Professional Stage Examination Tuesday 15 June 2010 (2 hours)

FINANCIAL ACCOUNTING
This paper is in two parts. Instructions for answering are given before each part. Read them carefully. Answer each question in black pen only.

All references to IFRS are to International Financial Reporting Standards and International Accounting Standards.

IMPORTANT Question papers contain confidential information and must NOT be removed from the examination hall. You MUST submit this question paper with your answer booklet and enter your candidate number in this box.

IF YOU FAIL TO DO SO YOUR SCRIPT WILL NOT BE MARKED

DO NOT TURN OVER UNTIL YOU ARE INSTRUCTED TO BEGIN WORK.

The Institute of Chartered Accountants in England and Wales 2010.

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June 2010

FINANCIAL ACCOUNTING - PART TWO

(80 marks) 1. Answer all FOUR questions.

2.

Answers to questions in this part must begin on separate pages. Use both sides of the paper in your answer booklet.

3.

Submit all workings.

4.

Ensure your candidate number is written on the front of your answer booklet.

5.

Answer each question in black pen only.

6.

The examiner will take account of the way in which material is presented.

7.

Unless otherwise stated, make all calculations to the nearest month and to the nearest .

The Institute of Chartered Accountants in England and Wales 2010.

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1.

Set out below is the trial balance of Dashwood Ltd as at 31 March 2010. Sales Purchases Administrative expenses Distribution costs Cost of developing new production process (Note 2) Plant and machinery Cost Accumulated depreciation at 31 March 2009 Land at cost (Note 4) Buildings Valuation (Note 4) Accumulated depreciation at 31 March 2009 Inventories at 31 March 2009 Retained earnings at 31 March 2009 Revaluation surplus at 31 March 2009 Ordinary share capital (1 shares) Bank account Finance lease (Note 5) Interest paid Trade and other receivables (Note 1) Trade and other payables 392,800 123,600 97,400 75,000 670,500 356,300 750,000 1,400,000 105,000 35,600 1,249,930 601,250 245,000 50,700 48,000 1,230 140,950 3,735,080 The following additional information is available: (1) One of Dashwood Ltds customers, Willoughby plc, went into liquidation in April 2010. At 31 March 2010, Willoughby plc owed Dashwood Ltd 11,000. The liquidator has indicated that only half of this debt will be recoverable. During the year Dashwood Ltd began to develop a new production process. Costs were first incurred on 1 August 2009 and accrued evenly over the period to 31 March 2010. On 1 December 2009 the production process met the relevant criteria for capitalisation as development expenditure in accordance with IAS 38, Intangible Assets. The company expects to introduce the new process in April 2010. Inventories on hand at 31 March 2010 were initially valued at a cost of 45,000. However, the production director has estimated their net realisable value to be 41,000. Dashwood Ltd revalued its buildings to 1.4 million some years ago. At the date of the revaluation the carrying amount of the buildings was 750,000 and their remaining useful life was estimated at 40 years. Dashwood Ltd makes an annual transfer between the revaluation surplus and retained earnings in accordance with best practice. Depreciation on buildings is presented in administrative expenses. In February 2010 the directors decided to also revalue the land. A report was received from the companys surveyor on 4 April 2010 estimating the value of the land at 31 March 2010 at 1 million. (5) On 1 April 2009 the directors entered into a finance lease agreement for a machine with a cash price of 225,000. The terms of the agreement required five payments of 48,000 annually, commencing on 31 March 2010. The 48,000 was duly paid on that date and also posted to the bank and finance lease accounts. No other entries have been made in respect of this transaction. Dashwood Ltd allocates finance charges on a sum-of-the-digits basis. 181,200 3,735,080 945,700

(2)

(3)

(4)

The Institute of Chartered Accountants in England and Wales 2010.

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(6)

Plant and machinery is depreciated on a straight-line basis over five years. Depreciation on plant and machinery is presented in cost of sales. The companys bank reconciliation at 31 March 2010 to the above nominal ledger balance, showed that interest for March 2010 of 500 had been taken from the companys bank account but that the nominal ledger account did not yet reflect this payment. The income tax charge for the year has been estimated at 10,000.

(7)

(8)

Requirement Prepare an income statement and statement of total comprehensive income for Dashwood Ltd for the year ended 31 March 2010 and a statement of financial position as at that date in a form suitable for publication. (24 marks)

NOTES: Notes to the financial statements are not required. Expenses should be analysed by function.

The Institute of Chartered Accountants in England and Wales 2010.

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2.

You are the assistant accountant at Middleton plc. The financial controller has asked you to prepare the companys statement of cash flows for the year ended 31 March 2010. An extract from the companys income statement for that year and its statement of financial position as at that date are set out below, together with some additional information. Income statement for the year ended 31 March 2010 (extract) 1,345,600 (23,700) 1,321,900 (265,000) 1,056,900

Profit from operations Finance costs Profit before tax Income tax expense Profit for the year

Statement of financial position as at 31 March 2010 ASSETS Non-current assets Property, plant and equipment Intangibles Current assets Inventories Trade and other receivables Cash and cash equivalents 2009

7,677,500 450,000 8,127,500 679,000 547,500 35,600 1,262,100 9,389,600

6,345,400 500,000 6,845,400 578,000 656,800 52,500 1,287,300 8,132,700

Total assets EQUITY AND LIABILITIES Equity Ordinary share capital (1 shares) Share premium account Revaluation surplus Retained earnings

2,000,000 600,000 5,252,300 7,852,300

1,400,000 200,000 1,550,000 3,524,800 6,674,800

Non-current liabilities Preference share capital (redeemable 1 shares) Current liabilities Trade and other payables Provisions Income tax payable

500,000

567,300 200,000 270,000 1,037,300 9,389,600

657,900 500,000 300,000 1,457,900 8,132,700

Total equity and liabilities

The Institute of Chartered Accountants in England and Wales 2010.

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Additional information: (1) During the year Middleton plc made the following sales of property, plant and equipment. Carrying amount Plant and equipment Land 567,000 2,000,000 2,567,000 Cash received 600,000 2,200,000 2,800,000

The revaluation surplus in the statement of financial position above relates wholly to the land which was disposed of during the year. (2) (3) Depreciation of 1,679,000 was charged for the year. The intangibles balance in the statement of financial position above relates solely to a patent purchased in 2007 which is being amortised over its estimated useful life. Trade and other payables include accrued interest payable of 6,500 (2009: 5,000). During the year, Middleton plc made a 1 for 5 bonus issue of ordinary shares out of retained earnings. This was followed by a further issue of shares at market price. The provisions figure in the statement of financial position relates to a single legal claim. It had been expected that the claim would be settled during the year ended 31 March 2010. However, negotiations have been lengthier than anticipated with the result that the estimate of the amount likely to be payable by Middleton plc has been changed significantly.

(4) (5)

(6)

Requirement Prepare a statement of cash flows for Middleton plc for the year ended 31 March 2010, including a note reconciling profit before tax to cash generated from operations, using the indirect method. (16 marks)

The Institute of Chartered Accountants in England and Wales 2010.

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3.

You are currently on secondment to Norland Ltd, a manufacturer and retailer of electrical goods. The company accountant has asked for your assistance in calculating certain figures for the consolidated statement of financial position as at 31 March 2010 and in preparing the provisions note for Norland Ltds individual (ie single company) financial statements for the year ended 31 March 2010. During the year ended 31 March 2010, Norland Ltd acquired shares in two other companies: Delaford Ltd and Barton Ltd. Details of these acquisitions and issues relating to the year-end provisions are set out below. (1) On 1 July 2009 Norland Ltd acquired 75% of the ordinary shares of Delaford Ltd for the following consideration: Cash of 200,000 payable immediately Cash of 400,000 payable in one years time (present value 385,500) 750,000 ordinary 1 shares in Norland Ltd (market value 1.20 per share) On the same date Norland Ltd acquired 30% of the ordinary shares of Barton Ltd, which it treats as an associate. The consideration of 500,000 was made up entirely of cash. The statements of financial position of the two companies at the date of acquisition showed the following: Delaford Ltd Equity Ordinary share capital (1 shares) Retained earnings 100,000 741,600 Barton Ltd 50,000 643,200

All assets and liabilities included in the companies statements of financial position at the date of acquisition were stated at their fair values, except for plant held by Delaford Ltd. This plant had a carrying amount of 220,000 but a fair value of 300,000. On 1 July 2009 this plant had a remaining useful life of five years. In the year to 31 March 2010 Delaford Ltd and Barton Ltd reported profits after tax of 235,200 and 123,600 respectively. Profits accrued evenly over the current year. (2) The following information is relevant to the provisions note: (i) At 31 March 2010 claims in respect of faulty hair straighteners were in progress from 800 customers. The claims department has advised that 20% of these claims are invalid. Of the remaining claims, 50% of the straighteners can be repaired at a cost to Norland Ltd of 20 per item, whilst the other 50% will need to be replaced at a cost of 50 per item. A similar provision was in place at 31 March 2009, amounting to 10,000. 8,500 was paid out in such claims during the year to 31 March 2010. During the year to 31 March 2010 Norland Ltd commenced a restructuring of its domestic appliances division. A formal plan was publicly announced on 1 January 2010 and the six-month programme of restructuring began on 1 March 2010. At 31 March 2010 the anticipated further costs to be incurred were: Redundancy costs Lease termination costs Staff retraining and relocation 300,000 50,000 100,000 450,000

(ii)

The Institute of Chartered Accountants in England and Wales 2010.

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(iii)

On 1 January 2009, new legislation came into force requiring manufacturers such as Norland Ltd to fit smoke filters in their factories. At 31 March 2010 Norland Ltd still had not fitted such smoke filters. The expected cost of fitting these has always been estimated at 250,000 and Norland Ltd plans to start this work in May 2010. However, a number of manufacturers which, like Norland Ltd, have failed to implement the legislation have been fined by the Health and Safety Executive. Norland Ltds lawyers have advised that there is a 75% chance that Norland Ltd will be fined for failing to comply with this legislation. Their best estimate of the fine at 31 March 2010 is 40,000. At 31 March 2009 the lawyers equivalent best estimate was 60,000.

Requirements (a) Using the information in (1) above, calculate the following figures for Norland Ltds consolidated statement of financial position as at 31 March 2010: (i) (ii) (iii) (b) Goodwill Non-controlling interest Investment in associate.

(7 marks)

Using the information in (2) above, prepare the provisions note showing the numerical movements table and relevant narrative disclosures, for inclusion in the individual financial statements of Norland Ltd for the year ended 31 March 2010. (8 marks) (15 marks)

The Institute of Chartered Accountants in England and Wales 2010.

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4.

At 1 April 2009 Jennings plc had investments in three companies: Ferrars Ltd, Brandon Ltd and Palmer Ltd. Extracts from the draft individual financial statements of the four companies for the year ended 31 March 2010 are shown below: Income statements Jennings plc 000 Revenue Cost of sales Gross profit Operating expenses Profit from operations Investment income 67,600 (43,700) 23,900 (12,700) 11,200 7,300 Ferrars Ltd 000 56,800 (41,600) 15,200 (5,400) 9,800 Brandon Ltd 000 42,500 (21,750) 20,750 (13,200) 7,550 1,000 Palmer Ltd 000 27,600 (14,300) 13,300 (5,400) 7,900 -

Profit before taxation Income tax expense Profit for the year

18,500 (4,000) 14,500

9,800 (2,000) 7,800

8,550 (1,700) 6,850

7,900 (1,500) 6,400

Statements of changes in equity (extracts) Retained earnings Ferrars Ltd Brandon Ltd 000 000 2,700 7,800 10,500 10,400 (2,000) 6,850 15,250

Jennings plc 000 At 1 April 2009 Ordinary dividends paid Total comprehensive income for the year At 31 March 2010 23,800 14,500 38,300

Palmer Ltd 000 4,550 (1,000) 6,400 9,950

Additional information: (1) The issued share capitals of the four companies at 1 April 2009 and number of shares held by Jennings plc were as follows: Issued 1 ordinary shares Jennings plc Ferrars Ltd Brandon Ltd Palmer Ltd 10 million 8 million 6 million 4 million Number of ordinary shares held by Jennings plc 6.4 million 4.2 million 1.6 million

No company has any reserves other than retained earnings. The fair values of the assets and liabilities of all three companies at acquisition were the same as their carrying amounts.

The Institute of Chartered Accountants in England and Wales 2010.

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(2)

Jennings plc acquired its shares in Ferrars Ltd several years ago for total consideration of 10 million when the retained earnings of Ferrars Ltd were 550,000. On 30 September 2009 Jennings plc sold all of its shares in Ferrars Ltd for 15 million. Ferrars Ltds profits accrued evenly over the current year. At 31 March 2009 cumulative impairment losses of 500,000 in respect of goodwill acquired in the business combination with Ferrars Ltd had been recognised. Jennings plc acquired its shares in Brandon Ltd on 1 April 2009 when the retained earnings of Brandon Ltd were 10.4 million. At 31 March 2010 an impairment loss of 700,000 was identified in respect of goodwill acquired in the business combination with Brandon Ltd and needs to be recognised. Jennings plc acquired its shares in Palmer Ltd several years ago when the retained earnings of Palmer Ltd were 600,000. Jennings plc has calculated that an impairment in the carrying amount of its investment in Palmer Ltd of 100,000 arose in the current year and needs to be recognised. During the year Brandon Ltd sold goods to Jennings plc at a mark-up of 20%. The goods cost Brandon Ltd 3 million. Half of these goods were still in Jennings plcs inventories at the year end. Investment income in Jennings plcs individual income statement includes its profit on the sale of shares in Ferrars Ltd and dividends received from Brandon Ltd and Palmer Ltd.

(3)

(4)

(5)

(6)

Requirements (a) Prepare the consolidated income statement of Jennings plc for the year ended 31 March 2010. You should assume that the disposal of Ferrars Ltd constitutes a discontinued activity in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. (18 marks) Calculate consolidated retained earnings brought forward at 1 April 2009. (3 marks)

(b) (c)

Explain the concepts underlying the preparation of consolidated financial statements, illustrating these concepts with reference to the consolidated income statement of Jennings plc. (4 marks) (25 marks)

NOTE: Work to the nearest

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