnings $ P 54,000 S (100% × 7,000 (W2)) 7,000 Goodwill impaired (4,000) ———

57,000 ———



(c) Consolidated statement of financial position at 31 December 2010

$ Goodwill 8,000 Sundry net assets (115,000 + 55,000) 170,000 ———— 178,000 ———— Equity capital 127,000 Retained earnings 40,000 ———— 167,000 Non-controlling interest 11,000 ———— 178,000 ———— (1) Net assets S Reporting Acquisition Post- date acquisition $ $ $ Share capital 30,000 30,000 – Retained earnings 25,000 25,000 - ——— ———

55,000 55,000 ——— ———

(2) Goodwill S $ Cost of shares 52,000 Net assets acquired S (80% × 55,000) (W1) (44,000) ———

8,000 ———

(3) Non-controlling interest $ S (20% × 55,000 (W1)) 11,000



(d) Consolidated statement of financial position at 31 December 2011

(i) Non-controlling interest valued at proportionate share of idenftifiable net assets $ Goodwill (8,000 – 3,200) 4,800 Sundry net assets (129,000 + 62,000) 191,000 ———— 195,800 ————

Equity capital 127,000 Retained earnings 56,400 ———— 183,400 Non-controlling interest 12,400 ———— 195,800 ———— (1) Net assets of S Reporting Acquisition Post- date acquisition $ $ $ Share capital 30,000 30,000 – Retained earnings 32,000 25,000 7,000 ——— ———

62,000 55,000 ——— ———

(2) Goodwill $ Cost of shares 52,000 Net assets acquired S (80% × 55,000) (W1) (44,000) ———

8,000 ———

(3) Non-controlling interest $ S (20% × 62,000 (W1)) 12,400 (4) Retained earnings $ P 54,000 S (80% × 7,000 (W2)) 5,600 Goodwill impaired (3,200) ———

56,400 ———



(ii) Non-controlling interest valued at fair value

(1) Goodwill $ Cost of shares 52,000 Fair value of non-controlling interest (6,000 × $2.15) 12,900 Net assets acquired (100%) (55,000) ———

9,900 ———

(2) Non-controlling interest $ Fair value on acquisition 12,900 Share of post-acquisition profits (7,000 × 20%) 1,400 Share of goodwill impairment (3,200 × 20%) (640) ———

13,660 ———

(4) Retained earnings $ P 54,000 S (80% × 7,000 (W2)) 5,600 Goodwill impaired (3,200 × 80%) (2,560) ———

57,040 ———

Answer 37 HONEY

Consolidated statement of financial position as at 30 June 2012

Assets $ Non-current assets Tangible assets (27,000 + 12,500) 39,500 Current assets (25,000 + 12,000) 37,000 ——— 76,500 ——— Equity and liabilities Shareholders’ equity Called up share capital 20,000 Share premium account 6,000 Retained earnings (9,000 + (⅔ × 14,000)) 18,333 ——— 44,333 Non-controlling interest (⅓ × 17,000) 5,667 ——— 50,000 Non-current liabilities 12,000 Current liabilities 14,500 ——— 76,500 ———

George

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