FINANCIAL REPORTING (FR)

QUESTION PACK

S. No Question ACCA Exam Paper Syllabus Area

1 Perd Co Sep/Dec 2022 Preparation of consolidated financial statements
2 Treats Co Sep/Dec 2022 Analysing and interpreting the financial statements
3 Venus Mar/Jun 2022 Analysing and interpreting the financial statements
4 Print Mar/Jun 2022 Preparation of single entity financial statements
5 Mims Co Sep/Dec 2021 Preparation of single entity financial statements
6 Pinardi Sep/Dec 2021 Analysing and interpreting the financial statements
7 Karl Group Sep/Dec 2020 Preparation of consolidated financial statements
8 Loudon Co Sep/Dec 2020 Preparation of single entity financial statements
9 Plank Co Mar/Jun 2020 Preparation of consolidated financial statements
10 Fit Co Mar/Jun 2020 Analysing and interpreting the financial statements
11 Bun Co Sep/Dec 2019 Analysing and interpreting the financial statements
12 Runner Co Sep/Dec 2019 Preparation of consolidated financial statements
13 Pirlo Mar/Jun 2019 Analysing and interpreting the financial statements
14 Vernon Mar/Jun 2019 Preparation of single entity financial statements
15 Perkins Mar/Jun 2018 Analysing and interpreting the financial statements
16 Haverford Mar/Jun 2018 Preparation of single entity financial statements
17 Duke Mar/Jun 2018 Preparation of consolidated financial statements
18 Duggan Mar/Jun 2018 Preparation of single entity financial statements
19 Yogi Jun 2015 Analysing and interpreting the financial statements
20 Cyclip Jun 2015 Preparation of consolidated financial statements
21 Xpand Dec 2014 Analysing and interpreting the financial statements
22 Quincy Dec 2014 Preparation of single entity financial statements
23 Plastik Dec 2014 Preparation of consolidated financial statements
24 Enca Jun 2014 Tangible non-current assets
25 Skeptic Jun 2014 Accounting for transactions in financial statements
26 Woodbank Jun 2014 Analysing and interpreting the financial statements
27 X-tol Jun 2014 Preparing single entity financial statements
28 Penketh Jun 2014 Preparation of consolidated financial statements
29 Polestar Dec 2013 Preparation of consolidated financial statements
30 Kingdom Dec 2013 Statement of cash flows
31 Speculate Jun 2013 Tangible non-current assets
32 Pulsar Jun 2013 Reporting financial performance
33 Monty Jun 2013 Preparation of single entity financial statements
34 Shawler Dec 2012 Tangible non-current assets
35 Viagem Dec 2012 Preparation of consolidated financial statements
36 Learning Co N/A Preparing single entity financial statements

Page 1 of 74
 Perd Co

This scenario relates to two requirements.

Perd Co acquired 80% of Sebastian Co on 1 April 20X6. Non-controlling interest is valued at fair value.

Extracts from the draft financial statements of both entities are shown below:

Statement of profit or loss for the year ended 31 March 20X8:

Perd Co Sebastian Co
$'000 $'000
Revenue 58,200 34,300
Cost of sales (34,340) (20,400)
Gross profit 23,860 13,900
Operating expenses (18,040) (7,130)
Profit from operations 5,820 6,770
Investment income 3,000 -
Finance costs (3,240) (1,600)
Profit before tax 5,580 5,170
Tax (1,560) (1,480)
Profit for the year 4,020 3,690

Statement of financial position as at 31 March 20X8:

Perd Co ($'000) Sebastian Co ($'000)
Total assets 297,310 110,540

The following information is relevant:

1. The cost of Perd Co's investment in Sebastian Co has been excluded from the total assets listed
above. As part of the consideration for Sebastian Co, $8m is due to be paid on 1 April 20X8. Perd Co
recorded a liability of $7.547m in its individual statement of financial position at 31 March 20X7 which
correctly represents the liability at that date. No other accounting entries have been made in relation
to this consideration for the year ended 31 March 20X8. Perd Co has a cost of capital of 6%.
2. On acquisition of Sebastian Co, the goodwill was correctly calculated at $3.2m. In the year to 31
March 20X7, goodwill was deemed to have been impaired by $400,000. A further impairment of
$300,000 is to be recognised for the year ended 31 March 20X8. Impairment losses are charged to
operating expenses.
3. At 1 April 20X6, Sebastian Co's property had a carrying amount of $11m but a fair value of $14m. At
this date, the property had a remaining life of 15 years. Sebastian Co sold the property for $15m on
30 September 20X7. For the year ended 31 March 20X8, Sebastian Co has recorded the historic
cost depreciation and the historic cost profit on disposal of the property in operating expenses.
Depreciation is charged on a pro-rata basis.
4. Perd Co made sales of $9m to Sebastian Co during the year ended 31 March 20X8.
Sebastian Co had only paid for $2m of these goods at 31 March 20X8. These sales were made at a
mark-up on cost of 25%, and Sebastian Co holds one third of these goods at 31 March 20X8.
5. At 31 March 20X8, the Perd group decided to revalue its non-current assets for the first time. Perd
Co's assets were deemed to have increased by $4.1m and Sebastian Co's assets by $0.7m. Neither
company has recorded the revaluation in its individual financial statements. Ignore deferred tax.
6. Sebastian Co paid a dividend of $1m in the year, which has been correctly recorded by both
companies.

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 Requirements

(a) Prepare the consolidated statement of profit or loss and other comprehensive income for the
Perd group for the year ended 31 March 20X8. (15 marks)

(b) Calculate the total assets that would be recognised in the consolidated statement of financial
position for the Perd group as at 31 March 20X8. (5 marks)

TOTAL 20 marks

Page 3 of 74
 Treats Co

This scenario relates to two requirements.

Treats Co manufactures confectionery. The following sector average ratios have been obtained for the
year ended 30 September 20X6:

Ratio Sector average

Return on year-end capital employed (ROCE) 28.80%
Net asset turnover 2.4 times
Gross profit margin 55%
Operating profit margin 12%
Current ratio 1.8:1
Inventory turnover period 25 days
Gearing (debt/equity) 43%
Receivables collection period 15 days

Extracts from the financial statements of Treats Co for the year ended 30 September 20X6 are as
follows:

Statement of Profit or Loss:

$'000
Revenue 214,553
Cost of sales (108,009)
Gross profit 106,544
Operating expenses (99,078)
Profit from operations 7,466
Finance costs (1,329)
Profit before taxation 6,137
Taxation (1,783)
Profit for the year 4,354

Statement of Financial Position:

ASSETS $'000
Non-current assets:
Property, plant and equipment (note (1)) 61,984

Current assets:
Inventories 30,393
Trade and other receivables 17,603
47,996
Total Assets 109,980

EQUITY and LIABILITIES

Equity:
Ordinary shares 7,000
Other components of equity (Share premium) 13,605

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 Retained earnings 5,363
Total equity (note (2)) 25,968

Non-current liabilities:
Borrowings 33,621

Current liabilities:
Trade and other payables 25,390
Overdraft (note (3)) 24,090
Current tax liabilities 911
50,391
Total Equity and Liabilities 109,980

The following information is also relevant:

1. The property, plant and equipment relates to retail stores operated by Treats Co and the
manufacturing plant, all of which are depreciated on a straight line basis over 20 years. The original
cost of these assets was $637.84m and the directors are now considering replacing and updating
much of the plant and equipment.
2. Treats Co paid a dividend of $7.14m during the year despite the concern raised by some directors
over the existing overdraft.
3. The overdraft is used for working capital management purposes and does not form part of the long-
term financing of Treats Co.
4. Treats Co sells its products through supermarket chains in addition to its owned retail stores. Most
companies in the sector exclusively sell through their own retail stores.

Note: The following preformatted table relates to part (a) of the question and has been replicated in the
response area.

Sector average per

Ratio Workings Treats Co
question
Return on year-end capital employed to be
28.80%
(ROCE) calculated
to be
Net asset turnover 2.4 times
calculated
to be
Gross profit margin 55%
calculated
to be
Operating profit margin 12%
calculated
to be
Current ratio 1.8:1
calculated
to be
Inventory turnover period 25 days
calculated
to be
Gearing (debt/equity) 43%
calculated
to be
Receivables collection period 15 days
calculated

Page 5 of 74
 (a) Calculate for Treats Co the equivalent ratios to those provided for the confectionery
manufacturing sector.

Note: The preformatted table relating to part (a) (see below) has also been replicated in the
question scenario for your information. (5 marks)

(b) Analyse the performance and financial position of Treats Co in comparison to its sector
averages. (15 marks)
TOTAL 20 marks

Page 6 of 74
 Venus

This scenario relates to four requirements.

Venus Co acquired 70% of the equity share capital of Luto Co, its only subsidiary, on 1 January 20X8.

On reviewing the consolidated financial statements, the managing director of Venus Co was
disappointed, commenting that he had expected to see higher gross profit for 20X8 due to the receipt of
discounted purchases from Luto Co in the post-acquisition period. He has remarked that the acquisition
of Luto Co has not had the positive impact he expected.

Extracts from the draft financial statements of the Venus Group and Venus Co (single entity) for the
years ended 30 June 20X7 and 20X8 are:

Venus Group (consolidated) Venus Co

30 June 20X8 (single entity)
$'000 30 June 20X7
$'000
Statement of profit or loss:
Revenue 39,000 32,000
Cost of sales (26,500) (21,000)
Gross profit 12,500 11,000

Net profit for the year 9,800 8,900

Profit attributable to:
Owners of Venus Co 9,200
Non-controlling interest 600

Statement of financial position:

Equity
Share capital 30,000 20,000
Other Components of Equity (Share premium) 35,000 5,000
Retained earnings 21,000 17,000
Non-controlling interest (NCI) 1,500
87,500 42,000

The acquisition of Luto Co has been accounted for correctly in the above financial statement extracts
and the following notes are relevant:

(1) Luto Co recognised revenue of $5m in the post-acquisition period which resulted in a profit of $2m.
(2) Since the acquisition, Venus Co is able to acquire goods from Luto Co at a discount. This has
resulted in a saving of $500,000 for Venus Co in the post-acquisition period. At 30 June 20X8 Venus
Co had no inventory that had been purchased from Luto Co.
(3) The consideration for the acquisition consisted of a share exchange and an additional $5m to be paid
on 1 January 20X9. Venus Co has a cost of capital of 8% which is equivalent to a discount factor of
0.926.
(4) The fair values of Luto Co’s assets at acquisition were equal to their carrying amounts, except for an
item of plant. This plant had a remaining life of three years at the date of acquisition. Its fair

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 value was $900,000 above its carrying amount. Venus Co’s assets are held at historical cost.
(5) All revenue and expenses are deemed to accrue evenly throughout the year.

Note: The following preformatted table relates to part (b)(i) of the question and has been replicated in the
response area:
$’000
Venus Co consolidated profit for the year 9,800
Adjustment 1: Deduct Luto Co post-acquisition profit - note (1) (2,000)
Adjustment 2: to be completed - note (2) to be calculated
Adjustment 3: to be completed - note (3) to be calculated
Adjustment 4: to be completed - note (4) to be calculated
Venus Co single entity net profit to be calculated

Net profit % working to be calculated

(a) Based on the extracts provided, use the pre-formatted table to calculate the following ratios
for Venus Co and the Venus Group for the years ended 30 June 20X8 and 30 June 20X7
respectively: Gross profit %, Net profit %, and Return on equity (equity should include NCI where
applicable). (3 marks)

(b)(i) Complete the table provided to adjust Venus Co's consolidated profit for the year ended 30
June 20X8 in order to calculate the profit of Venus Co for that year as if the acquisition of Luto
Co had not taken place. Your answer should take account of the information provided in the
notes. Your answer should also recalculate the net profit %. (5 marks)

(b)(ii) Explain why consolidated financial statements, for example those of the Venus Group, are
not comparable to those of a single entity, for example Venus Co. (3 marks)

(c) Based on your answers to parts (a) and (b), comment on the comparative performance of
Venus Co for the years ended 30 June 20X7 and 20X8, specifically addressing the managing
director’s comments. (9 marks)

TOTAL 20 marks

Page 8 of 74
 Print

This scenario relates to two requirements.

Print Co is a manufacturing company and has the following trial balance at 30 June 20X2:

$'000 $'000
Equity shares of $1 each 29,600
Other components of Equity (Share premium) 15,500
Retained earnings at 30 June 20X1 11,470
Plant and machinery (note (v))
- Cost 16,200
- Accumulated depreciation at 30 June 20X1 7,290
Land - at cost 45,000
Bank loan (repayable 20X5) (note (i)) 30,000
Trade and other receivables 25,010
Trade and other payables 4,170
Cash at Bank 4,700
Revenue 97,400
Production costs 60,150
Administrative expenses 29,570
Distribution costs 7,200
Finance costs 750
Inventory at 30 June 20X1 6,850
195,430 195,430

The following additional information is available:

(i) On 1 January 20X2 Print Co raised funds of $30m. The full amount was recorded in the nominal
ledger as a bank loan. The funds actually consisted of a bank loan of $16m and $14m from the issue
of seven million $1 ordinary shares. Interest is payable on the loan at 5% per annum. An accrual
for six months interest has been included in trade and other payables and recognised as a finance
cost. However, the calculation of interest was incorrectly based on the nominal ledger loan balance
at 30 June 20X2.
(ii) Inventories at 30 June 20X2 were initially valued at a total cost of $5.7m. This includes 700 units
with a cost of $1,400 per unit. In order to sell these items, they need an additional process that costs
$400 per unit, at which point they can then be sold for $1,600 per unit.
(iii) At 30 June 20X2, Print Co has a contract to purchase 22,500 electrical components over the next
three years at a cost of $450 each. These purchases are made at a constant rate. These
components are no longer required for their initial purpose but do have an alternative use, which will
require additional manufacturing costs of $600 per component. Thereafter, each component can
then be sold for $900. Alternatively, Print Co could cancel the contract immediately by paying a
penalty of $4m. Any adjustment resulting from this information should be made to administration
expenses. Ignore discounting.
(iv) On 1 July 20X1, the directors of Print Co decided to sell a piece of machinery and the asset met the
criteria to be classified as held for sale at that date. The machine, which cost $2.4m, had a carrying
amount of $1.5m at 1 July 20X1. At that date its fair value less costs to sell was $1.14m. The

Page 9 of 74
 machine was sold for $1.1m after selling costs on 1 July 20X2. No adjustments have been made to
take account of classifying the machine as held for sale.
(v) Print Co’s policy is to depreciate plant and machinery at 15% per annum on cost and to present the
depreciation charge in cost of sales.
(vi) The income tax refund for the year has been estimated to be $2.53m.

(a) Prepare the statement of profit or loss for Print Co for the year ended 30 June 20X2. (8 marks)

(b) Prepare the statement of financial position for Print Co as at 30 June 20X2. (12 marks)

TOTAL 20 marks

Page 10 of 74
 Mims Co

This scenario relates to THREE requirements.

The following is an extract from the trial balance of Mims Co for the year ended 31 December 20X5:

$'000 $'000
Revenue 24,300
Cost of sales 11,600
Administrative expenses 10,900
Distribution costs 7,300
Income tax (note (3)) 140
Deferred tax liability 1 January 20X5 (note (3)) 7,700
Provision at 1 January 20X5 (note (2)) 4,600
Retained earnings at 1 January 20X5 43,200
Equity share capital ($1) at 1 January 20X5 60,000
Intangible assets (note (6)) 3,300
Investment property (note (5)) 19,000
Finance costs 1,400
Investment income 500
Suspense account 46,500

The following information is relevant:

1- Mims Co noted there was an error in the inventory count at 31 December 20X4, meaning that the
closing inventory balance in the 20X4 financial statements was overstated by $0.7m. No entries have
yet been made to correct this error.
2- The provision relates to a court case in existence since December 20X4. Mims Co settled this case
on 31 December 20X5 for $6m. The full amount was credited correctly to cash, with a corresponding
debit entry being made in the suspense account.
3- The income tax figure in the trial balance relates to the under/over provision from the previous year.
The current year tax is estimated to be a tax refund of $1.2m. In addition to this, the deferred tax
liability at 31 December 20X5 is estimated to be $8.2m.
4- On 30 September 20X5, Mims Co made a 1 for 4 rights issue. The exercise price was $3.50 per
share. The proceeds were correctly accounted for in cash, with a corresponding credit entry being
made in the suspense account.
5- Mims Co acquired an investment property for $20m cash on 1 January 20X5 and decided to use the
fair value model to account for investment properties. As the property is expected to have a 20 year
useful life, depreciation was recorded on this basis. The fair value of the property at 31 December
20X5 has been assessed at $22m but no accounting has taken place in relation to this. All
depreciation and amortisation is charged on pro-rata basis to administrative expenses. There were
no other acquisitions or disposals of non-current assets.
6- Mims Co incurred a number of expenses in relation to brands during the year and has capitalised the
following costs as intangibles:
- $1.3m cash was paid on 1 April 20X5 to promote one of its major brands which is deemed to
have an indefinite life.
- $2m cash was paid on 1 October 20X5 to acquire a brand from one of its competitors. Mims Co
expect the brand to have a useful life of five years. Mims Co intends to sell it after five years. At
the point of sale, it is estimated that the value of the brand will have increased and so no
amortisation has been accounted for in the current year.

Page 11 of 74
 7- Mims Co paid a dividend of $0.04 per share on all existing shares 31 December 20X5, recording the
dividend paid in administrative expenses.

Part (a)
Prepare the statement of profit or loss for Mims Co for the year ended 31 December 20X5. (12 marks)

Part (b)
Prepare the statement of changes in equity for Mims Co for the year ended 31 December 20X5. (5
marks)

Part (c)
Prepare the following extracts from the statement of cash flows for Mims Co for the year ended 31
December 20X5: (3 marks)

i) Cash flows from investing activities; and

ii) Cash flows from financing activities.

Page 12 of 74
 Pinardi

This scenario relates to four requirements.

The Pindari group in the fragrance and cosmetics industry. On 1 Jan 20X7 Pindari Co disposed of one of
its subsidiaries, Silvia Co, for cash $42m. Silvia Co manufactures jewelry and was sold because the
Pindari group wanted to exit this particular sector.

Extracts from the consolidated financial statements of the Pindari group for the years ended 31 Dec
20X6 and 20X7 are as follows:

Statement of profit or loss 20X7 ($'000) 20X6 ($'000)

Revenue 98,300 122,400
Cost of sales (47,600) (71,800)
Gross profit 50,700 50,600
Operating expenses (33,700) (37,400)
Profit from operations 17,000 13,200
Finance costs (3,200) (5,500)
Profit before tax 13,800 7,700
Statement of financial position
Inventories 13,300 22,400
Cash 31,400 14,600
Non-current liabilities 42,000 61,000

The following information is relevant:

1- The accounting assistance has not accounted for Silva Co as a discontinued operation because the
disposal occurred on 1 Jan 20X7. No figures from Silva Co have been included in the 20X7 financial
statements extracts above. The proceeds from the disposal have been recorded in cash, with all net
assets and goodwill derecognised. The balancing figure was held in a suspence account.

2- Pindari Co acquired 100% of Silva Co on 1 Jan 20X1 and goodwill was calculated as $6m. The
goodwill had been impaired by 30% in 20X5. The net assets at 1 Jan 20Z7 were $35m.

3- As part of the sales agreement, the Pindari group will receive an annual fee of $2m for the use of the
Silva Co brand. The 20X7 annual fee has been included in the Pindari group revenue for the year
ended 31 Dec 20X7.

4- Results obtained from Silva Co’s indivudal published financial statements show the following key
information:

20X7 ($'000) 20X6 ($'000)

Revenue 39,000 36,000
Gross profit 18,800 12,600
Profit from operations 8,000 6,000

5- Prior to the disposal Silva Co used to use some property belonging to the Pindari group. Following
the disposal, the Pindari group moved its cosmetic division into this property.

Page 13 of 74
 Previously the cosmetic division had leased external facilities for $2.5m a year. At 1 Jan 20X7 the
lease had ten years remaining. To exit the lease, the Pindari group made a one-off payment of $3m
to the lessor and recorded it as operating expenses.

6- The Pindari group acquires raw materials from overseas. In 20X6 the group recorded foreign
exchange gains of $3m, and in 20X7 the group made a foreign exchange loss of $1m. both items
were recognised within operating expenses.

Requirements

(a) Calculate the gain on disposal of Silva Co that would need to be included in the consolidated
statement of profit or loss for the Pindari group for the year ended 31 Dec 20X7. (2 marks)

(b) Explain whether or not the disposal of Silva Co is likely to constitute a discounted operation,
and the correct accounting treatment for this. (3 marks)

(c) Calculate the following ratios, using the pre-formatted table, for the Pindari group for 20X7
and 20X6: (4 marks)

(d) Analyse the performance and position for the Pindari group for the year ended 31 Dec 20X7
compared to the year ended 31 Dec 20X6. (11 marks)

Page 14 of 74
 Karl Group

This scenario relates to three requirements.

At 1 January 20X8, the Karl group consisted of the parent, Karl Co, and two wholly-owned subsidiaries.
There were no intra-group transactions during the year.

The sale of one of the subsidiaries, Sinker Co, was completed on 31 December 20X8 when Karl Co sold
its entire holding for $20m cash. Sinker Co had net assets of $29m at the date of disposal. The sale
does not meet the definition of a discontinued operation and has been correctly accounted for in
the consolidated financial statements. The gain/loss on disposal of Sinker Co is included in
administrative expenses.

Karl Co had originally purchased Sinker Co on 1 January 20X2 for $35m. The fair value and carrying
amount of net assets of Sinker Co at the date of acquisition were $28m. Goodwill was considered to be
impaired by 70% at 31 December 20X8.

Extracts from the consolidated financial statements for the years ended 31 December 20X8 and 20X7
are shown below:

Extracts from the statements of profit or loss for the year ended 31 December:

Consolidated 20X8 ($'m) Consolidated 20X7 ($'m)

Revenue 289 272
Cost of sales (165) (140)
Gross profit 124 132
Administrative expenses (45) (23)
Distribution costs (15) (13)
Operating profit / (loss) 64 96

Extracts from the statements of financial position as at 31 December:

Consolidated 20X8 ($'m) Consolidated 20X7 ($'m)

Current assets 112 125
Equity 621 578
Non-current liabilities 100 150
Current liabilities 36 161

The following information is also relevant:

(1) The majority of non-current liabilities is comprised of bank loans.

(2) Sales of Sinker Co represented 14% of the total group sales for 20X8, however, in March 20X8,
Sinker Co lost a significant customer contract resulting in a number of redundancies. These redundancy
costs amounted to $15m and are included in administrative expenses. Overall, Sinker Co made an
operating loss of $17m.

(3) The Karl group manufactures food packaging. The inventory included in the above consolidated
statements of financial position is:

Group inventory at: Inventory ($'m)

31 Dec 20X8 65
31 Dec 20X7 78

Page 15 of 74
 (4) At 31 December 20X8, Sinker Co had inventory of $42m.

Requirements

(a) Calculate the gain/loss arising on the disposal of Sinker Co in the consolidated financial
statements of the Karl group. (4 marks)

(b) Based on the financial statements provided, calculate the following ratios and comment on
the financial performance and position of the Karl group for the years ended 31 December 20X8
and 20X7:

(i) Gross profit margin;

(ii) Operating profit margin;

(iii) Return on capital employed;

(iv) Current ratio; and

(v) Gearing ratio (debt/(debt+equity)).

Note: a maximum of 5 marks is available for the calculation of ratios (13 marks)

(c) Comment on how the sale of Sinker Co will affect the comparability of the consolidated
financial statements for the years ended 31 December 20X7 and 20X8. (3 marks)

Page 16 of 74
 Loudon Co

This scenario relates to two requirements.

Loudon Co has prepared a draft statement of profit or loss for the year ended 30 September 20X8
(before any adjustments required by notes (1) to (4) below). The draft profit has been added to retained
earnings and the summarised trial balance of Loudon Co as at 30 September 20X8 is:

$'000 $'000
Equity shares of $1 each 10,000
Retained earnings as at 30 September 20X8 (draft) 4,122
Office building at cost 20,000
Factories cost 1 October 20X7 (note (2)) 40,000
Office building accumulated depreciation 1 October 20X7 4,000
Factories accumulated depreciation 1 October 20X7 11,100
Environmental provision 1 October 20X7 (note (3)) 1,228
Current liabilities 34,500
Current assets 14,700
Proceeds of 5% loan note (note (1)) 5,000
Deferred Tax 1,500
Interest paid (note (1)) 250
Suspense account (note (2)) 3,500
74,950 74,950

The following notes are relevant:

(1) Loan note

A5% loan note was issued on 1 October 20X7 at its face value of $5m. Direct costs of the issue
amounted to $0.125m and were charged to profit or loss. The loan will be redeemed in five years time at
a substantial premium which gives an effective interest rate of 8%. The annual repayments of $250,000
($5m at 5%) are paid on 30 September each year.

(2) Non-current assets

Loudon Co acquired an office building for $20m on 1 October 20X2 with an estimated useful life of 25
years. Depreciation is charged on a pro-rata basis. On 1 April 20X8, the building was deemed to be
impaired as its fair value was estimated to be $12m. At that date the estimated remaining life was
revised to 12 years. Ignore the deferred tax consequences of this revaluation.

Loudon Co had ten factories. On 1 October 20X7 Loudon Co sold one of its factories with a carrying
amount of $3m (cost $5m and accumulated depreciation $2m) for $3.5m. The proceeds were credited to
the suspense account.

No depreciation has yet been charged on any non-current asset for the year ended 30 September 20X8.
The factories are depreciated at 15% per annum using the reducing balance method

(3) Environmental provision

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 Loudon Co has an obligation to clean-up environmental damage caused at one of its factory sites during
20X7. The clean-up is due to take place at the end of the factory's useful life. The liability has been
accounted for appropriately and the balance at 1 October 20X7 represents the correct present value at
that date. Loudon Co has a cost of capital of 5%.

(4) Deferred tax

At 30 September 20x8, the tax written down value of property, plant and equipment was $25m. The
income tax rate applicable to Loudon Co is 20%.

Requirements (20 marks)

(a) Prepare a schedule of adjustments required to the retained earnings of Loudon Co as at 30

September 20X8 as a result of the information in notes (1) to (4).

(b) Prepare the statement of financial position of Loudon Co as at 30 September 20X8.

Note: The notes to the statement of financial position are not required. All calculations should be
rounded to the nearest $'000.

Page 18 of 74
 Plank Co

This scenario relates to two requirements. Plank Co has owned 35% of Arch Co since 1 June 20X7 and
it acquired 85% of Strip Co on 1 April 20X8. The statements of profit or loss and other comprehensive
income for the year ended 31 December 20X8 are:

Plank Co ($'000) Strip Co ($'000) Arch Co ($'000)

Revenue 705,000 218,000 256,000
Cost of sales (320,000) (81,000) (83,500)
Gross profit 385,000 137,000 172,500
Distribution costs (58,000) (16,000) (18,500)
Administrative expenses (82,000) (28,000) (29,000)
Investment income 46,000 2,000 -
Finance costs (12,000) (14,000) (41,000)
Profit before tax 269,000 81,000 114,000
Income tax expense (51,500) (15,000) (21,430)
Profit for the year 217,500 66,000 92,570
Other comprehensive income
Gain on revaluation of land 2,800 3,000 -
Total comprehensive income for the year 220,300 69,000 92,570

The following information is relevant:

1. A fair value exercise conducted on 1 April 20X8 concluded that the carrying amounts of Strip Co's
net assets were equal to their fair values with the exception of an item of machinery which had a fair
value of $8m in excess of its carrying amount. At 1 April 20X8. the machinery had a remaining life of
three years. Depreciation is charged to cost of sales
2. Since acquisition, Plank Co has sold goods to Strip Co totalling $39m. Strip Co had one quarter of
these goods in inventory at 31 December 20X8. During the year, Plank Co also sold goods to Arch
Co for $26m, all of which Arch Co held in inventory at 31 December 20X8. All of these goods had a
mark-up on cost of 30%
3. The investment income of Plank Co for the year ended 31 December 20X8 includes dividends from
Stripe Co and Arch Co (see note 4). It also includes $5m interest receivable on a loan made to Strip
Co on 1 April 20X8.
4. Strip Co paid a dividend to shareholders of $18m on 31 December 20X8. Arch Co paid a dividend on
31 December 20X8 of $35 million.
5. In Plank Co's consolidated statement of financial position at 31 December 20X7, the carrying amount
of Plank Co's investment in Arch Co was $145,000. This was calculated using equity accounting.
6. All other comprehensive income occurred after 1 April 20X8. Unless otherwise indicated, all other
items in the above statements of profit or loss and other comprehensive income are deemed to
accrue evenly over the year.

Requirements

(a) Prepare the consolidated statement of profit or loss and other comprehensive income of
Plank Co for the year ended 31 December 20X8. (18 marks)

(b) Calculate the carrying amount of the investment in Arch Co in the consolidated statement of
financial position of Plank Co as at 31 December 20X8. (2 marks)

Page 19 of 74
 Fit Co

This scenario relates to two requirements.

Fit Co and Sporty Co both operate in the sportswear sector.

Extracts from the draft financial statements for the companies for the year ended 31 December 20X0 are
as follows.

Draft statement of profit or loss for the year ended 31 December 20X0:

Fit Co. ($'000) Sporty Co. ($'000)

Revenue 250,000 220,000
Cost of sales (190,000) (150,000)
Gross profit 60,000 70,000
Profit on disposal (note (iii)) 5,000
Operating expenses (40,000) (38,000)
Profit from operations 25,000 32,000
Finance cost (7,500) (7,500) (1,000)
Profit before tax 17,500 31,000

Draft statement of financial position as at 31 December 20X0:

Fit Co. ($'000) Sporty Co. ($'000)

Cash 5,000 10,000
Total equity 90,000 60,000
Non-current liabilities 45,000 15,000
Trade payables 35,000 12,000

The following information is also relevant:

(i) Fit Co is a manufacturer and retailer of premium branded sportswear, which it sells online and in its
own international chain of branded stores.

(ii) Sporty Co sells mid-market sportswear in department stores and online. It sources its good directly
from the manufacturer and does not make intemational sales. Sporty Co plans to expand into the
international market during the next financial year.

(iii) On 31 December 20X0, Fit Co disposed of its investment in the Active division for consideration of
$10m. The cash proceeds have been recorded as a receivable at the date the financial statements
were prepared and the gain on disposal is included in the statement of profit or loss above. The
Active division had the following ratios for the year ended 31 December 20X0:

Operating profit margin is 5%

Gross profit margin is 40%

Page 20 of 74
 (iv) Fit Co also charged $100,000 per month to the Active division for central services, which was
deducted from operating expenses in the financial statements.

Requirements

(a) Using the financial statement extracts provided, calculate the following ratios for both Fit Co and
Sporty Co: (6 marks)

(i) Gross Profit margin;

(ii) Operating profit margin;

(iii) Trade payables days;

(iv) Return on Capital Employed; and

(v) Gearing (debt/equity).

(b) Comment on the performance and position of both companies for the year ended 31 December
20X0. (14 marks)

Page 21 of 74
 Bun Co

Bun Co is a bakery which also owns two shops/cafés. Over the last two years, the company has
experienced declining profitability due to increased competition and so the directors wish to investigate if
this is a sector-wide problem. Consequently, they have acquired equivalent ratios for the sector, some of
which have been reproduced below.

Sector averages for the year ended 30 June 20X7:

Return on capital employed 18.6%

Operating profit margin 8.6%
Net asset turnover 2.01
Inventory holding period 4 days
Debt to equity 80%

The following information has been extracted from the draft financial statements of Bun
Co for the year ended 31 December 20X7:

Statement of profit or loss for the year ended 31 December 20X7:

$’000
Revenue 100,800
Cost of sales (70,000)
Gross profit 30,800
Operating expenses (17,640)
Profit from operations 13,160

Statement of financial position as at 31 December 20X7:

$’000
Non-current assets 55,000
Inventory 3,960
Equity:
Equity shares of $1 each 17,000
Revaluation surplus 5,400
Retained earnings 10,480
32,880
Non-current liabilities: 10% bank loan 14,400

Other relevant information to Bun Co:

(1) In 20X6, Bun Co acquired a popular brand name. At 31 December 20X7, the brand represented 20%
of non-current assets. The remaining 80% of non-current assets comprises of the property from
which Bun Co operates its bakery and shops. This property is owned by Bun Co and has no directly
associated finance. The property was revalued in 20X4.
(2) In the year ended 31 December 20X7, Bun Co began offering discounted meal deals to customers.
Bun Co hoped this strategy would help to reduce perishable inventory and reduce inventory holding
periods.
(3) In January 20X8, it was decided to discount some slow-moving seasonal inventory which had a
selling price of $1.5m. Under normal circumstances, these products have a gross profit margin of
20%. The inventory was sold in February 20X8 for 50% of what it had cost Bun Co to produce. The
financial statements for the year ended 31 December 20X7 were authorised for issue on 15 March

Page 22 of 74
 20X8.

Required:

(a) Adjust for the information in note (3) and calculate the 20X7 sector average equivalent ratios
for Bun Co.
(7 marks)

(b) Assess the financial performance and position of Bun Co for the year ended 31 December
20X7 in comparison with the sector average ratios.
(10 marks)

(c) Explain three possible limitations of the comparison between Bun Co and the sector average
ratios provided.
(3 marks)

(20 marks)

Page 23 of 74
 Runner Co

On 1 April 20X4, Runner Co acquired 80% of Jogger Co's equity shares when the retained earnings of
Jogger Co were $19.5m. The consideration consisted of cash of $42.5m paid on 1 April 20X4 and a
further cash payment of $21m, deferred until 1 April 20X5. No accounting entries have been made in
respect of the deferred cash payment. Runner Co has a cost of capital of 8%. The appropriate discount
rate is 0.926.

The draft, summarised statements of financial position of the two companies at 31 March 20X5 are
shown below:

Runner Co Jogger Co
$'000 $'000

ASSETS
Non-current assets
Property plant and equipment 455,800 44,700
Investments 55,000 –
510,800 44,700
Current assets
Inventory 22,000 16,000
Trade receivables 35,300 9,000
Bank 2,800 1,500
60,100 26,500
Total assets 570,900 71,200

Equity and liabilities

Equity
Equity shares of $1 each 202,500 25,000
Retained earnings 286,600 28,600
489,100 53,600
Current liabilities
Trade Payables 81,800 17,600
Total equity and liabilities 570,900 71,200

(i) Runner Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. The
fair value of the non-controlling interest in Jogger Co on 1 April 20X4 was estimated at $13m.
The fair values of Jogger Co's other assets, liabilities and contingent liabilities at 1 April 20X4 were
equal to their carrying amounts with the exception of a specialised piece of plant which had a fair
value of $10m in excess of its carrying amount. This plant had a ten year remaining useful life on 1
April 20X4.
(ii) In December 20X4 Jogger Co sold goods to Runner Co for $6.4m, earning a gross margin of 15% on
the sale. Runner Co still held $4.8m of these goods in its inventories at 31 March 20X5.
Jogger Co still had the full invoice value of $6.4m in its trade receivables at 31 March 20X5, however,
Runner Co’s payables only showed $3.4m as it made a payment of $3m on 31 March 20X5.

Page 24 of 74
 Required:

(a) Prepare the consolidated statement of financial position for Runner Co as at 31 March 20X5.
(16 marks)

(b) Runner Co acquired 30% of Walker Co's equity shares on 1 April 20X5 for $13m, Walker Co had
been performing poorly over the last few years and Runner Co hoped its influence over Walker Co would
help to turn the company around. In the year ended 31 March 20X6 Walker Co made a loss of $30m.
Runner Co has no contractual obligation to make good the losses relating to Walker Co.

Explain how Walker Co should be accounted for in the consolidated Statement of financial
position of Runner Co for the year ended 31 March 20X6. Your answer should also include a
calculation of the carrying amount of the investment in the associate at that date.

(4 marks)

(20 marks)

Page 25 of 74
 Pirlo

The consolidated statements of profit or loss for the Pirlo group for the years ended 31 December 20X9
and 20X8 are shown below.

20X9 20X8
$’000 $’000
Revenue 213,480 216,820
Cost of sales (115,620) (119,510)
––––––––– –––––––––
Gross profit 97,860 97,310
Operating expenses (72,360) (68,140)
––––––––– –––––––––
Profit from operations 25,500 29,170
Finance costs (17,800) (16,200)
Investment income 2,200 2,450
––––––––– –––––––––
Profit before tax 9,900 15,420
Share of profit of associate 4,620 3,160
Tax expense (2,730) (3,940)
––––––––– –––––––––
Profit for the year 11,790 14,640
––––––––– –––––––––
Attributable to: Shareholders of Pirlo Co 8,930 12,810
Non-controlling interest 2,860 1,830

The following information is relevant:

(i) On 31 December 20X9, the Pirlo group disposed of its entire 80% holding in Samba Co, a
software development company, for $300m. The Samba Co results have been fully
consolidated into the consolidated financial statements above. Samba Co does not represent
a discontinued operation.
(ii) The proceeds from the disposal of Samba Co have been credited to a suspense account and
no gain/loss has been recorded in the financial statements above.

(iii) Pirlo Co originally acquired the shares in Samba Co for $210m. At this date, goodwill was
calculated at $70m. Goodwill has not been impaired since acquisition, and external advisers
estimate that the goodwill arising in Samba Co has a value of $110m at 31 December 20X9.

(iv) On 31 December 20X9, Samba Co had net assets with a carrying amount of $260m. In
addition to this, Samba Co’s brand name was valued at $50m at acquisition in the
consolidated financial statements. This is not reflected in Samba Co’s individual financial
statements, and the value is assessed to be the same at 31 December 20X9.

(v) Samba Co is the only subsidiary in which the Pirlo group owned less than 100% of the
equity. The Pirlo group uses the fair value method to value the non-controlling interest. At 31
December 20X9, the non-controlling interest in Samba Co is deemed to be $66m.

(vi) Until December 20X8, Pirlo Co rented space in its property to a third party. This arrangement
ended and, on 1 January 20X9, Samba Co’s administrative department moved into Pirlo Co’s
property. Pirlo Co charged Samba Co a reduced rent. Samba Co’s properties were sold in
April 20X9 at a profit of $2m which is included in administrative expenses.

(vii) On 31 December 20X9, the employment of the two founding directors of Samba Co was
transferred to Pirlo Co. From the date of disposal, Pirlo Co will go into direct competition with
Samba Co. As part of this move, the directors did not take their annual bonus of $1m each
from Samba Co. Instead, they received a similar ‘joining fee’ from Pirlo Co, which was paid to

Page 26 of 74
 them on 31 December 20X9. These individuals have excellent relationships with the largest
customers of Samba Co, and are central to Pirlo Co’s future plans.

(viii) Samba Co’s revenue remained consistent at $26m in both 20X9 and 20X8 and Samba Co
has high levels of debt. Key ratios from the Samba Co financial statements are shown below:

20X9 20X8
Gross profit margin 81% 80%
Operating profit margin 66% 41%
Interest cover 1·2 times 1·1 times

Required:

(a) Calculate the gain/loss on the disposal of Samba Co which will be recorded in:

– The individual financial statements of Pirlo Co; and

– The consolidated financial statements of the Pirlo group.
(5 marks)

(b) Calculate ratios equivalent to those provided in note (viii) for the Pirlo group for the years
ended 31 December 20X9 and 20X8. No adjustment is required for the gain/loss on
disposal from (a).
(3 marks)

(c) Comment on the performance and interest cover of the Pirlo group for the years ended 31
December 20X9 and 20X8. Your answer should comment on:

– The overall performance of the Pirlo group;

– How, once accounted for, the disposal of Samba Co will impact on your analysis; and
– The implications of the disposal of Samba Co for the future results of the Pirlo group.
(12 marks)

(20 marks)

Page 27 of 74
 Vernon

The following extract is from the trial balance of Vernon Co at 31 December 20X8:

$’000 $’000
Cost of sales 46,410
Finance costs 4,050
Investment income (note (iii)) 1,520
Operating expenses (note (iii)) 20,640
Revenue (notes (i) and (ii)) 75,350
Tax (note vi)) 130

The following notes are relevant:

(i) Vernon Co made a large sale of goods on 1 July 20X8, which was also the date of delivery.
Under the terms of the agreement, Vernon Co will receive payment of $8m on 30 June 20X9.
Currently, Vernon Co has recorded $4m in revenue and trade receivables. The directors
intend to record the remaining $4m revenue in the year ended 31 December 20X9. The costs
of this sale have been accounted for correctly in the financial statements for the year ended
31 December 20X8. Vernon Co has a cost of capital of 8% at which an appropriate discount
factor would be 0·9259.

(ii) Vernon Co also sold goods to an overseas customer on 1 December 20X8 for 12m Kromits
(Kr). They agreed a 60-day payment term. No entries have yet been made to record this
sale, although the goods were correctly removed from inventory and expensed in cost of
sales. The amount remains unpaid at 31 December 20X8.

Relevant exchange rates are:

1 December 20X8: 6·4 Kr/$
31 December 20X8: 6·0 Kr/$

(iii) Vernon Co acquired $9m 5% bonds at par value on 1 January 20X8. The interest is
receivable on 31 December each year. Vernon Co incurred $0·4m broker fees when
acquiring the bonds, which has been expensed to operating expenses. These bonds are
repayable at a premium so have an effective rate of 8%. Vernon Co has recorded the interest
received on 31 December 20X8 in investment income.

(iv) During the year, Vernon Co revalued its head office for the first time, resulting in an increase
in value of $12m at 31 December 20X8. Deferred tax is applicable to this gain at 25%.

(v) Vernon Co values its investment properties using the fair value model. The investment
properties increased in value by $4m at 31 December 20X8.

(vi) The tax figure in the trial balance represents the under/over provision from the previous year.
The current tax liability for the year ended 31 December 20X8 is estimated to be $3·2m.

(vii) At 1 January 20X8, Vernon Co had 30 million $1 equity shares in issue. On 1 April 20X8,
Vernon Co issued an additional 5 million $1 equity shares at full market value. On 1 July
20X8, Vernon Co performed a 2 for 5 rights issue, at $2·40 per share. The market value of a
Vernon Co share at 1 July 20X8 was $3·10 per share.

Page 28 of 74
 Required:

(a) Produce a statement of profit or loss and other comprehensive income for Vernon Co for
the year ended 31 December 20X8.
(15 marks)

(b) Calculate the earnings per share for Vernon Co for the year ended 31 December 20X8.
(5 marks)

(20 marks)

Page 29 of 74
 Perkins

Below are extracts from the statements of profit or loss for the Perkins group and Perkins Co for the
years ending 31 December 20X7 and 20X6 respectively.

20X7 20X6
(Consolidated) (Perkins Co individual)
$’000 $’000
Revenue 46,220 35,714
Cost of sales (23,980) (19,714)
Gross profit 22,240 16,000
Operating expenses (3,300) (10,000)
Profit from operations 18,940 6,000
Finance costs (960) (1,700)
Profit before tax 17,980 4,300

The following information is relevant:

On 1 September 20X7, Perkins Co sold all of its shares in Swanson Co, its only subsidiary, for $28·64m.
At this date, Swanson Co had net assets of $26·1m. Perkins Co originally acquired 80% of Swanson Co
for $19·2m, when Swanson Co had net assets of $19·8m. Perkins Co uses the fair value method for
valuing the non-controlling interest, which was measured at $4·9m at the date of acquisition. Goodwill in
Swanson Co has not been impaired since acquisition.

In order to compare Perkin Co’s results for the years ended 20X6 and 20X7, the results of Swanson Co
need to be eliminated from the above consolidated statements of profit or loss for 20X7. Although
Swanson Co was correctly accounted for in the group financial statements for the year ended 31
December 20X7, a gain on disposal of Swanson Co of $9·44m is currently included in operating
expenses. This reflects the gain which should have been shown in Perkins Co’s individual financial
statements.

In the year ended 31 December 20X7, Swanson Co had the following results:

$m
Revenue 13.50
Cost of sales 6.60
Operating expenses 2.51
Finance costs 1.20

During the period from 1 January 20X7 to 1 September 20X7, Perkins Co sold $1m of goods to Swanson
Co at a margin of 30%. Swanson Co had sold all of these goods on to third parties by 1 September
20X7.

Swanson Co previously used space in Perkins Co’s properties, which Perkins Co did not charge
Swanson Co for. Since the disposal of Swanson Co, Perkins Co has rented that space to a new tenant,
recording the rental income in operating expenses.

The following ratios have been correctly calculated based on the above financial statements:

20X7 20X6
(Consolidated) (Perkins Co individual)
Gross profit margin 48·1% 44·8%
Operating margin 41% 16·8%
Interest cover 19·7 times 3·5 times

Page 30 of 74
Page 31 of 74
 Required:

(a) Calculate the gain on disposal which should have been shown in the consolidated
statement of profit or loss for the Perkins group for the year ended 31 December 20X7.
(5 marks)

(b) Remove the results of Swanson Co and the gain on disposal of the subsidiary to prepare
a revised statement of profit or loss for the year ended 31 December 20X7 for Perkins Co
only.
(4 marks)

(c) Calculate the equivalent ratios to those given for Perkins Co for 20X7 based on the
revised figures in part (b) of your answer.
(2 marks)

(d) Using the ratios calculated in part (c) and those provided in the question, comment on the
performance of Perkins Co for the years ended 31 December 20X6 and 20X7.
(9 marks)

(20 marks)

Page 32 of 74
 Haverford

Below is the trial balance for Haverford Co at 31 December 20X7:

$’000 $’000
Property – carrying amount 1 January 20X7 (note (iv)) 18,000
Ordinary shares $1 at 1 January 20X7 (note (iii)) 20,000
Other components of equity (Share premium) at 1 January 20X7 (note (iii)) 3,000
Revaluation surplus at 1 January 20X7 (note (iv)) 800
Retained earnings at 1 January 20X7 6,270
Draft profit for the year ended 31 December 20X7 2,250
4% Convertible loan notes (note (i)) 8,000
Dividends paid 3,620
Cash received from contract customer (note (ii)) 1,400
Cost incurred on contract to date (note (ii)) 1,900
Inventories (note (v)) 4,310
Trade receivables 5,510
Cash 10,320
Current liabilities 1,940
43,660 43,660

The following notes are relevant:

(i) On 1 January 20X7, Haverford Co issued 80,000 $100 4% convertible loan notes. The loan
notes can be converted to equity shares on 31 December 20X9 or redeemed at par on the
same date. An equivalent loan without the conversion rights would have required interest of
6%. Interest is payable annually in arrears on 31 December each year. The annual payment
has been included in finance costs for the year. The present value of $1 receivable at the
end of each year, based on discount rates of 4% and 6%, are:

4% 6%
End of year 1 0·962 0·943
End of year 2 0·925 0·890
End of year 3 0·889 0·840

(ii) During the year, Haverford Co entered into a contract to construct an asset for a customer,
satisfying the performance obligation over time. The contract had a total price of $14m. The
costs to date of $1·9m are included in the above trial balance. Costs to complete the contract
are estimated at $7·1m.

At 31 December 20X7, the contract is estimated to be 40% complete. To date, Haverford Co

has received $1·4m from the customer and this is shown in the above trial balance.

(iii) Haverford Co made a 1 for 5 bonus issue on 31 December 20X7, which has not yet been
recorded in the above trial balance. Haverford Co intends to utilise the share premium as far
as possible in recording the bonus issue.

(iv) Haverford Co’s property had previously been revalued upwards, leading to the balance on
the revaluation surplus at 1 January 20X7. The property had a remaining life of 25 years at 1
January 20X7.

At 31 December 20X7, the property was valued at $16m.

No entries have yet been made to account for the current year’s depreciation charge or the
property valuation at 31 December 20X7. Haverford Co does not make an annual transfer
from the revaluation surplus in respect of excess depreciation.

Page 33 of 74
 (v) It has been discovered that inventory totalling $0·39m had been omitted from the final
inventory count in the above trial balance.

Required:

(a) Calculate the adjusted profit for Haverford Co for the year ended 31 December 20X7.
(6 marks)

(b) Prepare the statement of changes in equity for Haverford Co for the year ended 31
December 20X7.
(6 marks)

(c) Prepare the statement of financial position for Haverford Co as at 31 December 20X7.
(8 marks)

(20 marks)

Page 34 of 74
 Duke

Duke Co is a retailer with stores in numerous city centres. On 1 January 20X8, Duke Co acquired 80% of
the equity share capital of Smooth Co, a service company specialising in training and recruitment. This
was the first time Duke Co had acquired a subsidiary.

The consideration for Smooth Co consisted of a cash element and the issue of some shares in Duke Co
to the previous owners of Smooth Co.

Duke Co has begun to consolidate Smooth Co into its financial statements, but has yet to calculate the
non-controlling interest and retained earnings. Details of the relevant information is provided in notes (i)
and (ii).

Extracts from the financial statements for the Duke group for the year ended 30 June 20X8 and Duke Co
for the year ended 30 June 20X7 are provided below:

Duke Group Duke Co

30 June 20X8 30 June 20X7
$’000 $’000
Profit from operations 14,500 12,700
Current assets 30,400 28,750
Share capital 11,000 8,000
Share premium 6,000 2,000
Retained earnings Note (i) and (ii) 9,400
Non-controlling interest Note (i) and (ii) Nil
Long-term loans 11,500 7,000
Current liabilities 21,300 15,600

The following notes are relevant:

(i) The fair value of the non-controlling interest in Smooth Co at 1 January 20X8 was deemed to
be $3.4m. The retained earnings of Duke Co in its individual financial statements at 30 June
20X8 are $13.2m.

Smooth Co made a profit for the year ended 30 June 20X8 of $7m. Duke Co incurred
professional fees of $0.5m during the acquisition, which have been capitalised as an asset in
the consolidated financial statements.

(ii) The following issues are also relevant to the calculation of non-controlling interest and
retained earnings:

– At acquisition, Smooth Co’s net assets were equal to their carrying amount with the
exception of a brand name which had a fair value of $3m but was not recognised in
Smooth Co’s individual financial statements. It is estimated that the brand had a five-year
life at 1 January 20X8.

– On 30 June 20X8, Smooth Co sold land to Duke Co for $4m when it had a carrying
amount of $2.5m.

(iii) Smooth Co is based in the service industry and a significant part of its business comes from
three large, profitable contracts with entities which are both well-established and financially
stable.

(iv) Duke Co did not borrow additional funds during the current year and has never used a bank
overdraft facility.

(v) The following ratios have been correctly calculated based on the above financial statements:

Page 35 of 74
 20X8 20X7
Receivables collection period 52 days 34 days
Inventory holding period 41 days 67 days

Other than the recognition of the non-controlling interest and retained earnings, no adjustment is
required to any of the other figures in the draft financial statements. All items are deemed to accrue
evenly across the year.

Required:

(a) Calculate the non-controlling interest and retained earnings to be included in the
consolidated financial statements at 30 June 20X8.
(6 marks)

(b) Based on your answer to part (a) and the financial statements provided, calculate the
following ratios for the years ending 30 June 20X7 and 30 June 20X8:

Current ratio;
Return on capital employed;
Gearing (debt/equity).
(4 marks)

(c) Using the information provided and the ratios calculated above, comment on the
comparative performance and position for the two years ended 30 June 20X7 and 20X8.
Note: Your answer should specifically comment on the impact of the acquisition of
Smooth Co on your analysis.
(10 marks)

(20 marks)

Page 36 of 74
 Duggan

The following extracts from the trial balance have been taken from the accounting records of Duggan Co
as at 30 June 20X8:

$’000 $’000
Convertible loan notes (note (iv)) 5,000
Cost of sales 21,700
Finance costs (note (iv)) 1,240
Investment income 120
Operating expenses (notes (ii) and (v)) 13,520
Retained earnings at 1 July 20X7 35,400
Revenue (note (i)) 43,200
Equity share capital ($1 shares) at 1 July 20X7 12,200
Tax (note (iii)) 130

The following notes are relevant:

(i) Duggan Co entered into a contract where the performance obligation is satisfied over time.
The total price on the contract is $9m, with total expected costs of $5m.

Progress towards completion was measured at 50% at 30 June 20X7 and 80% on 30 June
20X8.

The correct entries were made in the year ended 30 June 20X7, but no entries have been
made for the year ended 30 June 20X8.

(ii) On 1 January 20X8, Duggan Co was notified that an ex-employee had started court
proceedings against them for unfair dismissal. Legal advice was that there was an 80%
chance that Duggan Co would lose the case and would need to pay an estimated $1.012m
on 1 January 20X9.

Based on this advice, Duggan Co recorded a provision of $800k on 1 January 20X8, and has
made no further adjustments. The provision was recorded in operating expenses.

Duggan Co has a cost of capital of 10% per annum and the discount factor at 10% for one
year is 0.9091.

(iii) The balance relating to tax in the trial balance relates to the under/over provision from the
prior period. The tax estimate for the year ended 30 June 20X8 is $2.1m.

In addition to this, there has been a decrease in taxable temporary differences of $2m in the
year. Duggan Co pays tax at 25% and movements in deferred tax are to be taken to the
statement of profit or loss.

(iv) Duggan Co issued $5m 6% convertible loan notes on 1 July 20X7. Interest is payable
annually in arrears. These bonds can be converted into one share for every $2 on 30 June
20X9. Similar loan notes, without conversion rights, incur interest at 8%. Duggan Co
recorded the full amount in liabilities and has recorded the annual payment made on 30 June
20X8 of $0.3m in finance costs.

Relevant discount rates are as follows:

Present value of $1 in: 6% 8%

1 year 0.943 0.926
2 years 0.890 0.857

Page 37 of 74
 (v) Duggan Co began the construction of an item of property on 1 July 20X7 which was
completed on 31 March 20X8. A cost of $32m was capitalised. This included $2.56m, being
a full 12 months’ interest on a $25.6m 10% loan taken out specifically for this construction.
On completion, the property has a useful life of 20 years.

Duggan Co also recorded $0.4m in operating expenses, representing depreciation on the

asset for the period from 31 March 20X8 to 30 June 20X8.

(vi) It has been discovered that the previous financial controller of Duggan Co engaged in
fraudulent financial reporting. Currently, $2.5m of trade receivables has been deemed to not
exist and requires to be written off. Of this, $0.9m relates to the year ended 30 June 20X8,
with $1·6m relating to earlier periods.

(vii) On 1 November 20X7, Duggan Co issued 1.5 million shares at their full market price of
$2.20. The proceeds were credited to a suspense account.

Required:

(a) Prepare a statement of profit or loss for Duggan Co for the year ended 30 June 20X8.
(12 marks)

(b) Prepare a statement of changes in equity for Duggan Co for the year ended 30 June 20X8.
(5 marks)

(c) Calculate the basic earnings per share for Duggan Co for the year ended 30 June 20X8.
(3 marks)

Note: All workings should be done to the nearest $’000.

(20 marks)

Page 38 of 74
 Yogi

Yogi is a public company and extracts from its most recent financial statements are provided below:

Statements of profit or loss for the year ended 31 March

2015 2014
$’000 $’000
Revenue 36,000 50,000
Cost of sales (24,000) (30,000)
––––––– –––––––
Gross profit 12,000 20,000
Profit from sale of division (see note (i)) 1,000 nil
Distribution costs (3,500) (5,300)
Administrative expenses (4,800) (2,900)
Finance costs (400) (800)
––––––– –––––––
Profit before taxation 4,300 11,000
Income tax expense (1,300) (3,300)
––––––– –––––––
Profit for the year 3,000 7,700
––––––– –––––––

Statements of financial position as at 31 March

2015 2014
$’000 $’000 $’000 $’000
Non-current assets
Property, plant and equipment 16,300 19,000
Intangible – goodwill nil 2,000
––––––– –––––––
16,300 21,000
Current assets
Inventory 3,400 5,800
Trade receivables 1,300 2,400
Bank 1,500 6,200 nil 8,200
–––––– ––––––– –––––– –––––––
Total assets 22,500 29,200
––––––– –––––––
Equity and liabilities
Equity
Equity shares of $1 each 10,000 10,000
Retained earnings 3,000 4,000
––––––– –––––––
13,000 14,000
Non-current liabilities
10% loan notes 4,000 8,000
Current liabilities
Bank overdraft nil 1,400
Trade payables 4,300 3,100
Current tax payable 1,200 5,500 2,700 7,200
–––––– ––––––– –––––– –––––––
Total equity and liabilities 22,500 29,200
––––––– –––––––

Page 39 of 74
 Notes

(i) On 1 April 2014, Yogi sold the net assets (including goodwill) of a separately operated
division of its business for $8 million cash on which it made a profit of $1 million. This
transaction required shareholder approval and, in order to secure this, the management of
Yogi offered shareholders a dividend of 40 cents for each share in issue out of the proceeds
of the sale. The trading results of the division which are included in the statement of profit or
loss for the year ended 31 March 2014 above are:

$’000
Revenue 18,000
Cost of sales (10,000)
–––––––
Gross profit 8,000
Distribution costs (1,000)
Administrative expenses (1,200)
–––––––
Profit before interest and tax 5,800
–––––––

(ii) The following selected ratios for Yogi have been calculated for the year ended 31 March
2014 (as reported above):

Gross profit margin 40·0%

Operating profit margin 23·6%
Return on capital employed
(profit before interest and tax/(total assets – current liabilities)) 53·6%
Net asset turnover 2·27 times

Required:

(a) Calculate the equivalent ratios for Yogi:

(i)for the year ended 31 March 2014, after excluding the contribution made by the
division that has been sold; and
(ii) for the year ended 31 March 2015, excluding the profit on the sale of the division.
(5 marks)
(b) Comment on the comparative financial performance and position of Yogi for the year
ended 31 March 2015.
(10 marks)

(15 marks)

Page 40 of 74
 Cyclip

Page 41 of 74
Page 42 of 74
 Xpand

Xpand is a publicly listed company which has experienced rapid growth in recent years through the
acquisition and integration of other companies. Xpand is interested in acquiring Hydan, a retailing
company, which is one of several companies owned and managed by the same family. The summarised
financial statements of Hydan for the year ended 30 September 2014 are:

Statement of profit or loss

$’000
Revenue 70,000
Cost of sales (45,000)
–––––––
Gross profit 25,000
Operating costs (7,000)
Directors’ salaries (1,000)
–––––––
Profit before tax 17,000
Income tax expense (3,000)
–––––––
Profit for the year 14,000
–––––––

Statement of financial position

$’000 $’000
Assets
Non-current assets
Property, plant and equipment 32,400
Current assets
Inventory 7,500
Bank 100 7,600
––––––– –––––––
Total assets 40,000
–––––––
Equity and liabilities
Equity
Equity shares of $1 each 1,000
Retained earnings 18,700
–––––––
19,700
Non-current liabilities
Directors’ loan accounts (interest free) 10,000
Current liabilities
Trade payables 7,500
Current tax payable 2,800 10,300
––––––– –––––––
Total equity and liabilities 40,000
–––––––
From the above financial statements, Xpand has calculated for Hydan the ratios below for the year
ended 30 September 2014. It has also obtained the equivalent ratios for the retail sector average which
can be taken to represent Hydan’s sector.

Hydan Sector average

Return on equity (ROE) (including directors’ loan accounts) 47·1% 22·0%
Net asset turnover 2·36 times 1·67 times
Gross profit margin 35·7% 30·0%
Net profit margin 20·0% 12·0%

Page 43 of 74
 From enquiries made, Xpand has learned the following information:
(i) Hydan buys all of its trading inventory from another of the family companies at a price which is
10% less than the market price for such goods.
(ii) After the acquisition, Xpand would replace the existing board of directors and need to pay
remuneration of $2·5 million per annum.
(iii) The directors’ loan accounts would be repaid by obtaining a loan of the same amount with interest
at 10% per annum.
(iv) Xpand expects the purchase price of Hydan to be $30 million.

Required:

(a) Recalculate the ratios for Hydan after making appropriate adjustments to the financial
statements for notes (i) to (iv) above. For this purpose, the expected purchase price of $30
million should be taken as Hydan’s equity and net assets are equal to this equity plus the
loan. You may assume the changes will have no effect on taxation.
(6 marks)

(b) In relation to the ratios calculated in (a) above, and the ratios for Hydan given in the
question, comment on the performance of Hydan compared to its retail sector average.
(9 marks)

(15 marks)

Page 44 of 74
 Quincy

The following trial balance relates to Quincy as at 30 September 2012:

$’000 $’000

Revenue (note (i)) 213,000

Cost of sales 136,800

Distribution costs 12,500

Administrative expenses (note (ii)) 19,000

Loan note interest and dividend paid (notes (ii) and (iii)) 20,700

Investment income 400

Equity shares of 25 cents each 60,000

6% loan note (note (ii)) 25,000

Retained earnings at 1 October 2011 18,500

Land and buildings at cost (land element $10 million) (note (iv)) 50,000

Plant and equipment at cost (note (iv)) 83,700

Accumulated depreciation at 1 October 2011: buildings 8,000

plant and equipment 33,700

Equity financial asset investments (note (v)) 17,000

Inventory at 30 September 2012 24,800

Trade receivables 28,500

Bank 2,900

Current tax (note (vi)) 1,100

Deferred tax (note (vi)) 1,200

Trade payables 36,700

397,000 397,000

The following notes are relevant:

(i) On 1 October 2011, Quincy sold one of its products for $10 million (included in revenue in the trial
balance). As part of the sale agreement, Quincy is committed to the ongoing servicing of this product
until 30 September 2014 (i.e. three years from the date of sale). The value of this service has been
included in the selling price of $10 million. The estimated cost to Quincy of the servicing is $600,000
per annum and Quincy’s normal gross profit margin on this type of servicing is 25%. Ignore
discounting.

(ii) Quincy issued a $25 million 6% loan note on 1 October 2011. Issue costs were $1 million and these
have been charged to administrative expenses. The loan will be redeemed on 30 September 2014 at
a premium which gives an effective interest rate on the loan of 8%.

Page 45 of 74
 (iii) Quincy paid an equity dividend of 8 cents per share during the year ended 30 September 2012.

(iv) Non-current assets:

Quincy had been carrying land and buildings at depreciated cost, but due to a recent rise in property
prices, it decided to revalue its property on 1 October 2011 to market value. An independent valuer
confirmed the value of the property at $60 million (land element $12 million) as at that date and the
directors accepted this valuation. The property had a remaining life of 16 years at the date of its
revaluation. Quincy will make a transfer from the revaluation reserve to retained earnings in respect
of the realisation of the revaluation reserve. Ignore deferred tax on the revaluation.

Plant and equipment is depreciated at 15% per annum using the reducing balance method.

No depreciation has yet been charged on any non-current asset for the year ended 30 September
2012. All depreciation is charged to cost of sales.

(v) The investments had a fair value of $15·7 million as at 30 September 2012. There were no
acquisitions or disposals of these investments during the year ended 30 September 2012.

(vi) The balance on current tax represents the under/over provision of the tax liability for the year ended
30 September 2011. A provision for income tax for the year ended 30 September 2012 of $7·4
million is required. At 30 September 2012, Quincy had taxable temporary differences of $5 million,
requiring a provision for deferred tax. Any deferred tax adjustment should be reported in the income
statement. The income tax rate of Quincy is 20%.

Required:

(a) Prepare the statement of comprehensive income for Quincy for the year ended 30 September
2012.

(b) Prepare the statement of changes in equity for Quincy for the year ended 30 September 2012.

(c) Prepare the statement of financial position for Quincy as at 30 September 2012.

Notes to the financial statements are not required.

The following mark allocation is provided as guidance for this question:

(a) 11 marks
(b) 4 marks
(c) 10 marks

(25 marks)

Page 46 of 74
 Plastik

On 1 January 2014, Plastik acquired 80% of the equity share capital of Subtrak. The consideration was
satisfied by a share exchange of two shares in Plastik for every three acquired shares in Subtrak. At the
date of acquisition, shares in Plastik and Subtrak had a market value of $3 and $2·50 each respectively.
Plastik will also pay cash consideration of 27·5 cents on 1 January 2015 for each acquired share in
Subtrak. Plastik has a cost of capital of 10% per annum. None of the consideration has been recorded
by Plastik.

Below are the summarised draft financial statements of both companies.

Statements of profit or loss and other comprehensive income for the year ended 30 September
2014

Plastik Subtrak
$’000 $’000
Revenue 62,600 30,000
Cost of sales (45,800) (24,000)
Gross profit 16,800 6,000
Distribution costs (2,000) (1,200)
Administrative expenses (3,500) (1,800)
Finance costs (200) (nil)
Profit before tax 11,100 3,000
Income tax expense (3,100) (1,000)
Profit for the year 8,000 2,000
Other comprehensive income:
Gain on revaluation of property (note (i)) 1,500 nil
Total comprehensive income 9,500 2,000

Statements of financial position as at 30 September 2014

Plastik Subtrak
$’000 $’000
Assets
Non-current assets
Property, plant and equipment 18,700 13,900
Investments: 10% loan note from Subtrak (note (ii)) 1,000 nil
19,700 13,900
Current assets
Inventory (note (iii)) 4,300 1,200
Trade receivables (note (iv)) 4,700 2,500
Bank nil 300
9,000 4,000
Total assets 28,700 17,900
Equity and liabilities
Equity
Equity shares of $1 each 10,000 9,000
Revaluation surplus (note (i)) 2,000 nil
Retained earnings 6,300 3,500
18,300 12,500
Non-current liabilities
10% loan notes (note (ii)) 2,500 1,000
Current liabilities
Trade payables (note (iv)) 3,400 3,600
Bank 1,700 nil
Current tax payable 2,800 800
7,900 4,400

Page 47 of 74
 Total equity and liabilities 28,700 17,900

The following information is relevant:

(i) At the date of acquisition, the fair values of Subtrak’s assets and liabilities were equal to their
carrying amounts with the exception of Subtrak’s property which had a fair value of $4 million
above its carrying amount. For consolidation purposes, this led to an increase in depreciation
charges (in cost of sales) of $100,000 in the post-acquisition period to 30 September 2014.
Subtrak has not incorporated the fair value property increase into its entity financial
statements. The policy of the Plastik group is to revalue all properties to fair value at each
year end. On 30 September 2014, the increase in Plastik’s property has already been
recorded, however, a further increase of $600,000 in the value of Subtrak’s property since its
value at acquisition and 30 September 2014 has not been recorded.

(ii) On 30 September 2014, Plastik accepted a $1 million 10% loan note from Subtrak.

(iii) Sales from Plastik to Subtrak throughout the year ended 30 September 2014 had
consistently been $300,000 per month. Plastik made a mark-up on cost of 25% on all these
sales. $600,000 (at cost to Subtrak) of Subtrak’s inventory at 30 September 2014 had been
supplied by Plastik in the post-acquisition period.

(iv) Plastik had a trade receivable balance owing from Subtrak of $1·2 million as at 30
September 2014. This differed to the equivalent trade payable of Subtrak due to a payment
by Subtrak of $400,000 made in September 2014 which did not clear Plastik’s bank account
until 4 October 2014. Plastik’s policy for cash timing differences is to adjust the parent’s
financial statements.

(v) Plastik’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose Subtrak’s share price at that date can be deemed to be representative of
the fair value of the shares held by the non-controlling interest.

(vi) Due to recent adverse publicity concerning one of Subtrak’s major product lines, the goodwill
which arose on the acquisition of Subtrak has been impaired by $500,000 as at 30
September 2014. Goodwill impairment should be treated as an administrative expense.

(vii) Assume, except where indicated otherwise, that all items of income and expenditure accrue
evenly throughout the year.

Page 48 of 74
 Required:

(a) Prepare the consolidated statement of profit or loss and other comprehensive income for
Plastik for the year ended 30 September 2014.

(b) Prepare the consolidated statement of financial position for Plastik as at 30 September
2014.

The following mark allocation is provided as guidance for these requirements:

(a) 10 marks
(b) 17 marks

(c) Plastik is in the process of recording the acquisition of another subsidiary, Dilemma, and has
identified two items when reviewing the fair values of Dilemma’s assets.

The first item relates to $1 million spent on a new research project. This amount has been
correctly charged to profit or loss by Dilemma, but the directors of Plastik have reliably assessed
the fair value of this research to be $1·2 million.

The second item relates to the customers of Dilemma. The directors of Plastik believe Dilemma
has a particularly strong list of reputable customers which could be ‘sold’ to other companies and
have assessed the fair value of the customer list at $3 million.

Required:

State whether (and if so, at what value) the two items should be recognised in the
consolidated statement of financial position of Plastik on the acquisition of Dilemma.
(3 marks)

(30 marks)

Page 49 of 74
 Enca

(a) A director of Enca, a public listed company, has expressed concerns about the accounting
treatment of some of the company’s items of property, plant and equipment which have increased in
value. His main concern is that the statement of financial position does not show the true value of
assets which have increased in value and that this ‘undervaluation’ is compounded by having to
charge depreciation on these assets, which also reduces reported profit. He argues that this does
not make economic sense.

Required:

Respond to the director’s concerns by summarising the principal requirements of IAS 16

Property, Plant and Equipment in relation to the revaluation of property, plant and
equipment, including its subsequent treatment.
(5 marks)

(b) The following details relate to two items of property, plant and equipment (A and B) owned by Delta
which are depreciated on a straight-line basis with no estimated residual value:

Item A Item B
Estimated useful life at acquisition 8 years 6 years
$’000 $’000
Cost on 1 April 2010 240,000 120,000
Accumulated depreciation (two years) (60,000) (40,000)
–––––––– ––––––––
Carrying amount at 31 March 2012 180,000 80,000
–––––––– ––––––––
Revaluation on 1 April 2012:
Revalued amount 160,000 112,000
Revised estimated remaining useful life 5 years 5 years
Subsequent expenditure capitalised on 1 April 2013 nil 14,400

At 31 March 2014 item A was still in use, but item B was sold (on that date) for $70 million.

Note: Delta makes an annual transfer from its revaluation surplus to retained earnings in respect of
excess depreciation.

Required:
Prepare extracts from:
(i) Delta’s statements of profit or loss for the years ended 31 March 2013 and 2014 in
respect of charges (expenses) related to property, plant and equipment;
(ii) Delta’s statements of financial position as at 31 March 2013 and 2014 for the carrying
amount of property, plant and equipment and the revaluation surplus.

The following mark allocation is provided as guidance for this requirement:

(i) 5 marks
(ii) 5 marks
(10 marks)

(15 marks)

Page 50 of 74
 Skeptic

The following issues have arisen during the preparation of Skeptic’s draft financial statements for the
year ended 31 March 2014:

i. From 1 April 2013, the directors have decided to reclassify research and amortised development
costs as administrative expenses rather than its previous classification as cost of sales. They
believe that the previous treatment unfairly distorted the company’s gross profit margin.

ii. Skeptic has two potential liabilities to assess. The first is an outstanding court case concerning a
customer claiming damages for losses due to faulty components supplied by Skeptic. The second
is the provision required for product warranty claims against 200,000 units of retail goods supplied
with a one-year warranty.

The estimated outcomes of the two liabilities are:

Court case Product warranty claims

10% chance of no damages awarded 70% of sales will have no claim

65% chance of damages of $4 million 20% of sales will require a $25 repair
25% chance of damages of $6 million 10% of sales will require a $120 repair

iii. On 1 April 2013, Skeptic received a government grant of $8 million towards the purchase of new
plant with a gross cost of $64 million. The plant has an estimated life of 10 years and is
depreciated on a straight-line basis. One of the terms of the grant is that the sale of the plant
before 31 March 2017 would trigger a repayment on a sliding scale as follows:

Sale in the year ended: Amount of repayment

31 March 2014 100%

31 March 2015 75%
31 March 2016 50%
31 March 2017 25%

Accordingly, the directors propose to credit to the statement of profit or loss $2 million ($8 million x 25%)
being the amount of the grant they believe has been earned in the year to 31 March 2014. Skeptic
accounts for government grants as a separate item of deferred credit in its statement of financial
position. Skeptic has no intention of selling the plant before the end of its economic life.

Required:

Advise, and quantify where possible, how the above items (i) to (iii) should be treated in Skeptic’s
financial statements for the year ended 31 March 2014.

The following mark allocation is provided as guidance for this question:

(i) 3 marks
(ii) 4 marks
(iii) 3 marks

(10 marks)

Page 51 of 74
 Woodbank

Shown below are the financial statements of Woodbank for its most recent two years:

Statements of profit or loss for the year ended 31 March:

2014 2013
$’000 $’000
Revenue 150,000 110,000

Cost of sales (117,000) (85,800)

Gross profit 33,000 24,200

Distributive costs (6,000) (5,000)

Administrative costs (9,000) (9,200)

Finance costs – loan note interest (1,750) (500)

Profit before tax 16,250 9,500

Income tax expense (5,750) (3,000)

Profit for the year 10,500 6,500

Statements of financial position as at 31 March:

2014 2013
$’000 $’000
Assets

Non-current assets

Property, plant and equipment 118,000 85,000

Goodwill 30,000 Nil

148,000 85,000

Current assets

Inventory 15,500 12,000

Trade receivables 11,000 8,000

Bank 500 5,000

27,000 25,000

Total assets 175,000 110,000

Equity and liabilities

Equity

Equity shares of $1 each 80,000 80,000

Page 52 of 74
 Retained earnings 15,000 10,000

95,000 90,000

Non-current liabilities

10% loan notes 55,000 5,000

Current liabilities

Trade payables 21,000 13,000

Current tax payables 4,000 2,000

25,000 15,000

Total equity and liabilities 175,000 110,000

The following information is available:

(i) On 1 January 2014, Woodbank purchased the trading assets and operations of Shaw for $50
million and, on the same date, issued additional 10% loan notes to finance the purchase. Shaw
was an unincorporated entity and its results (for three months from 1 January 2014 to 31 March
2014) and net assets (including goodwill not subject to any impairment) are included in
Woodbank’s financial statements for the year ended 31 March 2014 .There were no other
purchases or sales of non-current assets during the year ended 31 March 2014.

(ii) Extracts of the results (for three months) of the previously separate business of Shaw, which are
included in Woodbank’s statement of profit or loss for the year ended 31 March 2014, are:

$’000

Revenue 30,000

Cost of sales (21,000)

Gross profit 9,000

Distributive costs (2,000)

Administrative costs (2,000)

(iii) The following six ratios have been correctly calculated for Woodbank for the year ended 31
March 2013:

Return on capital employed (ROCE)

(profit before interest and tax/year-end total assets less current 10.5%
liabilities)
Net asset (equal to capital employed) turnover 1.16 times

Gross profit margin 22.0%

Profit before interest and tax margin 9.1%

Current ratio 1.7:1

Gearing (debt/(debt + equity)) 5.3%

Page 53 of 74
 Required:

(a) Calculate for the year ended 31 March 2014:

(i) equivalent ratios (all six) to the above for Woodbank based on its reported figures;
and
(ii) equivalent ratios to the first FOUR only for Woodbank excluding the effects of the
purchase of Shaw.

Note: Assume the capital employed for Shaw is equal to its purchase price of $50 million.
(10 marks)

(b) Assess the comparative financial performance and position of Woodbank for the year
ended 31 March 2014. Your answer should refer to the effects of the purchase of Shaw.
(15 marks)

(25 marks)

Page 54 of 74
 X-tol

The following trial balance relates to Xtol at 31 March 2014:

$’000
$’000
Revenue (note (i)) 490,000

Cost of sales 290,600

Distribution costs 33,500

Administration expenses 36,800

Loan note interest and dividends paid (notes (iv) and (v)) 13,380

Bank interest 900

20-year leased property at cost (note (ii)) 100,000

Plant and equipment at cost (note (ii)) 155,500

Accumulated amortisation/depreciation at 1 April 2013:

leased property 25,000

plant and equipment 43,500

Inventory at 31 March 2014 61,000

Trade receivables 63,000

Trade payables 32,200

Bank 5,500

Equity shares of 25 cents each (note (iii)) 56,000

Share premium 25,000

Retained earnings at 1 April 2013 26,080

5% convertible loan note (note (iv)) 50,000

Current tax (note (vi)) 3,200

Deferred tax (note (vi)) 4,600

757,880 757,880

The following notes are relevant:

(i) Revenue includes an amount of $20 million for cash sales made through Xtol’s retail outlets
during the year on behalf of Francais. Xtol, acting as agent, is entitled to a commission of 10% of
the selling price of these goods. By 31 March 2014, Xtol had remitted to Francais $15 million (of
the $20 million sales) and recorded this amount in cost of sales.

(ii) Plant and equipment is depreciated at 12½% per annum on the reducing balance basis. All
amortisation/depreciation of non-current assets is charged to cost of sales.

(iii) On 1 August 2013, Xtol made a fully subscribed rights issue of equity share capital based on two

Page 55 of 74
 new shares at 60 cents each for every five shares held. The market price of Xtol’s shares before
the issue was $1·02 each. The issue has been fully recorded in the trial balance figures.

(iv) On 1 April 2013, Xtol issued a 5% $50 million convertible loan note at par. Interest is payable
annually in arrears on 31 March each year. The loan note is redeemable at par or convertible
into equity shares at the option of the loan note holders on 31 March 2016. The interest on an
equivalent loan note without the conversion rights would be 8% per annum.

The present values of $1 receivable at the end of each year, based on discount rates of 5% and
8%, are:
5% 8%
End of year 1 0.95 0.93
2 0.91 0.86
3 0.86 0.79

(v) An equity dividend of 4 cents per share was paid on 30 May 2013 and, after the rights issue, a
further dividend of 2 cents per share was paid on 30 November 2013.

(vi) The balance on current tax represents the under/over provision of the tax liability for the year
ended 31 March 2013. A provision of $28 million is required for current tax for the year ended 31
March 2014 and at this date the deferred tax liability was assessed at $8·3 million.

Required:

a) Prepare the statement of profit or loss for Xtol for the year ended 31 March 2014.
b) Prepare the statement of changes in equity for Xtol for the year ended 31 March 2014.
c) Prepare the statement of financial position for Xtol as at 31 March 2014.
d) Calculate the basic earnings per share (EPS) for Xtol for the year ended 31 March 2014.

Note: Answers and workings (for parts (a) to (c)) should be presented to the nearest $1,000;
notes to the financial statements are not required.

The following mark allocation is provided as guidance for this question:

a) 8 marks
b) 6 marks
c) 8 marks
d) 3 marks
(25 marks)

Page 56 of 74
 Penketh

On 1 October 2013, Penketh acquired 90 million of Sphere’s 150 million $1 equity shares. The
acquisition was achieved through a share exchange of one share in Penketh for every three shares in
Sphere. At that date the stock market prices of Penketh’s and Sphere’s shares were $4 and $2·50 per
share respectively. Additionally, Penketh will pay $1·54 cash on 30 September 2014 for each share
acquired. Penketh’s finance cost is 10% per annum.

The retained earnings of Sphere brought forward at 1 April 2013 were $120 million.

The summarised statements of profit or loss and other comprehensive income for the companies for the
year ended 31 March 2014 are:

Penketh Sphere
$’000 $’000
Revenue 620,000 310,000

Cost of sales (400,000) (150,000)

Gross profit 220,000 160,000

Distribution costs (40,000) (20,000)

Administrative costs (36,000) (25,000)

Investment income (note (iii)) 5,000 1,600

Finance costs (2,000) (5,600)

Profit before tax 147,000 111,000

Income tax expense (45,000) (31,000)

Profit for the year 102,000 80,000

Other comprehensive income

Gain/(loss) on revaluation of land (note (i) and (ii)) (2,200) 3,000

Total comprehensive income for the year 99,800 83,000

The following information is relevant:

(i) A fair value exercise conducted on 1 October 2013 concluded that the carrying amounts of Sphere’s
net assets were equal to their fair values with the following exceptions:

– the fair value of Sphere’s land was $2 million in excess of its carrying amount.

– an item of plant had a fair value of $6 million in excess of its carrying amount. The plant had a
remaining life of two years at the date of acquisition. Plant depreciation is charged to cost of
sales.

– Penketh placed a value of $5 million on Sphere’s good trading relationships with its customers.
Penketh expected, on average, a customer relationship to last for a further five years.
Amortisation of intangible assets is charged to administrative expenses.

(ii) Penketh’s group policy is to revalue land to market value at the end of each accounting period. Prior
to its acquisition, Sphere’s land had been valued at historical cost, but it has adopted the group

Page 57 of 74
 policy since its acquisition. In addition to the fair value increase in Sphere’s land of $2 million (see
note (i)), it had increased by a further $1 million since the acquisition.

(iii) On 1 October 2013, Penketh also acquired 30% of Ventor’s equity shares. Ventor’s profit after tax for
the year ended 31 March 2014 was $10 million and during March 2014 Ventor paid a dividend of $6
million. Penketh uses equity accounting in its consolidated financial statements for its investment in
Ventor. Sphere did not pay any dividends in the year ended 31 March 2014.

(iv) After the acquisition Penketh sold goods to Sphere for $20 million. Sphere had one fifth of these
goods still in inventory at 31 March 2014. In March 2014 Penketh sold goods to Ventor for $15
million, all of which were still in inventory at 31 March 2014. All sales to Sphere and Ventor had a
mark-up on cost of 25%.

(v) Penketh’s policy is to value the non-controlling interest at the date of acquisition at its fair value. For
this purpose, the share price of Sphere at that date (1 October 2013) is representative of the fair
value of the shares held by the non-controlling interest.

(vi) All items in the above statements of profit or loss and other comprehensive income are deemed to
accrue evenly over the year unless otherwise indicated.

Required:

(a) Calculate the consolidated goodwill as at 1 October 2013.

(b) Prepare the consolidated statement of profit or loss and other comprehensive income of
Penketh for the year ended 31 March 2014.

The following mark allocation is provided as guidance for this question:

(a) 6 marks
(b) 19 marks

(25 marks)

Page 58 of 74
 Polestar

On 1 April 2013, Polestar acquired 75% of the equity share capital of Southstar. Southstar had been
experiencing difficult trading conditions and making significant losses. In allowing for Southstar’s
difficulties, Polestar made an immediate cash payment of only $1·50 per share. In addition, Polestar will
pay a further amount in cash on 30 September 2014 if Southstar returns to profitability by that date. The
value of this contingent consideration at the date of acquisition was estimated to be $1·8 million, but at
30 September 2013 in the light of continuing losses, its value was estimated at only $1·5 million. The
contingent consideration has not been recorded by Polestar. Overall, the directors of Polestar expect the
acquisition to be a bargain purchase leading to negative goodwill.

At the date of acquisition shares in Southstar had a listed market price of $1·20 each.

Below are the summarised draft financial statements of both companies.

Statements of profit or loss for the year ended 30 September 2013

Polestar Southstar
$’000 $’000
Revenue 110,000 66,000

Cost of sales (88,000) (67,200)

Gross profit / (loss) 22,000 (1,200)

Distribution costs (3,000) (2,000)

Administrative costs (5,250) (2,400)

Finance costs (250) Nil

Profit/(loss) before tax 13,500 (5,600)

Income tax (expense)/relief (3,500) 1,000

Profit/(loss) for the year 10,000 (4,600)

Page 59 of 74
 Statements of financial position as at 30 September 2013

Polestar Southstar
$’000 $’000
Assets

Non-current assets

Property, plant and equipment 41,000 21,000

Financial assets: equity investments (note (iii)) 16,000 Nil

57,000 21,000

Current assets 16,500 4,800

Total assets 73,500 25,800

Equity and liabilities

Equity

Equity shares of 50 cents each 30,000 6,000

Retained earnings 28,500 12,000

58,500 18,000

Current liabilities 15,000 7,800

Total equity and liabilities 73,500 25,800

The following information is relevant:

(i) At the date of acquisition, the fair values of Southstar’s assets were equal to their carrying amounts
with the exception of an item of property. This had a fair value of $2 million above its carrying amount
and a remaining useful life of 10 years at that date. All depreciation is included in cost of sales.

(ii) Polestar transferred raw materials at their cost of $4 million to Southstar in June 2013. Southstar
processed all of these materials incurring additional direct costs of $1·4 million and sold them back to
Polestar in August 2013 for $9 million. At 30 September 2013 Polestar had $1·5 million of these
goods still in inventory. There were no other intra-group sales.

(iii) Polestar has recorded its investment in Southstar at the cost of the immediate cash payment; other
equity investments are carried at fair value through profit or loss as at 1 October 2012. The other
equity investments have fallen in value by $200,000 during the year ended 30 September 2013.

(iv) Polestar’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this
purpose, Southstar’s share price at that date can be deemed to be representative of the fair value of
the shares held by the non-controlling interest.

(v) All items in the above statements of profit or loss are deemed to accrue evenly over the year unless
otherwise indicated.

Page 60 of 74
 Required:

(a) Prepare the consolidated statement of profit or loss for Polestar for the year ended 30
September 2013.

(b) Prepare the consolidated statement of financial position for Polestar as at 30 September
2013.

The following mark allocation is provided as guidance for this question:

(a) 14 marks
(b) 11 marks

(25 marks)

Page 61 of 74
 Kingdom

Page 62 of 74
Page 63 of 74
Page 64 of 74
 Speculate

(a) The accounting treatment of investment properties is prescribed by IAS 40 Investment Property

Required:

(i) Define investment property under IAS 40 and explain why its accounting treatment is
different from that of owner-occupied property;
(ii) Explain how the treatment of an investment property carried under the fair value
model differs from an owner-occupied property carried under the revaluation model.

The following mark allocation is provided as guidance for this requirement:

(i) 3 marks
(ii) 2 marks
(5 marks)

(b) Speculate owns the following properties at 1 April 2012:

Property A: An office building used by Speculate for administrative purposes with a depreciated
historical cost of $2 million. At 1 April 2012 it had a remaining life of 20 years. After a
reorganisation on 1 October 2012, the property was let to a third party and reclassified as an
investment property applying Speculate’s policy of the fair value model. An independent valuer
assessed the property to have a fair value of $2·3 million at 1 October 2012, which had risen to
$2·34 million at 31 March 2013.

Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012, it had a fair
value of $1·5 million which had risen to $1·65 million at 31 March 2013.

Required:

Prepare extracts from Speculate’s entity statement of profit or loss and other
comprehensive income and statement of financial position for the year ended 31 March
2013 in respect of the above properties. In the case of property B only, state how it would
be classified in Speculate’s consolidated statement of financial position.

Note: Ignore deferred tax.

(5 marks)

(10 marks)

Page 65 of 74
 Pulsar

(a) The objective of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations specifies,
amongst other things, accounting for and presentation and disclosure of discontinued operations.

Required:

Define a discontinued operation and explain why the disclosure of such information is
important to users of financial statements.
(5 marks)

(b) Radar’s sole activity is the operation of hotels all over the world. After a period of declining
profitability, Radar’s directors made the following decisions during the year ended 31 March 2013:
– it disposed of all of its hotels in country A;
– it refurbished all of its hotels in country B in order to target the holiday and tourism market. The
previous target market in country B had been aimed at business clients.

Required:

Treating the two decisions separately, explain whether they meet the criteria for being
classified as discontinued operations in the financial statements for the year ended 31
March 2013.
(4 marks)

(c) At a board meeting on 1 July 2012, Pulsar’s directors made the decision to close down one of its
factories on 31 March 2013. The factory and its related plant would then be sold.

A formal plan was formulated and the factory’s 250 employees were given three months’ notice of
redundancy on 1 January 2013. Customers and suppliers were also informed of the closure at this
date.

The directors of Pulsar have provided the following information:

Fifty of the employees would be retrained and deployed to other subsidiaries within the group at a
cost of $125,000; the remainder will accept redundancy and be paid an average of $5,000 each.

Factory plant has a carrying amount of $2·2 million, but is only expected to sell for $500,000
incurring $50,000 of selling costs; however, the factory itself is expected to sell for a profit of $1·2
million.

The company rents a number of machines under operating leases which have an average of three
years to run after 31 March 2013. The present value of these future lease payments (rentals) at 31
March 2013 was $1 million; however, the lessor has said they will accept $850,000 which would be
due for payment on 30 April 2013 for their cancellation as at 31 March 2013.

Penalty payments due to non-completion of supply contracts are estimated at $200,000.

Required:

Explain and quantify how the closure of the factory should be treated in Pulsar’s financial
statements for the year ended 31 March 2013.

Note: The closure of the factory does not meet the criteria of a discontinued operation.
(6 marks)

(15 marks)

Page 66 of 74
Page 67 of 74
 Monty

Monty is a publicly listed company. Its financial statements for the year ended 31 March 2013 including
comparatives are shown below:

Statements of profit or loss and other comprehensive income for the year ended:
31 March 2013 31 March 2012
$’000 $’000
Revenue 31,000 25,000
Cost of sales (21,800) (18,600)
––––––– –––––––
Gross profit 9,200 6,400
Distribution costs (3,600) (2,400)
Administrative expenses (2,200) (1,600)
Finance costs – loan interest (400) (350)
––––––– –––––––
Profit before tax 3,000 2,050
Income tax expense (1,000) (750)
––––––– –––––––
Profit for the year 2,000 1,300
Other comprehensive income (note (i)) 1,350 nil
––––––– –––––––
3,350 1,300
––––––– –––––––

Statements of financial position as at:

31 March 2013 31 March 2012
$’000 $’000 $’000 $’000
Assets
Non-current assets
Property, plant and equipment 14,000 10,700
Deferred development expenditure 1,000 nil
––––––– –––––––
15,000 10,700
Current assets
Inventory 3,300 3,800
Trade receivables 2,950 2,200
Bank 50 6,300 1,300 7,300
–––––– ––––––– –––––– –––––––
Total assets 21,300 18,000
––––––– –––––––

Page 68 of 74
 Equity and liabilities
Equity
Equity shares of $1 each 8,000 8,000
Revaluation reserve 1,350 nil
Retained earnings 3,200 1,750
––––––– –––––––
12,550 9,750
Non-current liabilities
8% loan notes 1,400 3,125
Deferred tax 1,500 800
Bank loan 1,200 4,100 900 4,825
–––––– ––––––
Current liabilities
Bank loan 750 600
Trade payables 2,650 2,100
Current tax payable 1,250 4,650 725 3,425
–––––– ––––––– –––––– –––––––
Total equity and liabilities 21,300 18,000
––––––– –––––––

Notes:

(i) On 1 July 2012, Monty acquired additional plant for $1·5 million financed from a bank loan. On this
date it also revalued its property upwards by $2 million and transferred $650,000 of the resulting
revaluation reserve this created to deferred tax. There were no disposals of non-current assets
during the period.
(ii) Depreciation of property, plant and equipment was $900,000 and amortisation of the deferred
development expenditure was $200,000 for the year ended 31 March 2013.

Required:

(a) Prepare a statement of cash flows for Monty for the year ended 31 March 2013, in
accordance with IAS 7 Statement of Cash Flows, using the indirect method.
(15 marks)

(b) Comment on the comparative performance of Monty in terms of its return on capital
employed, profit margins, asset utilisation and gearing. Note: Up to 4 marks are available
for the calculation of the ratios.
(10 marks)

(25 marks)

Page 69 of 74
 Shawler

(a) Shawler is a small manufacturing company specialising in making alloy castings. Its main item of
plant is a furnace which was purchased on 1 October 2009. The furnace has two components: the
main body (cost $60,000 including the environmental provision – see below) which has a ten-year
life, and a replaceable liner (cost $10,000) with a five-year life.

The manufacturing process produces toxic chemicals which pollute the nearby environment.
Legislation requires that a clean-up operation must be undertaken by Shawler on 30 September
2019 at the latest. Shawler received a government grant of $12,000 relating to the cost of the main
body of the furnace only.

The following are extracts from Shawler’s statement of financial position as at 30 September 2011
(two years after the acquisition of the furnace):

Carrying amount
$
Non-current assets
Furnace: main body 48,000
replaceable liner 6,000
Current liabilities
Government grant 1,200
Non-current liabilities
Government grant 8,400
Environmental provision 18,000 (present value discounted at 8% per annum)

Required:

(i) Prepare equivalent extracts from Shawler’s statement of financial position as at 30

September 2012;
(3 marks)

(ii) Prepare extracts from Shawler’s income statement for the year ended 30 September
2012 relating to the items in the statement of financial position.
(3 marks)

(b) On 1 April 2012, the government introduced further environmental legislation which had the effect
of requiring Shawler to fit anti-pollution filters to its furnace within two years. An environmental
consultant has calculated that fitting the filters will reduce Shawler’s required environmental costs
(and therefore its provision) by 33%. At 30 September 2012 Shawler had not yet fitted the filters.

Required:

Advise Shawler as to whether they need to provide for the cost of the filters as at 30
September 2012 and whether they should reduce the environmental provision at this date.
(4 marks)

(10 marks)

Page 70 of 74
 Viagem

On 1 January 2012, Viagem acquired 90% of the equity share capital of Greca in a share exchange in
which Viagem issued two new shares for every three shares it acquired in Greca. Additionally, on 31
December 2012, Viagem will pay the shareholders of Greca $1·76 per share acquired. Viagem’s cost of
capital is 10% per annum.

At the date of acquisition, shares in Viagem and Greca had a stock market value of $6·50 and $2·50
each, respectively.

Income statements for the year ended 30 September 2012

Viagem Greca
$’000 $’000
Revenue 64,600 38,000

Cost of sales (51,200) (26,000)

Gross profit 13,400 12,000

Distribution costs (1,600) (1,800)

Administrative expenses (3,800) (2,400)

Investment income 600 Nil

Finance costs (420) Nil

Profit before tax 8,080 7,800

Income tax expense (2,800) (1,600)

Profit for the year 5,280 6,200

Equity as at 1 October 2011

Equity shares of $1 each 30,000 10,000

Retained earnings 54,000 35,000

The following information is relevant:

(i) At the date of acquisition, the fair values of Greca’s assets were equal to their carrying amounts with
the exception of two items:

– An item of plant had a fair value of $1·8 million above its carrying amount. The remaining life of
the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
– Greca had a contingent liability which Viagem estimated to have a fair value of $450,000. This
has not changed as at 30 September 2012. Greca has not incorporated these fair value changes
into its financial statements.

(ii) Viagem’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this
purpose, Greca’s share price at that date can be deemed to be representative of the fair value of the
shares held by the non-controlling interest.

Page 71 of 74
 (iii) Sales from Viagem to Greca throughout the year ended 30 September 2012 had consistently been
$800,000 per month. Viagem made a mark-up on cost of 25% on these sales. Greca had $1·5
million of these goods in inventory as at 30 September 2012.

(iv) Viagem’s investment income is a dividend received from its investment in a 40% owned associate
which it has held for several years. The underlying earnings for the associate for the year ended 30
September 2012 were $2 million.

(v) Although Greca has been profitable since its acquisition by Viagem, the market for Greca’s products
has been badly hit in recent months and Viagem has calculated that the goodwill has been impaired
by $2 million as at 30 September 2012.

Required:

(a) Calculate the consolidated goodwill at the date of acquisition of Greca.

(b) Prepare the consolidated income statement for Viagem for the year ended 30 September
2012.

The following mark allocation is provided as guidance for these requirements:

(a) 7 marks
(b) 14 marks
(21 marks)

(c) The carrying amount of a subsidiary’s property will be subject to review as part of the fair value
exercise on acquisition and may be subject to review in subsequent periods.

Required:

Explain how a fair value increase of a subsidiary’s property on acquisition should be treated
in the consolidated financial statements; and how any subsequent increase in the carrying
amount of the property might be treated in the consolidated financial statements.

Note: Ignore taxation.

(4 marks)

(25 marks)

Page 72 of 74
 Learning Co

The accountant of Learning Co has prepared the following list of account balances as at 31 December
2014:

Trial balance as at 31 December 2014:

$’000 $’000
50c ordinary shares (fully paid) 450
10% debentures (secured) 200
Retained earnings 1.1.2014 242
General reserve 1.1.2014 171
Land and buildings 1.1.2014 (cost) 430
Plant and machinery 1.1.2014 (cost) 830
Accumulated depreciation:
Buildings 1.1.2014 20
Plant and machinery 1.1.2014 222
Inventory 1.1.2014 190
Sales 2,695
Purchases 2,152
Ordinary dividend 15
Debenture interest 10
Wages and salaries 254
Light and heat 31
Sundry expenses 113
Suspense account 135
Trade accounts receivable 179
Trade accounts payable 195
Cash 126
4,330 4,330

Notes to trial balance:

(a) Sundry expenses include $9,000 paid in respect of insurance for the year ended 1 September 2015.
Light and heat does not include an invoice of $3,000 for electricity for the three months ending 2 January
2015, which was paid in February 2015. Light and heat also include $20,000 relating to salesman’s
commission.

(b) The suspense account is in respect of the following items:

$’000
Proceeds from share issue of 100,000 ordinary shares 120
Proceeds from sale of plant 300
480
Less consideration for acquisition of Mary & Co 285
135

Page 73 of 74
 (c) The net assets of Mary & Co were purchased on 3 March 2014. Assets were valued as follows:

$’000
Equity instruments 231
Inventory 34
265

All the inventory acquired was sold during 2014. The equity instruments were still held by Learning at
31.12.2014. Goodwill has not been impaired in value.

(d) The property was acquired some year ago. The buildings element of the cost was estimated at
$100,000 and the estimated useful life of the assets was fifty years at the time of purchase. As at 31
December 2014 the property is to be revalued at $800,000.

(e) The plant which was sold had costs $350,000 and had a net book value of $274,000 as at 1.1.2014.
$36,000 depreciation is to be charged on plant and machinery for 2014.

(f) The management wish to provide for:

(i) Debenture interest due

(ii) A transfer to general reserve of $16,000
(iii) Audit fees of $4,000

(g) Inventory as at 31 December 2014 was valued at $220,000 (at cost)

(h) Tax is to be ignored

(i) Take all depreciation to cost of sales

Required:

Prepare the financial statements of Learning Co as at 31 December 2014. You do not need to
produce notes to the statements.
(20 marks)

Page 74 of 74