P2 Corporate Reporting Study Questions

STUDY QUESTION BANK CORPORATE REPORTING (INTERNATIONAL) (P2)
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Question 1 SUBSTANCE OVER FORM
The accounting profession attaches great importance to the principle of substance over form.
Required:
(a) Define the term substance over form. (1 mark)
(b) Apply the principle of substance over form to the following transactions, considering
each separately.
(i) Axe Inc has a year-end of 31 March. It has entered into a factoring
arrangement with Shotgun Factors Inc in respect of $22,000 of receivables
outstanding on 31 March 2009, whereby Axe received cash for 75% of the face
value of the debts on that date.
Axe will receive a further 24% in respect of debtors paying in April and 23%
for those paying in May, with the amount received diminishing at the rate of
1% per month thereafter. Shotgun Factors Inc has recourse to Axe for any bad
debts. (4 marks)
(ii) On 5 March 2009, Exe Inc sold goods to Megabank Inc for $18,000 cash and
agreed to repurchase the goods for $19,800 cash on 5 April 2009. Exe Inc also
has a year-end of 31 March. (4 marks)
(9 marks)
Question 2 TRANSACTIONS PURPOSE
Once a transactions commercial purpose has been established, it is necessary to decide whether the
transaction gives rise to new assets or liabilities, or changes the companys existing assets or liabilities.
Required:
(a) Explain briefly how an asset or liability may arise under the Framework for the
Preparation and Presentation of Financial Statements published by the IASB. (4 marks)
(b) Discuss the principles behind:
(i) the recognition of an asset or liability in an entitys statement of financial
position.
(ii) the derecognition of an asset.
(Students should utilise all relevant IASB pronouncements in answering this
question.) (7 marks)
(c) Mortgage Lend, a subsidiary of Lendco, has sold a portfolio of secured loans to Borrow.
Borrow has financed this purchase by issuing floating rate loan notes that are secured on all
the assets of Borrow. Borrow was set up for the purpose of this transaction and has a small
amount of equity share capital.
Discuss the criteria which would determine how the transaction would be treated in the
financial statements of the above companies. (9 marks)
(20 marks)
CORPORATE REPORTING (INTERNATIONAL) (P2) STUDY QUESTION BANK
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Question 3 THEORETICAL PRINCIPLES
The IASBs Framework for the Preparation and Presentation of Financial Statements are a set of
theoretical principles which are designed to influence the drafting of future accounting standards.
However it can be argued that accountancy research and accounting theory have no place in the
standard setting process and are of little practical relevance to the accountant. Such terms as agency
theory and positive accounting theory are meaningless to the practising accountant, and their
underlying principles will never have an impact upon accounting practice.
Required:
(a) Explain what you understand by the terms agency theory and positive accounting
theory, discussing whether these theoretical concepts can help explain why a company
chooses a particular accounting policy and why accounting standards change over time.
(13 marks)
(b) Discuss why accountancy research may appear to have little relevance to the practising
accountant. (5 marks)
(c) Discuss the advantages of the IASBs Framework and whether it is too theoretical for
use in the standard setting process. (7 marks)
(25 marks)
Question 4 CREATIVE ACCOUNTING
In producing the Framework for the preparation and presentation of financial statements
(Framework) the IASB has had to address the potential problem that the management of some
companies may choose to adopt inappropriate accounting policies. These could have the effect of
portraying an entitys financial position in a favourable manner. In some countries, this is referred to
as creative accounting. Included in the Framework, and a common feature of many recent
international accounting standards, is the application of the principal of substance over form.
Required:
(a) Describe in broad terms common ways in which management can manipulate financial
statements to indulge in creative accounting and why they would wish to do so.
(7 marks)
(b) Explain the principle of substance over form and how it limits the above practice; and
for each of the following areas of accounting describe an example of the application of
substance over form:
(i) group accounting;
(ii) financing non-current assets;
(iii) measurement and disclosure of current assets. (8 marks)

(15 marks)
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Question 5 CURRENT COST RATIOS
It has been stated that: Current cost accounts allow for the impact of specific price changes on the net
operating assets and thus the operating capability of the business. The same tools of analysis as those
applied to historical cost accounts are generally appropriate. The ratios derived from current cost
accounts will often differ substantially from those revealed in historical cost accounts but should be
more realistic indicators when assessing an entity or making comparisons between entities.
Required:
(a) Explain, with reasons, whether the value of the following ratios might differ if
calculated using current cost accounts rather than the historical cost accounts.
(i) Return on capital employed (ROCE)
(ii) Inventory turnover ratio (utilising the year end inventory value)
(iii) Receivables turnover ratio
(iv) Gearing ratio (in the statement of financial position) (8 marks)

(b) Explain the principal limitations of the specific historical cost ratios set out in part (a)
when utilising them for the purpose of inter-firm comparison. (11 marks)
(c) Briefly discuss whether you feel that current cost based ratios are more realistic
indicators of a companys performance than those ratios based upon historical cost
accounts. (6 marks)
(25 marks)
Question 6 MESON
Meson is a recently incorporated company. Its business is the development of standard computer
software packages, the sale or licensing to use of standard or customised standard software packages
and the design, development and maintenance of bespoke software to order. Payment by customers is
usually in stages over the term of the design-development work. More recently, Meson has commenced
the retailing of computer hardware.
Meson has also developed a prototype retail shop which will aim to sell computer time (on PCs) -
customers will be able to visit the shop and use either their own or Mesons software to process data,
etc. It is Mesons aim to establish a nation-wide chain of such shops by licensing interested
entrepreneurs to use the concept and benefit from Mesons nation-wide advertising campaign. Meson
will supply, in addition to know how and advertising, administrative back up, software and hardware.
Meson is considering alternative methods of charging the independent proprietors of shops, including:
(a) an up front license fee followed by regular fees based on turnover of the shops
(b) no up front payment but regular fees based on a larger percentage of turnover of the shops.
Software and hardware supplied by Meson will be charged on delivery at normal selling prices.
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Required:
(a) Explain what is meant by revenue recognition. (9 marks)
(b) Prepare a memorandum advising the directors of Meson as to the considerations to be
taken into account in determining a policy for accounting for revenue from:
(i) the design and sale of software and the retailing of hardware; (8 marks)
(ii) the proposed retail shop licensing operation. (8 marks)
(25 marks)
Question 7 REVENUE RECOGNITION
The timing of revenue (income) recognition has been long an area of debate and inconsistency in
accounting. The operating cycle of an entity may involve the following stages:

obtaining an order for goods prior to manufacture;
acquisition of goods prior to manufacture;
production of goods;
obtaining an order for goods in inventory;
delivery of goods;
collection of cash (re: credit sales);
provision of after sales service or warranties.
In many countries the critical event approach has traditionally been used to determine the timing of
income recognition. The IASB in its Framework for the Preparation and Presentation of Financial
Statements (Framework) identifies elements of Financial Statements. It uses these to determine
when income or expenses occur, these principals also form the basis of revenue recognition in IAS 18
Revenue.
Required:
(a) In relation to each of the above stages in the operating cycle discuss, giving practical
examples where possible, the circumstances in which the critical event may be deemed
to have occurred at that stage. (12 marks)
(b) Discuss the criteria used in the Framework to determine when income or expenses arise,
and how they should be reported. (5 marks)
(c) Telecast Industries, a public listed company, is preparing its accounts for the year ended 30
September 2008. In May 2008 it bought the rights to a film called Wind of Change. It
paid a fixed fee and will not incur any further significant costs or commissions. It has entered
into the following contracts with:
(i) Warmer Cinemas
This is a large company with a chain of cinemas throughout the world. Warmer
Cinemas has negotiated the right to screen the film during the period from 1 July
2008 to 31 December 2008 in as many of its cinemas and as frequently as it
chooses. Telecast Industries will be paid 15% of gross box office receipts.
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(ii) Big Screen
This is a small company operating a single cinema. Under the terms of the contract
it may screen the film twice a day for the same period as the above contract. It has
paid a fixed fee of $10,000.
(iii) Global Satellite
This is a satellite television company that broadcasts to South East Asia. It paid
$4million in August 2008 for the right to screen the film 10 times at intervals of not
less than one month apart during the period from 1 January 2009 to 31 December
2009.
Required:
Applying the recommendations in the Framework and IAS 18 Revenue describe how
Telecast Industries should treat the income from each of the above contracts in the
accounting year ended 30 September 2008. (8 marks)

Note: You are not required to discuss how the cost of the film should be expensed.
(25 marks)
Question 8 MELD
Draft accounts for Meld, a quoted company, for the year ended 30 June 2009 include the following
amounts.
$
Revenue 472,800
Cost of sales and expenses (including interest payable of $15,000) (376,800)

Profit before tax 96,000
Tax (28,800)
Dividends paid (21,600)

45,600

Additional information

(1) Meld acquired an unincorporated business during the year for $12,000. The fair
value of separable net assets acquired was $9,120 and goodwill to the extent of
$576 is to be written off against profits for the year. Revenue and operating
expenses (included in the figures above) for this business since acquisition were
$4,800 and $3,600 respectively.
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(2) The company has been following local GAAP until this year when it gained a
quotation on the London Stock Exchange. They have decided to prepare accounts
according to IFRSs for the purposes of satisfying their reporting obligations under
the listing agreement. In light of differences between the rules in local GAAP and
those in IAS 38 the directors have decided to change the companys accounting
policy for research costs from one of capitalisation and amortisation to immediate
write-off of all expenditure as incurred. At present, research costs are included in
the draft figures as follows.
Cost Amortisation
$ $
At 1 July 2008 34,560 20,160
Costs incurred 3,100
Amortisation charged 4,800

At 30 June 2009 37,660 24,960

(3) In July 2008, the company revalued non-current assets which had originally cost
$19,200 to $28,800. Accumulated depreciation at the date of revaluation was
$7,200. At the date of revaluation, the remaining useful economic life of these
assets was five years and depreciation has been charged on the revalued amount for
the year.
(4) At 1 July 2008, capital and reserves comprised
$
Ordinary share capital 240,000
Revaluation surplus (relating to land) 48,000
Retained earnings 168,000

456,000

Required:
Prepare the following for the year ended 30 June 2009, insofar as the information given permits.
(i) Profit or loss for year.
(ii) Statement of other comprehensive income
(iii) Statement of changes in equity
Note: Ignore any tax issues, other than that given in the question.
(15 marks)
Question 9 KEY CHANGES
(a) Explain how the profit or loss on disposal of an asset is calculated and why this method
is used (5 marks)
(b) Explain the criteria which determine
(i) whether an item is recognised in the financial statements
(ii) whether an item once recognised, appears in the profit or loss, other
comprehensive income or the statement of changes in equity. (8 marks)
(13 marks)
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Question 10 FAM
Fam had the following tangible non-current assets at 31 December 2007:
Cost Depreciation NBV
$000 $000 $000
Land 500 500
Buildings 400 80 320
Plant and machinery 1,613 458 1,155
Fixtures and fittings 390 140 250
Assets under construction 91 91
_____ _____ _____
2,994 678 2,316
_____ _____ _____
In the year ended 31 December 2008 the following transactions occur:
(1) Further costs of $53,000 are incurred on buildings being constructed by the company. A
building costing $100,000 is completed during the year.
(2) A deposit of $20,000 is paid for a new computer system which is undelivered at the year end.
(3) Additions to plant are $154,000.
(4) Additions to fixtures, excluding the deposit on the new computer system, are $40,000.
(5) The following assets are sold.
Cost Depreciation Proceeds
brought forward
$000 $000 $000
Plant 277 195 86
Fixtures 41 31 2
(6) Land and buildings were revalued at 1 January 2008 to $1,500,000, of which land is worth
$900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on
the basis of existing use value on the open market.
(7) The useful economic life of the buildings is unchanged. The buildings were purchased ten
years before the revaluation.
(8) Depreciation is provided on all assets in use at the year end at the following rates.
Buildings 2% per annum straight line
Plant 20% per annum straight line
Fixtures 25% per annum reducing balance
Required:
Show the disclosure under IAS 16 Property, Plant and Equipment that is required in the notes
to the published accounts for the year ended 31 December 2008.
(14 marks)
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Question 11 SPONGER
Sponger Inc has been having financial difficulties recently due to the economic climate in its
industry sector. However, its financial director Mr Philip Tislid has discovered that there are a
number of schemes by which he can obtain government financial assistance. Details of the
assistance obtained are as follows.

(a) Sponger Inc has received three grants of $10,000 each in the current year relating to
ongoing research and development projects. One grant relates to the Cuckoo project
which involves research into the effect of various chemicals on the pitch of the human
voice. No constructive conclusions have been reached yet.

The second relates to the development of a new type of hairspray which is expected to be
extremely popular. Commercial production will commence in 2010 and large profits are
foreseen. The third relates to the purchase of high powered microscopes.

(b) In 2007 Sponger Incs premises were entirely isolated from the outside world for four
months due to the renovation of roads by the local council. All production was lost in that
period. Mr Tislid has been assured by the councils officers, that a $25,000 compensation
grant will be paid on submission of the relevant triplicate form. Mr Tislid had not yet
filled in the form by 31 December 2008.

(c) Sponger Inc entered into an agreement with the government that, in exchange for a grant
of $60,000, it will provide vocational experience tours around its factory, for twelve
young criminals per month over a five year period starting on 1 January 2008. The grant
was to be paid on the date Sponger Inc purchased a minibus (useful life three years) to take
the inmates to the factory and back. The bus was bought and the grant received on 1
January 2008.

The grant becomes repayable on a pro rata basis for every monthly visit not fulfilled.
During 2008 five visits did not take place due to the pressure of work and this pattern is
expected to be repeated over the next four years.

No repayments have yet been made.

Mr Tislid is totally confused as to how to account for these grants.

Required:
Write a memorandum to Mr Tislid explaining to him how he should account for the above
grants in the accounts for the year ended 31 December 2008.
(12 marks)

Question 12 MOORE
Moore, an investment property company, has been constructing a new building for the last 18 months.
At 31 December 2007, the cinema was nearing completion, and the costs incurred to date were:
$m
Materials, labour and sub-contractors 14.8
Other directly attributable overheads 2.5
Interest on borrowings 1.3

The building is deemed to be a qualifying asset and therefore any borrowing costs are capitalised as
part of the cost of the building. The amount of borrowings outstanding at 31 December 2007 in respect
of this project is $18m, and the interest rate is 9.5%pa.
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During the three months to 31 March 2008 the project was completed, with the following additional
costs incurred:
$m
Materials, labour and sub-contractors $1.7
Other overhead $0.3
The company were not able to determine the fair value of the property reliably during the construction
period and so used the allowance within IAS 40 to value at cost until construction was complete.
On 31 March 2008, the company obtained a professional appraisal of the cinemas fair value, and the
valuer concluded that it was worth $24m. The fee for his appraisal was $0.1m, and has not been
included in the above figures for costs incurred during the 3 months.
The cinema was taken by a national multiplex chain on an operating lease as at 1 April 2008, and was
immediately welcoming capacity crowds. The lease agreement allows for annual revisions, and thus it
was clear that it was worth even more than the valuation at 31 March 2008. Following a complete
valuation of the companys investment properties at 31 December 2008, the fair value of the cinema
was established at $28m.
Required:
Set out the accounting entries in respect of the cinema complex for the year ended 31 December
2008.
(10 marks)
Question 13 ARROCHAR INC
Arrochar Inc is about to undertake a sale and leaseback arrangement on 1 January 2008 in respect of an
item of plant and machinery which results in a finance lease.
The net book value of the plant and machinery at 31 December 2007 was $240,000 which compared
with a fair value of $280,000. The original cost of the plant was $390,000 and the remaining useful life
at 1 January 2008 estimated at five years.
The plant can be sold for $310,000 and leased back for five years with annual rentals of $80,000
payable in arrears.
Required:
Produce the relevant notes to the financial statements for the year ended 31 December 2008
under the various alternatives open to the company under IAS 17.
(12 marks)
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Question 14 HEYWOOD PLC
The problems of identifying and valuing intangible assets with a view to recognising them on the
statement of financial position has been an area of inconsistent practice that has led to great debate
within the accountancy profession. IAS 38 Intangible Assets was issued in order to try and eliminate
these inconsistent practices.
Required:
(a) Discuss the recognition and initial measurement criteria for intangible assets contained
in IAS 38 Intangible assets. (9 marks)
(b) On 1 July 2008 Heywood, a company listed on a recognised stock exchange, was finally
successful in acquiring the entire share capital of Fast Trak. The terms of the bid by
Heywood had been improved several times as rival bidders also made offers for Fast Trak.
The terms of the initial bid by Heywood were:
20 million $1 ordinary shares in Heywood. Each share had a stock market price of
$350 immediately prior to the bid;
a cash element of $15 million.
The final bid that was eventually accepted on 1 July 2008 by Fast Traks shareholders.
Heywood had improved the cash offer to $25million and included a redeemable loan note of
a further $25 million that will be redeemed on 30 June 2012. It carried no interest, but
market rates for this type of loan note were 13% per annum. There was no increase in the
number of shares offered but at the date of acceptance the price of Heywoods shares on the
stock market had risen to $400 each.
The present value of $1 receivable in a future period where interest rates are 13% can be
taken as:
at end of year three $070
at end of year four $060

The fair value of Fast Traks net assets, other than its intangible long-term assets, was
assessed by Heywood to be $64million. This value had not changed significantly throughout
the bidding process. The details of Fast Traks intangible assets acquired were:
(i) The brand name of Kleenwash a dish washing liquid. A rival brand name
thought to be of a similar reputation and value to Kleenwash had recently been
acquired for a disclosed figure of $12 million.
(ii) A Government licence to extract a radioactive ore from a mine for the next ten
years. The licence is difficult to value as there was no fee payable for it.
However, as Fast Trak is the only company that can mine the ore, the directors
of Heywood have estimated the licence to be worth $9 million. The mine itself
has been included as part of Fast Traks property, plant and equipment.
(iii) A fishing quota of 10,000 tonnes per annum in territorial waters. A specialist
company called Quotasales actively trades in these and other quotas. The price
per tonne of these fishing quotas at the date of acquisition was $1,600. The
quota is for an indefinite period of time, but in order to preserve fish stocks the
Government has the right to vary the weight of fish that may be caught under a
quota. The weights of quotas are reviewed annually.
(iv) The remainder of the long-term intangible assets is attributable to the goodwill
of Fast Trak.
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Required:
Calculate the purchase consideration and prepare an extract of the intangible assets of
Fast Trak that would be separately recognised in the consolidated financial statements
of Heywood on 1 July 2008. Your answer should include an explanation justifying your
treatment of each item. (8 marks)
(c) On the same date, but as a separate purchase to that of Fast Trak, Heywood acquired
Steamdays, a company that operates a scenic railway along the coast of a popular tourist area.
The summarised statement of financial position at fair values of Steamdays on 1 July 2008,
reflecting the terms of the acquisition was:
$000
Goodwill 200
Operating licence 1,200
Property train stations and land 300
Rail track and coaches 300
Steam engines (2) 1,000

Purchase consideration 3,000

The operating licence is for ten years. It has recently been renewed by the transport authority
and is stated at the cost of its renewal. The carrying values of the property and rail track and
coaches are based on their estimated replacement cost. The carrying value of the engines
closely equates to their fair value less any disposal costs.
On 1 August 2008 the boiler of one of the steam engines exploded, completely destroying the
whole engine. Fortunately no one was injured, but the engine was beyond repair. Due to its
age a replacement could not be obtained. Because of the reduced passenger capacity the
estimated value in use of the business after the accident was assessed at $2 million.
Passenger numbers after the accident were below expectations even after allowing for the
reduced capacity. A market research report concluded that tourists were not using the railway
because of the fear of a similar accident occurring to the remaining engine. In the light of this
the value in use of the business was re-assessed on 30 September 2008 at $18 million. On
this date Heywood received an offer of $900,000 in respect of the operating licence (it is
transferable).
Required:
Briefly describe the basis in IAS 36 Impairment of Assets for allocating impairment
losses; and show how each of the assets of Steamdays would be valued at 1 August 2008
and 30 September 2008 after recognising the impairment losses. (8 marks)
(25 marks)
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Question 15 DEFER
Your client, a limited liability company, wishes to defer expenditure on development activities where
possible and for as long as possible. The finance director has asked for your advice on what procedures
to set up in order to identify relevant expenditure and comply with best accounting practice.
Required:
Draft the contents of a letter to the finance director of the company which addresses his concerns.

(10 marks)
Question 16 STARSKY
It is a general application of the concept of prudence that the carrying value of an asset should not be
greater than the amount of cash that it will generate. IAS 36 Impairment of assets gives guidance on the
application of this principle in particular to non current assets. Under the rules in IAS 36 an asset must
be written down to its recoverable amount when this is less than its carrying value. The standard
ensures that impairment loss is measured and recognised on a consistent basis.
Required:
(a) Explain the need for IAS 36 Impairment of Assets. (4 marks)
(b) Define and explain the concept of recoverable amount contained within IAS 36 (4 marks)
(8 marks)
Question 17 GENPOWER
IAS 37 Provisions, Contingent Liabilities and Contingent Assets is concerned with the accounting
treatment of provisions and contingencies.
Required:
(a) (i) Explain the need for an accounting standard in respect of provisions. (5 marks)
(ii) Describe the principles in IAS 37 of accounting for provisions. Your answer
should refer to definitions and recognition and measurement criteria. (7 marks)

(b) Genpower is a company involved in the electricity generating industry. It operates some
nuclear power stations for which environmental clean-up costs can be a large item of
expenditure. The company operates in some countries where environmental costs have to be
incurred as they are written into the licensing agreement, and in other countries where they
are not a legal requirement. The details of a recent contract Genpower entered into are:
A new nuclear power station has been built at a cost of $200 million and was brought into
commission on 1 October 2007. The licence to produce electricity at this station is for 10
years. This is also the estimated economic life of the power station. The terms of the licence
require the power station to be demolished at the end of the licence. It also requires that the
spent nuclear fuel rods (a waste product) have to be buried deep in the ground and the area
sealed such that no contamination can be detected. Genpower will also have to pay for the
cost of cleaning up any contamination leaks that may occur from the water cooling system
that surrounds the fuel rods when they are in use.
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Genpower estimates that the cost of the demolition of the power station and the fuel rod
sealing operation will be$180 million in ten years time. The present value of these costs at
an appropriate discount rate is $120 million. From past experience there is a 30% chance of a
contaminating water leak occurring in any 12 month period. The cost of cleaning up a leak
varies between $20 million and $40 million depending on the severity of the contamination.
Extracts from the companys draft financial statements to 30 September 2008 relating to the
contract after applying the companys normal accounting policy for this type of power station
are:
Statement of comprehensive income charge: $ million
Non-current asset depreciation (power station)
10% $200 million 20
Provision for demolition and sealing costs
10% $180 million 18
Provision for cleaning up contamination due to water leak
(30% an average of $30 million) 9

47

Statement of financial position:
Tangible Non-current assets:
Power station at cost 200
Depreciation (20)

180

Non-current liabilities:
Provision for environmental costs ($18 + $9 million) 27

Note: no contamination from water leakage occurred in the year to 30 September 2008.
Genpower is concerned that its current policy does not comply with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets and has asked for your advice.
Required:
(i) Comment on the acceptability of Genpowers current accounting policy, and
redraft the extracts of the financial statements in line with the regulations of
IAS 37. (8 marks)
Note: your answer should ignore the unwinding of the discount to present value.
(ii) Assuming Genpower was operating the nuclear power station in a country that
does not legislate in respect of the above types of environmental costs;
Explain the effect this would have on your answer to (i) above. (5 marks)
Note: your answer should include a consideration of what Genpowers environmental policy
might be.
(25 marks)

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Question 18 HOOPER
Hooper is an incorporated entity. Hooper accounts for deferred taxation using the balance sheet liability
method in IAS 12 Income Taxes. A taxation rate of 20% was applicable to the year ended 30
September 2007, and as a result of recent legislation, the taxation rate for the year to 30 September
2008 has been increased to 30%. The following details are given
Year ended 30 September 2007 2008
$000 $000
Accounting profit 21,450 27,600
Add
Depreciation for accounting purposes 3,000 to be calculated
Donations 500 300
Amortisation of software costs 1,200 to be calculated

______
26,150
Depreciation for tax purposes (3,750) to be calculated

______
22,400

______
Tax expense at 20% 4,480 to be calculated
(see (b) (i))
Summary of non-current assets: Plant Software
Cost b/f 1 October 2007 16,000 4,500
Additions year to 30 September 2008 4,000 nil
Accumulated depreciation
b/f 1 October 2007 9,600 2,700
Charge for year to 30 September 2008 to be calculated to be calculated
Accumulated tax depreciation
b/f October 2007 9,250 see note (ii) below
Tax depreciation year to 30
September 2008 to be calculated to be calculated

Additional information:
(i) Plant is depreciated at 20% pa straight line for accounting purposes and 25% pa on a reducing
balance for tax purposes
(ii) The software development started in 2003 and was completed on 30 September 2005. During
the development period these costs were capitalised. Amortisation commenced on 1 October
2005 and was based on the sum-of-the-digits method over a 5 year life. Software costs are
allowed in full for tax purposes as they are incurred.
(iii) Donations are not an allowable tax deduction.
(iv) Hoopers forecasts indicate that future profits will arise that will attract tax liabilities.
15
Required:
(a) Calculate the current tax expense for the year to 30 September 2008
(b) Calculate the deferred tax liability or asset at 30 September 2007 and 2008 arising in
relation to the plant and software of Hooper.
Note: you are not required to consider the charge or credit to income in respect of
deferred tax.
(10 marks)
Question 19 KERENSKY
The following information relates to Kerensky.
(a) The company made an accounting profit of $900,000.
(b) Properties were revalued from $240,000 to $300,000 in the period.
(c) The remaining non-current assets comprised plant and machinery. On 1 July 2008 this
amounted to
$
Tax base 500,000
Net book value 1,300,000

During the year to 30 June 2009 depreciation amounted to $260,000 and tax allowable
depreciation of $175,000 was claimed.
(d) The company entered into a five year operating lease on 1 July 2008 for an item of plant with
a useful economic life of ten years. Kerensky has accounted for this lease in accordance with
IAS 17 Leases. The lease rentals (which have all been paid on time to date) were to be as
follows:
$
Initial payment (1 July 2008) 110,000
Rentals (30 June 2009, 2010, 2011, 2012, 2013) 50,000 per rental

(e) Kerensky now realises that a programme of research and development is essential to set itself
apart from its competition. In the current year (the first year in which capitalisation has
occurred) expenditure of $80,000 was capitalised in accordance with IAS 38 Intangible
Assets.
Required:
(a) Calculate the corporate income tax liability for the year ended 30
th
June 2009.
(b) Calculate the deferred tax balance that is required in the statement of financial position
as at 30
th
June 2009.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate
the deferred tax charge for the year ended 30
th
June 2009.
(d) Prepare the disclosure note which shows the compilation of the tax expense for the year
ended 30
th
June 2009.
16
(e) Prepare a note which reconciles accounting profit multiplied by the applicable tax rate
and the tax expense.
(f) Prepare a disclosure note showing the movement on deferred tax in respect of each type
of temporary difference.
Assume a corporation tax rate of 30%.
(20 marks)
Question 20 KASHMAR
Kashmar operates a garage business, selling, hiring and repairing motor vehicles. It has produced the
following trial balance for the year ended 31 August 2008.
$ $
Share capital ordinary shares of $1 each 300,000
Share premium 20,000
Revaluation surplus 50,000
Land and buildings (land element $100,000) 450,000
Workshop machinery 50,000 15,000
Fixtures and fittings 75,000 10,000
Hire fleet 63,000 34,000
Investments 20,000
Inventory at 1 September 2007
New vehicles 60,000
Used vehicles 80,000
Spare parts and consumables 22,000
Receivables 87,000
Recoverable tax 1,000
Payables 165,000
Cash in hand 2,000
Bank overdraft 20,000
Interim dividend paid 20,000
Sales tax 10,000
Bank loan 96,000
Dividends received (net) 16,000
Sales 1,735,000
Purchases and direct labour costs 1,186,000
Distribution costs 100,000
Administrative expenses 270,000
Interest payable (net) 10,000
Interest income (net) 5,000
Deferred taxation 10,000

2,496,000 2,496,000

17
Additional information

(1) Inventory at 31 August 2008 comprises
$
New vehicles 80,000
Used vehicles 60,000
Spare parts and components 15,000

155,000

(2) All of the revaluation surplus relates to the land element of the premises. There
were no additions to land in the year ended 31 August 2008.
(3) It is company policy to use the straight-line method of depreciation and to charge a
full years depreciation in the year of acquisition. Asset lives used are
Buildings 50 years
Workshop machinery 10 years
Fixtures and fittings 15 years
Hire fleet 3 years

The current years depreciation has not yet been accounted for.
(4) Receivables include deferred consideration of $20,000 on part of a sale of new
company vehicles, and this will be received on 1 October 2008.
(5) The bank loan was taken out in September 2006 and is repayable in 10 equal annual
instalments commencing in August 2007.
(6) Kashmar operates in a country where the following tax regime exists
Withholding tax is deducted at source from interest received/paid at the rate of
25%. Investment income is to be shown gross in the statement of comprehensive
income. Net tax deducted at source is reclaimed by the suffering company as a
reduction of its income tax liability of the year in which the tax has been deducted
(7) The corporate tax liability for the year is estimated at $46,000.
(8) The tax bases of items where temporary differences exist are as follows
$
Buildings 320,000
Workshop machinery 25,000
Fixtures and fittings 55,000
Hire fleet 6,000

Deferred tax is to be provided at 30%. There are no further temporary differences at
the year end (including note 10 below).
18
(9) The company has entered into a contract to fit a car repair facility for the local
militia. The terms of the contract are:
$
Contract value 200,000
Costs to date (debited to purchases) 60,000
Estimated costs to complete 80,000
Billings (all received and credited to sales) 55,000
Work certified 80,000

(10) Administrative expenses includes $27,000 prepayment in respect of a defined
contribution retirement benefit plan.
Required:
Prepare the statement of comprehensive income and statement of financial position for Kashmar
for the year ended 31 August 2008 in accordance with relevant accounting standards and
legislation.
(25 marks)
Question 21 BOSUN
The summarised draft consolidated financial statements of Bosun to 31 March 2009 are shown below.
Bosun plc statement of comprehensive income year to 31 March 2009:
$000
Sales revenue 2,800
Cost of sales (1,750)
_____
Gross profit 1,050
Operating costs (344)
_____
706
Finance costs (64)
_____
Profit before tax 642
Taxation (150)
_____
Profit after tax 492
Non-controlling interests (20)
_____
472
Extraordinary items (126)
_____
346
Dividends (100)
_____
Retained profit for year 246

19
Statement of financial position as at 31 March 2009:
Assets $000 $000
Non-current
Property, plant and equipment 2,540
Investment in finance leases 900
_____
3,440
Current assets 1,000
_____
Total assets 4,440

Equity and liabilities

Capital and reserves
Equity shares of $1 each 1,200
Reserves:
Retained earnings b/f 1 April 2008 1,134
year to 31 March 2009 346
less dividends (100) 1,380
_____ _____
2,580
Non-controlling interest 140
Non-current liabilities
12% Redeemable Loan Note (2013) 200
Current liabilities 1,520
_____
Total equity and liabilities 4,440

The above consolidated financial statements have been drafted by inexperienced accounting staff. The
following information relates to issues that the accounting staff had particular difficulties with:
(i) Retail car sales:
In September 2008 Bosun held a one-month promotion campaign aimed at increasing its
retail sales of new cars. A special edition manufacturers model called the Firefly was sold
during September. The promotion consisted of offering within the normal selling price:
free lease finance over two years
an extended three year warranty against mechanical failure

In total 100 of these cars were sold under the offer terms.
20
Details relating to the finance of the cars sold under the offer are:
$
Selling price included in turnover ($15,000 100) 1,500,000
Paid for by:
Initial deposit paid in September 2008 ($3,000 100) (300,000)
________
Initial investment in finance lease 1,200,000
Received 6 monthly payments of $500 100 (300,000)
________
Investment in finance leases at 31 March 2009 900,000
________
receivable within one year 12 $500 100 600,000
receivable after more than one year 6 $500 100 300,000
Applying the same finance rates as Bosun uses for normal leased car sales the true finance
cost of the promotional sales over the two year lease would be $1,200 per car. It has been
calculated that this would normally be earned as follows:
In the year to 31 March 2009 $500 per car
31 March 2010 $450 per car
31 March 2011 $250 per car
The manufacturer of the cars will reimburse any warranty claims in the first 12 months. From
past experience the second and third years free warranty will cost an average of $150 per
car. Bosun has not provided any amount for warranty claims in the year to 31 March 2009 as
they are covered by the manufacturers warranty until September 2009.
(ii) Business combination:
On 31 March 2009 Bosun issued 200,000 equity shares (market value $4 each) in a 1 for 1
share exchange to acquire the entire share capital of Capstan. The accounting staff have
included the following statement of comprehensive income results of Capstan into the
consolidated statement of comprehensive income for the year. Capstans trading on 31 March
2009 can be taken as negligible.
The summarised results of Capstan are:
Statement of comprehensive income year to 31 March 2009
$000
Sales revenue 600
Cost of sales (350)
___
Gross profit 250
Operating costs (90)
___
160
Income tax (60)
___
Profit after tax 100

No dividends have been paid by Capstan.
21
Summarised statement of financial position as at 31 March 2009
Net assets 800

Equity shares $1 each 200
Retained earnings 600
___
800

The fair values of Capstans net assets at the date of acquisition were equal to their book
values.
(iii) Extraordinary item:
This represents the cost ($180,000 less tax relief of $54,000) incurred during the year of
making the companys computer systems Euro compliant. As this cost will never recur it
has been treated as an extraordinary item, however the auditors have advised that this should
be treated as ordinary expenditure.
(iv) 12% Redeemable loan note:
On 1 April 2007 a redeemable loan note with a nominal value of $200,000 was issued at a
discount of 5% (i.e. at $95 per $100 nominal value). It is redeemable on 31 March 2013 at a
premium of 10%. The inexperienced staff have treated the whole of the discount as a finance
cost and ignored the premium on redemption. The company policy is to amortise (through the
statement of comprehensive income) such discounts and premiums in a straight-line manner.
(v) Directors share options:
Four directors have each held options to buy 100,000 shares in Bosun at a price of $200
since 2005. The options become exercisable in the year 2011. The average fair value of the
shares during the year to 31 March 2009 can be taken as $400. The cost of the options has
been charged against profits prior to the start of the current financial year.
Required:
(a) Redraft the consolidated financial statements of Bosun for the year to 31 March 2009 to
comply with the auditors advice and relevant International Accounting Standards in
relation to items (i) to (v) above. (21 marks)
(b) Calculate the basic and diluted Earnings Per Share for Bosun for the year to 31 March
2009 in accordance with IAS 33. (4 marks)
(25 marks)
22
Question 22 BACUP
The summarised statements of financial position of Bacup, Townley and Rishworth as at 31 March
2009 are as follows:
Bacup Townley Rishworth
$000 $000 $000
Non-current assets:
Tangible assets 3,820 4,425 500
Development expenditure 200
Investments 1,600

______ _____ _____
5,420 4,625 500

______ _____ _____
Current assets:
Inventory 2,740 1,280 250
Receivables 1,960 980 164
Cash at bank 1,260 86

______ _____ _____
5,960 2,260 500

______ _____ _____
Total assets 11,380 6,885 1,000

______ _____ _____
Capital and reserves:
Ordinary shares of 25 cents each 4,000 500 200
Reserves:
Share premium 800 125
Retained earnings
at 31 March 2008 2,300 380 450
Profit for the year 1,760 400 150

______ _____ _____
8,860 1,405 800

______ _____ _____
Current liabilities:
Trade payables 2,120 3,070 142
Bank overdraft 2,260
Taxation 400 150 58

______ _____ _____
2,520 5,480 200

______ _____ _____
Total equity and liabilities 11,380 6,885 1,000

______ _____ _____
23
The following information is relevant:
(i) Investments
Bacup acquired 1.6 million shares in Townley on 1 April 2008 paying 75 cents per share. On
1 October 2008 Bacup acquired 40% of the share capital of Rishworth for $400,000.
(ii) Group accounting policies
The development expenditure in the statement of financial position of Townley does not meet
the recognition criteria for intangible assets as prescribed by IAS 38. It relates to a project
that was commenced on 1 April 2007. At the date of acquisition the value of the capitalised
expenditure was $80,000. No development expenditure of Townley has yet been depreciated.
Goodwill
Non-controlling interest is valued at its proportionate share of the identifiable net assets
acquired, it is not credited with its share of goodwill. The goodwill was tested for impairment
at the year end and it was found that the goodwill in respect of Townley was impaired by
$92,000.
As the carrying value of the investment in Rishworth is less than its recoverable amount there
is no impairment to recognise in the consolidated accounts.
(iii) Intra-group trading
The inventory of Bacup includes goods at a transfer price of $200,000 purchased from
Townley after the acquisition. The inventory of Rishworth includes goods at a transfer price
of $125,000 purchased from Bacup. All transfers were at cost plus 25%.
The receivables of Bacup include an amount owing from Townley of $250,000. This does
not agree with the corresponding amount in the books of Townley due to a cash payment of
$50,000 made on 29 March 2009, which had not been received by Bacup at the year end.
(iv) Share premium
The share premium account of Townley arose prior to the acquisition by Bacup.
Required:
(a) A consolidated statement of financial position of the Bacup group as at 31 March 2009.
(18 marks)
(b) Norden Manufacturing has been approached by Mr Long, a representative of Townley. Mr
Long is negotiating for Norden to supply Townley with goods on six-month credit. Mr Long
has pointed out that Townley is part of the Bacup group and provides the consolidated
statement of financial position to support the credit request.
Required:
Briefly discuss the usefulness of the group statement of financial position for assessing
the creditworthiness of Townley and describe the further investigations you would
advise Norden Manufacturing to make. (7 marks)
(25 marks)
24
Question 23 HAMPLE
Hample is a small publicly listed company. On 1 April 2008 it acquired 90% of the equity shares in
Sopel, a private limited company. On the same day Hample accepted a 10% loan note from Sopel for
$200,000 which was repayable at $40,000 per annum (on 31 March each year) over the next five years.
Sopels retained profits at the date of acquisition were $2,200,000.
Statements of financial position as at 31 March 2009
Hample Sopel
$000 $000
Non-current assets
Property, plant and equipment 2,120 1,990
Intangible Software 1,800
Investments equity in Sopel 4,110
10% loan note Sopel 200
others 65 210

_____ _____

6,495 4,000
Current assets
Inventories 719 560
Trade receivables 524 328
Sopel current account 75
Cash 20 1,338 888

_____ _____ _____ _____

Total assets 7,833 4,888

_____ _____

Equity and liabilities:
Equity shares of $1 each 2,000 1,500
Share premium 2,000 500
Retained earnings 2,900 6,900 1,955 3,955

_____ _____

10% Loan note from Hample 160
Government grant 230 230 40 200

_____ _____

Current Liabilities
Trade payables 475 472
Hample current account 60
Income taxes payable 228 174
Operating overdraft 27

_____ _____

703 733

_____ _____

Total equity and liabilities 7,833 4,888

_____ _____

25
(i) Included in Sopels property at the date of acquisition was a leasehold property recorded at its
depreciated historic cost of $400,000. The leasehold had been sublet for its remaining life of
only four years at an annual rental of $80,000 payable in advance on 1 April each year. The
directors of Hample plc are of the opinion that the fair value of this leasehold is best reflected
by the present value of its future cash flows. An appropriate cost of capital for the group is
10% per annum.
The present value of a $1 annuity received at the end of each year where interest rates are
10% can be taken as:
3 year annuity $250
4 year annuity $320

(ii) The software of Sopel represents the depreciated cost of the development of an integrated
business accounting package. It was completed at a capitalised cost of $2,400,000 and went
on sale on 1 April 2007. Sopels directors are depreciating the software on a straight-line
basis over an eight-year life (i.e. $300,000 per annum). However, the directors of Hample
are of the opinion that a five-year life would be more appropriate as sales of business
software rarely exceed this period.
(iii) The inventory of Hample on 31 March 2009 contains goods at a transfer price of $25,000 that
were supplied by Sopel who had marked them up with a profit of 25% on cost. Unrealised
profits are adjusted for against the profit of the company that made them.
(iv) On 31 March 2009 Sopel remitted to Hample a cash payment of $55,000. This was not
received by Hample until early April. It was made up of an annual repayment of the 10%
loan note of $40,000 (the interest had already been paid) and $15,000 off the current account
balance.
(v) Non-controlling interest is valued at the proportionate share of the identifiable net assets
acquired, it is not credited with its share of goodwill. Goodwill has fallen in value by 20% of
that originally recognised on acquisition.
Required:
(a) Prepare the consolidated statement of financial position of Hample for the year ended
31 March 2009. (20 marks)
(b) Included in Hamples other investments are 6,000 A shares in Woodbridge, a private
limited company. These shares were acquired during the year to 31 March 2009. The total
share capital of Woodbridge is made up of:
Equity voting A shares 10,000
Equity non-voting B shares 20,000

All of Woodbridges equity shares are entitled to the same dividend rights; however during
the year to 31 March 2009 Woodbridge made substantial losses and did not pay any
dividends.
26
Hample has treated its investment in Woodbridge as an ordinary investment on the basis that:
it is only entitled to a minority of any dividends that Woodbridge may pay (i.e.
6,000/30,000 = 20%)
it does not any have directors on Woodbridges Board; and
it does not exert any influence over the operating policies or management of
Woodbridge.
Required:
Discuss the accounting treatment of Woodbridge by Hamples directors and state how
you believe the investment should be accounted for. (5 marks)
(25 marks)

Question 24 HOLDING
Holding acquired 18 million of Subsides equity shares on 1 January 2008 at a cost of $10 per share.
Holdings accounting year end is 30 September; the year end of Subside prior to its acquisition had
been 30 June. In order to facilitate the consolidation process Subside has changed its year end to 30
September and prepared its financial statements for the 15 months period to 30 September 2008. The
following are the statements of comprehensive income of both companies:
Holding Subside
12 months to 15 months to
30 September 30 September
2008 2008
$ million $ million
Revenue 350 280
Cost of sales (200) (170)
Gross profit 150 110
Operating expenses (72) (35)
Interest payable (10) (5)
Dividend from Subside 15
Profit before tax 83 70
Income tax expense (22) (10)

_____ _____

Profit after tax 61 60

_____ _____

Dividends final payable (25)
final paid (15 September 2008) (20)

_____ _____

The share capital and reserves of Subside at 30 June 2007 were:
$ million $ million
Equity shares of $1 each 24
Reserves:
Revaluation surplus 20 84

_____ _____

108

_____

27
(i) In the post acquisition period Holding sold goods to Subside at a price of $30 million.
Holding had marked up the cost of these goods by 25%. One third of these goods were still
held in inventory by Subside at 30 September 2008.
(ii) The revaluation surplus of Subside relates to land carried at its fair value. It was last revalued
on 30 June 2007. At the date of acquisition the value of the land had increased by a further
$4 million.
(iii) The only other fair value adjustment that is required in respect of the acquisition is in relation
to the plant and equipment of Subside. The details of this are:
Book value
30 June 2007
$ million
Cost on 1 July 2005 100
Depreciation (2 years) (40)

_____

Net book value 60

_____

The plant is being depreciated over a 5-year life using the straight-line method. This is in line
with group policy. The cost of sales expense of Subside contains an amount of $25 million in
respect of depreciation on the plant for the 15 months to 30 September 2008. The
replacement cost of the type of plant used by Subside has increased dramatically since it was
acquired and Holding estimated that the fair value of Subsides plant at the date of acquisition
was $90 million. The estimate of its remaining life was unaltered.
(iv) Subsides business activities are not seasonal in nature and therefore it can be assumed that
profits, and related dividends, accrued evenly throughout the 15 month period to 30
September 2008. Dividends paid out of pre-acquisition profits are to be treated as income
and should not be deducted from the cost of acquiring the shares in the subsidiary.
(v) Non-controlling interests is valued at the proportionate share of the subsidiarys identifiable
net assets, and therefore does not include any goodwill in respect of the acquisition. The
value of goodwill was $42m at 30 September 2008. Any impairment should be treated as an
operating expense.
Required:
(a) Calculate the consolidated goodwill in respect of the acquisition of Subside. (8 marks)
(b) Prepare the consolidated statement of comprehensive income of Holding for the year to
30 September 2008. (17 marks)
(25 marks)
28
Question 25 H INC, S INC AND T INC
(a) Statements of financial position at 31 December 2008
P Inc S Inc T Inc
$ $ $
Shares in S Inc (75%) 65,000
Shares in T Inc (60%) 50,000
Sundry net assets 145,000 70,000 75,000

210,000 120,000 75,000

Ordinary share capital 120,000 70,000 40,000
Reserves 90,000 50,000 35,000

210,000 120,000 75,000

Both investments were acquired on 31 December 2001 when S Inc reserves were $10,000 and
T Inc reserves were $12,000. Goodwill was written off prior to 1 January 2008. Non-
controlling interest is valued at the proportionate share of the identifiable net assets.
Required:
Prepare the consolidated statement of financial position at 31 December 2008. (8 marks)
(b) Facts as in (a) above except investments acquired alternatively
Balances on
S Inc T Inc
reserves reserves
$ $
(i) P Inc in S Inc on 31 December 2005 12,000 14,000
S Inc in T Inc on 31 December 2006 13,000 15,000

or

(ii) S Inc in T Inc on 31 December 2005 14,000 16,000
P Inc in S Inc on 31 December 2006 15,000 17,000

Required:
Determine which of the above amounts should be used as the pre-acquisition reserves of
S Inc and T Inc in (i) and (ii). (4 marks)
(12 marks)
29
Question 26 JANE INC
Jane Inc holds 90% of the ordinary shares of Prue Inc and 20% of the ordinary shares of Elizabeth Inc.
Prue Inc also holds 60% of the ordinary shares of Elizabeth Inc.
Jane Inc acquired its holding in Prue Inc on 1 January 2002 when the reserves of that company were
$201,000. On the same date both companies acquired their shares in Elizabeth Inc when the balance on
retained profits was $67,000.
The statements of financial position of the three companies at 31 December 2008 are as follows.
Jane Inc Prue Inc Elizabeth Inc
$ $ $
Investments at cost
in Prue Inc 600,000
in Elizabeth Inc 40,000 120,000
Sundry assets 1,336,000 717,000 213,000

1,976,000 837,000 213,000

Share capital (ordinary $1 shares) 500,000 400,000 100,000
Reserves 1,476,000 437,000 113,000

1,976,000 837,000 213,000

Notes
(1) Goodwill has been fully written off prior to 1 January 2008.
Required:
Prepare the consolidated statement of financial position at 31 December 2008.
(12 marks)
30
Question 27 HOLLY INC
Statements of financial position at 31 December 2008
Holly group Ivy Inc
$000 $000
Non current assets
Tangible (at NBV) 4,400 2,500
Investment in Ivy Inc at cost 600

5,000 2,500
Current assets 3,460 1,520

8,460 4,020

$1 ordinary shares 2,000 800
Retained earnings 1,560 900

3,560 1,700
Non-controlling interests 500
Non-current liabilities 2,000 1,680
Current liabilities 2,400 640

8,460 4,020

Holly Inc acquired a 40% interest in Ivy Inc on 1 January 2004 when the retained profits of Ivy Inc
were $70,000.
There is no impairment in the investment in Ivy.
Required:
Prepare a consolidated statement of financial position at 31 December 2008.
(7 marks)
31
Question 28 ASSOCK INC
The draft statements of comprehensive income for the year ending 30 June 2009 of Assock Inc, and its
subsidiary and associated undertakings Curly Inc and Tiny Inc, appear below.
Assock Incs investments in these companies were made as follows.
(a) On 1 July 2008 40% of the ordinary share capital of Tiny Inc. A director of Assock Inc has
been appointed to the board of Tiny Inc to take an active part in its management.
(b) On 1 November 2008 75% of the ordinary share capital of Curly Inc.
The following additional information is relevant.
(a) Assock Inc has no other investments.
(b) During the year Curly Inc had sold goods to Assock Inc amounting to $255,000. Of these
$176,000 had been sold in the period 1 November 2008 to 30 June 2009.
At the year-end, Assock Inc held unsold goods with a sales value of $17,000. These were
included in the calculation of Assock Incs cost of sales. Curly Incs mark up was 20% on
cost price.
It is Assocks policy to eliminate unrealised profit in full but to charge the non-controlling
interest with their share as appropriate.
(c) In addition Assock Inc had bought for $150,000 goods from Tiny Inc at a margin of 30% on
sales price. Half of these remained unsold at the year-end.
Assock Inc Curly Inc Tiny Inc
$ $ $
Revenue 2,600,000 1,100,000 1,600,000
Cost of sales (2,167,000) (901,500) (1,315,400)

Gross profit 433,000 198,500 284,600
Distribution costs (88,400) (32,700) (35,900)
Administration expenses (104,600) (48,800) (38,700)

Operating profit 240,000 117,000 210,000
Dividends from
Subsidiaries 24,000
Associates 18,800

Profit before taxation 282,800 117,000 210,000
Income tax expense (90,000) (51,000) (85,000)

Profit after taxation 192,800 66,000 125,000

Extract from SOCIE
Dividends ordinary paid 132,000 32,000 47,000

Required:
Prepare a consolidated statement of comprehensive income of Assock Inc for the year ending 30
June 2009. (Ignore any issues relating to goodwill).
(10 marks)
32
Question 29 HARLEY INC
On 30 June 2009 Harley Inc had net assets of $1,052,000. These comprised $22,000 in cash, $650,000
of net current assets, and the balance represented the cost of investment in Davidson Inc.
Harley Incs share capital at the year ended 30 June 2009 comprised 220,000 $1 ordinary shares.
Harley Incs retained earnings reserves were $732,000 at that date.
Harley Inc had acquired 40% of Davidson Inc on 1 July 2001, when Davidson Incs reserves were
$100,000, and a further 30% of Davidson Inc on 1 July 2002, when Davidson Incs reserves were
$124,000. The cost of the two acquisitions was $160,000 and $220,000 respectively in cash.
On 1 July 2002 the fair value of the initial 40% shareholding was $175,000 and the fair value of non-
controlling interest was $157,200. Harley has chosen to value non-controlling interest at fair value, and
incorporate its share of goodwill into the acquisition process. The fair value of the identifiable net
assets on acquisition was $252,200.
At the year ended 30 June 2009, Davidson Incs reserves were $255,000.
Davidson Incs share capital was 100,000 $1 ordinary shares.
Goodwill has been impaired by $60,000 since acquisition.
Required:
Prepare the consolidated statement of financial position of the Harley group at 30 June 2009.
(14 marks)
33
Question 30 ARBITRARY INC
Arbitrary Inc has for many years held 80% of the ordinary shares of Contrary Inc which it purchased
for $175,000. On 1 July 2008 Arbitrary sold all of these shares and used the proceeds ($212,000) to
purchase 65% of the ordinary shares of Enthusiast Inc on the same date. Share capital of Contrary Inc
and Enthusiast Inc has remained constant for many years at $100,000 and $200,000 respectively. Net
assets of Contrary Inc and Enthusiast Inc were as follows.
Contrary Inc Enthusiast Inc
At acquisition At 1.1.2008 At 1.1.2008
$ $ $
Net assets 187,000 150,000 280,000

Statements of comprehensive income for all three companies for the year ended 31 December 2008
were as follows.
Arbitrary Inc Contrary Inc Enthusiast Inc
$ $ $
Revenue 1,926,500 521,600 792,400
Cost of sales (1,207,200) (386,200) (405,900)

Gross profit 719,300 135,400 386,500
Distribution costs (207,500) (79,200) (198,200)
Administrative expenses (184,600) (26,100) (107,100)

Profit before tax 327,200 30,100 81,200
Taxation (110,000) (9,500) (27,500)

Profit after tax 217,200 20,600 53,700

Extract from SOCIE
Retained b/d 671,300 50,000 80,000
Profit after tax 217,200 20,600 53,700
Dividends
Paid (1 May 2008) (50,000)

Retained c/f 838,500 70,600 133,700

No entries have been made in Arbitrary Incs statement of comprehensive income relating to the sale of
Contrary Inc. The companies all have a marginal tax rate of 33%.
All of the goodwill in respect of Contrary had been written off prior to 1 January 2008. The value of
goodwill in respect of Enthusiast was $9,667 at 31 December 2008. Non-controlling interest are valued
at the proportionate share of the identifiable net assets on acquisition.
Required:
Prepare the consolidated statement of comprehensive income for Arbitrary Inc for the year
ended 31 December 2008.
(15 marks)
34
Question 31 BELT INC
Many years ago Belt Inc acquired 80,000 of the ordinary shares of Braces Inc when the reserves of
Braces Inc were $70,000. On 1 October 2008 Belt Inc sold 50,000 of the shares for $206,000.
Goodwill arising on the acquisition of Braces had been fully written off by the start of the year. The
draft statements of financial position of the two companies as at 31 December 2008 are as follows.
Belt Inc Braces Inc
$000 $000
Tangible non current assets 580 300
Investment in Braces Inc 160
Inventory 215 100
Receivables 290 120
Cash 141 130

1,386 650

$1 ordinary shares 250 100
Retained earnings 690 450
Payables 240 100
Proceeds of sale of shares 206

1,386 650

The draft statements of comprehensive income of the two companies for the year ended 31 December
2008 are as follows.
Belt Inc Braces Inc
$000 $000
Revenue 3,000 1,400
Cost of sales (1,980) (800)

Gross profit 1,020 600
Operating costs (528) (300)

Profit before tax 492 300
Tax (205) (110)

Profit after tax 287 190
Retained earnings b/d 403 260

Retained earnings c/f 690 450

On 1 October the fair value of the residual interest in Braces was $170,000.
35
Required:
Prepare the consolidated statement of financial position of the Belt group Inc as at 31
December 2008 and the consolidated statement of comprehensive income for the year then
ended.

Note The figures above relating to Belt Inc include the results of a wholly owned
subsidiary, Smartass Inc. Ignore tax on the disposal of the shares.
(18 marks)

Question 32 GUIDO ELECTRICALS INC
In January 2008 Guido Electricals Inc made an offer of $20,000 for patent rights owned by Chuck Inc,
a small family company. Rather than accept the offer the directors of Chuck Inc announced to Guido
Electricals Inc that the whole company was available for sale. Consequently the share capital of Chuck
Inc was acquired by Guido Electricals Inc in exchange for consideration of $220,000.
The statement of financial position of Chuck Inc at the time of its acquisition was as follows.
Electricals Rope-making Total
$ $ $
Owned property 80,000 80,000
Leasehold property 30,000 30,000
Plant and machinery
Cost 20,000 10,000 30,000
Depreciation (8,000) (5,000) (13,000)
Motor vehicles
Cost 10,000 10,000
Depreciation (6,000) (6,000)
Inventory 32,000 18,000 50,000
Receivables 9,000 9,000
Cash 3,000 1,000 4,000
Payables (6,000) (2,000) (8,000)

134,000 52,000 186,000

Share capital 50,000

186,000

Guido Electricals Inc intended to sell off the rope-making segment of the business as soon as possible
after the acquisition had been completed. The segment was sold late in 2008 for $50,000. The
segment made a profit after tax of $5,000 for the period up to the date of sale.
Guido Electricals Inc integrated the electricals segment of the business into its existing operations,
except that it did not require the motor vehicles. These were sold to the directors of Chuck Inc shortly
after the acquisition for $1,500.
The owned properties and the leasehold properties were valued on an existing use basis at the time of
the acquisition at $77,000 and $27,000 respectively. The gross replacement cost of the electricals plant
and machinery was $30,000, of the rope-making plant and machinery was $12,000, and of the motor
vehicles was $15,000. There is no evidence of market value due to the specialist nature of the plant.
36
The inventory may be analysed as follows.
Electricals Rope-making
$ $
Raw materials 2,000 18,000
Work in progress 20,000
Finished goods 10,000

32,000 18,000

The replacement cost of the Electricals raw materials was not materially different from their historic
cost. The replacement cost of the rope-making raw materials was $21,000. All electricals are made to
customers own specifications from standard raw materials.
The directors of Guido Electricals Inc calculate that 10% of their time and therefore payroll costs
(amounting to $57,000) has been spent on work related to the acquisition. In addition legal fees of
$10,000 were incurred.
Required:
Following the provisions of IFRS 3, calculate the goodwill arising on the acquisition of Chuck Inc
which will be reflected in the financial statements of Guido Electricals Inc for the year ended 31
December 2008.
(12 marks)
Question 33 BERTIE
The following transactions took place at Bertie, a limited liability company, a company reporting in
dollars, in the year ended 31 December 2008.
(a) Sale of goods on credit on 1 October 2008 for 50,000. The customer paid on 3 December
2008.
(b) Purchases of goods on credit for 60,000. The goods were received by Bertie on 15
December 2008 and the account had not been settled by the year end.
(c) A non-current asset was purchased on 1 January 2008 for 200,000 cash. The asset has a life
of five years.
(d) A long term loan of 800,000 was taken out with a bank on 3 December 2008 for the purpose
of improving the companys working capital.
Relevant exchange rates are:
$1 =
1 January 2008 1.70
1 October 2008 1.65
3 December 2008 1.50
15 December 2008 1.40
31 December 2008 1.35
Required:
Show how each of the above transactions would be represented in the statement of
comprehensive income and/or statement of financial position of Bertie in the year ended 31
December 2008.
(8 marks)
37
Question 34 TERRY INC
Terry Inc has one wholly owned subsidiary Bob GmbH, a company set up by Terry Inc on 1 January
2006 in order to expand operations in Germany. The summarised draft accounts of the two companies
for 2008 are given below.
Draft statements of financial position as at 31 December 2008
Terry Bob
$000 000
Plant at cost 800 360
Depreciation (300) (72)

500 288
Investment in subsidiary 300
Inventory 250 225
Net monetary current assets 158 396

1,208 909

Called up share capital $1/ 1 ords 500 600
Loans 400 72

1,208 909

Draft statement of comprehensive income for the year ended 31 December 2008
Terry Inc Bob Inc
$000 000
Revenue 810 720
Cost of sales (300) (208)

Gross profit 510 512
Other expenses (excluding depreciation) (150) (116)
Depreciation (100) (36)

Profit before taxation 260 360
Taxation (130) (180)

Retained profit 130 180

The exchange rate moved as follows.
to the $
1 January 2006 2.00
1 January 2008 1.90
31 December 2008 1.80
Average for the year 2008 1.85

38
Required:
(a) Under the provisions of IAS 21, prepare;
(i) the consolidated statement of financial position as at 31 December 2008
(ii) the consolidated statement of comprehensive income for the year ended 31
December 2008.
(iii) a statement showing movements on group reserves for the year ended 31
December 2008.
(10 marks)
(b) State concisely the concept on which the closing rate method is based. (1 mark)
Note All calculations should be made to the nearest $000.
(11 marks)
Question 35 JUPITER INC
Jupiter Inc prepares accounts to 31 March annually. The functional currency of Jupiter is the $.
On 31 December 2008 Jupiter Inc acquired 90% of the issued ordinary capital of Mars Inc which trades
in Intergalatica where the currency is the Gal. At 31 March 2009 the following statements of financial
position were prepared.
Jupiter Inc Mars Inc
$000 Gal 000
Tangible non current assets 148,500 197,400
Investments 85,000
Net current assets 212,800 145,500
Long term loans (93,000) (60,000)

353,300 282,900

Capital ordinary $1 (1 Gal) 300,000 150,000
Retained earnings At 31 March 2009 53,300 132,900

353,300 282,900

Relevant data is as follows.
(1) The profit of both companies accrues evenly throughout the year. Jupiter Inc and Mars Inc
had profits for the year ended 31 March 2009 of $18.9 million and 24.9 million Gal
respectively.
(2) The holding companys long term loans include $24 million borrowed from a Swiss bank (to
build a new factory) on 1 July 2007 at 2.1 francs = $1. The rate at 31 March 2009 was 2.3
francs = $1. It is recorded at the sum received in the statement of financial position.
(3) When agreeing the purchase price of Mars Inc it was agreed that non current assets were
already at fair value but that trade receivables required a write down of 50,000,000 Gals.
This has not been adjusted in the books of the subsidiary.
39
(4) Rates of exchange have been
Gal = $1
31 March 2009 4.2
Average for the three months to 31 March 2009 4.8

(5) Non-controlling interest is valued at the proportionate share of the identifiable net assets, it is
not credited with its share of goodwill. The value of goodwill at 31 March 2009 is Gal
178,496.
Required:
Prepare the consolidated statement of financial position of Jupiter Inc and subsidiary at 31
March 2009
(9 marks)
Question 36 MARY INC
Mary Inc purchased a 60% holding in Marie SA, a company which is situated in Frankland where the
local currency is the Fr, several years ago when the rate of exchange was Fr6 to $1, and the reserves of
Marie SA amounted to Fr60,000. The statements of financial position of the two companies at 31
December 2008 are as follows.
Mary Inc Marie SA
$ Fr
Land at cost 300,000 580,000
Buildings
Cost 280,000 240,000
Depreciation (28,000) (108,800)
Plant
Cost 274,000 91,500
Depreciation (108,000) (38,500)
Investment in subsidiary 70,000
Current assets 367,000 174,000

1,155,000 938,200

Ordinary shares of $1, 1Fr 250,000 500,000
Retained earnings 508,000 239,200
Payables (including taxation) 397,000 199,000

1,155,000 938,200

The statements of comprehensive income for the year ended 31 December 2008 showed the following
results.
$ Fr
Trading profit (after depreciation) 397,000 230,000
Taxation 200,000 109,000

(1) Non-controlling interest are valued at the proportionate share of the identifiable net assets, it
is not credited with its share of goodwill. Goodwill has been fully impaired prior to 1 January
2008.
40
(2) The following exchange rates are relevant.
1 January 2008 Fr5.5 : $1
Average 2008 Fr5.0 : $1
31 December 2008 Fr4.5 : $1

Required:
Prepare a consolidated statement of financial position at 31 December 2008 together with a
statement of comprehensive income and a statement showing the movement in reserves during
the year ended on that date in accordance with IAS 21.
(25 marks)
Question 37 CHRISTOPHER INC
The draft accounts of Christopher Inc and its subsidiary Wren Inc for 2008 are set out below.
Draft statements of financial position as at 31 December 2008
Christopher Inc Wren Inc
$000 000
Non current assets 1,500 1,200
Investment in Wren Inc at cost 250
Inventory ` 1,050 600
Receivables 1,130 1,280
Cash 546 300

4,476 3,380

Share capital 1,000 500
Retained earnings 1,116 560

2,116 1,060
Loan 300 500
Trade payables 1,610 1,220
Taxation 450 600

4,476 3,380

Draft statements of comprehensive income for the year ended 31 December 2008
Christopher Inc Wren Inc
$000 000
Revenue 7,696 8,700
Cost of sales and other operating expenses (6,950) (7,800)

Operating profit 746 900
Interest payable and similar charges (150)

Profit before taxation 596 900
Taxation (450) (600)

Retained profit 146 300

41
Christopher Inc purchased 80% of the shares in Wren Inc on 1 January 2005 when the reserves of Wren
Inc were 130,000.
The loan in the books of Christopher Inc represents a loan of 600,000 which was raised in order to
finance the investment in Wren Inc.
Non-controlling interest is valued at the proportionate share of the identifiable net assets, it is not
credited with its share of goodwill.
The value of goodwill at 31 December 2007 is 180, and at 31 December 2008 it is 82.
Exchange rates have moved as follows.
to the $
1 January 2005 3.0
1 January 2008 3.0
Average for 2008 2.5

Required:
(a) Prepare the consolidated statement of financial position as at 31 December 2008.
(9 marks)
(b) Prepare the consolidated statement of comprehensive income for the year ended 31
December 2008. (6 marks)
(c) Prepare a statement showing the movement on the consolidated retained earnings for
the year ended 31 December 2008. (5 marks)
(20 marks)
42
Question 38 LADWAY
(a) The draft statements of financial position for the years to 31 March 2009 and 2008 of
Ladway, a company listed on a recognised stock exchange, are shown below:
2009 2008
$m $m $m $m
Assets
Non-current assets
Tangible assets 2,480 1,830
Intangibles 450 410

_____ _____

2,930 2,240
Current assets
Inventories 920 763
Trade receivables 642 472
Cash and cash equivalents 34

_____ _____

1,562 1,269

_____ _____


_____ _____

Equity and liabilities
Equity capital 500 400
Reserves
Share premium 90 70
Revaluation surplus 170
Retained earnings 1,871 1,732

_____

_____

2,631 2,202
8% Loan note 200
10% preferred capital 350 350
Government grants 210 160
Deferred tax 52 30
Environmental provision 76 24

_____ _____

888 564
Current liabilities
Accrued interest 4
Operating overdraft 63
Taxation 176 185
Government grants 50 40

_____ _____

973 743

_____ _____


_____ _____

43
The draft statement of comprehensive income for Ladway for the year to 31 March 2009 is as
follows:
$m $m
Revenue 3,655
Cost of sales:
Depreciation of tangibles 366
Amortisation of intangibles 36
Other costs 2,522

_____

(2,924)

_____

Gross profit for period 731
Other operating income government grant 50

_____

781
Distribution costs 75
Administration 56
Environmental provision 67

_____

(198)

_____

583
Interest loan stock (12)
Preferred dividend (35)

_____

Profit before income tax 536
Income tax expense (177)

_____

359

_____

Extract from SOCIE
Dividend paid 220
Tangible non-current assets:
(i) these include land which was revalued giving a surplus of $170 million during the
period;
(ii) the companys motor vehicle haulage fleet was replaced during the year. The fleet
originally cost $42 million and had been written down to $11 million at the date of
its replacement. The gross cost of the fleet replacement was $180 million and a
trade-in allowance of $14 million was given for the old vehicles;
44
(iii) the company acquired some new plant on 1 July 2008 at a cost of $120 million
from Bromway. An arrangement was made on the same day for the liability for the
plant to be settled by Ladway issuing at par an 8% Loan note dated 2010 to
Bromway. The value by which the 8% Loan note exceeded the liability for the
plant was received from Bromway in cash.
Provision:
The provision represents an estimate of the cost of environmental improvements relating to
the companys mining activities.
Equity share issues:
During the year Ladway made a bonus issue from the share premium reserve of one share for
every ten shares held. Later Ladway made a further share issue for cash.
Required:
A statement of cash flows for Ladway for the year to 31 March 2009 prepared in
accordance with IAS 7 Statement of Cash Flows. (20 marks)
(b) IAS 7 encourages companies to disclose, usually in the notes, additional information on:
(i) aggregate cash flows relating to an expansion of operating capacity separate to
those required to maintain operating capacity; and
(ii) cash flows arising from each reported operating segment.
Required:
Discuss the relevance and usefulness of the above information to users of accounts.
(5 marks)
(25 marks)
45
Question 39 LOVEY INC
The draft statement of comprehensive income, statements of financial position and notes of Lovey Inc
group are as follows.
Consolidated statement of comprehensive income for the year ended 31 December 2008
$000
Group operating profit (after goodwill impairment of $15,000) 385
Income from interest in associated undertaking 21

Group profit before tax 381
Taxation (170)

Group profit after tax 211
Non-controlling interest (29)

Profit for the financial year 182

Extract from SOCIE
Dividends paid 100

Consolidated statements of financial position 31Dec 2008 31 Dec 2007
ASSETS $000 $000 $000 $000
Non current assets
Intangible assets 58 -
Tangible non current assets (Note 1) 933 520
Interest in associate 90 75
Current assets
Inventory 119 106
Receivables 205 180
Cash at bank and in hand 96 290
420 576


Ordinary shares 90 60
Share premium 243 40
Non-controlling interest 98 90
Non current liabilities
Debentures 100 100
Current liabilities
Corporation tax 170 135
Accruals for interest 8 5
343 336


46
Notes

(1) Tangible non current assets
$000
Net book value at start of year 520
Additions 505
Net book value of disposals (45)
Depreciation charge (47)

Net book value at end of year 933

Non current assets disposed of comprise assets sold during the year for $18,000 cash and
$15,000 trade-in allowances against new non current assets.
(2) Acquisition of subsidiary
During the year an 80% holding in Newhall Inc was acquired. Details of the acquisition are
as follows.
$000
Non current assets 129
Inventory 30
Receivables 25
Cash 83
Payables (17)

250
Non-controlling interest (20%) (50)

200
Goodwill 73

273

Shares 233
Cash 40

273

Required:
Prepare the group statement of cash flows and notes for Lovey Inc for the year ended 31
December 2008 in accordance with IAS 7.
(25 marks)
47
Question 40 GUNDAR INC GROUP
The draft statement of comprehensive income, statements of financial position and notes of Gundar Inc
group are as follows.
Consolidated statement of comprehensive income for the year ended 31 December 2008
$000
Group operating profit 500

Group profit before tax 488
Taxation (125)

Group profit after tax 363
Non-controlling interest (31)

332
Profit on disposal of subsidiary (Note 3) 17

Profit for the financial year 349

Extract from SOCIE
Dividend paid 100

Consolidated statements of financial position 31 December 2008 31 December 2007
$000 $000 $000 $000
ASSETS
Non current assets
Intangibles - goodwill 40
Tangibles (Note 1) 660 629
Current assets
Inventory 170 110
Receivables 158 130
Cash at bank and in hand 303 10
631 250

Total assets 1,291 919

Ordinary shares 100 100

764 515
Non-controlling interest 74 83
Non current liabilities
Debentures 100 100
Current liabilities
Corporation tax 125 103
Accruals for interest 2 3
353 221

Total equity and liabilities 1,291 919

48
Notes

(1) Tangible non current assets
$000
Net book value at start of year 629
Additions 226
Net book value of disposals (91)
Depreciation charge (104)

Net book value at end of year 660

Non current assets disposed of comprise assets sold during the year for $3,000 cash and
$4,000 trade-in allowance against new non current as well as the asset previously owned by
Beetee Network Inc. Additions include assets costing $74,000 which have not been paid for
by the year-end.
(2) Reserves
Retained earnings
$000
Balance at start of year 415
Retained profit (349 100) 249

Balance at end of year 664

(3) Disposal of subsidiary
During the year an 80% holding in Beetee Network Inc was disposed of. Details of the
disposal are as follows.
$000
Non current assets 70
Inventory 10
Receivables 20
Cash 5
Payables (15)

90
Non-controlling interest (20%) (18)

72
Goodwill disposed of 40

112
Profit on disposal 17

Cash proceeds 129

Required:
Prepare the group statement of cash flows for Gundar Inc for the year ended 31 December 2008
in accordance with IAS 7.
(25 marks)
49
Question 41 WEBSTER
Webster is a publicly listed diversified holding company that is looking to acquire a suitable
engineering company. Two private limited engineering companies, Cole and Darwin, are available for
sale. The summarised financial statements for the year to 31 March 2009 of both companies are as
follows:
Statements of comprehensive income

Cole Darwin
$000 $000 $000 $000
Sales revenue (note i) 3,000 4,400
Opening inventory 450 720
Purchases (note ii) 2,030 3,080

_____ _____

2,480 3,800
Closing inventory (540 ) (1,940) (850) (2,950)

_____ _____ _____ _____

Gross profit 1,060 1,450
Operating expenses (480) (964)

_____ _____

Profit from operations 580 486
Loan note interest (80)
Overdraft interest (10)

_____ _____

Net profit for period 500 476

_____ _____

50
Statements of financial position

Cole Darwin
$000 $000 $000 $000
Non-current assets
Property, plant and equipment
(note iii and iv) 2,340 3,100
Current assets
Inventory 540 850
Accounts receivable 522 750
Bank 20

_____ _____

1,082 1,600

_____ _____


_____ _____

Equity and Liabilities
Equity Shares of $1 each 1,000 500
Reserves:
Revaluation reserve 700
Retained earnings 1 April 2008 684 1,912
Profit for year to 31 March 2009 500 476

_____ _____

2,184 3,588
10% Loan note 800
Current liabilities
Accounts payable 438 562
Overdraft 550

_____ _____

438 1,112

_____ _____


_____ _____

Webster bases its preliminary assessment of target companies on certain key ratios. These are listed
below together with the relevant figures for Cole and Darwin calculated from the above financial
statements:
Cole Darwin
Return on capital employed (500 + 80)/(2184 + 800) 100 194 % (476/3588) 100 133 %
Asset turnover (3000/2984) 101 times (4400/3588) 123 times
Gross profit margin 353 % 330 %
Net profit margin 167 % 108 %
Accounts receivable collection period 64 days 62 days
Accounts payable payment period 79 days 67 days
Note: capital employed is defined as shareholders funds plus non-current debt at the year end; asset
turnover is sales revenues divided by gross assets less current liabilities.
51
The following additional information has been obtained:
(i) Cole is part of the Velox Group. On 1 March 2009 it was permitted by its holding company
to sell goods at a price of $500,000 to Brander, a fellow subsidiary. The sale gave Cole a
gross profit margin of 40% instead of its normal gross margin of only 20% on these types of
goods. In addition Brander was instructed to pay for the goods immediately. Cole normally
allows three months credit.
(ii) On 1 January 2009 Cole purchased $275,000 (cost price to Cole) of its materials from
Advent, another member of the Velox Group. Advent was also instructed by Velox to depart
from its normal trading terms, which would have resulted in a charge of $300,000 to Cole for
these goods. The Groups finance director also authorised a four-month credit period on this
sale. Cole normally receives two months credit from its suppliers. Cole had sold all of these
goods at the year-end.
(iii) Non-current assets:
Details relating to the two companies non-current assets are:
Cost/revaluation Depreciation Book value
$000 $000 $000
Cole property 3,000 1,860 1,140
Cole plant 6,000 4,800 1,200

_____

2,340

_____

Darwin property 2,000 100 1,900
Darwin plant 3,000 1,800 1,200

_____

3,100

_____

The two companies own very similar properties. Darwins property was revalued to
$2,000,000 at the beginning of the current year (i.e. 1 April 2008). On this date Coles
property, which is carried at cost less depreciation, had a book value of $1,200,000. Its
current value (on the same basis as Darwins property) was also $2,000,000. On this date (1
April 2008) both properties had the same remaining life of 20 years.
(iv) Darwin Ltd purchased new plant costing $600,000 in February 2009. In line with company
policy a full years depreciation at 20% per annum has been charged on all plant owned at the
year-end. The equipment is still being tested and will not come on-stream until next year. The
purchase of the plant was largely financed by an overdraft facility, which resulted in the
interest cost shown in the statement of comprehensive income. Both companies depreciate
plant over a five-year life and treat all depreciation as an operating expense.
(v) The bank overdraft that would have been required but for the favourable treatment towards
Cole in respect of items in (i) and (ii) above, would have attracted interest of $15,000 in the
year to 31 March 2009.
52
Required:
(a) Restate the financial statements of Cole and Darwin in order that they may be
considered comparable for decision making purposes. State any assumptions you make.
(10 marks)
(b) Recalculate the key ratios used by Webster and, referring to any other relevant points,
comment on how the revised ratios may affect the assessment of the two companies.
(10 marks)
(c) Discuss whether the information in notes (i) to (iv) above would be publicly available,
and if so, describe its source(s). (5 marks)
(25 marks)
Question 42 HEYWOOD BOTTLERS
Below are the financial statements for the years to 31 March 2008 and 2009 of Heywood Bottles, a
company which manufactures bottles for many different drinks companies.
Statements of comprehensive income for the years to 31 March
2008 2009
$m $m $m $m
Sales revenues 120 300
Manufacturing costs 83 261
Depreciation 7 (90) 9 (270)
___ ___ ___ ___

Gross profit 30 30
Other expenses 10 28
Interest 2 (12) 10 (38)
___ ___ ___ ___

Profit/(loss) before tax 18 (8)
Tax (6) (4)

___ ___
Profit/(loss) after tax 12 (12)
Dividends paid (8) (8)

___ ___
4 4

___ ___
53
Statements of financial position as at 31 March
2008 2009
$m $m $m $m
Non-current assets:
Land and buildings 5 5
Plant and Equipment 38 58

___ ___
43 63
Current assets:
Inventory 12 18
Receivables 25 94
Deferred expenditure 6
Bank 8

___ ___
45 118

___ ___
Total assets 88 181

___ ___
Ordinary 25 25
Reserves:
Capital reserves 11 10
Retained earnings 8 19 (12) (2)

___ ___ ___ ___
44 23
Non-current liabilities 19 32
Current liabilities
Others 10 12
Bank 34

___
25
___
126

___ ___
Total equity and liabilities 88 181

___ ___
54
Note:
(1) Plant and equipment is made up as follows:
$m $m
at 31 March 2008 2009
Owned plant 10 18
Leased plant 28 40

(2) Non-current liabilities are leasing obligations
The directors were disappointed in the profit for the year to 31 March 2008 and held a board
meeting in April 2008 to discuss future strategy. The Managing Director was insistent that
the way to improve the companys results was to increase sales and market share. As a result
the following actions were implemented.
(i) an aggressive marketing campaign through trade journals cost $12 million was undertaken.
Due to expected long-term benefits $6 million of this has been included as a current asset in
the statement of financial position at 31 March 2009;
(ii) a price promise to undercut any other suppliers price was announced in the advertising
campaign;
(iii) a major contract with Koola Drinks was signed that accounted for a substantial proportion of
the companys output. This contract was obtained through very competitive tendering.
(iv) the credit period for customers was extended from two months to three months.
A preliminary review by the Board of the accounts to 31 March 2009 concluded that the companys
performance had deteriorated rather than improved. There was particular concern over the prospect of
renewing the bank overdraft facility because the maximum legal agreed level of $30 million had been
exceeded. The Board decided that it was time to seek independent professional advice on the
companys situation.
Required:
In the capacity of a business consultant, prepare a report for the Board of Heywood Bottles
analysing the companys performance for the year to 31 March 2009 in comparison with the
previous year. Particular emphasis should be given to the effects of the implementation of the
effects of the actions referred to in points (i) to (iv) above.
(15 marks)
55
Question 43 RADAN
Extracts from the statement of financial position of Radan as at 1 April 2008 are:
$000 $000
Ordinary shares of 25 cents each 4,000
Reserves:
Share premium 700
Capital redemption reserve 1,300
Revaluation surplus 90

_____
2,840

_____

6,840

_____

10% Convertible loan notes 2,000
8% Preference shares 1,000

_____

Note: The above are extracts from the opening statement of financial position for the current reporting
year.
The following draft statement of comprehensive income has been prepared for the year to 31 March
2009, prior to the declaration of the proposed final ordinary dividend for the year:
$000 $000
Profit before interest and tax 1,800
Loan interest (200)
Preference dividend (80)

_____

Profit before tax 1,520
Taxation
provision for 2009 300
Deferred tax 390

_____
(690)

_____

830
Dividends paid Ordinary (320)

_____

510

_____

(i) A bonus issue of 1 new share for every 8 ordinary shares held was made on 7 September
2008.
(ii) A fully subscribed rights issue of 1 new share for every 5 ordinary shares held at a price of 50
cents each was made on 1 January 2009. Immediately prior to the issue the market price of
Radans ordinary shares was $1.40 each.

56
(iii) The terms of conversion of the 10% loan notes are:
Year Loan notes Ordinary shares
2011 to 2015 $100 100
2016 $100 120
Income tax is to be taken as 33%.
(iv) The profit before interest and taxation includes the following items:
stage profits of $150,000 relating to construction contracts that have been
calculated in accordance with IAS 11 Construction contracts;
an exchange gain of $25,000 on a long-term foreign currency loan.
(v) The statement of financial position includes an asset of deferred development expenditure of
$114,000. The directors are confident that the development project will be a success.
(vi) Plant and equipment was revalued on 1 April 2006 giving a surplus of $150,000. At that time
it had a remaining life of five years. It is being depreciated, based on its revalued amount, on
a straight-line basis. The excess depreciation for the years to 31 March 2007 and 2008 has
been transferred from the revaluation surplus to retained earnings.
(vii) The earnings per share (EPS) was correctly reported in last years accounts at 8 cents.
Required:
(a) Calculate the earnings per share (EPS) for Radan for the year ended 31 March 2009:
(i) on a basic basis (including the comparative figure);
(ii) on a diluted basis (ignore the comparative figure);
and state which figures need to be disclosed in the financial statements (ignore
comparatives). (11 marks)
(b) Explain why it is useful to disclose the EPS calculated on a diluted basis in addition to
the basic basis. (6 marks)
(c) Discuss the principles underlying the calculation of the distributable profit of Radan at
31 March 2009 prior to the deduction of any dividends relating to the current year; and
explain how you have treated the items in notes (iv), (v) and (vi) above. (8 marks)
(25 marks)
57
Question 44 CONNECT
Connect is a listed incorporated entity. It is quoted on its local exchange. This exchange is a member
of IOSCO and has recently announced that it is going to change its listing regulations to require all
registrants to prepare financial statements in accordance with IFRS instead of local GAAP for all
accounting periods beginning on or after 1 January 2007. Furthermore it will require members of the
exchange to use IFRS for filing purposes with immediate effect. Connect has decided to adopt IFRS
immediately.
Local GAAP has undergone considerable convergence with IFRS in recent years and there are no
major recognition and measurement implications for existing members. However the local GAAP
disclosure requirements are less demanding than IFRS in several areas. One of these is that there is no
local regulation on the need to disclose related party transactions.
Connect has asked for your help in identifying relevant related party transactions in accordance with
IFRS and for guidance on the disclosures that need to be made. Mr Joint, the finance director of
Connect, has provided the following information:
(1) The two major shareholders of Connect are Big Boy Investment Fund (BBIF) which holds
45% of the share capital and Mr Big who holds 10%. Mr Big is a multimillionaire. He set up
BBIF several years ago and is the majority investor in the fund. No other shareholder owns
more than 1%.
(2) Connect has 14 subsidiaries. There is considerable inter company trading between the
members of this group. Transfer prices are generally below market rates for members of the
group. The total inter group sales in the period are $110 million. This is at cost plus 10%.
Normal trading terms would be at cost plus 30%. The group revenue was over $800 million
in the last financial year.
(3) Connect has recently signed an advertising contract with JJ Advertising. JJ Advertising is an
agency owned by Janet Joint. She is the wife of the finance director. The contract is worth $
10 million per annum. This contract was won in a competitive tender.
(4) Connect has recently sold a tract of land to Weld. Weld is an incorporated entity. The land
was sold for $4.5 million (net of a selling cost of $100,000). The market value of the land
was $5.3 million and its value in use was $3.8 million. It was carried at a book value of $5.8
immediately prior to the sale. Mr Big is a director and major investor in Weld.
(5) Three of the directors of Connect have set up a consultancy which provides services to
Connect. Connect paid $2.6 million in respect of these services in the last financial year.
Required:
Set out, for inclusion in a report to directors, the reasons why it is important to disclose related
party transactions and the nature of any disclosure required for the above transactions under
IAS 24 Related Party Transactions.
(25 marks)
58

P2 Corporate Reporting Study Questions

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