Financial Accounting - Professional Stage – June 2013

PROFESSIONAL STAGE FINANCIAL ACCOUNTING – OT EXAMINER’S COMMENTS

The performance of candidates in the June 2013 objective test questions section for the Professional Stage
Financial Accounting paper was good. Candidates performed better on LO3 (preparation of consolidated
financial statements) than they did on the other two syllabus areas.

When practising OT items, care should always be taken to ensure that the principles underlying any particular
item are understood rather than rote learning the answer. In particular, candidates should ensure that they read
all items very carefully.

The following table summarises how well* candidates answered each syllabus content area.

Syllabus area Number of questions Well answered Poorly answered

LO1 4 3 1
LO2 6 4 2
LO3 5 5 0
Total 15 12 3

*If 50% or more of the candidates gave the correct answer, then the question was classified as ‘well answered’.

Comments on the two most poorly answered questions, both in LO2 (preparation of single company financial
statements) are given below:

Item 1

This item required candidates to calculate closing inventory in accordance with IAS 2, Inventories. The question
featured raw materials, work in progress and finished goods. Almost all candidates calculated a net realisable
value for work in progress and finished goods which was lower than cost and used that figure in their
calculation. However, although most candidates correctly allowed for a discounted selling price and for costs still
to be incurred to complete the work in progress, a majority did not reduce the discounted selling price by the
selling costs to be incurred to arrive at the correct figure for net realisable value.

Item 2

This item tested the calculation of the amount of an intangible asset to be capitalised in accordance with IAS 38,
Intangible Assets. Most candidates recognised that initial research costs and the cost of evaluating research
findings should not be capitalised and that development costs and patent registration costs should be
capitalised. However, a majority of candidates failed to recognise that the depreciation charged in the period on
specialised equipment needed for the development process should also have been capitalised.

Copyright © ICAEW 2013. All rights reserved. Page 1 of 14

 Financial Accounting - Professional Stage – June 2013

PROFESSIONAL STAGE FINANCIAL ACCOUNTING

MARK PLAN AND EXAMINER’S COMMENTARY

The marking plan set out below was that used to mark this question. Markers were encouraged to use discretion
and to award partial marks where a point was either not explained fully or made by implication. More marks
were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid
points which were made by candidates.

Question 1

Overall marks for this question can be analysed as follows: Total: 30

General comments
Part (a) of this question tested the preparation of an income statement (which needed to be split between
continuing and discontinued operations) and a statement of financial position from a list of balances plus a
number of adjustments. Adjustments included a warranty provision, calculation of the annual depreciation
charge, a finance lease taken out during the year, and an adjustment to revenue to reflect IAS 18,
Revenue. Part (b) required a discussion of the objective of general purpose financial statements and the
purpose of accounting standards, illustrated by reference to the financial statements prepared in Part (a).

Falcon Ltd
(a) Income statement for the year ended 31 December 2012

£
Continuing operations
Revenue (W5) 1,264,600
Cost of sales (W1) (631,750)
Gross profit 632,850
Distribution costs (W1) (38,200)
Administrative expenses (W1) (223,200)
Profit from operations 371,450
Finance cost (12,600 + 1,000 (W6)) (13,600)
Profit before tax 357,850
Income tax expense (35,000 – 2,000) (33,000)
Profit for the year from continuing operations 324,850

Discontinued operations
Loss for the year from discontinued operations (W2) (164,600)
Profit for the year 160,250

Statement of financial position as at 31 December 2012

£ £
Assets
Non-current assets
Property, plant and equipment (W3) 543,750
Current assets
Inventories 35,600
Trade and other receivables 32,800
68,400
Non-current asset held for sale 80,000
148,400
Total assets 692,150

Copyright © ICAEW 2013. All rights reserved. Page 2 of 14

 Financial Accounting - Professional Stage – June 2013

Equity and liabilities

Equity
Ordinary share capital 200,000
Retained earnings (W4) 140,550
340,550
Non-current liabilities
Finance lease liability (W6) 103,500
Deferred income (60,000 x 1/3) 20,000
123,500
Current liabilities
Trade and other payables 78,500
Taxation 35,000
Deferred income (60,000 x 1/3) 20,000
Provisions 55,000
Finance lease liability (W6) 5,000
Borrowings 34,600
228,100
Total equity and liabilities 692,150

Workings

(1) Allocation of expenses

Cost of sales Distribution Administrative
costs expenses
£ £ £
Per Q 744,300 43,500 235,600
Opening inventories 30,200
Adj re discontinued operations (160,900) (5,300) (17,400)
Adj re lease payment (5,000)
Closing inventories (35,600)
Depreciation charges (W3) 53,750 10,000
631,750 38,200 223,200

(2) Loss on discontinued operations

£
Revenue 114,000
Costs included in TB (160,900 + 17,400 + 5,300) (183,600)
Loss on held for sale asset/depreciation (120,000 – (85,000 – (40,000)
5,000))
Other discontinued operations costs (55,000)
(164,600)

(3) PPE
Plant and Land and
equipment buildings
£ £
B/f Cost 570,600 375,000
B/f Accumulated depreciation (235,600) (95,000)
Classified as held for sale (120,000)
Leased building (W6) 112,500
215,000
Depreciation – plant @ 25% (53,750)
Depreciation – buildings ((275,000 x 2%) Ab + (112,500 ÷ 25) (OF)) (10,000)

161,250 382,500

Total PPE 543,750

Copyright © ICAEW 2013. All rights reserved. Page 3 of 14

 Financial Accounting - Professional Stage – June 2013

(4) Retained earnings

£
At 1 January 2012 (19,700)
Profit for the period 160,250
At 31 December 2012 140,550

(5) Revenue
£
Per TB 1,418,600
Less: After sales support re future years (60,000 x 2/3) (40,000)
Discontinued operations (114,000)
1,264,600

(6) Lease of land and buildings

SOD = (24 x 25)/2 = 300

£
Total payments (5,000 x 25) 125,000
Fair value (112,500)
Finance charge 12,500

Year ended 31 B/f Payment Capital Interest C/f

December
£ £ £ £ £
2012 112,500 (5,000) 107,500 24/300 x 108,500
12,500)
1,000
2013 108,500 (5,000) 103,500

Tutorial note

Credit was also given if candidates depreciated the held for sale asset to the date of classification as held
for sale, and then calculated a (smaller) impairment loss. The shortcut taken above recognised the fact
that only a single figure for PPE was required for the statement of financial position.

Copyright © ICAEW 2013. All rights reserved. Page 4 of 14

 Financial Accounting - Professional Stage – June 2013

Most candidates made a reasonable attempt at this question with the vast majority preparing a complete
statement of financial position and income statement. Presentation was reasonable, although a significant
number of candidates lost marks by failing to include appropriate sub-totals on their statement of financial
position. The majority of candidates did not appear to have been unnerved by the inclusion of a
discontinued operation in this question and, pleasingly, almost all included a figure for loss from
discontinued operations on the face of the income statement, although hardly any candidates showed
headings for “Continuing operations” and “Discontinued operations” (which was surprising as these were
included in Question 2 on the paper).

The adjustments to revenue, opening and closing inventory, the finance lease calculations, the asset held
for sale and allocation of costs to the correct expense category were all well dealt with, although very many
candidates calculated a second year interest charge for the finance lease when this was not needed. By
far the most common errors were the failure to correctly split the finance lease liability between current and
non-current, the inclusion of the wrong amount on the statement of financial position for income tax
payable (including the charge for the year, as opposed to the liability for the year), and an incomplete
calculation of the loss from discontinued operations. With regards to the latter, almost all candidates
calculated this as the sales of the Scottish operations less its costs, but far less increased this loss by the
estimated future costs and/or by the depreciation and/or impairment on the held for sale asset, with many
candidates either ignoring these figures or including them in continuing operations. A minority of
candidates time-apportioned the figures for the Scottish operations, clearly not understanding how IFRS 5
should be applied.

Other common errors included the following.

- Failing to deduct the prior year tax overestimate from the current year tax estimate to arrive at the
correct current year income statement charge and/or showing the wrong figure in current liabilities.
- Not correcting administrative expenses to remove the lease payment incorrectly posted to this
account.
- Incorrectly calculating the sum-of-the-digits for the finance lease.
- Treating the resultant deferred income as a current or non-current asset rather than as a liability or
failing to split the liability between current and non-current.
- Showing the asset held for sale in non-current as opposed to current assets.
- Taking the depreciation on the leased asset to cost of sales instead of administrative expenses.
- Adding the opening retained loss to the profit for the year, instead of deducting it.
- Failing to include a sub-total for operating profit on the income statement.
- Calculating, usually correctly, a carrying amount for the leased asset but then failing to add that
figure in to the property, plant and equipment figure for the statement of financial position.
- Calculating depreciation and/or impairment on the held for sale asset but failing to remove the cost
of the held for sale asset from property, plant and equipment.
- Depreciating the leased asset by 2% when it had a shorter useful life of 25 years.

Almost all candidates did use the recommended “costs matrix” when allocating costs between the three
expense categories. It was very noticeable that those candidates who did not use this format tended to
produce disorganised workings (often split between the face of the income statement and /or a number of
separate workings) which were difficult to follow and therefore might have lost marks. Far fewer candidates
seem capable of producing a clear working for property, plant and equipment which resulted in them
repeating calculations and often losing the “connection” between the depreciation expense to go into the
costs matrix and the depreciation expense to be added to accumulated depreciation brought forward. It
was often impossible to see any “audit trail” to support the final figure for property, plant and equipment on
the face of the statement of financial position and many candidates lost potential marks because of this.
This is an issue which has been flagged up repeatedly.
Total possible marks 25
Maximum full marks 25

Copyright © ICAEW 2013. All rights reserved. Page 5 of 14

 Financial Accounting - Professional Stage – June 2013

(b) The objective of general purpose financial reporting

The IASB Conceptual Framework states that the objective of general purpose financial reporting is to
provide financial information about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity. These decisions
involve buying, selling or holding equity and debt instruments and providing or settling loans and other forms
of credit.

For example, the lessor of the land and buildings may have looked at Falcon Ltd’s previous financial
statements in deciding whether or not to extend credit. They would have considered whether Falcon Ltd
would be likely to be able to meet the lease repayment terms.

Investors would be particularly interested in the information concerning continuing versus discontinued
operations – particularly as the continuing operations have made a profit of £324,850, but the discontinued
operations have made a loss of £164,600. Without this split it may have seemed that Falcon Ltd was only
able to generate profits of £160,250, less than half of its actual continuing profits.

Falcon Ltd’s suppliers may look at the financial statements in deciding whether or not to grant credit – they
may be concerned that the fact that Falcon Ltd’s current liabilities are way in excess of its current assets
may mean that the company could struggle to pay its debts as they fall due.

The purpose of accounting standards

The purpose of accounting standards is to identify proper accounting practices for the preparation of
financial statements. Accounting standards create a common understanding between users and
preparers on how particular items are treated.

For example, it will be clear from Falcon Ltd’s financial statements that it carries its property, plant and
equipment under the cost model. Users will need to then take care if comparing Falcon Ltd’s financial
statements with those which use the valuation model.

It is IAS 17, Leases, which dictates the correct treatment of finance versus operating leases. Hence the
lease of the building was treated as a finance lease. This will be common practice across all entities
following IFRS and will make their financial statements comparable with those of other companies.

IAS 18, Revenue, dictates that Falcon Ltd only account for revenue on services provided to date. Hence an
adjustment was made in Part (a) to remove the revenue relating to after-sales support not yet provided.
Again, this will be common practice across all entities following IFRS
Attempts at the written part of the paper were, as usual, disappointing, with very few candidates scoring
more than one or two marks. Many failed to gain the marks for those parts of the answer that could be taken
from the open book text, and only a minority were able to provide examples from Falcon Ltd’s financial
statements which were relevant to either the objective of general purpose financial reporting or to the
purpose of accounting standards. Whilst most candidates recognised that accounting standards helped to
achieve consistency or comparability very few made the point that accounting standards inform the
preparers of accounts how to deal with key accounting issues in the financial statements. Many candidates
thought that the main purpose of accounting standards is to ensure that financial statements are prepared
on the basis of “substance over form” and then proceeded to give examples of accounting for substance
over form. Others discussed the qualitative characteristics of financial statements at length and gave
examples of how various accounting standards met these qualitative characteristics.
Total possible marks 8½
Maximum full marks 5

Copyright © ICAEW 2013. All rights reserved. Page 6 of 14

 Financial Accounting - Professional Stage – June 2013

Question 2

Overall marks for this question can be analysed as follows: Total: 19

General comments
This question tested the preparation of a consolidated statement of cash flows and supporting note, where a
subsidiary had been disposed of during the year. Missing figures to be calculated included dividends paid
(to the group and to the non-controlling interest), dividends received, tax paid, additions to property, plant
and equipment, and proceeds from the issue of share capital.

Eagle plc

Consolidated statement of cash flows for the year ended 31 December 2012
£ £
Cash flows from operating activities
Cash generated from operations (Note) 495,850
Interest paid (W1) (20,000)
Income tax paid (W2) (81,200)
Net cash from operating activities 394,650
Cash flows from investing activities
Purchase of property, plant and equipment (W3) (460,200)
Proceeds from sale of property, plant and equipment 60,000
Dividends received from associate (W4) 50,600
Disposal of Owl Ltd net of cash disposed of ((194,450 x
80%) + 10,500) – 1,500) 164,560
Net cash used in investing activities (185,040)
Cash flows from financing activities
Proceeds from share issues (220,000 + 50,000) – 140,000 110,000
+ 20,000))
Repayment of long-term loan (150,000 – 125,000) (25,000)
Dividends paid (W5) (266,200)
Dividends paid to non-controlling interest (W6) (22,410)
Net cash used in financing activities (203,610)
Net increase in cash and cash equivalents 6,000
Cash and cash equivalents at beginning of period 14,500
Cash and cash equivalents at end of period 20,500

Note: Reconciliation of profit before tax to cash generated from operations

£
Profit before tax (324,100 + 41,400) 365,500
Share of profits of associate (56,700)
Finance cost 22,000
Profit on disposal of property, plant and equipment (60,000 – 56,000) (4,000)
Depreciation charge 175,600
Increase in trade and other receivables ((75,700 + 13,900) – 88,900) (700)
Decrease in trade and other payables ((52,800 – 3,000) – (40,500 + 8,450 – 5,000)) (5,850)
Cash generated from operations 495,850

Copyright © ICAEW 2013. All rights reserved. Page 7 of 14

 Financial Accounting - Professional Stage – June 2013

Workings

(1) Interest paid

£ £
Cash (β) 20,000 B/d 3,000
C/d 5,000 CIS 22,000
25,000 25,000

(2) Income tax

£ £
Cash (β) 81,200 B/d 78,000
C/d 68,000 CIS (64,800 + 6,400) 71,200
149,200 149,200

(3) Property, plant and equipment

£ £
B/d 983,500 Disposal of sub 187,500
Other disposals 56,000
Additions (β) 460,200 Depreciation charge 175,600
C/d 1,024,600
1,443,700 1,443,700

(4) Investment in associate

£ £
B/d 179,800 Cash received (β) 50,600
CIS 56,700 C/d 185,900
236,500 236,500

(5) Retained earnings

£ £
Dividends in SCE (β) 266,200 B/d 675,100
C/d 663,000 CIS 254,100
929,200 929,200

(6) Non-controlling interest

£ £
Cash (β) 22,410 B/d 150,800
Disposal (194,450 x 20%) 38,890
C/d 140,200 CIS 50,700
201,500 201,500

Copyright © ICAEW 2013. All rights reserved. Page 8 of 14

 Financial Accounting - Professional Stage – June 2013

Most candidates produced a well-presented statement of cash flows with all the relevant headings, although
the headings that continue to let candidates down are “property, plant and equipment” which was all too often
shortened to “PPE” and Dividends paid to non-controlling interest” abbreviated to use “NCI”. Such
abbreviations, in one of the main financial statements, will cause candidates to lose presentation marks. As
usual, many candidates lost marks for use of the incorrect bracket convention and/or including cash flows
under the wrong headings. Typically for a question featuring a consolidated statement of cash flows,
candidates lost most marks on the groups aspect of the question, in particular failing to adjust accurately for
the disposal of the subsidiary and miscalculating the figure for the actual disposal as it should appear in the
statement.

In the main, workings took the form of T accounts, with very few candidates completing some of their T
accounts with all the entries the wrong way round. However, some candidates still insist on producing tabular
workings or workings on the face of the statement of cash flows. This can make it more difficult to see
evidence of correct double entry and to award marks where the final figure is incorrect (or uses the incorrect
bracket convention). Pleasingly, hardly any candidates produced no workings at all – an even riskier approach
as if figures are calculated incorrectly it is not possible to award any partial marks.

The reconciliation note was generally well done with candidates making a good attempt at the adjustments.
However, most candidates failed to add the disposed of subsidiary’s profit before tax to the continuing profit
before tax, to form the first figure of the reconciliation note. Most candidates correctly made the adjustments for
the associate, the finance costs and the depreciation charge. The profit on disposal of property, plant and
equipment was often ignored or added instead of being deducted. It was less common to see the correct
adjustments for the movements in trade receivables and payables, with most errors being made over the
adjustment for the disposed of subsidiary’s figures.

Figures for income tax paid, interest paid, repayment of the long-term loan and purchase of property, plant and
equipment were those most commonly calculated correctly and shown correctly on the face of the statement
although in a minority of cases a positive figure was shown. However, a significant number of candidates failed
to adjust, or adjusted incorrectly for, the tax on the discontinued operations in the income tax T-account.
Others omitted to include all three necessary credit entries in the property, plant and equipment T-account.

Many candidates also correctly calculated the figure for dividends received from the associate and dividends
paid to the parent, although a number misclassified the former as a financing cash flow and others included
total profit for the year in retained earnings instead of including only the group share. It was less common to
see the correct figure for dividends paid to the non-controlling interest as, once again, many candidates failed
to adjust or adjusted incorrectly for the subsidiary disposed of during the period. It was also rare to see the
correct figure for the disposal of the subsidiary, with many miscalculating the sale proceeds (showing a lack of
understanding as to how the profit on disposal is calculated), although most clearly knew to deduct the cash
disposed of from their figure (although a minority deducted this from the closing cash and cash equivalents
figure in the statement of cash flows).

Only a minority of candidates correctly calculated the proceeds from the share issues, as many failed to
appreciate that the bonus issue (which was made out of the share premium account) was effectively a contra
entry between the share capital and share premium accounts. Hence all that was needed was a comparison of
the opening and closing figures in a combined T-account to arrive at the cash proceeds.
Total possible marks 19
Maximum full marks 19

Copyright © ICAEW 2013. All rights reserved. Page 9 of 14

 Financial Accounting - Professional Stage – June 2013

Question 3

Overall marks for this question can be analysed as follows: Total: 22

General comments
This question featured a group of companies, comprising parent, two subsidiaries (one acquired during the
year) and one associate. Part (a) required the calculation of the goodwill arising on acquisition of the new
subsidiary, with fair value adjustments to be made. Part (b) required the preparation of the consolidated
income statement. Adjustments included intra-group transactions of both inventory and property, plant and
equipment, and impairment write-downs.

Kite plc

(a) Goodwill arising in the business combination with Vulture Ltd

£ £
Consideration
Cash 15,000
Shares at market value (300,000 x £1.30) 390,000
405,000
Net assets at acquisition
Share capital 100,000
Retained earnings at 1 January 2012 567,000
Profit to 31 March 2012 (49,200 x 3/12) 12,300
Less: Dividends paid (120,000)
Fair value adjustments:
Re building (W) 44,000
Goodwill to be written off (33,000 – (3,600 x 3/12)) (32,100)
Contingent liability (20,000)
(551,200)
Non-controlling interest at acquisition x 30% 165,360
19,160
Working – fair value adjustment re building
£
Fair value at 1 April 2012 154,000
Carrying amount at 1 April 2012 (250,000 – ((250,000 ÷ 25) x 14)) (110,000)
44,000

Almost all candidates used the correct methodology for calculating goodwill, although some lost marks for
not showing the % used to calculate the non-controlling interest share of the net assets at acquisition. It is
not sufficient to put “x NCI%”.

In calculating the consideration almost all candidates included the cash of £15,000 and the shares at market
value. However, many then also included the professional fees that should have been written off to
expenses. Others deducted this figure, failing to appreciate that whilst the company had incorrectly included
this figure in the cost of investment (which was not given in the question), they themselves had not, having
correctly added the cash and the shares. It was therefore rare to see this amount written off to operating
expenses in Part (b).

In calculating the net assets at acquisition, almost all candidates added share capital, retained earnings
brought forwards and three months of the profit for the year. Fewer deducted the dividends paid and fewer
still made the correct adjustment for goodwill (although a good number adjusted by the gross figure of
£33,000). Where an adjustment was made for the contingent liability, most did use the correct figure of
£20,000.

A good number of candidates correctly calculated the fair value adjustment in respect of the building,
although a significant minority calculated this in Part (b) and did not adjust for it in Part (a). Some credit was
given for this.
Total possible marks 6½
Maximum full marks 6

Copyright © ICAEW 2013. All rights reserved. Page 10 of 14

 Financial Accounting - Professional Stage – June 2013

(b) Consolidated income statement for the year ended 31 December 2012
£
Revenue (W1) 2,818,550
Cost of sales (W1) (1,850,525)
Gross profit 968,025
Operating expenses (W1) (584,000)
Profit from operations 384,025
Share of profit of associate ((30,600 x 40%) – 3,000 – 2,160 (W2)) 7,080
Profit before tax 391,105
Income tax expense (W1) (76,125)
Profit for the period 314,980

Profit attributable to
Owners of Kite plc (β) 275,500
Non-controlling interest (W3) 39,480
314,980

Workings

(1) Consolidation schedule

Kite plc Harrier Vulture Adj Consol

Ltd Ltd
9/12
£ £ £ £ £

Revenue 1,579,500 879,500 491,550 (132,000) 2,818,550

Cost of sales – per Q (1,050,600) (598,700) (328,125) 132,000
– PURP (W2) (13,200)
– PPE PURP ((275,000 – 8,100 (1,850,525)
234,500) ÷ 5)
Op expenses – per Q (345,600) (103,800) (117,300)
– prof fees re acquisition (5,000)
– additional deprec on (3,000)
building ((44,000 (OF from a)
÷ 11) x 9/12)
– adj re GW w/o on acq 2,700
(3,600 x 9/12)
– GW impairment (12,000) (584,000)
Tax (37,500) (29,400) (9,225) (76,125)
142,500 36,600

(2) PURPs
Harrier Ltd Buzzard Ltd
% £ £
Sales 100 132,000 54,000
Cost of sales (80) (105,600) (43,200)
GP 20 26,400 10,800
x½ 13,200 5,400
X 40% 2,160

(3) Non-controlling interest in year

£
Harrier Ltd (20% x 142,500 (W1)) 28,500
Vulture Ltd (30% x 36,600 (W1)) 10,980
39,480

Copyright © ICAEW 2013. All rights reserved. Page 11 of 14

 Financial Accounting - Professional Stage – June 2013

The consolidation schedule was generally prepared correctly with almost all candidates appreciating that
only nine-twelfths of the acquired subsidiary’s results should be included. Candidates who produced a
consolidation schedule gained the majority of the more straightforward marks available and then usually
went on to prepare a reasonable consolidated income statement which gained a good number of the
presentation marks available. The most common loss of presentation marks was for abbreviating non-
controlling interest to “NCI”. Very few candidates did their consolidation workings on the face of the group
income statement, which was pleasing.

Most candidates correctly reduced group revenue and cost of sales by the sales made between the parent
and the subsidiary, but some also made the same adjustment with the sales between the parent and the
associate.

The majority of candidates correctly calculated the two provisions for unrealised profit on intra-group sales,
although some then forgot to reduce the group share of the associate’s profit by only the group share of the
associate’s provision for unrealised profit. The non-controlling interest was correctly calculated by the
majority of candidates although a small number used the group percentage holding rather than the non-
controlling interest percentage. Others omitted to state what percentage they were using in this calculation
(or what figure they were multiplying this percentage by) and so lost marks.

Most candidates made a reasonable attempt at the associate calculation, with the most common error being
a failure to adjust for the unrealised profit (or forgetting to adjust it for the associate percentage). A few
candidates omitted to reduce the group share of the associate’s profit by the impairment loss in respect of
the associate, with some charging this instead against the parent’s profits.

The most common mistakes were made in the calculation of the adjustments in the consolidation schedule.
The provision for unrealised profit in respect of the subsidiary’s sales was generally included correctly along
with the goodwill impairment, although a significant number of candidates also deducted the impairment
loss in respect of the associate. A minority of candidates included the goodwill impairment in the
subsidiary’s column instead of in the parent’s. The intra-group sale of a machine was less well dealt with,
with only a minority of candidates getting this completely correct. A significant number of candidates
calculated the correct unrealised profit figure but then went on to add it to cost of sales rather than
deducting it. It was also common to see this figure in the parent’s column rather than the subsidiary’s (ie
seller’s) column. A significant number of candidates failed to appreciate that this transfer had taken place in
the previous year and so there was no need to make an adjustment for the original profit on transfer, but just
for the difference in subsequent depreciation.

The additional depreciation on the fair value adjustment calculated in Part (a) also produced a number of
different answers with only a minority of candidates gaining all the marks for the calculation and for dealing
with the adjustment correctly. Common mistakes were to either not take nine-twelfths of the of one year’s
worth of the adjustment or to use the incorrect adjustment in the first place. The most common error for the
write-off of the goodwill on the unincorporated business was to not adjust by nine-twelfths and/or to add the
resultant figure to operating expenses rather than deducting it.
Total possible marks 16
Maximum full marks 16

Copyright © ICAEW 2013. All rights reserved. Page 12 of 14

 Financial Accounting - Professional Stage – June 2013

Question 4

Overall marks for this question can be analysed as follows: Total: 9

General comments
This question required the preparation of a statement of changes in equity for a single entity. Opening
balances were provided together with a series of events which occurred during the current year. Matters to
be dealt with included the issue of ordinary shares, the payment of ordinary and redeemable preference
dividends, a prior period error, a change from the cost model to the revaluation model (with resultant
reserve transfer) and a change of depreciation method. Some of the matters also impacted on the draft
profit for the period.

Hawk Ltd

Statement of changes in equity for the year ended 31 December 2012

Ordinary Share premium Retained earnings Revaluation

share surplus
capital

£ £ £ £
At 1 January 2012 500,000 125,000 489,700 –

Correction of error – – (100,000) –

Restated balance 500,000 125,000 389,700 –

Issue of ordinary shares 100,000 50,000 – –

Total comprehensive income – – 79,300 400,000
for the year (Ws 1 and 2)
Dividend on ordinary shares – – (120,000) –
(600,000 x 0.20)
Transfer to retained earnings – – 20,000 (20,000)
(W2)

At 31 December 2012 600,000 175,000 369,000 380,000

Workings

(1) Revised profit for the year

£
Draft profit 137,800
Less: Dividend on redeemable preference shares (200,000 x 3%) (6,000)
Depreciation on property (3,000,000 ÷ 20) (150,000)
Adj to depreciation re special plant (W3) (2,500)
Add: Error re opening inventory 100,000
79,300

Copyright © ICAEW 2013. All rights reserved. Page 13 of 14

 Financial Accounting - Professional Stage – June 2013

(2) Revaluation and depreciation transfer

£
Valuation on 1 January 2012 3,000,000
Carrying amount of property on 1 January 2012 (3,370,000 – 770,000) 2,600,000
400,000
Annual transfer ÷ 20 20,000

(3) Depreciation adjustment re special plant

£
Depreciation charged in 2012 (30,000 x 25%) 7,500
Depreciation on new basis (30,000 ÷ 3) 10,000
Additional charge needed 2,500

Most candidates made some kind of attempt at this question although full presentation marks were only
gained by a minority of candidates. The majority of candidates correctly included the brought forward figures
for ordinary share capital and share premium. The brought forward figure for retained earnings was
sometimes adjusted by the correction of the error rather than showing this adjustment as a separate line on
the statement of changes in equity itself. Where the correction of the error was made on the statement it was
often added rather than deducted. Only a few candidates showed a restated balance after this adjustment
had been made.

The majority of candidates showed the correct entries for the share issue in the period, and for the dividend
payment made. Candidates generally included the profit figure in the statement although only a minority
correctly identified this as being part of “total comprehensive income”. The adjustments to profit were not
generally well dealt with, with probably only around half of candidates making some of the adjustments. Of
those candidates that did attempt to make adjustments to profit the most common errors were to make the
adjustments in the wrong direction (ie added rather than deducted or vice versa). Some candidates made
their adjustments on the face of the statement of changes in equity, instead of in a separate working. Only a
small minority of candidates included the redeemable preference shares in the statement of changes in
equity.

The revaluation surplus arising in the year was generally calculated correctly, although this was almost
always presented on a separate line to “total comprehensive income” usually being described as a
revaluation, highlighting a lack of understanding in this area. Most candidates who arrived at the correct
revaluation figure also arrived at the correct transfer between the revaluation surplus and retained earnings,
reflecting the “excess” depreciation for the year.

Only a minority of candidates correctly calculated the depreciation adjustment for the special plant and went
on to adjust profit correctly for it. A number of candidates calculated one or other of the old and new
depreciation figures but then often failed to make the resultant adjustment in the correct direction.
Total possible marks 10
Maximum full marks 9

Copyright © ICAEW 2013. All rights reserved. Page 14 of 14